korps menwa module korps supply chain management

MODUL KORPS SUPPLY CHAIN MANAGEMENT

KORPSMENWAINDONESIA

WidyaCastrenaDharmaSidha

HUMANCAPITALDIVISION

2016

Contents

i

CONTENTS

Chapter 1: Introduction and History ....................................................................................................................... 1

Supply Chain ................................................................................................................................................... 1

Supply Chain Management....................................................................................................................... 2

Objectives of Supply Chain Management ........................................................................................... 6

Customer Orientation.................................................................................................................................. 7

Importance and benefits of Supply Chain Management .............................................................. 7

Components of supply chains ................................................................................................................. 8

Supply Chain Decisions ........................................................................................................................... 12

Supply Chain Management Today ...................................................................................................... 14

Trends in Development ........................................................................................................................... 15

Where the Supply Chain Creates Value? .......................................................................................... 17

Chapter 2: Global Supply Chain Management .................................................................................................. 21

2.1 Focus of Present Supply Chain Management: Going Global .................................................... 21

2.2 Managing a Global vs. Domestic Supply Chain ............................................................................. 22

2.3 Supply Chain Management Features that provide Global Competitive Edge ................... 24

2.4 Dimensions of Challenges ...................................................................................................................... 26

2.5 Response of Supply Chain to Globalisation .................................................................................... 28

2.6 Supply Chain Integration: Challenges and Good Practices ....................................................... 31

2.7 Competitive Factors Influencing Supply Chain Competition.................................................... 31

2.8 Contemporary Trends in SCM............................................................................................................... 35

Chapter 3: Planning and Designing the Supply Chain ................................................................................... 38

3.1 Planning Supply Chain Network .......................................................................................................... 38

3.2 Efficiency and responsiveness in Supply Chain Management ................................................. 38

3.3 Decision phases in Supply Chain ......................................................................................................... 39

3.4 Drivers of Supply Chain Performance ................................................................................................ 42

3.5 Designing distribution in the Supply Chain..................................................................................... 48

3.6 Supply Chain Network Design .............................................................................................................. 49

3.7 Factors influencing network design decisions................................................................................ 52

3.8 Phases of Global Network Design decisions ................................................................................... 54

3.9 Outsourcing and Offshoring .................................................................................................................. 56

Contents

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3.10 Benefits of outsourcing business processes .................................................................................... 56

3.11 Importance of Location Decisions in SCM operations ................................................................ 58

3.12 Capacity Planning ...................................................................................................................................... 59

3.13 Bullwhip Effect ............................................................................................................................................. 60

Chapter 4: Lean Supply Management .................................................................................................................. 63

4.1 Lean Manufacturing ................................................................................................................................... 63

4.2 Focusing on Cost-to-Serve ...................................................................................................................... 64

4.3 Principles of Lean Supply ......................................................................................................................... 65

4.4 Lean Process Mapping Tools .................................................................................................................. 67

Chapter 5: Agile Supply Management ................................................................................................................. 75

5.1 Agile as Supply Chain Model ................................................................................................................ 75

5.2 Characteristics of the Agile Supply Chain ........................................................................................ 76

5.3 Comparison of lean supply with agile supply ................................................................................. 78

5.4 From supply chain to demand chain .................................................................................................. 81

5.5 Using the supply chain to compete .................................................................................................... 82

5.6 Developing agility in the organisation .............................................................................................. 82

Chapter 6: Purchasing and Supplier Selection .................................................................................................. 85

6.1 Strategic Role of Purchasing ................................................................................................................. 85

6.2 Purchasing Process .................................................................................................................................... 87

6.3 Supplier Selection ...................................................................................................................................... 90

6.4 Contributions to the Kraljic matrix ...................................................................................................... 96

6.5 Strategic change in the Kraljic matrix ................................................................................................ 98

6.6 Towards Knowledge Based Sourcing ............................................................................................... 100

Chapter 7: Supply Relationship and Integration ........................................................................................... 103

7.1 Supply Relationship ................................................................................................................................ 103

7.2 The Partnership Model .......................................................................................................................... 104

7.3 Strategic Alliance ...................................................................................................................................... 107

7.4 The Power of Partnership ..................................................................................................................... 109

7.5 Strategic Alliances: Collaboration as a Resource ......................................................................... 110

7.6 Behavioural Characteristics and Results .......................................................................................... 110

7.7 Integrating the Supply Chain .............................................................................................................. 113

7.8 Benefits of the Integrated Supply Chain ......................................................................................... 115

Contents

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Chapter 8: The Present and Future Challenges of SCM ............................................................................. 116

8.1 Creating Customer Centric Supply Chain ....................................................................................... 116

8.2 Dynamics in SCM ..................................................................................................................................... 117

8.3 Current issues in SCM ............................................................................................................................ 122

8.4 Business renovation in SCM ................................................................................................................ 124

8.5 Supply chain risks..................................................................................................................................... 127

8.6 Supply chain frameworks and standards ........................................................................................ 129

8.7 Performance measurement in SCM .................................................................................................. 132

8.8 Supply chain informatisation ............................................................................................................... 135

Chapter 1: Introduction and History

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Supply Chain

American Production and Inventory Control Society (APICS, 1990) defines the term supply chain

as either the “processes from the initial raw materials to the ultimate consumption of the finished

product linking across supplier-user companies,” or as the “functions within and outside a

company that enable the value chain to make products and provide services to the customer.”

The APICS dictionary defines value chain as “functions within a company that add value to the

products or services that the organisation sells to customers and for which it receives payment.”

The differences between the supply chain and the value chain are illustrated in the Figure below.

The supply chain is shown as a series of arrows moving from the raw materials stage to the final

customer.

Each of these arrows represents an individual firm, which has its own value chain. In Figure 1.1

this value chain is enlarged for one firm in the supply chain so that some of the internal functions

of the firm that add value can be shown. In this example note that purchasing, marketing, and

operations management are shown as part of the firm’s internal value chain. These are internal

functions of the firm and they occur in every firm that is a member of a supply chain.

Figure 1.1 Supply Chain vs Value Chain


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Supply Chain Management

1.2.1 Emergence of Supply Chain Management

The term “supply chain management” is relatively new in the literature, appearing first in 1982

(Oliver & Weber, 1982) to describe connecting logistics with other functions, and by Houlihan

(1985, 1988) to describe the connections between logistics and internal functions and external

organizations. The evolution of SCM continued into the 1990s due to the intense global

competition (Handfield, 1998).

Before the 1950s, logistics was thought of in military terms. It had to do with procurement,

maintenance, and transportation of military facilities, materials, and personnel. The study and

practice of physical distribution and logistics emerged in the 1960s and 1970s (Heskett et al.,

1973).

Around 1950s changes occurred that could be classified as a first “Transformation.” The

importance of logistics increased considerably, when physical distribution management in

manufacturing firms was recognised as a separate organizational function (Heskett et al., 1964).

The SCM concept was coined in the early 1980s by consultants in logistics (Oliver and Webber,

1992). The authors emphasized that the supply chain must have been viewed as a single entity

and that strategic decision-making at the top level was needed to manage the chain in their

original formulation. The emergence and evolution of Supply Chain Management may be

depicted as a timeline shown in the Figure below.

Supply chain management (SCM) has emerged as an important pursuit among business

organisations. Textbooks in the fields of purchasing, logistics and operations are increasingly

Figure 1.2 Evolution of Supply Chain Management


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using the term “Supply Chain Management” in titles. The same is true of course titles, department

names, and faculty titles.

1.2.2 Definition of Supply Chain Management

“The design and management of seamless, value-added process across organisational

boundaries to meet the real needs of the end customer”

- Institute for Supply Management

“Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly,

warehousing and inventory tracking, order entry and order management, distribution across all

channels, and delivery to the customer.”

-The Supply Chain Council

How could one draw a boundary of a supply chain? In order to answer this question, one needs

to understand the four intrinsic flows of a supply chain.

Material Flow: From the beginning of the supply chain to the finished products at the end of the

supply chain, all manufacturing supply chains have material flows from the raw materials. For

instance, a furniture-making supply chain will have the wood cut down from forest at the

beginning of its supply chain and home furniture at the end of supply chain. It is clear in this case

that the continuous flow of wood been transformed through the chain and end up to furniture

forms the whole supply chain. A furniture supply chain can never be confused with a sugar

manufacturing supply chain because the material flows in between are clearly different and never

will they cross with each other.

The flow of material (“products and services”) starts from the source of materials forward (or

upstream) to the final consumer in the external chain. It should be noted that there is also a

backward (or downstream) flow of materials, mainly associated with product returns. The growing

importance of reverse logistics in recent years has sharpened the focus on management of these

flows. For example, “Return” is the process most recently incorporated into the SCOR model

(Supply Chain Council, 2005).


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Much SCM theory has its origins in the well-established field of materials management. The

evolution of materials management in many ways mirrors the evolution of SCM as a whole. For

example, the focus on manufacturing inventory reduction in the 1960s and1970s became an

integral part of the broader field of materials management in the 1980s and early 1990s (Sweeney,

2006). The need for more integrated approaches to materials management across the supply

chain became a strong focus in the 1990s (see, for example: Hines, 1993). It could be argued that

the whole field of logistics, with its origins in a military context, is fundamentally concerned with

the efficient and effective management of the flow of materials through supply chains. In any

event, The SCOR model Version 8.0 was released by the Supply Chain Council in June 2006.

Information Flow: All supply chains have and make use of information flows. Throughout a

supply chain there number of information flows. Demand information flow, forecasting

information flow, production and scheduling information flows, and design and NPI information

flows are common. The information can run both directions, towards upstream and downstream

alike. It should be noted that most of them are unique to the specific supply chain. The

information of children’s toy has no value to a motorbike supply chain. Every supply chain has its

own set of information flows, which is vital to its existence and protected against those of other

supply chains.

The need to share information across the various entities along the supply chain is definitely of

paramount importance. Chopra and Meindl (2001) stress that information “serves as the

connection between the supply chain’s various stages, allowing them to coordinate their actions

and bring about many of the benefits of maximising total supply chain profitability.”

In all the information sharing that takes place in supply chain managemetn, however, there is a

need to ensure that the information flow is accurate and reliable. Procter & Gamble (P&G) started

to explore, after experiencing erratic shifts in ordering along the supply chain for its popular

brand of disposable diapers, a phenomenon referred to as the bullwhip effect. This phenomenon

results in the flow of distorted information from one entity to another along the supply chain. In

particular, it was found that distributors’ orders showed more variability than that of sales

(customer demand) and, further along the supply chain, P&G’s orders to its supplier exhibited

the greatest variability. Managers at every link in the supply chain tend to magnify even slight

demand uncertainties and variability, and will tend to make ordering and inventory decisions in


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their own entity’s interest. The phenomenon can give rise to excessive inventories, poor customer

service, and lost revenues, among others. It is not unique to P&G or the consumer packaged

goods industry, but has also been experienced in a computer company and a pharmaceutical

company (Lee et al., 1997).

Finance Flow: Every supply chain obviously has the finance or money flow, which the experts

also call the blood stream of a supply chain. This flow is an integral part of the supply chain.

Financial resources also flow up and down the supply chain, align with product and information

flow. The invoices are flowing down the supply chain, while payments are flowing up the supply

chain. Invoices and payments flow up and down along the whole supply chain.

The manufacturers are getting paid, but are also paying their suppliers. The suppliers are paying

their suppliers, while consumers are paying retailers, etc. The finance flow is endless in circular

motion.

Order processing is the main supply chain management process that initiates the flow of

payments. The ordering is directly related to customer credit limit, invoicing, and accounts

receivable. Customers place orders and pay for products through order processing systems.

Considering the fact that this process is multiplied to every single customer, the whole process

needs to be automated.

Payment flows are affected by terms of trade between players in the supply chain, such as

payment terms, credits, return policies, etc. By changing the terms of trade, the physical flows of

products can also be changed as well. For effective supply chain management companies must

design appropriate financial flow so that these three flow streams (product, information, and

financial resources) are aligned.

Commercial flow: All supply chain represents a transactional commercial flow. This means that

the material flow that run through the supply chain changes its ownership from one company to

another, from supplier to buyer. The transactional process of buying and selling shifts the material

flow’s ownership from the supplier to the buyer repeatedly until the end of the supply chain –

the end-consumer. This transactional commercial flow will only take place in a supply chain where


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there are more than one companies. On the other hand, if it is with an organisation there will be

material flow, but no ownership change, and hence no commercial flow.

The four flows described above not only better explain the function of the supply chain, but also

define it more thoroughly. They represent four major areas of concerns and research activities in

the supply chain management, which covers most of the known issues in the published literatures.

Objectives of Supply Chain Management

The fundamental objective is to "add value".

That brings us to the example of the fish fingers. During the Supply Chain Management'98

conference in the United Kingdom, a participant in a supply chain management seminar said that

total time from fishing dock through manufacturing, distribution, and final sale of frozen fish

fingers for his European grocery-products company was 150 days. Manufacturing took a mere

43 minutes. That suggests an enormous target for supply chain managers. During all that time,

company capital is--almost literally in this case--frozen. What is true for fish fingers is true of

most products.

Examine any extended supply chain, and it is likely to be a long one. James Morehouse, a vice

president of consulting firm A.T. Kearney, reports that the total cycle time for cornflakes, for

example, is close to a year and that the cycle times in the pharmaceutical industry average 465

days. In fact, Morehouse argues that if the supply chain, of what he calls an "extended enterprise,"

is encompassing everything from initial supplier to final customer fulfilment, could be cut to 30

days, that would provide not only more inventory turns, but fresher product, an ability to

customise better, and improved customer responsiveness. "All that add value," he says. And it

provides a clear competitive advantage.

Supply Chain Management becomes a tool to help accomplish corporate strategic objectives:

By reducing working capital,

By taking assets off the balance sheet,

By accelerating cash-to-cash cycles,

By increasing inventory turns, and so on.


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Customer Orientation

The end-consumer to a supply chain is perhaps the most important factor of all as far as its

management is concerned. Everything a supply chain does is driven by the needs and wants of

the end-consumer. The contents of SCM are populated with the approaches, activities as well as

the strategies that are aiming at delivering the products and services to satisfy the end-consumer.

Therefore, it is safe to say that the SCM should be and has always been a customer centred

management. This reflects the typical characteristic of supply chain’s customer orientation.

Importance and benefits of Supply Chain Management

In the ancient Greek fable about the tortoise and the hare, the speedy and over confident rabbit

fell asleep on the job, while the "slow and steady" turtle won the race. That may have been true

in Aesop's time, but in today's demanding business environment, "slow and steady" won't get

you out of the starting gate, let alone win any races. May be you need to become “fast and

steady”. Managers these days recognise that getting products to customers faster than the

competition will improve a company's competitive position. To remain competitive, companies

must seek new solutions to important Supply Chain Management issues such as modal analysis,

supply chain management, load-planning, route- planning and distribution network design.

Companies must face corporate challenges that impact Supply Chain Management such as

reengineering globalisation and outsourcing. Why is it so important for companies to get

products to their customers quickly? Faster product availability is key to increasing sales, says R.

Michael Donovan of Natick, Mass., a management consultant specialising in manufacturing and

information systems.

"There's a substantial profit advantage for the extra time that you are in the market and your

competitor is not," he says. "If you can be there first, you are likely to get more orders and more

market share." The ability to deliver a product faster also can make or break a sale. "If two

alternative [products] appear to be equal and one is immediately available and the other will be

available in a week, which would you choose? Clearly, "Supply Chain Management has an

important role to play in moving goods more quickly to their destination."


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The goals of modern SCM are to reduce uncertainty and risks along the supply chain, thereby

positively affecting inventory levels, cycle time, processes and customer service. All these

contribute to increased profitability and competitiveness.

Components of supply chains

1.6.1 The broad components of supply chains

The term supply chain comes from a picture of how the partnering organisations are linked

together. As shown in Figure 1.3, a simple supply chain links a company which manufactures or

assembles a product (middle of the chain) with its suppliers (on the left), and distributors and

customers (on the right). The upper part of the picture shows a generic supply chain, while the

bottom part shows a specific example of making toys.


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The arrows in Figure 1.3 shows the flow of material among the various partners. Not shown is the

flow of returns, which may be in reverse direction. The broken lines, which are shown only in the

upper part, indicate the bi-directional flow of information.

The supply chain is composed of three parts:

a. Upstream. This part includes the suppliers (which can be manufacturers and/or assemblers)

and their suppliers. Such a relationship can be extended, to the left, in several tiers, all the

way to the origin of the material (e.g., mining ores, growing crops).

b. Internal supply chain. This part includes all the processes used in transforming the inputs

received from the suppliers to outputs, from the time the inputs enter an organisation to the

time that the product(s) goes to distribution outside the organisation.

c. Downstream. This part includes all the activities involved in delivering the product to final

customers. (The supply chain actually ends when the product reaches its after use disposal -

- presumably back to Mother Earth somewhere).

As one can see a supply chain involves activities during the entire product life cycle, from "dirt to

dust." However, a supply chain is more than that, since we also deal with a movement of

Figure 1.3: Supply Chains of Toys Making (--- = information)


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information and money, and with procedures that support the movement of a product or a

service. Finally, the organisations and individuals involved are considered as part of the chain as

well.

Supply chains come in all shapes and sizes and may be fairly complex as shown in Figure 1.4. As

can be seen in the Figure 1.4, the supply chain for a car manufacturer includes hundreds of

suppliers, dozens of manufacturing plants (parts) and assembly plants (cars), dealers, direct

business customers (fleets), wholesalers, customers, and support functions such as product

engineering and purchasing.

Notice that in this case, the chain is not strictly linear as in Figure 1.4. Here we see some loops in

the process. Sometimes the flow of information and even goods can be bi-directional. For

example, not shown in this Figure 1.4 is the return of cars to the dealers, in cases of defects or

recalls by the manufacturer.

1.6.2 Conceptual components of SCM

Any supply chain management practice and activities is captured by the three conceptual

components:

Figure 1.4: An Automotive Supply Chain


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Supply Chain Configuration

Supply Chain Relationship

Supply Chain Coordination

Supply Chain Configuration is about how a supply chain is created from all its participating

firms. This comprises how big is the supply base for OEM (original equipment manufacturer); how

wide or narrow is the extent of vertical integration (which is the single ownership of consecutive

activities along the supply chain); how much of the OEM’s operations are outsourced; how the

downstream distribution channel is designed; and so on. It is also known as supply chain

architecture. The decision on supply chain configuration is strategic and at a higher level.

Supply Chain Relationship is about inter-firm relationships across the supply chain although

the key focus of relationship is often around the OEM and its first tier suppliers and first tier

customers and the relationship in between. The type and level of the relationship is determined

by the contents of inter-organisational exchanges.

Supply Chain Coordination refers mainly to the inter-firm operational coordination within a

supply chain. It includes the coordination of continuous material flows from the suppliers to the

buyers and through to the end consumer in a preferably JIT manner. Inventory management

throughout the supply chain could be a key focal point for the coordination. Production capacity,

forecasting, manufacturing scheduling, even customer services will all constitute the main

contents of the coordination activities in the supply chain.

Given the critical importance of coordination, few researchers have appeared to develop and test

the concept of coordination in the supply chain. Senge (1990) popularised systems thinking that

can be used to understand the reality of logistics and coordinate the chain members in order to

create collective knowledge. Konijnendijk (1994) examined the coordination process at tactical

and operational levels about product specification, volume, mix and lead-times between sales

and manufacturing in engineer-to-order (ETO) companies. Stank et al. (1999) studied inter-firm

coordination processes characterised by effective communication, information exchange,

partnering and performance monitoring in food industry supply chains. Lee et al. (1997)

suggested channel coordination, operational efficiency and information sharing to improve the

overall supply chain performance. Current research often emphasises a single coordination mode


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as the act of managing specific objects such as interdependent processes, information and

knowledge. Little attention has been given to exposing different coordination modes and their

interactions. The exception was Lee (2000), who provided an interesting concept of supply chain

integration that consists of information sharing, logistics coordination and organisational

relationship linkage. Pykeet al. (2000) shared this concept and tested it in an empirical study.

However, Lee (2000) considered only the coordination mode due to process realignment and said

nothing about combining different modes of coordination.

Supply Chain Decisions

We classify the decisions for supply chain management into two broad categories -- strategic

and operational. As the term implies, strategic decisions are made typically over a longer time

horizon. These are closely linked to the corporate strategy, and guide supply chain policies from

a design perspective. On the other hand, operational decisions are short term, and focus on

activities over a day-to-day basis. The effort in these type of decisions is to effectively and

efficiently manage the product flow in the "strategically" planned supply chain.

There are four major decision areas in supply chain management: 1) location, 2) production, 3)

inventory, and 4) transportation (distribution), and there are both strategic and operational

elements in each of these decision areas.

1.7.1 Location Decisions

The geographic placement of production facilities, stocking points, and sourcing points is the

natural first step in creating a supply chain. The location of facilities involves a commitment of

resources to a long-term plan. Once the size, number, and location of these are determined, so

are the possible paths by which the product flows through to the final customer. These decisions

are of great significance to a firm since they represent the basic strategy for accessing customer

markets, and will have a considerable impact on revenue, cost, and level of service. These

decisions should be determined by an optimisation routine that considers production costs, taxes,

duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc.

(SeeArntzen, Brown, Harrison and Trafton [1995] for a thorough discussion of these aspects.)

Although location decisions are primarily strategic, they also have implications on an operational

level.


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1.7.2 Production Decisions

The strategic decisions include what products to produce, and which plants to produce them in,

allocation of suppliers to plants, plants to DC's, and DC's to customer markets. As before, these

decisions have a big impact on the revenues, costs and customer service levels of the firm. These

decisions assume the existence of the facilities, but determine the exact path(s) through which a

product flows to and from these facilities. Another critical issue is the capacity of the

manufacturing facilities--and this largely depends the degree of vertical integration within the

firm. Operational decisions focus on detailed production scheduling. These decisions include the

construction of the master production schedules, scheduling production on machines, and

equipment maintenance. Other considerations include workload balancing, and quality control

measures at a production facility.

1.7.3 Inventory Decisions

These refer to means by which inventories are managed. Inventories exist at every stage of the

supply chain as either raw materials, semi-finished or finished goods. They can also be in-process

between locations. Their primary purpose to buffer against any uncertainty that might exist in the

supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their

value, their efficient management is critical in supply chain operations. It is strategic in the sense

that top management sets goals. However, most researchers have approached the management

of inventory from an operational perspective. These include deployment strategies (push versus

pull), control policies --- the determination of the optimal levels of order quantities and reorder

points, and setting safety stock levels, at each stocking location. These levels are critical, since

they are primary determinants of customer service levels.

1.7.4 Transportation Decisions

The mode of transportation choice aspect of these decisions are the more strategic ones. These

are closely linked to the inventory decisions, since the best choice of mode is often found by

trading-off the cost of using the particular mode of transport with the indirect cost of inventory

associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety

stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they

necessitate holding relatively large amounts of inventory to buffer against the inherent

uncertainty associated with them. Therefore customer service levels, and geographic location play

vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs,


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operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments

versus Lot-for-Lot), routing and scheduling of equipment are key in effective management of the

firm's transport strategy.

Supply Chain Management Today

If we take the view that Supply Chain Management is what Supply Chain Management people

do, then in 1997 Supply Chain Management has a firm hand on all aspects of physical distribution

and materials management. Seventy-five percent or more of respondents included the following

activities as part of their company's Supply Chain Management department functions:

Inventory management

Transportation service procurement

Materials handling

Inbound transportation

Transportation operations management

Warehousing management

Moreover, the Supply Chain Management department is expected to increase its range of

responsibilities, most often in line with the thinking that sees the order fulfilment process as one

co-ordinated set of activities. Thus the functions most often cited as planning to formally include

in the Supply Chain Management department are:

Customer service performance monitoring

Order processing/customer service

Supply Chain Management budget forecasting

On the other hand, there are certain functions which some of us might feel logically belong to

Supply Chain Management which companies feel are the proper domain of other departments.

Most difficult to bring under the umbrella of Supply Chain Management are:

Third party invoice payment/audit

Sales forecasting

Master production planning

Today Supply Chain Management includes services such as:

Operational Analysis and Design Materials Handling


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Distribution Strategy

Operational Improvements, Distribution Management

Computer Systems

Warehouse Design Project Management

Operational Commissioning

Computer Simulation

Technical Seminars

Write-in responses reveal the leading edge of what some Supply Chain Management

departments are doing. These include engineering change control for packaging; custom design

packaging; drafting national Supply Chain Management standards; and implementing SCM

software.

Trends in Development

The future for Supply Chain Management looks very bright. This year, as well as last year, two

major trends are benefiting Supply Chain Management operations. These are

Customer service focus

Information technology

Successful organisations must be excellent in both of these areas, so the importance of Supply

Chain Management and the tools available to do the job right will continue to expand.

The continuous development of SCM is partly driven by the changes of overall business

environment and intensified competitions in the global market place. But partly it is influenced

by the new understanding of the supply chain that they participate. Following are a number of

early trends in the subject’s development quite clear and apparent.

1) From functional to process perspective. Business management used to see and take action

on the functional (departmental) silos in the business. It was understandable that naturally the

function is what seen to be the distinctive delivery part of the business. But, today with supply

chain management concept managers can see their problems more from the process (to serve

the customers) perspective, understanding that functions can only make sense if it is perceived

from a supply chain process perspective.


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2) From operational to strategic viewpoint. At early years of applying supply chain

management concept, managers tends to see it as another operational tactics that will help to

reduce operational cost, such as purchasing function improvement and optimising the logistics

operations. But, gradually more and more managers realised that the effective changes can only

be achieved if the operational issues are addressed from the supply chain wide strategic

viewpoint. Operational excellence can only be manifested through its strategic fit.

3) From single enterprise to extended enterprise. Enterprise management is now arguably

displaced by the supply chain management, where the supply chain is by definition the extended

enterprise. The long established enterprise centred management thinking was based on that the

competition was raged between the organisations, thus it becomes obsolete as the competitions

are now predominantly between the supply chains. Management thinking over the extended

enterprise produces a great deal ideas that a single enterprise cannot.

4) From transactional to relationship based engagement. Business engagement between firms

in the past was predominantly transaction based and cost driven. The merit of any purchasing

and procurement of externally sourced materials and services was judged by the transactional

measures such as price, volume and delivery terms. But what’s now more of the practices in

working with external organisations within the supply chain is so called relationship based

engagement. This relationship approach does not abandon the transactional activities but put its

decision baking on much wider consideration of knowledge exchange, long-term commitment,

incentives and reward.

5) From local to regional, and from regional to global. Connections of supply network have

over the last two decades grown from local to regional and to global. Hardly any major enterprise

and supply chains is not connected to some part of the world. You need to get out before you

can get up. This trend is spurred by the lower cost of labour and materials in many parts of the

world, as well as first mover advantages in setting up global market presence.

We cannot conclude that the trends in development are always positive and promising. With

support of the supply chain management risks are now continuously growing. The task of

managing and improving supply chain performances across all industrial sectors is only becoming


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tougher, not easier. This calls for deeper and more thorough understanding of the challenges

supply chains are facing.

Where the Supply Chain Creates Value?

Supply chain management's ability to affect profitability and shareholder value should come as

no surprise. As Richard Thompson, a partner in Ernst & Young's supply chainpractice, points out,

supply chain management affects virtually every aspect of a company's business. "Everything is

involved," he says. "Supply chain management [influences] plan-buy-make-move-and-sell."

Enhanced revenues, tighter cost control, more effective asset utilisation, and better customer

service are just the beginning.

Thompson and his colleagues have identified five areas in which supply chain management can

have a direct effect on corporate value. They include:

Profitable growth. Supply chain management contributes to profitable growth by

allowing assembly of "perfect orders," supporting after-sales service, and getting

involved in new product development. The bottom-line numbers give the answer.

According to A.T. Kearney's research, inefficiencies in the supply chain can waste up to25

percent of a company's operating costs. With profit margins of only 3 to 4 percent, the

consultants point out, even a 5-percent reduction in supply-chain waste can double a

company's profitability.

Working-capital reductions. Increasing inventory turns, managing receivables and

payables, minimising days of supply in inventory, and accelerating the cash-to-cash cycle

all are affected by supply chain execution. Thompson cites the case of a consumer-

products company that took 20 minutes to make a product and five and a half months

to collect payment for it. "If you can cut the cash cycle down, there are millions of dollars

there," he says.

Fixed-capital efficiency. This refers to network optimisation--for instance, assuring that

the company has the right number of warehouses in the right places, or outsourcing

functions where it makes more economic sense.

Global tax minimisation. "There's a ton of money here," Thompson says, if companies

look at assets and sales locations, transfer pricing, customs duties, and taxes.


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Cost minimisation. This largely focuses on day-to-day operations, but it also may

involve making strategic choices about such issues as outsourcing and process design.

Based on experience with companies participating in MIT's Integrated Supply Chain Management

Program, there has been found that the most commonly reported bottom-line benefits are

centred on reduced costs in such areas as inventory management, transportation and

warehousing, and packaging; improved service through techniques like time-based delivery and

make-to-order; and enhanced revenues, which result from such supply chain related

achievements as higher product availability and more customised products.

The companies studied by Metz have recorded a number of impressive supply-chain

accomplishments, including:

a 50-percent inventory reduction.

a 40-percent increase in on-time deliveries.

a 27-percent decrease in cumulative cycle time.

a doubling of inventory turns coupled with a nine-fold reduction in out-of-stock rates.

a 17-percent revenue increase.

On a broader scale, research conducted by Mercer Management Consulting reveals that

organisations with the best supply chains typically excel in certain pivotal performance areas.

Specifically, they outperform their counterparts along such key metrics as reducing operating

costs, improving asset productivity, and compressing order-cycle time. In a separate study,

Mercer found that close to half of all senior executives surveyed had specific supply-chain

improvement projects among their top 10 corporate initiatives. This is a resounding affirmation

at the highest levels of supply-chain management's competitive potential.

A study by the management consulting firm of A.T. Kearney has come at the supply-chain

payback from another angle--the costs of not paying careful attention to the supply-chain

process. The Kearney consultants found as discussed previously that supply-chain inefficiencies

could waste as much as 25 percent of a company's operating costs.

Finally, the PRTM study cited earlier documented the powerful advantages of supply-chain

management across a range of critical measures. The leading companies, for example, enjoyed a


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cash-to-order cycle time that was fully one-half of the median companies'. Similarly, their

inventory days of supply turned out to be 50 percent less than the median. The best-in-class

companies, moreover, met their promised delivery dates 17 percent more often than the rest of

the pack.

1.10.1 Examples

These are some of the big-picture numbers. Most companies, though, find it more meaningful to

focus on the payback potential of specific activities within the total supply-chain process. The

following examples illustrate the kinds of benefits that can be realised. Individually, these

improvements can bring important cost savings and service enhancements. Collectively, they can

lead to dramatic breakthroughs in profitability and market share.

Morehouse believes that Supply Chain Management also can play key roles in increasing a

company's market share--"... not by cutting price, but by doing such a superb job that you attract

profitable market share," he says. In other words, a company needs to have not only the right

product, but also the right processes for the market.

Distribution network optimisation. Optimising the distribution network--that is determining

the best location for each facility, setting the proper system configuration, and selecting the right

carriers--brings immediate cost advantages of 20 to 30 percent. That's the figure determined by

IBM's Wholesale Distribution Industry Segment, based on consulting engagements in a wide

range of industries. "This typically breaks down into transportation savings of 15 to 25 percent

and improvements in inventory-carrying costs of 10 to 15 percent," says Mark Wheeler, national

solutions manager for the IBM consulting unit.

Shipment consolidation. A proven, though often overlooked, supply-chain lever lies in shipment

consolidation. Nabisco offers an instructive example. For one retail customer, the company had

been delivering product from multiple plants via six different LTL (Less Than Truckload) deliveries.

Through the use of a third-party SCM provider, it was able to consolidate these multi-vendor

loads into two truckloads. By strategically consolidating the shipments, reports Rick D. Blasgen,

senior director of product supply, Nabisco cut its transportation costs by half. On top of that, it

reduced inventory levels, increased inventory turns, cut lead-times, improved on-time delivery,

and enhanced case-fill rates.


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Cross docking. Another supply-chain technique with proven payback potential is cross docking.

This is the practice of receiving and processing goods for reshipping in the shortest time possible

and with minimum handling and no storage. According to Maurice Trebuchon of Coopers &

Lybrand's SysteCon Division, cross docking can yield savings of 25 percent or more over

conventional warehousing.

Supplier management. Research from McKinsey & Co. demonstrates the substantial

improvements possible through aggressive supply management. An article by McKinsey

consultants in the winter 1998 issue of SCM Review mentions a client in the automotive industry

that had successfully integrated vendors into its product-development process. On one particular

team, the integration paid dividends in triplicate: the parts count dropped by 30 percent, the

number of assembly steps and material specifications was reduced by half, and development time

shrank from years to months.

Supplier integration. The abundant advantages of supplier integration were again evident in a

two-year study conducted by the Global Procurement and Supply Chain Initiative at Michigan

State University. Drawing on responses received from around the globe, the study showed that

companies that involved suppliers earlier on in the product-design and -development process

consistently outperformed those that did not. This was true across a range of supply-

management metrics. The comparative improvement in purchased material costs alone was 15

percent.

Industry experts say most of those barriers fall into one of three broad categories:

information sharing,

integration,

or the people themselves.

Until these barriers are dismantled, products will not flow swiftly to customers and companies

will not achieve the benefits promised by supply chain management.

Chapter 2: Global Supply Chain Management

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2.1 Focus of Present Supply Chain Management: Going Global

Multinational companies, entrepreneurs, and management consulting firms will increasingly

recruit individuals with the competencies required to identify, develop and analyse sources of

value-addition in global supply chains. According to Jeff Berg, Director, PRTM: "Vanguard

companies are exploiting supply chain thinking and technologies to enhance their competitive

position.

They are shifting to more responsive and cost-efficient channels, seamlessly integrating their key

customers and partners into their supply chains, and reorganising themselves to optimise their

product, capital, and information flows. Anecdotal and ad-hoc decision-making won't get the job

done in the competitive landscape of the future.

Just as supply chain innovators such as Wal-Mart and Dell computer have carved out their place

at the table using supply chain strategies, new players will emerge with supply chain optimising

technologies. These players will not only be `technology´ companies, such as Amazon.com, they

will include well-established players in automotive, chemicals, packaged goods, and retail. In fact,

the companies who can remove excess costs and assets from their supply chains and improve

their delivery and responsiveness will be the darlings of Wall Street and their customers, in the

next few years."

Global supply chain management focuses on the operational and strategic process of the entire

network of business that transform inputs (e.g., raw materials and information) into value-added

finished products and services for end customers. Notably, global supply chain managers

integrate, leverage, and monitor the continual flow of information among all supply chain entities

in both manufacturing and service businesses. Usually the activities in early stages of the supply

chain are manufacturing-oriented (e.g., weaving fabric or building airplanes) and the latter stages

are service-oriented (e.g., retailing apparel, logistics or managing an airline). However,

service processes often occur at the interfaces between firms in the supply chain to coordinate

information flows from customers, and service businesses have their own unique supply chain

characteristics. Thus, a fundamental understanding of both manufacturing and service operations


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is vital to this concentration. We believe the business leaders of the future will be those that can

best use supply chain excellence as a strategic competitive asset.

2.2 Managing a Global vs. Domestic Supply Chain

Variables like border crossings and multiple hand-offs make for more uncertainty, but experts

say it all comes down to managing information. Truth be told, there are very few solely domestic

companies left these days. Businesses are either directly sourcing overseas or their suppliers are;

fewer and fewer companies are not selling their goods in international markets. And, even if your

strategy is to stay wholly domestic, your competition is coming (or will soon come) from every

area of the globe.

“There are very few companies that are not touched by global issues; if not directly, then through

their suppliers or customers,” says Mike Peters, First V.P., ProLogis Solutions Group. Yossi Sheffi,

Director, Center for Transportation and Logistics, MIT, takes the concept one step further. “Even

if a company only has domestic suppliers and domestic customers, it must always be analysing

whether it would be better to go overseas. And companies are always subject to global

competition, they must be conducting constant analysis of their global competitors,” he says.

So, if the focus is global and companies are sourcing, selling or manufacturing overseas, does the

domestic supply chain still exist? Or, on the other hand, has formerly domestic components

simply become part of a larger, overall global supply chain?

The answer isn’t clear cut. While almost everyone agrees that companies must function in a global

marketplace, there is far less agreement on how this context translates when it comes to

managing the supply chain. Although companies may think globally in scope, when it comes

down to actual tactical operations there’s a lot of local blending going on.

Sheffi and Peters both agree that there are certain elements that are required to manage any

supply chain regardless of whether it’s domestic or global. Things like visibility, technology and

flexibility are basic ingredients that need to be incorporated seamlessly in order for a supply chain

to function efficiently regardless of the length of the chain.


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“Technology is crucial. It speeds the supply chain and creates visibility,” says Sheffi. He believes

that technology is becoming more aligned as standards are coming into place that allow different

systems to communicate and share information. This is an issue that companies must address

whether they operate in the home country or around the world.

Visibility is another key element. “You need to know where the goods are,” says Peters. This is

particularly critical in order to allow companies to manage their supply chain strategically,

identifying various points throughout the supply chain where goods can be held to reduce the

risk of delays. And, with capacity issues still a concern in North America, a delay-reduction

strategy applies across the board.

Jack Gross, VP & GM International, Schneider Logistics, also suggests that flexibility is critical to

the success of the supply chain. Companies need to ensure that both their supply chain and their

partners can readily integrate alternate locations should circumstances dictate quick response.

For instance, if the goods normally come into the Port of Long Beach, but because of delays, they

go to Port of Seattle instead, the supply chain needs to be flexible enough to handle the change

at both the domestic and global level. Globally, the destination port needs to be switched, and

domestically, the transportation providers must be flexible enough to meet the goods at the

alternate location and get them to their ultimate destination.

Technology, visibility and flexibility are all tied to information and this leads to an area

increasingly important in supply chain management—the need for upgraded information

management. “The movement of goods is not really the challenge, information is,” says Keith

Goldsmith, Sr. VP, Business Development and Technology, TNT Logistics. Companies operating

today are collecting tremendous amounts of data and the trend to move towards point of sale

information is resulting in mountains of information being fed into a company’s system. While

ultimately this information will help businesses streamline their operations and reduce inventory,

the trick right now is to take the raw data and translate it into a form that is useful for the

customer. In fact, many would argue that today, managing the supply chain is more about

managing information than moving goods.


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2.3 Supply Chain Management Features that provide Global

Competitive Edge

Today’s popular supply chain management can help companies achieve and maintain a

competitive edge globally by empowering them to streamline and enhance their most important

supply chain operations from start to finish. With supply chain management in place,

organisations can maximise cost-efficiency, increase productivity, and give their bottom line a big

boost.

Software enables realisation of broader benefits. How does supply chain management software

enable the realisation of all these benefits? By offering a broad range of robust features, delivered

through a comprehensive suite of tightly integrated modules and applications. This functionality

is designed to fully automate and support supply chain processes from end-to-end, and includes:

Inventory Management

With supply chain management, companies can significantly improve the way they track and

manage their supplies of raw materials and components needed for production, finished goods

to satisfy open sales orders, and spare parts required for field service and support. This eliminates

excess and waste, frees up valuable real estate for other important purposes, and minimises

related storage costs.

Order Management

Supply chain management software can dramatically accelerate the execution of the entire order-

to-delivery cycle by helping companies to more productively generate and track sales orders.

Supply chain management also enables the dynamic scheduling of supplier deliveries to more

effectively meet demand, as well as more rapid creation of pricing and product configurations.

Procurement

All activities and tasks associated with sourcing, purchasing, and payables can be fully automated

and streamlined across a company’s entire supplier network with supply chain

management software. As a result, businesses can build stronger relationships with vendors,

better assess and manage their performance, and improve negotiations to leverage volume or

bulk discounts and other cost-cutting measures.


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Logistics

As companies expand globally, their supply chains become more and more complex. This makes

the coordination of the numerous warehouses and transportation channels involved quite a

challenging endeavour without supply chain software in place. With supply chain management,

businesses can improve on-time delivery performance and boost customer satisfaction by

achieving complete visibility into how finished goods are stored and distributed, regardless of

the number of facilities or partners that participate.

Forecasting and Planning

With supply chain management, organisations can more accurately anticipate customer demand

and plan their procurement and production processes accordingly. As a result, they can avoid

unnecessary purchases of raw-materials, eliminate manufacturing over-runs, and prevent the

need to store excess finished goods, or slash prices to move products off of warehouse shelves.

Return Management

Supply chain software can simplify and accelerate the inspection and handling of defective or

broken goods – on both the buy and sell side of the business – and automate the processing of

claims with suppliers and distributors, as well as insurance companies.

Many supply chain offerings also include add-on options or modules designed to enhance

related activities. Through these features, support is provided for a variety of important processes

such as contract management, product lifecycle management, capital asset management, and

more.

Top Supply Chain Challenges

According to Supply Chain Council (SCC), the Five Most Common Supply Chain Management

Challenges are:

Unable to apply the right metrics to manage supply chains effectively

By far the most 'popular' challenge, finding and implementing the right metrics remains a

problem in supply chain management. This includes disputes about the right metrics between

supply chains, product lines or departments within a company, agreeing on definitions and


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calculations, having too many metrics or too few metrics, difficulty benchmarking and difficulty

finding metrics that are supported 'of-the-shelf' in reporting tools.

Difficulty prioritising supply chain improvement efforts

Companies struggle to identify where to deploy their expert resources and in what sequence.

Problem solvers are scarce, you want them to work on those problems that have the biggest

impact on your supply chain performance. This includes lack of a standard approach (every group

has their own methods with varying results), internal politics, lack of fact-based prioritisation,

capabilities/skills are limited to few key individuals.

Performance is lagging

Whether a company is driven by the need to reduce costs or inventory, need to improve customer

satisfaction, or want to increase the speed to respond to market changes, performance gaps

continue. Supply chain require to improve the performance of a lagging.

Complexity of supply chains

Serving many different customers with a wide variety of products and services may result in a

complex, global, network of suppliers, factories, warehouses, transporters, customers and others.

The complexity of such a network is hard to unravel and makes it difficult to find where and why

problems occur. This includes challenges like: "We don't know what our supply chains are", "What

is the right number of supply chains?", the desire to standardise processes.

Finding and holding on to supply chain talent

Although supply chain management is now a generally accepted and understood function in a

company, it is difficult to find true supply chain talent. Supply chain management covers multiple

disciplines and it can therefore be difficult to find that all-round supply chain person. How many

people in your organisation have deep and wide knowledge of planning, sourcing,

manufacturing, distribution and order management functions? How many can see the supply

chain as a whole? This includes problems like finding the right people, reducing attrition and

developing hiring, training and redeployment plans.

2.4 Dimensions of Challenges

Challenges can also be viewed in the following dimensions:


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2.4.1 Market dimension

Continuing demand volatility across the world market has hampered many supply chains’ ability

to manage the responsiveness effectively. Demand fluctuation at the consumer market level

poses a serious challenge to the assets configuration of supply chain, capacity synchronisation,

and lead-time management. With increased market transparency, many B2B and end customers

simply shop for the lowest price, overlooking their loyalty to particular suppliers or products. A

lack of robust forecasting and planning tools may have contributed to the problem, as companies

and their suppliers frequently find themselves scrambling to meet unexpected changes in

demand.

2.4.2 Technology dimension

Technology and the level of the sophistication in applying the technology for competitive

advantages have long been recognised as the key strategic challenges in supply chain

management. This is even more so, when we are now talking about the supply chain development

in a global stage. (Discussion on this point is more elaborate in the following chapters).

2.4.3 Resource dimension

From resource based perspective, global supply chain development is both motivated by dinging

new resources around world and by make better use of its own already acquired resources to

yield economic outputs. It comes as no surprises that one of the key strategic challenges in global

supply chain development is about resource deployment.

2.4.4 Time dimension

Most of the key global supply chain challenges are time related, and it appears to be that they

are becoming even more time related than ever before. Competitions on many new electronic

consumer products is largely about who developed it first and become the industry leader. From

the internal supply chain perspective, the cost and core competences are all largely measured

against time. Inventory cost increase, if the materials do not move on quick enough; supply chain

responsiveness is can be significantly influenced by the lead-time and throughput time. Indeed,

one of the key supply chain management subject areas is about agility and responsiveness. That

is basically defined as how fast the supply chain can respond to the unexpected and often quite

sudden changes in market demand.


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2.5 Response of Supply Chain to Globalisation

Knowing the challenges is one thing perhaps to begin with, but learning about how to face up to

the challenges is quite another. Despite the plethora of literatures on supply chain management,

there are still no universally agreed “one size fit all” recipes for managers to prescribe in order to

survive the challenges. Academic and empirical studies show the following approaches that

supply chains have survived the global challenges.

2.5.1 Collaboration

A great deal of global supply chain management activities are not necessarily about competing

against one another, rather it is more about collaboration and partnering. Inter-firm collaboration

in supply chain management context is simply defined as working together to achieve a common

goal. The collaboration is usually mentioned when there is an area or a project the activities of

the collaboration can be associated with. The parties that involved in the collaboration are often

referred to as the partners or collaborative partners. There are a number of obvious reasons why

collaboration is one of the most favourite supply chain management approaches.

Sharing resources: collaboration between two firms helps to share the complementary resources

between them. Information, knowledge and intellectual resources are also very common

resources that are shared during the collaboration.

Achieve synergy: collaboration of the two partnering firms will usually result in what is called

‘synergy.’ Synergy, in general, may be defined as two or more things functioning together to

produce a result not independently obtainable. That is, if elements A and B are combined, the

result is greater than the expected arithmetic sum A+B.

Risk sharing: a properly constructed collaboration can help to mitigate the company’s market

and supply risk significantly for both parties. By collaborating on investment and marketing, the

negative impact of the supply chain risks can be borne by both parties and thus shared and

halved.

Innovation: collaboration in technology development and R&D partnering is particularly

effective way to advance their competitive advantages through innovation in the technological

frontier. In most of innovation training programmes one can always recognise one of steps of


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generating innovative ideas and that can be through the brain storming across a multi-functional

team.

2.5.2 Supply chain integration

The nature of a supply chain is that it is usually a network which consists of a number of

participating firms as its member.

For a global supply chain the network stretches many parts of the world, and the participating

member firms of the network can be an independent company in any country around the world.

Supply chains are therefore voluntarily formed ‘organisations’ with fickle loyalties and often

antagonistic relations in between the member firms. Communication and visibility along the

supply chain are usually poor. In other words, supply chains are not born integrated.

Supply chain integration therefore can be defined as the close internal and external coordination

across the supply chain operations and processes under the shared vision and value amongst the

participating members. Usually, a well-integrated supply chain will exhibit high visibility, lower

inventory, high capacity utilisation, short lead-time, and high product quality (low defect rate).

Therefore, managing supply chain integration has become one of the most common supply chain

management approaches that can stand up to the global challenges.

However, there is no supply chain that is strictly 100% integrated, nor any one that is strictly 0%

integrated. It is about how much the supply chain is integrated from a focal company’s point of

view. To illustrate this degree of difference in supply chain integration, Frohlich and Westbrook

(2001) suggested a concept of ‘Arc of Integration’ (Figure 3). A wider arc represents a higher

degree of integration which covers larger extent of the supply chain, and a narrow one for a

smaller extent. The issue about supply integration is particularly important when the supply chain

is formed by the members around the globe.


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Figure 2.1 Arc of integration (Source: Frohlich and Westbrook, 2001)

2.5.3 Divergent product portfolio

A conventional wisdom says that ‘don’t put all your eggs in one basket.’ It also makes sense in

formulating a global supply chain development strategy. Translated into business management

terminology, the wisdom is very similar to the ‘divergent product portfolio’ strategy. Then it may

make even more sense when the global market becomes the stage for the supply chain. Two key

characteristics of global market are volatility and diversity.

Develop divergent product portfolio will make the supply chain more capable of satisfying the

divergent demand of the world market. Many leading multinational organisations have already

been the firm believer of this strategy. They have developed a wide range of product or even

business sector portfolio to cater for the market needs. Virgin Group, General Electric, British

Aerospace are just some well know examples.

Development of “blue ocean strategy”

Based on a study of 150 strategic moves in many globally active supply chains over the last thirty

years, Kim and Mauborgne argue that developing the ‘blue ocean strategy’ (as they coined it) has

already been proven an effective response to the global challenges for many supply chains.

Tomorrow’s leading supply chains will succeed not by battling competitors, but by creating ‘blue

ocean’ of uncontested market space that is ripe for growth. They have proved that one can face

up to the challenges most effectively without actually doing so. Creating new market space is

actually a lot easier than you think if you know how.

Figure 2.1: Arcs of integration


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2.6 Supply Chain Integration: Challenges

From Peter L. Jennings, Research Associate, CAPS Research we get the following Challenges to

Supply Chain Integration:

1. Establish a vision of how financial and non-financial results will improve with supply chain

integration.

2. Develop people, culture and an organisation that supports the supply chain vision.

3. Develop customer-centric metrics.

4. Develop multiple supply chains to meet the needs of different customer and market

segments.

5. Establish the correct positioning of work on a global basis.

6. Incorporate supply chain consideration into product and service design decisions.

7. Maintain sourcing as a first-level priority.

8. Stay focused and consistent in relationships with customers and suppliers.

9. Create an effective Sales and Operations process.

10. Develop valid and reliable databases, data and information.

11. Develop the capabilities and analytic tools required to make effective decisions in an

increasingly complex and risky environment.

12. Build trust within and across organisations in the supply chain.

13. Find ways to share risk equitably among supply chain partners.

14. Find ways to share rewards equitably among supply chain partners.

This research does not provide all of the answers to overcoming these challenges to integrating

your supply chains or even a comprehensive approach for doing so. But in the following pages,

you will find strategies and good practices developed by our focus companies to meet these

challenges and to push ahead in integrating supply chains.

2.7 Competitive Factors Influencing Supply Chain Competition

From Peter L. Jennings, Research Associate, CAPS Research we also get a discussion on

Competitive Factors Influencing Supply Chain Competition:

The Quest for Competitive Advantage

The idea of sustainable competitive advantage requires that superior economic performance

compared to competition be achieved over time. It is based on unique capabilities valued by the


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market and is difficult to duplicate in a particular industry space. However, it appears that

sustainable competitive advantage is difficult to achieve and maintain over time as measured by

superior economic performance.

Two studies done by Wiggins and Raefli, 2002 and 2005 (from a sample of 6,772 firms in 40

industries over 25 years) found that:

Only a small minority of firms exhibit superior performance for a 10-year period.

Regulating mechanisms in the market constantly pressure superior performing firms to

return to the main group, while sub-performing firms either improve efficiencies or

continue in a downward spiral of decline and eventual failure.

In the follow-up study by the same researchers in 2005, additional evidence was provided that

competitive advantage is getting harder to attain, harder to sustain and is shorter in duration.

Also, competitive advantages becoming less a matter of a developing and maintaining single

advantage over time but more a matter of “concatenating over time a sequence of

advantages”(Wiggins and Ruefli 2005).

The overall implication is a paradigm shift for the strategic management of the supply chain in

which the key challenge to attaining and sustaining competitive advantage becomes how to

continuously improve internal flexibility and reduce competitive response time. In addition, the

continuous implementation and improvement of multiple versus single strategies providing for

competitive advantage and agility across all elements of the supply chain will be a likely

requirement.

Examples of the rapid change that supply chains of the firms studied have had to respond include:

Faster than anticipated market shifts to new products and technologies

Erosion of dominant worldwide market positions

Increasing supply constraints and upward pricing pressure from suppliers

Increasing size and complexity of projects

Remote and complex project locations worldwide

Fewer available suppliers and customer requirements for cycle-time reduction

Rapidly changing customer mix with pressure for reduced response times

Significant price/cost squeeze with less available market share

“Flawless execution” required for new product and service introductions


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Product design cost reductions with product innovations

Significant emphasis on “lean” and “agile”

Time Compression

The idea of time-based competition is not new. The ever-accelerating pace of competition,

however, continues unabated. Senior executives in the current study testify to a significant

compression of time within just last two to three years. Transitions of all kinds —markets,

products, processes, technologies — are quickening and increasingly overlapping, adding to the

complexity of managing a global supply chain.

To compete effectively, supply chains will have to be increasingly agile to meet changing

customer and competitive demands. In addition, firms will have to quickly respond to labour rate,

fuel and energy cost, and political uncertainties. These dynamic changes will require rapid shifts

in manufacturing sites, distribution centres and outsourcing locations for both manufacturing

and business processes, and the agile reconfiguration of supply chains.

Information Technology

By definition, a supply chain includes the flow of information to and from all participation entities.

Many, if not most, of the supply chain problems are the result of poor flow of information,

inaccurate information, untimely information, etc. Information must be managed properly in each

supply chain segment.

Therefore, another major catalyst of change and source of competitive advantage in supply chain

management is information technology. It is transforming the way firms communicate with,

transact with and learn from customers, competitors and supply partners, and therefore compete

across the supply chain. Information technology enables firms to exchange information with a

broader set of partners, leading to positions of greater certainty across more relationships.

Consequently, the strategic role of effectively and efficiently managing supply chains has steadily

expanded across enterprises and extended across geographies.

Overall, firms are now confronted with more complex environments. These complex

environments are characterised by rapid and/or discontinuous change in demand and resource

availability, or technology shifts, which lead to contingencies difficult or impossible to anticipate.


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As firms increase the scope and distance of their activities, and work to include more constituents

in their decision process, they introduce additional management complexity. Therefore, valid and

timely information across all elements of tightly coupled supply chains is required to provide for

the appropriate allocation of human, physical, financial and information resources across these

extended and complex supply chains operating in changing environments.

Information systems are the links that enable the communication and collaboration along the

supply chain. They represent “one of the fundamental elements that link the organisations of

supply chain into a unified and coordinated system. In the current competitive climate, little doubt

remains about the importance of information and information technology to the ultimate

success, and perhaps even the survival, of any SCM initiative” (Handfield and Nichols [1999]).

Case studies of some world-class companies such as Wal-Mart, Dell Computers and Federal

Express, indicate that these companies created very sophisticated information systems, exploiting

the latest technological developments and creating innovative solutions. Representative IT

solutions are shown, together with the problems they solve, in Table 2.1

Supply chain problem IT solution

Linear sequence of processing is too slow. Parallel processing, using workflow software.

Waiting times between chain segments are

excessive.

Identify reason (DSS software) and expedite

communication and collaboration (Intranets,

groupware).

Existence of non-value added activities. Value analysis (SCM software), simulation

software.

Slow delivery of paper documents. Electronic documents and communication

system (e.g. EDI, e-mail).

Repeat process activities due to wrong

shipments, poor quality, etc.

Electronic verifications (software agents),

automation; eliminating human errors,

electronic control systems.

Batching; accumulate work orders between

supply chain processes to get economies of

scale; e.g. save on delivery.

SCM software analysis, digitise documents for

online delivery

Learn about delays after they occur, or learn

too late.

Tracking systems, anticipate delays, trend

analysis, early detection (intelligent systems).


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Excessive administrative controls such as

approvals (signatures). Approvers are in

different locations.

Parallel approvals (workflow), electronic

approval system. Analysis of need.

Lack of information, or too slow flow. Internet/intranet, software agents for

monitoring and alert. Bar codes, direct flow

from POS terminals.

Lack of synchronisation of moving materials. Workflow and tracking systems.

Synchronisation by software agents.

Poor coordination, cooperation and

communication.

Groupware products, constant monitoring,

alerts, collaboration tools.

Delays in shipments from warehouses. Use robots in warehouses, use warehouse

management software

Redundancies in the supply chain. Too many

purchasing orders, too many handling and

packaging.

Information sharing via the Web creating

teams of collaborative partners supported by IT

(see Epner [1999]).

Obsolescence of parts and components that

stay too long in storage.

Reducing inventory levels by information

sharing internally and externally, using

intranets and groupware.

Table 2.1 IT solutions to supply chain problems

One of the most important topics related to IT and SCM is information sharing along the supply

chain.

2.8 Contemporary Trends in SCM

Changing business dynamics and intensifying competition have brought about new challenges

for supply chain professionals. Globalisation, shortened product lifecycles, stringent regulations

and volatile markets have made effective supply chain management a prerequisite for business

success and growth. So supply chain professionals are constantly assessing their supply chains to

make sure that gaps are filled and inefficiencies corrected promptly.

Globalisation does not seem to have reduced process and management costs. In fact those

hidden costs could be on the rise when supply chain becomes more global if not careful.


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Leading companies are taking an end-to-end approach in managing risk at each node of the

supply chain. To keep the supply chain as lean as possible, they are taking a more active role in

demand planning, which ensures they order only the amount of material needed to fill firm

orders.

Volatile market demands and economic conditions have brought about some interesting and

noteworthy trends in supply chain management:

More Emphasis on Visibility: Increasingly supply chain professionals are realising the need for

more visibility in supply chains. So today's supply chain solutions focus on offering analytics data

that facilitate decision-making, as opposed to merely providing static visibility. These solutions

provide consolidated, real-time analytics and share them with relevant stake-holders, thereby

making information more actionable.

Improved Responsiveness: Traditionally supply chains have been driven by forecasts, and

supply of inventory has been based on predicted demand. However, this model does not work in

the current dynamic market scenario. Manufacturers are now expected to be highly responsive

to changing market demands. And this has led to the emergence of tools which enable better

visibility, communication, and collaboration, and empower manufacturers by making their supply

chains more responsive, flexible and versatile.

Enhanced Collaboration & Communication: Globally distributed operations, outsourced

manufacturing, and multiple regulatory standards necessitate better co-ordination and timely

communication in supply chains. And these are crucial aspects in supply chain management

today. So there is growing emphasis on the need for efficient collaboration and communication,

to enable judicious decision-making. Hence supply chain solutions are also increasingly catering

to this need.

Low Investment & High ROI with Advanced Software: Unfriendly economic conditions have

forced manufacturers and supply chain professionals to cut down on their IT budgets. This has

led to the growing use of SaaS-based applications in supply chain management, which offer

advanced, and integrated information management capabilities. Unlike traditional applications

these solutions are on-demand services which can be deployed easily without having to install


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complex software or hardware. These do not require high capital investment or expensive

maintenance. These are low cost solutions, but guarantee high ROI.

Increased Use of Supply Chain Consulting: Manufacturers have realised that today’s supply

chains are highly dynamic in nature and therefore require dedicated time, and resources. Hence

they are now resorting to supply chain consultant, who offer their expertise to help resolve issues

and manage supply chains more efficiently. Their vast experience helps in overcoming challenges

and in making supply chains more flexible and responsive.

Globalisation of manufacturing has revolutionised economies worldwide. While low-cost regions

are being used for manufacturing, they also pose a unique set of challenges which need to be

addressed. Global supply chain models are susceptible to increased risks, lack of visibility, reduced

control and collaboration. And the above-mentioned trends in supply chain management reveal

that manufacturers are trying to overcome the limitations of global supply chain models in order

to build seamless supply chains.

Chapter 3: Planning and Designing the Supply Chain

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3.1 Planning Supply Chain Network

A vital issue in supply chain management is to design and plan out the overall architecture of the

supply chain network and the value adding flows that go through it. This means that managers

should step back and looks at the supply chain as a whole and formulates strategies and

processes that maximise the total supply chain value-adding and minimises the total supply chain

costs. There are several key contents of such architecture design and planning. The major ones

have been discussed in this chapter.

The general business environment is a lot more dynamic than in the 1990's, with customer

expectations of delivery lead-times shortening tremendously. At the same time, much of the

manufacturing capability has been outsourced – meaning that companies have to be much more

responsive to the customer, even though they have less direct control over operations. Today's

environment requires more collaboration than control; more coordination than optimisation.

3.2 Efficiency and responsiveness in Supply Chain Management

Responsiveness can be defined as the “ability to react purposefully and within an appropriate

time-scale to customer demand or changes in the marketplace, to bring about or maintain

competitive advantage” (Holweg, 2005, p. 605). In contrast, a supply chain would be considered

efficient if the focus is on cost reduction and no resources are wasted on non-value added

activities (Naylor, Naim and Berry, 1999, p. 108).

Supply chain responsiveness includes a supply chain's ability to do the following:

• Respond to wide ranges of quantities demanded

• Meet short lead times

• Handle a large variety of products

• Build highly innovative products

• Meet a high service level

• Handle supply uncertainty

These abilities are similar to many of the characteristics of demand and supply that led to high

implied uncertainty. The more of these abilities a supply chain has, the more responsive it is.


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Responsiveness, however, comes at a cost. For instance, to respond to a wider range of quantities

demanded, capacity must be increased, which increases costs.

This increase in cost leads to the second definition: Supply chain efficiency is the inverse of the

cost of making and delivering a product to the customer. Increases in cost lower efficiency. For

every strategic choice to increase responsiveness, there are additional costs that lower efficiency.

Providing the right degree of responsiveness and having an efficient supply chain at the same

time is a goal that is hard to achieve and that typically involves trade-off decisions by

management, since increased responsiveness can be perceived to come at the expense of

reduced efficiency, and vice versa. However, there may be strategies, such as revised planning

approaches, that restructure supply chain processes to achieve both goals at the same time and

enable a supply chain to be responsive and efficient simultaneously.

3.3 Decision phases in Supply Chain

To make supply chain management effective and efficient, managers need to take various

decisions related to the flow of information, product and funds. Decisions in supply chain

management could be categorised in three phases depending on the frequency of each decision

and the time frame during which decision phase impact.

3.3.1 Supply Chain Strategy or Design

A supply chain strategy determines the nature of procurement of raw materials, transportation

of materials to and from the company, manufacture of the product or operation to provide the

service, and distribution of the product to the customer, along with any follow-up service and a

specification of whether these processes will be performed in-house or outsourced. Given that

firms are rarely completely vertically integrated, it is important to recognize that the supply chain

strategy defines not only what processes within the firm should do well but also what the role

played by each supply chain entity is.

During this phase, given the marketing and pricing plans for a product, a company decides how

to structure the supply chain over the next several years. It decides what the chain's configuration

will be, how resources will be allocated, and what processes each stage will perform. Strategic

decisions made by companies include whether to outsource or perform a supply chain function


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in-house, the location and capacities of production and warehousing facilities, the products to

be manufactured or stored at various locations, the modes of transportation to be made available

along different shipping legs, and the type of information system to be utilized.

A firm must ensure that the supply chain configuration supports its strategic objectives and

increases the supply chain surplus during this phase. Cisco's decisions regarding its choice of

supply sources for components, contract manufacturers for manufacturing, and the location and

capacity of its warehouses, are all supply chain design or strategic decisions. Supply chain design

decisions are typically made for the long term (a matter of years) and are very expensive to alter

on short notice.

Consequently, when companies make these decisions, they must take into account uncertainty

in anticipated market conditions over the next few years.

We must remember two important points regarding Supply Chain Management:

i. There is no supply chain strategy that is always right

ii. There is a right supply chain strategy for a given competitive strategy

3.3.2 Supply Chain Planning

For decisions made during this phase, the time frame considered is a quarter to a year. Therefore,

the supply chain's configuration determined in the strategic phase is fixed. This configuration

establishes constraints within which planning must be done. The goal of planning is to maximize

the supply chain surplus that can be generated over the planning horizon given the constraints

established during the strategic or design phase. Companies start the planning phase with a

forecast for the coming year (or a comparable time frame) of demand in different markets.

Planning includes making decisions regarding which markets will be supplied from which

locations, the subcontracting of manufacturing, the inventory policies to be followed, and the

timing and size of marketing and price promotions. Dell's decisions regarding markets supplied

by a production facility and target production quantities at each location are classified as

planning decisions. Planning establishes parameters within which a supply chain will function

over a specified period of time. In the planning phase, companies must include uncertainty in

demand, exchange rates, and competition over this time horizon in their decisions. Given a

shorter time frame and better forecasts than the design phase, companies in the planning phase


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try to incorporate any flexibility built into the supply chain in the design phase and exploit it to

optimize performance. As a result of the planning phase, companies define a set of operating

policies that govern short-term operations.

3.3.3 Supply Chain Operation

The time horizon here is weekly or daily, and during this phase companies make decisions

regarding individual customer orders. At the operational level, supply chain configuration is

considered fixed, and planning policies are already defined. The goal of supply chain operations

is to handle incoming customer orders in the best possible manner. During this phase, firms

allocate inventory or production to individual orders, set a date that an order is to be filled,

generate pick lists at a warehouse, allocate an order to a particular shipping mode and shipment,

set delivery schedules of trucks, and place replenishment orders. Because operational decisions

are being made in the short term (minutes, hours, or days), there is less uncertainty about demand

information. Given the constraints established by the configuration and planning policies, the

goal during the operation phase is to exploit the reduction of uncertainty and optimize

performance.

Supply Chain decision making framework can be shown with the figure below:


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Figure 3 Supply Chain decisions making framework

The design, planning, and operation of a supply chain have a strong impact on overall profitability

and success. It is fair to state that a large part of the success of firms like Wal-Mart and Dell can

be attributed to their effective supply chain design, planning, and operation.

3.4 Drivers of Supply Chain Performance

To understand how a company can improve supply chain performance in terms of responsiveness

and efficiency, we must examine the logistical and cross-functional drivers of supply chain

performance: facilities, inventory, transportation, information, sourcing, and pricing. These drivers

interact with each other to determine the supply chain's performance in terms of responsiveness

and efficiency. As a result, the structure of these drivers determines if and how strategic fit is

achieved across the supply chain.

First we define each driver and discuss its impact on the performance of the supply chain.

3.4.1 Facilities


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Facilities are the actual physical locations in the supply chain network where product is stored,

assembled, or fabricated. The two major types of facilities are production sites and storage sites.

Decisions regarding the role, location, capacity, flexibility of facilities have a significant impact on

the supply chain's performance.

For instance, an auto-parts distributor striving for responsiveness could have many warehousing

facilities located close to customers even though this practice reduces efficiency. Alternatively, a

high-efficiency distributor would have fewer warehouses to increase efficiency despite the fact

that this practice will reduce responsiveness.

Deciding where a company will locate its facilities constitutes a large part of the design of a supply

chain. A basic trade-off here is whether to centralize in order to gain economies of scale or to

decentralize to become more responsive by being closer to the customer. Companies must also

consider a host of issues related to the various characteristics of the local area in which the facility

is situated. These include macroeconomic factors, quality of workers, cost of workers, cost of

facility, availability of infrastructure, proximity to customers, the location of that firm's other

facilities, tax effects, and other strategic factors.

Companies must also determine a facility's capacity to perform its intended function or functions.

A large amount of excess capacity allows the facility to be very flexible and to respond to wide

swings in the demands placed on it. Excess capacity, however, costs money and therefore can

decrease efficiency. A facility with little excess capacity will likely be more efficient per unit of

product it produces than one with a lot of unused capacity. The high-utilization facility, however,

will have difficulty responding to demand fluctuations. Therefore, a company must make a trade-

off to determine the right amount of capacity to have at each of its facilities.

3.4.2 Inventory

Inventory encompasses all raw materials, work in process, and finished goods within a supply

chain. Changing inventory policies can dramatically alter the supply chain's efficiency and

responsiveness. For example, a clothing retailer can make itself more responsive by stocking large

amounts of inventory and satisfying customer demand from stock.


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Inventory exists in the supply chain because of a mismatch between supply and demand. This

mismatch is intentional at a steel manufacturer, where it is economical to manufacture in large

lots that are then stored for future sales. The mismatch is also intentional at a retail store where

inventory is held in anticipation of future demand. An important role that inventory plays in the

supply chain is to increase the amount of demand that can be satisfied by having the product

ready and available when the customer wants it. Another significant role that inventory plays is

to reduce cost by exploiting economies of scale that may exist during production and distribution.

A large inventory, however, increases the retailer's cost, thereby making it less efficient. Reducing

inventory makes the retailer more efficient but hurts its responsiveness.

3.4.3 Transportation

Transportation entails moving inventory from point to point in the supply chain. Transportation

can take the form of many combinations of modes and routes, each with its own performance

characteristics. Transportation choices have a large impact on supply chain responsiveness and

efficiency.

The role of transportation in a company's competitive strategy figures prominently in the

company's consideration of the target customer's needs. If a firm's competitive strategy targets

a customer who demands a very high level of responsiveness, and that customer is willing to pay

for this responsiveness, then a firm can use transportation as one driver for making the supply

chain more responsive. The opposite holds true as well. If a company's competitive strategy

targets customers whose main decision criterion is price, then the company can use

transportation to lower the cost of the product at the expense of responsiveness. Because a

company may use both inventory and transportation to increase responsiveness or efficiency, the

optimal decision for the company often means finding the right balance between the two.

For example, a mail-order catalogue company can use a faster mode of transportation such as

FedEx to ship products, thus making its supply chain more responsive, but also less efficient given

the high costs associated with using FedEx. Or the company can use slower but cheaper ground

transportation to ship the product, making the supply chain efficient but limiting its

responsiveness.


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3.4.4 Information

Information consists of data and analysis concerning facilities, inventory, transportation, costs,

prices, and customers throughout the supply chain. Information is potentially the biggest driver

of performance in the supply chain because it directly affects each of the other drivers.

Information presents management with the opportunity to make supply chains more responsive

and more efficient. For example, with information on customer demand patterns, a

pharmaceutical company can produce and stock drugs in anticipation of customer demand,

which makes the supply chain very responsive because customers will find the drugs they need

when they need them. This demand information can also make the supply chain more efficient

because the pharmaceutical firm is better able to forecast demand and produce only the required

amount.

Information serves as the connection between various stages of a supply chain, allowing them to

coordinate and maximize total supply chain profitability.

Information is also crucial to the daily operations of each stage in a supply chain. For instance, a

production scheduling system uses information on demand to create a schedule that allows a

factory to produce the right products in an efficient manner. A warehouse management system

uses information to create visibility of the warehouse's inventory. The company can then use this

information to determine whether new orders can be filled.

Information can also make this supply chain more efficient by providing managers with shipping

options, for instance, that allow them to choose the lowest-cost alternative while still meeting the

necessary service requirements.

3.4.5 Sourcing

Sourcing is the choice of who will perform a particular supply chain activity such as production,

storage, transportation, or the management of information. At the strategic level, these decisions

determine what functions a firm performs and what functions the firm outsources.

Sourcing decisions affect both the responsiveness and efficiency of a supply chain. After Motorola

outsourced much of its production to contract manufacturers in China, it saw its efficiency

improve but its responsiveness suffer because of the long distances. To make up for the drop in


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responsiveness, Motorola started flying in some of its cell phones from China even though this

choice increased transportation cost. Flextronics, an electronics contract manufacturer, is hoping

to offer both responsive and efficient sourcing options to its customers. It is trying to make its

production facilities in the United States very responsive while keeping its facilities in low-cost

countries efficient. Flextronics hopes to become an effective source for all customers using this

combination of facilities.

3.4.5.1 Components of Sourcing Decisions

In-House or Outsource

The most significant sourcing decision for a firm is whether to perform a task in-house or

outsource it to a third party. This decision should be driven in part by its impact on the total

supply chain profit. It is best to outsource if the growth in total supply chain profit is significant

with little additional risk. Within a task such as transportation, managers must decide whether to

outsource all of it, outsource only the responsive component, or outsource only the efficient

component. Once again, the decision should be based in part on the growth in total supply chain

profitability.

Supplier Selection

Managers must decide on the number of suppliers they will have for a particular activity. They

must then identify the criteria along which suppliers will be evaluated and how they will be

selected. For the selection process, managers must decide whether they will use direct

negotiations or resort to an auction. If an auction is used, it must be structured to ensure the

desired outcome.

Procurement

Procurement is the process in which the supplier sends product in response to customer orders.

Managers must decide on the structure of procurement of direct as well as indirect materials, and

strategic as well as general materials. In each case, it is important to identify the critical

mechanism for increasing supply chain profits. For example, a firm should set up procurement

for direct materials to ensure good coordination between the supplier and buyer. In contrast, the

procurement of MRO products should be structured to ensure that transaction costs are low.


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3.4.6 Pricing

Pricing determines how much a firm will charge for goods and services that it makes available in

the supply chain. Pricing affects the behaviour of the buyer of the good or service, thus affecting

supply chain performance. For example, if a transportation company varies its charges based on

the lead time provided by the customers, it is very likely that customers who value efficiency will

order early and customers who value responsiveness will be willing to wait and order just before

they need a product transported.

Early orders are less likely if prices do not vary with lead time.

Components of Pricing Decisions

We now describe key components of pricing decisions that affect supply chain performance.

Pricing and Economies of Scale

Most supply chain activities display economies of scale. Changeovers make small production runs

more expensive per unit than large production runs. Loading and unloading costs make it

cheaper to deliver a truckload to one location than four. In each case, the provider of the supply

chain activity must decide how to price it appropriately to reflect these economies of scale. A

commonly used approach is to offer quantity discounts.

Care must be taken to ensure that quantity discounts offered are consistent with the economies

of scale in the underlying process. Otherwise there is a danger of customer orders being driven

primarily by the quantity discounts even though the underlying process does not have significant

economies of scale.

Everyday Low Pricing Versus High-Low Pricing

A firm such as Costco practices everyday low pricing at its warehouse stores, keeping prices

steady over time. Costco will go to the extent of not offering any discount on damaged books to

ensure its everyday low pricing strategy. In contrast, most supermarkets practice high-low pricing

and offer steep discounts on a subset of their product every week. The Costco pricing strategy

results in relatively stable demand. The high-low pricing strategy results in a peak during the

discount week, often followed by a steep drop in demand during the following weeks. The two

pricing strategies lead to very different demand profiles that the supply chain must serve.


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Fixed Price versus Menu Pricing

A firm must decide whether it will charge a fixed price for its supply chain activities or have a

menu with prices that vary with some other attribute, such as the response time or location of

delivery. If marginal supply chain costs or the value to the customer vary significantly along some

attribute, it is often effective to have a pricing menu. We have already discussed Amazon as an

example of a firm offering a menu that is somewhat consistent with the cost of providing the

particular supply chain service. An example where the pricing menu is somewhat inconsistent is

seen at many MRO suppliers. They often allow customers to have their order shipped to them or

to be picked up in person.

A customer pays an additional shipping fee for home delivery but pays nothing for a personal

pickup. The pick, pack, and deliver cost at the warehouse, however, is higher in the case of a

personal pickup compared to home delivery. The pricing policy thus can lead to customer

behaviour that has a negative impact on profits.

3.5 Designing distribution in the Supply Chain

Distribution refers to the steps taken to move and store a product from the supplier stage to a

customer stage in the supply chain. Distribution occurs between every pair of stages in the supply

chain. Raw materials and components are moved from suppliers to manufacturers, whereas

finished products are moved from the manufacturer to the end consumer. Distribution is a key

driver of the overall profitability of a firm because it affects both the supply chain cost and the

customer experience directly.

It would be no exaggeration to state that two of the world's most profitable companies, Wal-

Mart and Seven-Eleven Japan, have built the success of their entire business around outstanding

distribution design and operation. In the case of Wal-Mart, distribution allows the company to

provide high availability levels of relatively common products at a very low cost. In the case of

Seven-Eleven Japan, effective distribution provides a very high level of customer responsiveness

at a reasonable cost.

Performance of a distribution network should be evaluated along two dimensions:

i. Customer needs that are met


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ii. Cost of meeting customer needs

Firms that target customers who can tolerate a long response time require only a few locations

that may be far from the customer. These companies can focus on increasing the capacity of each

location. In contrast, firms that target customers who value short response times need to locate

facilities close to them. These firms must have many facilities, each with a low capacity. Thus, a

decrease in the response time customers desire increases the number of facilities required in the

network.

Managers must make two key decisions when designing a distribution network:

1. Will product be delivered to the customer location or picked up from a preordained

site?

2. Will product flow through an intermediary (or intermediate location)?

Based on the firm's industry and the answers to these two questions, one of six distinct

distribution network designs may be used to move products from factory to customer, which are

classified as follows:

1. Manufacturer storage with direct shipping

2. Manufacturer storage with direct shipping and in-transit merge

3. Distributor storage with package carrier delivery

4. Distributor storage with last-mile delivery

5. Manufacturer/distributor storage with costumer pickup

6. Retail storage with customer pickup

3.6 Supply Chain Network Design

Supply chain network design decisions include the assignment of facility role, location of

manufacturing, storage, or transportation-related facilities, and the allocation of capacity and

markets to each facility. Supply chain network design decisions are classified as follows.

1. Facility role: What role should each facility play? What processes are performed at each facility?

2. Facility location: Where should facilities be located?

3. Capacity allocation: How much capacity should be allocated to each facility?

4. Market and supply allocation: What markets should each facility serve? Which supply sources

should feed each facility?


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Network design decisions have a significant impact on performance because they determine the

supply chain configuration and set constraints within which the other supply chain drivers can be

used either to decrease supply chain cost or to increase responsiveness. All network design

decisions affect each other and must be made taking this fact into consideration. Decisions

concerning the role of each facility are significant because they determine the amount of

flexibility the supply chain has in changing the way it meets demand. For example, Toyota has

plants located worldwide in each market that it serves. Before 1997, each plant was capable of

serving only its local market. This hurt Toyota when the Asian economy went into a recession in

the late 1990s. The local plants in Asia had idle capacity that could not be used to serve other

markets that were experiencing excess demand. Toyota has added flexibility to each plant to be

able to serve markets other than the local one. This additional flexibility helps Toyota deal more

effectively with changing global market conditions.

It is important for a firm to identify the mission or strategic role of each facility when designing

its global network. Kasra Ferdows (1997) suggests the following classification of possible strategic

roles for various facilities in a global supply chain network.


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3.6.1 Offshore facility

This is a low-cost facility for export production. An offshore facility serves the role of being a low-

cost supply source for markets located outside the country where the facility is located. The

location selected for an offshore facility should have low labor and other costs to facilitate low-

cost production. Given that many Asian developing countries waive import tariffs if all the output

from a factory is exported, they are preferred sites for offshore manufacturing facilities.

3.6.2 Source facility:

This would be a low-cost facility for global production. A source facility also has low cost as its

primary objective, but its strategic role is broader than that of an offshore facility. A source facility

is often a primary source of product for the entire global network. Source facilities tend to be

located in places where production costs are relatively low, infrastructure is well developed, and

a skilled workforce is available.

Good offshore facilities migrate over time into source facilities. Many Chinese and Indian apparel

manufacturers are attempting to transform into source facilities since the drop in apparel quotas

in 2005.

3.6.3 Server facility

This is a regional production facility. A server facility's objective is to supply the market where it

is located. A server facility is built because of tax incentives, local content requirement, tariff

barriers, or high logistics cost to supply the region from elsewhere. In the late 1970s, Suzuki

partnered with the Indian government to set up Maruti Udyog. Initially, Maruti was set up as a

server facility and produced cars only for the Indian market. The Maruti facility allowed Suzuki to

overcome the high tariffs on imported cars in India.

3.6.4 Contributor facility

This is a regional production facility with development skills. A contributor facility serves the

market where it is located but also assumes responsibility for product customization, process

improvements, product modifications, or product development. Most well-managed server

facilities become contributor facilities over time. The Maruti facility in India today develops many

new products for both the Indian and the overseas markets and has moved from being a server

to a contributor facility in the Suzuki network.


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3.6.5 Outpost facility:

This is a regional production facility built to gain local skills. An outpost facility is located primarily

to obtain access to knowledge or skills that may exist within a certain region. Given its location,

it also plays the role of a server facility. The primary objective remains one of being a source of

knowledge and skills for the entire network. Many global firms have set up outpost production

facilities in Japan despite the high operating costs.

3.6.6 Lead facility:

Facility that leads in development and process technologies. A lead facility creates new products,

processes, and technologies for the entire network. Lead facilities are located in areas with good

access to a skilled workforce and technological resources.

3.7 Factors influencing network design decisions

A wide variety of factors influence network design decisions in supply chains.

3.7.1 Strategic Factors

A firm's competitive strategy has a significant impact on network design decisions within the

supply chain. Firms that focus on cost leadership tend to find the lowest-cost location for their

manufacturing facilities, even if that means locating very far from the markets they serve.

Convenience store chains aim to provide easy access to customers as part of their competitive

strategy. Convenience store networks thus include many stores that cover an area, with each store

being relatively small.

Global supply chain networks can best support their strategic objectives with facilities in different

countries playing different roles. For example, Nike has production facilities located in many Asian

countries. Its facilities in China and Indonesia focus on cost and produce mass-market lower-

priced shoes for Nike. In contrast, facilities in Korea and Taiwan focus on responsiveness and

produce higher priced new designs. This differentiation allows Nike to satisfy a wide variety of

demands in the most profitable manner.

3.7.2 Technological Factors


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Characteristics of available production technologies have a significant impact on network design

decisions. If production technology displays significant economies of scale, a few high-capacity

locations are most effective. This is the case in the manufacture of computer chips, for which

factories require a very large investment. As a result, most semiconductor companies build few

high-capacity facilities.

In contrast, if facilities have lower fixed costs, many local facilities are preferred because this helps

lower transportation costs. For example, bottling plants for CocaCola do not have a very high

fixed cost. To reduce transportation costs, Coca-Cola sets up many bottling plants all over the

world, each serving its local market.

3.7.3 Macroeconomic Factors

Macroeconomic factors include taxes, tariffs, exchange rates, and other economic factors that are

not internal to an individual firm. As global trade has increased, macroeconomic factors have had

a significant influence on the success or failure of supply chain networks. Thus, it is imperative

that firms take these factors into account when making network design decisions.

3.7.4 Customer Response Time and Local Presence

Firms that target customers who value a short response time must locate close to them. For

example, customers are unlikely to come to a convenience store if they have to travel a long

distance to get there. It is thus best for a convenience store chain to have many stores distributed

in an area so that most people have a convenience store close to them.

3.7.5 Logistics and Facility Costs

Logistics and facility costs incurred within a supply chain change as the number of facilities, their

location, and capacity allocation is changed. Companies must consider inventory, transportation,

and facility costs when designing their supply chain networks.

Inventory and facility costs increase as the number of facilities in a supply chain increase.

Transportation costs decrease as the number of facilities is increased. If the number of facilities

increases to a point where inbound economies of scale are lost, then transportation cost

increases. For example, with few facilities Amazon.com has lower inventory and facility costs than

Borders, which has about 450 stores. Borders, however, has lower transportation costs.


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3.8 Phases of Global Network Design decisions

Global network design decisions are made in four phases as shown in the figure below:

3.8.1 Define a supply chain strategy/design

The objective of the first phase of network design is to define a firm's broad supply chain design.

This includes determining the stages in the supply chain, and whether each supply chain function

will be performed in-house or outsourced. Phase I starts with a clear definition of the firm's

competitive strategy as the set of customer needs that the supply chain aims to satisfy. The supply

chain strategy then specifies what capabilities the supply chain network must have to support the

competitive strategy.

3.8.2 Define the regional facility configuration

The objective of the second phase of network design is to identify regions where facilities will be

located, their potential roles, and their approximate capacity.

An analysis of Phase II starts with a forecast of the demand by country. Such a forecast must

include a measure of the size of the demand as well as a determination of whether the customer

requirements are homogenous or variable across different countries. Homogenous requirements


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favor large consolidated facilities, whereas requirements that vary across countries favor smaller,

localized facilities.

The next step is for managers to identify whether economies of scale or scope can play a

significant role in reducing costs, given available production technologies. If economies of scale

or scope are significant, it may be better to have a few facilities serving many markets. For

example, semiconductor manufacturers such as Advanced Micro Devices have very few plants for

their global markets, given the economies of scale in production. If economies of scale or scope

are not significant, it may be better for each market to have its own facility.

Next, managers must identify demand risk, exchange-rate risk, and political risk associated with

different regional markets. They must also identify regional tariffs, any requirements for local

production, tax incentives, and any export or import restrictions for each market. The tax and

tariff information is used to identify the best location to extract a major share of the profits. In

general, it is best to obtain the major share of profits at the location with the lowest tax rate.

Managers must identify competitors in each region and make a case for whether a facility needs

to be located close to or far from a competitor's facility. The desired response time for each

market and logistics costs at an aggregate level in each region must also be identified.

Based on all this information, managers identify the regional facility configuration for the supply

chain network using network design models discussed in the next section. The regional

configuration defines the approximate number of facilities in the network, regions where facilities

will be set up, and whether a facility will produce all products for a given market or a few products

for all markets in the network.

3.8.3 Select a set of desirable potential sites

The objective of this phase is to select a set of desirable potential sites within each region where

facilities are to be located. Sites should be selected based on an analysis of infrastructure

availability to support the desired production methodologies. Hard infrastructure requirements

include the availability of suppliers, transportation services, communication, utilities, and

warehousing infrastructure. Soft infrastructure requirements include the availability of skilled

workforce, workforce turnover, and the community accessibility to business and industry.


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3.8.4 Location Choices

The objective of this phase is to select a precise location and capacity allocation for each facility.

Attention is restricted to the desirable potential sites selected in the earlier phase. The network is

designed to maximize total value to the firm taking into account the expected margin and

demand in each market, various logistics and facility costs, and the taxes and tariffs at each

location.

3.9 Outsourcing and Offshoring

The decision and processes of moving any strategically significant operations out to the external

suppliers is called outsourcing.

Outsourcing or strategic outsourcing is commonly known as the “make-or-buy” decision.

Organisations may want to contract some of its in-house operations such as design,

manufacturing and marketing to its external suppliers. If a Chinese organisation can produce the

same components at a fraction of the usual cost, it will surely attract many OEMs to outsource

the production of the components to it. But it is also possible, that if some companies, say in

India, may have much better capability of developing a better software and outsource its

operations to them in order to gain the supply chain value adding.

There are two points to clarify. First, outsourcing is not just a decision of make or buy, but also a

process that includes identifying the potential suppliers, contractual negotiation, regular

evaluation and review of the outsourced operation. Second, not all operations that carried out by

the external suppliers are suitable to be classified as outsourcing; only the strategically significant

operations can be classified as outsourcing. For example, to a manufacturing supply chain,

outsourcing some key components manufacturing operations is strategically significant; but the

external catering service supply used by the same company is not. That’s why outsourcing is often

interchangeably called strategic outsourcing.

3.10 Benefits of outsourcing business processes

There are many benefits of outsourcing business processes to destinations around the world.

Some of them are:


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Cost advantages

The most obvious and visible benefit relates to the cost savings that outsourcing brings about.

Companies can get your job done at a lower cost and at better quality as well. Due to the

difference in wages between western countries and Asia, the same kind of work that is done over

there can be done in China or India, for instance, at a fraction of the cost. Often the cost savings

is around 50% to 60% by outsourcing. Plus, the quality of the services provided is high thereby

ensuring that low-cost does not mean low-quality.

Increased efficiency

When a business is outsourced it needs to an outsourcing partner, they bring years of experience

in business practices and expertise in delivering complex outsourcing projects. Thus, they can do

the job better with their knowledge and understanding of the domain. This leads to an increase

in productivity and efficiency in the process thereby contributing to the bottom-line of a

company.

Focus on core areas

Outsourcing business processes would free energies and enable to focus on building your brand,

invest in research and development and move on to providing higher value added services.

Save on infrastructure and technology

Outsourcing eliminates the need for investment in infrastructure as the outsourcing partner takes

the responsibility of the business processes and hence develops infrastructure for the same.

Access to skilled resources

Through outsourcing businesses get access to experts and professionals get their work done.

Time zone advantage

Apart from the cost advantage, the other much touted benefit has to do with the time zone

differential between your country and the location you are outsourcing to. This unique advantage

gives you the benefit of round-the-clock business operations.

Faster and better services

Standard and competitive services offer better with high quality deliverables and decrease the

lead time it takes a company’s product to reach the marketplace. Thus it gets faster in getting

ideas converted into products and better at delivering the value-added proposition.

The types of outsourcing business can be broadly observed in three categories.

Business process outsourcing (BPO)

• Marketing / call centre outsourcing


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• R & D process outsourcing

• Engineering process outsourcing (EPO)

• HR and recruitment process outsourcing

• Knowledge process outsourcing (KPO)

Business function outsourcing

• Financial auditing

• IT services

• Logistics services

Facility and man power outsourcing

• Capital equipment leasing

• Free length experts hiring

Outsourcing is relatively simple to understand as a concept, but is difficult to implement in

practice. The debate surrounding the outsourcing decisions can be lengthy and complicated. The

decision often will involve many factors from all levels of management and are intricately inter-

related. It is therefore recommended that managers should set up and follow an appropriate

process to make the outsourcing decisions and execute the decisions.

Another closely related concept in supply chain architecture design is called ‘offshoring’.

Offshoring is defined as moving the on-shore operations to offshore locations in order to take

the advantages of local resources, and to reduce operating cost or create market presence.

However offshoring does not necessarily mean outsourcing, especially when the ownership of

the off-shored operation remains unchanged. There has been no outsourcing taken place.

3.11 Importance of Location Decisions in SCM operations

The choice of geographical locations for supply chain operations is an important decision area

for supply chain design and planning. Location decision is about the geographical positioning of

the supply chain functions (such as assembly and distribution). It is normally done for the purpose

of better serving the customers and further reducing the operational cost in the supply chain.

Clearly, not all the locations are suitable for the supply chain operations. But one thing is assured

that when changing a location, many business-related factors change along with it. That makes

the location change a powerful management instrument. Without doubt, a location decision will

have profound impact on labour cost, material cost, taxation, currency exposure, financial and


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legal regulations and so on. These will further lead toward the significant changes in business

outcomes, supply chain performance, and even environmental consequences.

It is important to understand that the operational considerations for the location decisions are

not enough for the supply chain location design. Operational considerations for choosing a

location are still valid and useful, but they are mainly the measures of the operations costs from

many different dimensions.

Zara manufactures its apparel using a combination of flexible and quick sources in Europe (mostly

Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel manufacturers,

who have moved most of their manufacturing to Asia. About 40 percent of the manufacturing

capacity is owned by Inditex, with the rest outsourced. Products with highly uncertain demand

are sourced out of Europe, whereas products that are more predictable are sourced from its Asian

locations. More than 40 percent of its finished-goods purchases and most of its in-house

production occur after the sales season starts. This compares with less than 20 percent production

after the start of a sales season for a typical retailer.

To facilitate managers to make locations decision, Dr. Dawei Lu suggests using the common

weighted scoring method as shown in figure 3.5.

Figure 3.4 The weighted scoring method. (Source: Slack et.al. 2006)

3.12 Capacity Planning

Capacity planning is the process of determining the production capacity needed by an

organisation to meet changing demands for its products. Effective capacity is the maximum

amount of work that an organisation is capable of completing in a given period due to constraints

such as quality problems, delays, material handling, etc. A discrepancy between the capacity of

an organisation and the demands of its customers results in inefficiency, either in under-utilised

resources or unfulfilled customers. The goal of capacity planning is to minimise this discrepancy.


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Given today's economic times, capacity planning and management is getting a lot of scrutiny. On

the one hand, companies must have the capability to fulfil demand. On the other hand, cash is

too precious to invest in capacity, production, or materials before they are really needed. Plus,

companies need a flexible and cost-effective way to respond to changes in demand, given the

current volatility and uncertainties in the marketplace.

To carry out the capacity planning in real-world supply chain, however, one needs to deal with it

in three levels.

At the level 1

Managers will have to manage the company internal capacity synchronisation to achieve the

capacity planning objectives. This is because the desired capacity for the supply chain will

eventually to be executed and implemented by each and every individual participating member

of the supply chain.

At the level 2

The key to achieved optimised capacity for a supply chain lies in its external synchronisation. The

need for synchronise the capacities of each participating member is very simple. It is to reduce

and eliminate the waste incurred by the redundant capacities and to eliminate possible risks of

short supply due to the bottlenecks.

At the level 3

The whole supply chain’s capacity must be synchronised with the market demand changes, and

market demand change is often unknown or uncertain. Forecasting has long been used to assist

the planning of the supply chain’s capacity but with limited successes. The credential of the

analytical forecasting methods has not lived to its promises. As the result forecasting is either

lucky or wrong. Thus supply chain managers must resort to other more effective means of

managing capacity synchronisation and ultimately the supply chain responsiveness.

3.13 Bullwhip Effect

Distorted information or the lack of information, such as inaccurate demand data or forecasts,

from the customer end can ripple back upstream through the supply chain and magnify demand


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variability at each stage. This can result in high buffer inventories, poor customer service, missed

production schedules, wrong capacity plans, inefficient shipping, and high costs. This

phenomenon, which has been observed across different industries, is known as the bullwhip

effect. It occurs when slight to moderate demand variability becomes magnified as demand

information is transmitted back upstream in the supply chain. Figure 3.6 presents a detailed

perspective of the bullwhip effect.

Figure 3.6 The Bullwhip Effect

The bullwhip effect is created when supply chain members make ordering decisions with an eye

to their own self-interest and/or they do not have accurate demand information from the

adjacent supply chain members. If each supply chain member is uncertain and not confident

about what the actual demand is for the succeeding member it supplies and is making its own

demand forecast, then it will stockpile extra inventory to compensate for the uncertainty. In other

words, they create a security blanket of inventory. As shown in Figure 3.6, demand for the end

user is relatively stable and the inventory is small. However, if slight changes in demand occur,

and the distributor does not know why this change occurred, then the distributor will tend to

overreact and increase its own demand, or conversely reduce its own demand too much if

demand from its customer unexpectedly drops. This creates an even greater overreaction by the


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manufacturer who supplies the distributor and the suppliers who supply the manufacturer. One

way to cope with the bullwhip effect is for supply chain members to share information, especially

demand forecasts. If the supply chain exhibits transparency, then members can have access to

each other's information, which reduces or eliminates uncertainty.

Understanding the bullwhip effect is therefore essential to the supply chain design and planning.

Bullwhip effect is also known as Forrester Effect as Jay Forrester (1961) showed that this was so

by modelling supply chain mathematically and he called it industrial dynamics. What happened

basically is that when the small demand ripple in the market place is felt by the retailer at the end

of the supply chain, the retailer will then start adjusting their orders to the wholesalers, and the

wholesaler in turn will adjust its orders to the distributer, and the distributer to the factory. One

would imagine when the factory receives the orders, it will have the equally small changes.

Unfortunately, it could not be farther from the truth. The small ripples have been significantly

amplified stage by stage towards the upstream of the supply chain. When it reaches the factory

or components manufacture the magnitude of fluctuation becomes unrecognisable.

Basically, the bullwhip effect has three key characteristics. The first is oscillation. The demand,

orders or inventories move up and down in an alternative pattern. The second is amplification.

The magnitude of the alteration and fluctuation increases as it travels to the upstream end of the

supply chain. The third is phase lag. The cycle of peaks and troughs of one stage also tends to

lag behind the one in the previous stage. Those characteristics can be clearly demonstrated by a

supply chain simulation game.

The causes of the bullwhip effect are systemic. They are a combination of structured delays both

in order processing and shipping, over ordering and ignoring the incoming good in the pipeline,

under ordering and failing to see the build-up of downstream demand, panic and over react, lack

of coordination, poor forecasting and so on. In real-world supply chain operations, there will be

even more factors that worsening the bullwhip effect, such as batching, facility breakdown, poor

maintenance, inappropriate scheduling and communication, poor capacity coordination, market

disruptions and many more.

Chapter 4: Lean Supply Management

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4.1 Lean Manufacturing

Lean principles are derived from the Japanese manufacturing industry. The term was first coined

by John Krafcik in his 1988 article, "Triumph of the Lean Production System”.

From the beginning of 1950s to the end of 1980s, Toyota led Japanese automotive industry

created a unique production / manufacturing system, which brought the industry from the ruins

of the 2nd World War to the biggest automobile exporter in the world. That system was known

as the Toyota Production System (TPS), now more commonly known as lean manufacturing. The

term ‘lean’ was first coined in a large scale research programme called IMVP (International Motor

Vehicle Programme) initiated by MIT (Massachusetts Institute of Technology).

Both lean and TPS can be seen as a loosely connected set of potentially competing principles

whose goal is cost reduction by the elimination of waste. These principles include: Pull processing,

perfect first-time quality, Waste minimisation, Continuous improvement, Flexibility, Building and

maintaining a long term relationship with suppliers, Automation, Load levelling and Production

flow and Visual control. The disconnected nature of some of these principles perhaps springs

from the fact that the TPS has grown pragmatically since 1948 as it responded to the problems it

saw within its own production facilities. Thus what one sees today is the result of a 'need' driven

learning to improve where each step has built on previous ideas and not something based upon

a theoretical framework.

Lean manufacturing was not designed and implemented in a short period. It took long years of

continuous drive and continuous improvement, trial-and-error, and in stages perfected a system

that works best. Compared with the mass production system, lean manufacturing is focused on

management improvement of people -particularly the operators on the shop floor. The whole

production system is basically pulled from the demand rather than entirely depend on forecasting

based scheduled production. Product customisation and increased scope of customer choices

are the direct results. Lean manufacturing develop and make use of employee’s intellectual assets.

Everyone is encouraged to make improvement suggestions and even have the power to stop the

assembly line if they see something wrong. High commitment, hardworking, well educated

workforce and loyalty to the company become part of the organisational culture.

http://en.wikipedia.org/wiki/Autonomation


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Lean manufacturing emphasises the optimisation across organisations and supply bases not just

the functional silos. It promotes close partnership relations with the first tier suppliers and other

strategic partners in the distribution channel. It created the tiered supply base structure. The

waste between the organisations, often ignored in the past, has been identified as key

improvement area.

4.2 Focusing on Cost-to-Serve

Many may think that the focus of lean supply chain is just cost cutting. This is a wrong concept.

It would become a ‘mean’ supply chain if that is the case. Cost and efficiency appears always on

the top agenda when it come to make a process leaner, but cost cut is not the focus of lean

supply chain. A slight misunderstanding of the concept could have a long lasting negative

outcome in supply chain performance. In a lean supply chain, a cost-cutting idea can only be

acceptable if it passes the ‘cost-to-serve’ test. In other words, the focus of lean is not on the cost

but on the cost-to-serve.

Organisations have been harnessing lean concepts to corporate logistics systems and the wider

domain of supply chain management ever since Toyota demonstrated its inevitable leadership

position in production management. However, as so often occurs when new concepts are applied

to supply chain thinking, people can start to have irrational expectations about the actual

benefits. The reason for such irrational expectation appears always grew out from the delusion

of the original terms and ideas.

The basic concept of lean is identifying and eliminating waste in the material, processes, time and

information, and adding value perceived from the eyes of consumer. Thus waste is the one to be

cut across the management spectrum, not necessarily the cost. When a cost is identified as the

waste, which does not seem to have added any value, it should be rightly slashed. The key issue

here, therefore, is to looking for the cost that adds no value. If the cost that does add value to

the supply chain has been cut, value has been cut with it. There is little justification why should

value adding cost is to be cut. Toyota’s three original criteria for value adding activities are:

i. Physical changes should be there

ii. Customer concern oriented

iii. Right at the first time


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Thus, wasteful activities are defined as non-value adding activities. If the activity adds the value

and the value is identified by the customer, the activity ‘serves’ the customer. Therefore a suitable

interpretation of the lean principles in terms of approach towards the cost should be that to

identify and eliminating the non-value adding or non- ‘serving’ activities. Thus, a measure for

how wasteful is a cost or a cost incurring activity can be defined by what’s known as ‘cost-to-

serve’.

With this measure, one can relate activities to see which one adds more value and which one is

more of a waste. When the ‘total cost involved’ remains unchanged, the more ‘Customer

perceived value and service’ received the lower the ‘cost-to-serve’, and vice versa. So, the lean

approach is not cost cutting but cost-to-serve cutting, which clarifies the opening confusion in this

section. Furthermore, the purpose of lean approach can, therefore, be interpreted as to minimise

the level of cost-to-serve.

The lean concept based on cost-to-serve can explain why some supply chains achieve low cost

by ensuring customers are not over-serviced, while others achieved much leaner supply chain by

investing more into the operation.

4.3 Principles of Lean Supply

Robert Martichenko and Kevin von Grabe, authors of Building a Lean Fulfilment Stream:

Rethinking Your Supply Chain and Logistics to Create Maximum Value at Minimum Total Cost

described eight guiding principles for lean supply chain networks.

While many companies have embraced lean in manufacturing processes, they have yet to un-tap

the wealth of opportunity lean brings to the supply chain. Senior executives often acknowledge

lean can add value, but many still haven't moved past the education stage into full-scale lean

supply chain implementation. One reason may be that they haven't made the mental leap as to

how to accomplish this task. The Lean Supply Chain is a system of interconnected and

interdependent forces that operate in unison to accomplish overarching supply chain objectives.

These objectives are accomplished in alignment with 8 key principles, these principles are:


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1. Eliminate all waste in the supply chain so that only value remains. Creating a smooth

flow of products downstream in a supply chain requires all departments and functions in the

organisation to work in harmony. The seven types of waste in manufacturing are well known.

The Toyota approach to identifying areas of waste is to classify waste into seven ‘mudas’. The

seven ‘mudas’ are:

i. Transportation: Each time a product is moved it stands the risk of being damaged, lost,

delayed, etc. as well as being a cost for no added value. Transportation does not make

any transformation to the product that the consumer is willing to pay for.

ii. Inventory: Inventory, be it in the form of raw materials, work-in-progress (WIP), or

finished goods, represents a capital outlay that has not yet produced an income either

by the producer or for the consumer. Any of these three items not being actively

processed to add value is waste.

iii. Motion: In contrast to transportation, which refers to damage to products and

transaction costs associated with moving them, motion refers to the damage that the

production process inflicts on the entity that creates the product, either over time (wear

and tear for equipment and repetitive strain injuries for workers) or during discrete events

(accidents that damage equipment and/or injure workers).

iv. Waiting: Whenever goods are not in transport or being processed, they are waiting. In

traditional processes, a large part of an individual product's life is spent waiting to be

worked on.

v. Over-processing: Over-processing occurs any time more work is done on a piece other

than what is required by the customer. This also includes using components that are

more precise, complex, higher quality or expensive than absolutely required.

vi. Over-production: Overproduction occurs when more product is produced than is

required at that time by customers. One common practice that leads to this muda is the

production of large batches, as often consumer needs change over the long times large

batches require. Overproduction is considered the worst muda because it hides and/or

generates all the others. Overproduction leads to excess inventory, which then requires

the expenditure of resources on storage space and preservation, activities that do not

benefit the customer.

vii. Defects: Whenever defects occur, extra costs are incurred reworking the part,

rescheduling production, etc. This results in labour costs, more time in the "Work-in-


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progress". Defects in practice can sometimes double the cost of one single product. This

should not be passed on to the consumer and should be taken as a loss.

2. Make customer consumption visible to all members of the supply chain. Flow in the

supply chain begins with customer consumption. Visibility to customer consumption for all

supply chain partners is critical for acting as the "pacemaker" of the supply chain.

3. Reduce lead time. Reducing inbound and outbound logistics gets us closer to customer

demand which results in reduced reliance on forecasting, increased flexibility and reduced

waste of "overproduction".

4. Create level flow. Levelling the flow of material and information results in a supply chain

with significantly less waste at all nodes in the system.

5. Use pull systems. Pull systems reduce wasteful complexity in planning and overproduction

that can occur with computer-based software programs such as material resource planning

(MRP), and they permit visual control of material flow in the supply chain.

6. Increase velocity and reduce variation. Fulfilling customer demand through delivery of

smaller shipments more frequently increases velocity. This in turn helps to reduce inventories

and lead times and allows you to more easily adjust delivery to meet actual customer

consumption.

7. Collaborate and use process discipline. When all members of the supply chain can see if

they are operating intake with customer consumption, they can more easily collaborate to

identify problems, determine root causes, and develop appropriate countermeasures.

8. Focus on total cost of fulfilment. Make decisions that will meet customer expectations at

the lowest possible total cost—no matter where they occur in the supply chain. This means

eliminating decisions that benefit only one part of the stream at the expense of others. This

is the real challenge, but can be achieved when all members of the supply chain share in

operational and financial benefits when waste is eliminated.

4.4 Lean Process Mapping Tools

Lean approach has been quite long-standing. The lean movement is still going firm. In today’s

business management world, lean method is still the most popular one across the world. Over

more than 70% of organisations have, to various extents, exercised lean. One of the reasons why

lean is so widely applied and continues to be the most popular method is that it has a set of

practical tools that can be readily applied in almost all business circumstances.


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Several extensively used tools can directly support lean supply chain management. Most of the

figures of the tools are sourced from the article ‘Going lean’ by Peter Hines and David Taylor

(2000).

Value Stream Mapping

Time Based Process Mapping

Process activities mapping

Supply chain response matrix

Logistics pipeline map

Production variety funnel

Quality filter mapping

Demand amplification mapping

Value adding time profile

Value stream mapping is a graphic mapping technique that helps managers understand the

material and information flows as a product makes its way through the process. Value stream

mapping also considers factors such as capacity, quality, and variability. One of the major metrics/

outputs of a value stream mapping exercise is to identify the percentage of the total lead time

that is value-adding.

Figure 4 Time-based process mapping


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Time-based process mapping tool is a simply ‘walk through’ tool to identify and map out the

activity time (suppose to be value adding) and waste time (non-value adding) in every steps that

the material has gone through, as shown in Figure 5 below.

The process activity mapping tool maps out the different activities i.e. operation, transport,

inspection and storage that the materials have to go through. Keys are assigned to each activity

types to help visualisation. Plan flow diagram can also be added to optimise the flow. A process

analyst must decide whether to show small activities separately in a map or to show them

collectively as larger, more aggregated activities. This decision weighs the benefit of including an

activity against the cost in time and effort to handle such minute detail. Pictures, physical layouts

or blueprints, work routing sheets, and other documents might be needed to give a better overall

description of the process.

Figure 5 Time-based process mapping


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Supply Chain Responsiveness Matrix (SCRM) is such tool used for analysing stock, process and

lead-time. It is constructed by reviewing stages of the companies’ process and reviewing

the inventory and lead time associated with each step – then displaying the results pictorially.

In the example below we can see that the process takes 33 days to complete and there is 48 days

(lead time) inventory within the supply chain with a total lead time therefore of 81 days.

Figure 6 Process activity mapping


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The approach does have some drawbacks however as there may be valid reasons for some

“overstocking” for example – risk avoidance mitigating obsolescence, batch break buying. These

may all account for surplus inventory but have been made with appropriate rationale.

However given these drawbacks, SCRM has many benefits:

Once produced the diagram is very easy to understand

Can help improvement teams “home in” on areas which have large stock holdings

Can show areas that may represent quick win improvement targets.

Figure 7 Example Supply Chain Responsiveness Matrix

Figure 8 Supply chain response matrix.


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Logistics pipeline map is a compliment to the supply chain response matrix. It shows the

accumulation of process time on the horizontal axis and of inventory levels on the vertical axis. It

shows exactly where the inventory and time accumulate within each operation.

Production variety funnel is a visual mapping technique that plots the number of product variety

at each stage of the manufacturing process. This technique is used to identify the point at which

a generic product becomes either increasingly or totally customer specific.

Figure 9 Logistics pipeline map

Figure 10 Product variety funnel


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Quality filter mapping is a tool designed to identify quality problems in the order fulfilment

process or the wider supply chain. The map shows where three different types of quality defects

occur in the value stream.

Demand amplification mapping is a graph of quantity against time, showing the batch sizes of a

product at various stages of the production process. This may be plotted with a company or along

the supply chain. It also can be used to show inventory holdings at various stages long the supply

chain.

Figure 9 Quality filter mapping


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Value adding time profile plots the accumulation of both value adding and non-value adding

costs against the time. It is an excellent tool for looking at time compression or mapping out

where money is being wasted.

Figure 10 Demand amplification mapping

Figure 11 Value adding time profile

Chapter 5: Agile Supply Management

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5.1 Agile as Supply Chain Model

Agile refers to the ability to react and adapt to the changes in demand and supply situations in a

supply chain. To accommodate the inherent variations in demand and supply, supply chains need

to react and adapt to such changes as they happen, to minimise the disruption and optimize the

objectives, such as costs, fulfilment rates, inventory, and so on. So what does it mean to have an

agile supply chain?

An agile supply chain design will have redundancy built into its processes, allowing it to quickly

respond to expected changes. This supply chain will be best to maximize the service levels for

fulfilling demand, manufacturing personalized products, and providing excellent customer

service. These objectives will drive the supply chain to keep higher levels of inventories to

maintain order fulfilment targets, favour on-time deliveries over cheaper shipments, and favour

quality inputs and personalised services over mass produced, commoditized goods. These supply

chains will have more flexible supplier contracts that enable them to change order quantities,

destinations, need dates, and even cancel the orders altogether if the demand falls off a cliff.

Suppliers will typically allow such flexibility for a cost. When demand suddenly rises and the

primary suppliers cannot cope with the increased demand, an agile supply chain will go to a

secondary set of suppliers that would have been established in advance for maintaining supplies

for such an eventuality. As purchase volumes for the secondary suppliers will be low and demand

uneven, the costs of such contracts is generally higher. However, having all these layers of extra

inventories, warehousing, transportation, and suppliers will provide enough buffer to the supply

chain to handle most variations in demand, supply, or lead-time while maintaining its stated

service levels.

Yusuf et al. (2003) claim that there are four pivotal objectives of agile manufacturing as part of

an agile supply chain. These objectives are (1) customer enrichment ahead of competitors, (2)

achieving mass customisation at the cost of mass production, mastering change, (3) mastering

change and uncertainty through routinely adaptable structures and (4) leveraging the impact of

people across enterprises through information technology.


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Apparently, the focus in an agile supply chain is on being fast and also on being smart in how

you aligning with the increasingly demanding customers. But the tenet is still that supply chains

are driven by the end-consumers in the dynamic market places. The need for supply chain agility

ultimately comes from the consumer. However, the customer behaviours could be driven by

uncertainties caused possibly by the world oil prices, terrorism-related demand change or by the

impact new technological advancement. The unpredictability is not so much the result of one

customer ad hoc behaviour; it is combined effect of an uncertain world rippling up and down the

supply chain.

Often the longer the supply chain the more complexity and increased risk of bullwhip effect. In

industries such as fashion and consumer technology, the plethora of products seem to increase

exponentially while in the same time the product life cycles in the market are getting shorter.

5.2 Characteristics of the Agile Supply Chain

Agility is a supply chain-wide capability that embraces organisational structures, value chain

configurations, information systems, logistics processes and in particular mindset and culture. A

key characteristic of an agile supply chain is flexibility, which should be interpreted from two side

of supply chain. From the inside of supply chain, such flexibility means configurations and

structures are not fixed. They may transform quickly as the needs arises. From outside, i.e. from

market and consumer perspective, the supply chain must deliver timely products and services;

and deliver them at the beginning of the usually short profit widows; often to be innovative and

to be the market leader.

Thus ‘agile supply chain’ is essentially a practical approach to managing supply networks and

developing flexible capabilities to satisfy the fast changing customer demand. It is about moving

and transforming a supply chain that is structured around the focal company and its product

categories to the one that is centred on end-consumers and their requirement.

In order to achieve the responsiveness required for innovative products, an agile supply chain

should contain the following key characteristics:

1. Flexibility

2. Market sensitivity

3. A virtual network


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4. Postponement

5. Selected lean supply chain principles

Flexibility is a key characteristic of an agile supply chain. Flexibility in manufacturing is the ability

to respond quickly to the variations of manufacturing requirements in product volume, product

variety and of the supply chain. The variability in volume is demonstrated by product launching,

seasonal demand, substitution and promotional activities. The changes in variety relate to

increased number of SKUs in new products, distributors’ own brands (DOB), etc. The variations in

the supply chain result from variability of lead times of both suppliers and customers, increased

service level, change in order size, etc.

There are instances of failures during the 1980s where companies invested in sophisticated

flexible manufacturing systems (FMS) in pursuit of flexibility. At the other end of the scale all the

attentions were given to organisational flexibility (e.g. cultural and skills integration between

craftsmen and operators), producing limited success. Recognising a closer link between agile

processes there is a huge interest in the service sector, also how to optimize the benefits of agile

processes for a faster response to customer demand. In order to improve flexibility in a supply

chain, it is crucial to reduce complexity in product specifications to maximize mass customisation,

reduce complexity in processes by standardizing them and enhance organisation flexibility by

multi-skilling and seamless working practices.

Market sensitivity means that the supply chain is capable of responding to real demand. This

requires demand planning not to be driven by periodically adjusted annual forecast, but by actual

customer requirements. The scheduling of operations will be reverse scheduling based on

customer orders rather than forward scheduling based on forecast. In addition to actual customer

order, the use of information technology and efficient consumer response (ECR) and customer

relationship management (CRM) systems should be utilised to capture data directly from point

of sales and consumer buying habits. The growth in ‘loyalty cards’ and ‘store cards’ is also another

source of consumer data to enhance the management of market sensitivity.

Virtual integration is characterised by informal and flexible and dynamic relationships between

the divisional units and different sectors of the supply chain. The use of internet and information

technology have enabled the real-timesharing of data between customers, buyers, suppliers,


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planners, manufacturers and distributors in a virtual network. The visibility of demand and

collaborative planning forecasting and replenishment (CPFR) systems (see Chapter 12) in a virtual

network are important tools to respond to the real needs of customers in a global market. The

concept of competitive advantage through world class manufacturing in individual sites has now

shifted to network excellence. The supply chain where a group of partners can be linked together

in a virtual network and communicate on-line and on time is a vital characteristic of agility.

Postponement is based on the principle that semi-finished products and components are kept

in generic form and the final assembly or customisation does not take place until the final

customer or market requirements are known. The principle of postponement is an essential

characteristic of an agile supply chain. The rapid response tailored the customer needs is also

helped by the buffer capacity of key workstations. The point in the supply chain where the semi-

finished products are stocked is also known as ‘de-coupling’ point. This point should be as close

to the market place as possible in the downstream of the supply chain. In addition to responding

quickly to specific customer demand, the concept of postponement offers some operational,

economic and marketing advantages. As the inventory is kept at a generic level there are fewer

SKUs and this makes easier forecasting and less inventory in total. As the inventory is kept at an

earlier, stage stock value is also likely to be less than the value of finished product inventory. A

higher level of variety can be offered at a lower cost and marketing can promote apparent

exclusivity to customers by ‘mass customisation’.

An agile supply chain also shares some lean supply chain principles or characteristics. The

enhanced responsiveness of an agile supply chain is in addition to the high level of efficiency,

quality assurance and smooth operation flow which are the key characteristics of a lean supply

chain. An agile supply chain also focuses on the elimination of waste or mud as in a lean process

but with a different strategy for buffer capacity and inventory required for postponement.

However, a pure lean strategy can be applied up to the de-coupling point and then an agile

strategy can be applied beyond that point. It should be possible to achieve volume-oriented

economies of scale up to the de-coupling point. This is similar to a service operation (e.g. a bank)

where the repetitive activities are isolated or de-coupled and carried out in the back office with

lean thinking while responsive customer service is provided at front end.

5.3 Comparison of lean supply with agile supply


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The capabilities of an agile supply chain is created and measured from the ‘outside in’ as opposed

to pushing product offerings into the market – the ‘inside out’. The strategic focus of an agile

supply chain is a relentless pursuit of customer value in every part of its fabric. The operational

planning of agile supply chain is focused on the capabilities for responsiveness and constantly in

anticipation of unpredictable sudden changes in demand. Such capability building and customer

attention cannot be achieved without a cost. Typically, in order to ensure availability, extra

production and service capacity need to be reserved; this will incur additional cost of over

capacity. However, when the strategic positioning of the supply chain is rightly set, the gains from

the agility are worth the effort and cost. This actually raised an important question. In which

business circumstances that the agile supply chain is worthwhile?

To answer this question, we may do some comparative observations between lean and agile by

looking at some most common variables in supply chain management. First, we can make

observation on the volume and variety of the product that supply chain produces. As shown in

Figure 5.1, lean works best for high volume, low variety and more predictable operating

environment; whilst agility is needed in less predictable environment where the demand for

variety and choice is a dominant feature.

Figure 5.1 Volume and variety observation.


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We can also make observation from some specific characteristics of demand and supply. As

shown in Figure 5.2 the supply characteristics in lead-time can be long or short; whilst the

predictability of market demand can be categorised into either predictable or unpredictable. It

then become intuitive that in the case of long supply lead-time with predictable customer

demand, the plan and execution style of lean model works the best; while in the case of short

supply lead-time with unpredictable demand, the Agile responsiveness works the best.

Figure 5.2 Demand characteristics observation

More comprehensively, Mason-Jones et al. (1999) developed a comparative analysis between

lean and agile by observing a whole host of supply chain attributes as shown in Table 1. This list

clearly mapped out two distinctively different attributive profiles for both lean and agile supply

chain to home in.

Table 1 Distinguishing Attributes Lean Supply Agile Supply

Distinguishing Attributes Lean Supply Agile Supply

Typical products Commodities Fashion goods

Market place demand Predictable Volatile

Product variety Low High

Product life cycle Long Short

Customer drivers Cost Availability

Profit margin Low High


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Dominant cost Physical cost Marketability cost

Stock-out penalties Long-term contractual Immediate and volatile

Purchasing policy Buy materials Assign capacity

Information enrichment Highly desirable Obligatory

Forecasting mechanism Algorithmic consultative

5.4 From supply chain to demand chain

There is a fundamental difference between the traditional approach to supplying product to

markets and the newly emerging model we have described here. The traditional approach is

based upon optimising production, handling and transportation through the calculation of

‘economic batch quantities’. It is essentially a ‘push’ type of system were product is produced

ahead of demand, normally against a forecast and is then held in the market place awaiting

orders. The model suggests that ideally the supply chain should become a ‘demand chain’ - in

other words, everything that is moved, handled or produced should ideally be in response to a

known customer requirement. A supply chain tends, by its very nature, to focus on creating

efficiency in terms of the flow of material from source to user. On the other hand a demand chain

is focused more on effectiveness in the sense that it seeks to be market-driven responding to the

needs of the market more rapidly.

The key to this transformation - from supply chain to demand chain - is agility.

Table 2 summarises the major differences between the traditional model and the new approach

to supply chain management.

Table 2: Agile supply chain management versus traditional approach

Agile approach Traditional approach

Stock is held at multiple echelons, often

based on organisational and legal

ownership considerations.

Stock is held at the fewest echelons, if at

all with finished goods sometimes being

delivered direct from factory to customer.

Replenishment is driven sequentially by

transfers from one stocking echelon to

another.

Replenishment of all echelons is driven

from actual sales/usage data collected at

the customer interface.


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Production is planned by discrete

organizational units with batch feeds

between discrete systems.

Production is planned across functional

boundaries from vendor to customer,

through highly integrated systems, with

minimum lead-times.

Majority of stock is fully finished goods,

dispersed geographically, waiting to be

sold.

Majority of stock is held as ‘work in

progress’ awaiting build/configuration

instructions.

5.5 Using the supply chain to compete

It is becoming increasingly clear that the changed conditions in the global marketplace demand

a much more agile response from the organisation and its partners in the supply chain. The idea

in the past was that marketing success was based upon strong brands and innovative

technologies. Today brands and innovation are still critical but they are not enough. Instead the

winning combination is strong brands and innovative technologies supported by an agile supply

chain capable of responding more rapidly to volatile demand.

True competitive advantage is gained when the organisation is able to consistently meet the

needs of customers more precisely and in a more timely way than anyone else. As the realisation

grows that it is no longer company competing against company but rather supply chain against

supply chain, then the prospect of market leadership will surely be enhanced.

5.6 Developing agility in the organisation

There are number of things the organisations in the supply chain need to get it right before they

can become competitive in the agility dominated operating environment.

This may include organisational structure change, process reengineering, cultivating appropriate

culture, developing KPI, and investing in IT system. The top level executives commitment and

direct involvement is the transformation is critical. It may also down to the right style of

leadership.

Structure Change


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As mentioned earlier, agile supply chain differs from the lean one from its structure to say the

least. The structure change required for developing an agile supply chain applies to two aspects.

One is the supply chain architecture; another is the organisational internal structure. It has to be

said here that we assume business and supply chain strategies have been and will be developed

appropriately to support the structure decision making.

For the supply chain structure, it all about the organisations external connections and how the

whole supply chain is networked together. The first consideration is the extent of vertical

integration. For an agile supply chain, the broad guidance is to have small or narrow span of

vertical integration. This will give the supply chain a great deal of flexibility without feeling

bogged down by the fixed assets. The second aspect to consider might be the outsourcing

alternatives. To have a network of capable suppliers that can take outsourcing contracts from

you, will materially improve the agility of the supply chain. The other one to consider is the

location of the suppliers. Long distance and poor infrastructure will certain impede the supply

chain’s fast reaction and thus need to be pruned in the network.

From the organisational internal structure point of view, agile supply chain also demands some

structure changes. Some historically centralised operation may need to be decentralised to cut

the bureaucracy and respond to local conditions. Multi-divisional structure may be advisable to

concentrate on the product, service, and geographical area and allowing units to adapt to local

needs. Agile operations would also prefer more flat structures not tall hierarchies. High degree

of empowerment and less formal rules are also positive factors to the agile structure.

Process Change

In the agile supply chain, processes are still necessary, but they are fewer by definition. Any

process slows down the response time should be considered for reengineering. It is likely that

some process short-cuts are necessary for the agile operation and the level of operational risks

may rise. But the top priority is still the responsiveness, so long as the safety is not compromised.

Ways may be found to by-pass the regulations and opportunistic flair could play a role in

achieving unanticipated profit. However, this does not mean to create any expansive purchasing

or costly deliveries. Quite the contrary, the process that drive and support agile supply chain are

often the unique combinations of standard or modular process which is the key to containing the

cost while delivering the service to unexpected demand.


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The postponement process discussed in the previous section is a widely applied process to

achieve higher agility. It is also important that the business processes are aligned through the

supply chain. Thus a coordinated process development for agile response is essential.

IT Systems

Agile supply chains are best underpinned by an ERP system similar to those used in other supply

chain types. An array of additional applications designed to optimise the agile capabilities

including process alignment and joint forecasting and planning. Zara’s achievement of

remarkable responsiveness was due no small measure of its IT systems. The centralised design

teams for man’s ware, woman’s ware and children’s ware are hardwired with the retail stores

around the world. Using on-line market information the teams will be able to change or creating

new designs quickly ahead of the competition. Anecdotally, if as few as three people have come

to the store and asked something that Zara don’t have. Zara’s design team will take it on and

design it for them.

Nevertheless, investing in applications does not necessarily mean investing in large lump of

capital equipment. In fact, investing in hardware may even hinder the agility development.

Hardware is generally rigid and non-transferable between markets, once invested it will only

depreciate, and it depreciates much faster when new updated equipment are coming onto the

market. Renting or buying the service without taking the ownership of the hardware appears to

be a better choice for agile supply chains.

Chapter 6: Purchasing and Supplier Selection

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6.1 Strategic Role of Purchasing

Purchasing function has a strategically indispensable role to play in supply chain management. It

covers the sourcing end of supply chain management interfacing with the delivery end of the

suppliers.

According to the classical definition of purchasing is: to obtain materials and/or services of the

right quality in the right quantity from the right source, deliver them to the right place at the right

price.

A much modern and comprehensive definition of purchasing is: the process undertaken by the

organisational unit which, either as a function or as part of an integrated supply chain, is

responsible for procuring supplies of materials and services of the right quality, quantity, time

and price, and the management of the suppliers, thereby contributing to the competitive

advantages of the achievement of the corporate strategy. Purchasing management thus, by

definition, supports and implements the supply chain management strategies. It is one of, or

maybe the most important, delivery arms of supply chain management. Often it directly delivers

the cost saving, quality improvement and fulfils the supplier relationships. Purchasing function’s

critical role can also be illustrated from a simplified income statement:

Total sales = £10,000,000

Purchased Service / materials = £7,000,000

Salaries = £2,000,000

Overheads = £500,000

Profit = £500,000

Suppose this is a company’s profit-loss account for the current year, and the shareholders

demand the CEO to deliver double the profit in the next year. What can the CEO do with regards

to those factors associated with the account? Well, assume everything else remains equal,

doubling the total sales will eventually double the profit. It is equivalent to create two companies.

But the problem with this approach is that the sales volume is often constrained by the market.

If the product cycle has passed the maturity and started to decline, to maintain the amount of


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sale would be difficult let alone to double it. Or, the company could reduce the salary by 25%,

which could make £500,000 saving for the bottom line.

Common sense tells that it is not feasible, and the CEO would not agree as his 25% cut would be

biggest of all. Another alternative is to get rid of all the overheads costs, which also makes

£500,000 saving. However, this is almost impossible to do practically, nor agreeable theoretically.

What’s left is to curtail the buyer-in goods and service by 7% which will make $500,000 savings

for the bottom line. Now, just 7% cut in purchasing would result in 100% increase of profit. This

is no doubt a very effective approach as the effort appears to be small and the gain is amazingly

high. It is apparently the only viable and convincing choice there is to it.

Who is going to do that for the company? It is the purchasing function. This is why purchasing

function is distinctly so important to the company’s profit level. It is the company’s profit

leveraging point, whereby a small input can generate large output. No wonder we see many

OEMs often try to enforce the supplied material cost reduction by 4-5% year on year, albeit, this

may not be the best approach from the contemporary supply chain best-practice perspective.

The operational processes of purchasing function can be represented by the diagram shown in

Figure 6.1. It basically intermediates the company’s internal operations with the suppliers,

ensuring the right suppliers are found and engaged in a process of supply and delivering the

required materials, components and services that best suit the internal operations.


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Figure 6.1: Operational purchasing activities (adopted from Slack, 1998)

These are just the visible parts of purchasing function. Beyond these processes, there might more

important high level strategic decisions to be made for the purchasing. Typically, make-or-buy

decisions, supply base rationalisation, supplier development and etc.

6.2 Purchasing Process

Procurement or Purchasing is an important process for a business or a company that focuses on

providing the right quality and quantity of products to people. It is important that a business is

aware of how the process will affect the whole purchasing strategy that they are using with their

products or services.

Using the Kraljic Matrix is one way to help make the process easier and smarter. This strategy

helps companies to use to minimize the vulnerability of their supply chain while simultaneously

maximizing the buying power that they can have from the goods that they are offering.


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The Quadrants of the Kraljic Matrix

Kraljic Matrix is divided into four quadrants that will show the potential result of the profits that

a certain business can have when it is on one axis and see how vulnerable the business will be,

with the suppliers’ disappearance from the other side of the axis. The four quadrants are: Strategic

Items, Leverage Items, Bottleneck Items and Non-Critical Items. For those businesses whose

purchasing managers are interested in incorporating the use of the matrix into their business, it

is important that they know the most and the least critical parts of the Kraljic Matrix as well as

those that show high and low impact on the business’ strategy.

Strategic Items

These products are those that are included in the critical needs of the buyer because of the fact

that these products may either be difficult to deliver, hard to find, costly, or directly impact the

profitability of the company. Although all quadrants work together to make up the complete

picture, because of the very nature of this quadrant and its relation to the business’s bottom line,

this should be the quadrant to examine in depth first.

Leverage Items

This quadrant is on the right side of the matrix with a high financial risk involved in the items that

fall here, but it is at the bottom so the supply risk is low. Therefore, even though the financial

impact on the business is very high, the strategies and considerations for these items are different


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because of the wide variety of options available to procure them. Items in abundant supply tend

to work well with competitive bidding as a part of the overall strategy.

For such leverage products, Kraljic proposes a purchasing strategy of competitive bidding.

Understandably, competitive bidding will only work if there is more than one supplier. The low

supply risk factor of leverage products supports this strategy. Alternative suppliers are in this case

available and substitution of supplier is possible. The buyer can then benefit on the lower price

and cost advantages. It is important to understand that the buyer need to do so, because the

high financial impact the leveraged products.

Bottleneck Items

This is the first of the two on the left side so you know it has a low financial risk. However, being

on the top means the risk to the supply is greater with possibly only 1 or 2 vendors out there with

the specific items needed. As a result of the reduced financial impact, these items are a little safer

to explore other options. It is a sound strategy to nurture the relationship with the vendor while

at the same time investigating and looking into other resources.

Non-Critical or Routine Items

The products in this quadrant are at the bottom left so that means low financial risk and low

supply risk. A perfect example of this would be basic office supplies such as paper, pens, binders,

tape, etc. The challenge is that in many cases, the fees associated with shipping, transporting and

receiving them are more than the items themselves!

For the non-critical or routine products, Kraljic proposed a purchasing strategy of system

contracting plus e-commerce solutions, because these products have large varieties and high

logistics complexity and often labour intensive in handling. The sophisticated computer based

system ordering suits well with the nature of the products. Although the alternative sources of

supply are available, bidding is not recommended. This is because the low cost nature of the

materials made the bidding unnecessary; and the variety complexity of the materials will make

the bidding unaffordable.

By using the Kraljic Matrix, a business can better understand the potential profit in relation to the

supply chain weaknesses and vulnerabilities. By being aware of the four quadrants, there is no


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doubt that purchasing managers will have an easier time dealing with their procurement

processes. They can make better strategy decisions, work on those relationships that are key to

the financial success of the business, and identify items of lesser importance that may work better

finding alternative sourcing or even outsourcing.

6.3 Supplier Selection

One of the critical tasks of purchasing function is to identify and select the suppliers. This is

particularly true when we talk about strategic components and bottleneck components. In both

of these categories, suppliers are by no means ascertained. The quality of the suppliers and the

righteousness of their selection will have direct implications on the supply chain’s long-term

competitiveness. The processes of going about selecting suppliers can be suggested as follows,

but by no means comprehensive and universal:

Set up Selection criteria

Initial contact

Formal evaluation

Price quotation

Financial data

Reference checking

Supplier visit

Audits, assessments or surveys

Initiation test

Apparently, these processes are mainly around setting and taking measures against the criteria.

However, there are three significantly different approaches toward supplier selection. The first is

based on the product that the supplier can deliver. This approach will normally check the product

prototype to see if the quality and technical specifications can be met and the delivery terms are

satisfactory. The second is based on the capability that the supplier displays. It typical checks

whether the supplier has the design and development capability, strategic investment in

technology and skills, and up to scratch management. This capability approach is often used for

long-term supplier selection and can be done well before the idea of component is taking shape.

The third is the combination of product and capability selection. It applies to when a strategically

important new part is to be outsourced to a new supplier. Not only the supplier must comply

with all the product specific requirements but also should have the capability of making future


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generation of the products in the long run, so as to sustain the supply chain development. Some

frequently used criteria for capability filtering are as follows.

Assessment criteria on the supplier’s capability:

Total quality management policy

BS 5750/ ISO 9000 certification or equivalent

Implementing latest techniques e.g. JIT, EDI

In-house design capability

Ability to supply locally or world-wide as appropriate

Consistent delivery performance, service standards and product quality

Attitude on total acquisition cost

Willingness to change, flexible attitude of management and workforce

Favourable long term investment plan

The power dependence between the buyer and the supplier

The second phase in Kraljic’s framework, after the classification of the product categories, deals

with market analysis by plotting the bargaining power of the suppliers against its own strength

as a buyer. This concerns everything from quality and quantity aspects to the relative strength of

existing suppliers.

Important factors during this phase are the check of supplier’s capacity utilisation, supplier’s

break-even stability, uniqueness of supplier’s product, past variations in capacity utilisation of

main production units and the potential costs of non-delivery and inadequate quality. Taken

together, Kraljic stress the importance of knowing both the supplier strength and company

strength in order to do a good market analysis. The evaluation criteria will also differ for different

industries.

Strategic positioning of the products identified in the classification phase

The third phase concerns strategic positioning of the materials/products identified in phase one.

This makes it possible spot opportunities and vulnerabilities in the supply markets and it also

makes it possible to develop counterstrategies. Three basic risks categories are possible in the

strategic quadrant depending on where in the matrix a product category is positioned: exploit,

balance and diversify. As appendix II shows, different actions are needed for volume, price,


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contractual coverage, new suppliers, inventories, own production, substitution, value engineering

and logistics. The normal situation is that companies will have different roles when different items

and suppliers are regarded. The company will have more flexibility in negotiations if the company

is stronger than its supplier. The exploit strategy is used when the buyer plays a dominant role

and the supplier’s strength is medium or low; there should however be a balance in order not to

jeopardise the relationship with the supplier. With an equal power situation a balanced approach

are used and when the supplier dominate a diversified approach is used. This can also mean that

the buyer should try to find material substitutes or new suppliers. This can lead to inducements

as longer contracts and higher prices. This stage is more related to the prevailing conditions the

purchasing department faces.

Long-term actions plans and strategies

The fourth phase concerns setting up actions plans for the long term and opens up for changing

the prevailing conditions in phase three above. The previous phases have dealt with volume,

price, supplier selection, material substitution, inventory policy and so forth. The fourth phase

makes it possible to improve the general sourcing strategy. This can mean securing long-term

supply and taking actions depending on the risks the company faces. Options with clear

objectives, steps, responsibilities and different measurements need to be clear for the top

management. The fourth phase should lead to strategies for critical purchasing materials both

considering time and what actions that need to be taken.

Kraljic also discuss in his article the importance that the purchasing department reflects the

overall corporate set-up. This concerns for example if the purchasing department should be

centralised or decentralised. He also points out the problem of the purchasing department not

being informed when new actions are taken and that the information period is too short. The

purchasing department need information at least three to six months before the start-up of a

new project, in order to negotiate prices, rescheduling supply quantities and so forth. Tailor made

systems are probably also needed for complex companies with numerous products and multiple

plants. This can include forecast systems, EDP-supported planning, integration of purchasing

systems with other corporate systems, purchasing analyses approaches such as commodity

analysis, value analysis and improved systems support, both in order to work less with

administrative task but also in order to be more efficient.


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Alternative purchasing portfolio approaches to purchasing

The purchasing portfolio models that are used for comparison and as a critique to the Kraljic

matrix, are gathered foremost from the literature review by Dubois and Pedersen (2002),

regarding different and prominent purchasing portfolio models. They are summarised in

appendix III. Improvements of the Kraljic matrix has according to Dubois and Pedersen (2001)

mainly concerned (1) the purchasing behaviour in relation to single materials or components and

supply and purchasing situations (Kornelius and Van Stekelenborg, 1994; Olsen and Ellram, 1997)

and further (2) the classification of buyer-supplier relationships (Bensaou, 1999; Gelderman and

Van Weele, 2000). We have added some articles, which in our opinion contributes and is in line

with the purpose of this master thesis. These are foremost articles by Gelderman and Van Weele

(2002), (2003) and Caniëls and Gelderman (2005).

The purchasing behaviour in relation to single materials or components and supply and

purchasing situations

Concerning the authors in the literature review by Dubois and Pedersen (2002), Kornelius and

Van Stekelenborg (1994) mean that the purchasing- and supply literature only recognises ideal

types of relationships between buyer and supplier. Descriptions of the buyer- supplier

relationship is not linked to a specific situation but are instead based on differences on just one

contingency (e.g. the power balance and so forth), which makes it difficult answering the

question: when to do what. It is about an understanding of what purchasing principles to apply

in what supply situation. The authors see this as an imperfection in the existing literature that

only describes the control measures without saying anything about the situational characteristics.

This also concerns Kraljic, because of his focus on the power-dependence between the buyer and

the supplier as a contingency and the fact that control measures cannot be defined at random

since they depend on the situational characteristics. In addition to this the time span must be

considered.

Ellram and Olsen (1997) criticises portfolio models on a general basis. Among other thing they

stress the importance of considering the complexity of the dimensions used to categorise the

elements in the portfolio. If the dimensions are too simple important variables can be overlooked.

The process of categorising is also more important than the classification itself, because during

the categorisation process, the decision-makers must agree on the importance of the different

products, suppliers, or relationships segmented in the specific portfolio model. Furthermore,


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portfolio models have a tendency to result in strategies that are independent of each other. The

strategies for products and suppliers are seldom linked in the overall long term purchasing

strategy and there is also no general guidance of choosing among the resulting strategies.

Regarding the supplier relationship, and in line with Kornelius and Van Stekelenborg (1994), the

authors stress that it is not enough only to focus on the power balance between the buyer and

the supplier and suggest strategies based on that current balance (as Kraljic suggests). Exploiting

its power as a buyer can be a strategy that works in the short run but not such a wise move in

the long run. Ellram and Olsen make a parallel to the methods by Lopez as a former manager at

General Motors. Lopez used his buying power to impose massive cost reductions from their

suppliers. However, the main critique concerns the need of models to assist in the management

of the company’s entire portfolio of relationships.

Classification of buyer-supplier relationships

Bensaou (1999) discusses the implications of the fact the business press and academics

recommend managers to move from arm’s length relationships to longer-term collaborative

strategic partnership. This was largely based on empirical studies of Japanese production and

supply practices, for example the success stories of Toyota. The author discusses some of the

negative aspects of a more collaborative partnership, i.e., they are costly to develop, nurture, and

maintain. The investments in the relationships also increase the risk for the buying company.

Bensaou’s conclusion that collaboration should be avoided under some circumstances is in sharp

contrast to still another discussion departing from the Kraljic model, namely Håkansson &

Persson (2007), who argue that collaboration is always possible and can be applied in Kraljic’s

matrix all quadrants. This means that partnership should not only be prevalent in the strategic

quadrant of the matrix and that exploitation of different types of interdependencies can always

be useful.

A buyer and a supplier can create more efficient activity structures through

collaboration

Gelderman and Van Weele (2000) on the other hand, highlight the power dependence

perspective in the Kraljic matrix. They stress that there is a natural conflict of interest in the buyer

supplier relationship, i.e., both prefer a dominant power position due to the attached benefits.

Furthermore, it is not clear in what way the balance of power enters the Kraljic matrix.


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Strategic change in the Kraljic matrix

Gelderman and Van Weele (2002) highlight that the Kraljic model does not provide guidelines

for strategic movements of commodities and/or suppliers within the matrix, i.e., how movements

should be done in the matrix before or after decisions regarding strategic change. In addition to

this, they mean that purchasing professionals should always look for possibilities to move to

another more favourable strategic position in the matrix. The authors stress that previous

research do not reveal how purchasing professionals handle the problem of positioning

commodities and/or suppliers into the portfolio and how they actually develop purchasing

strategies, and what results are derived from using portfolio techniques. Kraljic’s

recommendations for the four categories in the matrix are recommendations such as: strategic

partnership, exploiting power, efficient processing and volume insurance. The authors mean that

these recommendations are generic by nature and thereby only rough indications.

Gelderman and Van Weele (2003) also mention that previous researchers always claim strategic

partnership in the strategic quadrant, which is not according to Kraljic ideas (balance, exploit,

diversify). Furthermore the authors highlight the importance of considering how the supplier

accesses the situation.

A partnership is only possible if both parties have the same intensions. An extension from the

previous authors and also a critique of the dyadic relationship between the buyer and supplier is

the ideas by Fredriksson (2007) concerning triadic sourcing. This concept deals with managing

interdependencies in triads including one buyer and two suppliers and where the supplier-

supplier relationship simultaneously is subject to both competition and cooperation. This concept

means that the dyadic relationship is not always valid. Gelderman and Van Weele (2003) further

argue, in line with Day (1986), that there are unanswered questions regarding measurement in

the Kraljic matrix. Day (1986) also questioned how the dimensions in the matrix (profit impact

and supply risk) should be measured. Gelderman and Van Weele (2003) stress that measurement-

and strategic issues are handled differently and that companies adjust the Kraljic approach in

order to for example match the conditions on the end markets and the overall business strategy.

Canïels & Gelderman (2005) verifies that contributions to the Kraljic model typically recommend

one purchasing strategy for each portfolio quadrant (this report is a supplementary research of

the report by Gelderman and Van Weele (2003)). However the authors mean that purchasers


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make a clear distinction between alternative strategies within each quadrant. Little is also known

about how the concept of the power dependence between buyers and suppliers and how that

influence the choice for a specific purchasing strategy.

6.4 Contributions to the Kraljic matrix

In the literature review by Dubois and Pedersen (2002), Kornelius and Van Stekelenborg (1994)

mean that prescriptive models are needed in order to choose the appropriate purchasing strategy

in a given situation. In order to cope with this the authors presented a typology for the

characterisation of supply situations. For each purchasing situation a working method is

presented, which will support decision makers in coping with the diversity in supply situations.

The control principles of purchasing in a specific time span, should derive from the internal

market demand (strategic importance of the purchased goods and services, product

characteristics, unpredictability of the customer demand) on the one hand, and the delimitations

of the external supply market (buyer’s importance of the supplier, switching costs, supply scarcity,

number of suppliers, geographic concentration the financial situation of the supplier, overall

market conditions and so forth) on the other hand. This led to four purchasing situations: plain

supply situation, internally problematic situation, externally problematic situation, and a

complicated situation. This enables purchasers to focus their attention on the contingencies that

need attention and by that develop purchasing strategies for the different quadrants in the

proposed portfolio. The complicated situation (high control need of the internal- and the external

supply market) can be compared to the strategic quadrant of the Kraljic matrix, where the

purchase needs to comply with very detailed specifications and conditions. In this situation

purchasing must be integrated with other functions within the buying company. Taken together

the control activities are directed towards supply situations that are causing a high control need.

Ellram and Olsen (1997) expanded differently on the Kraljic matrix to analyse a firm’s portfolio of

supplier relationships. They propose a multi-step approach to analyse a company’s supplier

relationships. The first step in the portfolio analysis is to analyse spend in order ascertain ideal

relationships for major purchases. In this step weights are assigned to each of the factors in the

two dimensions. The second step concerns a descriptive analysis of the company’s current

suppliers in order to look at how the supply task is managed. Finally, actions plans are formed

how to adapt existing supplier relationships based on the link between the analysis made in step

one and two. The first step generated a portfolio model with the dimensions: difficulty of


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managing the purchase situation and strategic importance of the purchase. The latter dimension

describes factors internal to the firm (competence factors, economic factors and image factors)

and the first dimension describes external factors to the company (product characteristics, supply

market characteristics and environmental characteristics). This division between internal- and

external factors can be seen as similar to Kornelius and Van Stekelenborg (1994) and the control

principles for internal market demand and the external supply market.

The second step in the working method, analysis of the company’s suppliers, leads to a new

portfolio model with the dimensions relative supplier attractiveness and the strength of the

relationship. In relation to Kraljic, power dependence and supply risk are only two factors in this

phase influencing the appropriate strategy when managing supplier relationships. Factors

influencing the dimension relative supplier attractiveness are: financial and economic factors,

performance factors, technological factors, organisational, cultural, and strategic factors and

finally complemented factors, such as actions plans based on changes in a specific business

context and the safety record of the supplier. Factors in this dimension, describe why a buyer

should choose a specific supplier and it depends on the contingency for a specific

commodity/supplier.

This is also in line with Kornelius and Van Stekelenborg (1994). The second dimension, the

strength of the relationship, includes economic factors, character of the exchange relationship,

cooperation between the buyer and the supplier and the distance between the buyer and the

supplier. The importance of each relationship is represented by a circle, where the size of the

circle illustrates the current allocation of resources to the relationship. Finally and the third step

of the working method by Ellram and Olsen, is to develop action plans for moving from current

to the ideal supplier relationship regarding purchases highlighted in step one. If the ambitions

are to keep a strategically important supplier, it is important to strengthen the relationship.

Bensaou (1999) also proposed a framework for managing a portfolio of relationships. His

framework for managing a portfolio of relationships departs from the correlation between the

buyer specific investment and the supplier specific investment. From this perspective, strategic

partnership correlates with the investments from both the buyer and the supplier in the

relationship, and as one of the respondents of the study declared – “We are tired of this smooth

talk about let’s work in partnership”. The findings in the authors study leads to a portfolio of how


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to manage a portfolio of relationship. This portfolio will help senior managers handle the

governance structure and/or the relational design under different external contingencies.

Furthermore, there will be guidance how to manage each relationship.

Each quadrant of the first portfolio (specific investments) is from the perspective of managing the

relationship not seen as inferior to one another. Therefore a strategic partnership does not mean

a high performing relationship. Based on this, Bensaou (1999) proposes a portfolio of managing

relationships based on the dimensions relationship requirements and actual relationship

capabilities. If the relationship requirements are high and the actual relationship capabilities are

graded low, the status is an under designed relationship. This means that the capabilities of the

current relationship need to adapt to the requirements of the relationship in order to be match

and to be competitive.

Gelderman and Van Weele (2000) developed the Kraljic matrix model further by trying to identify

and classify the content of the buyer-supplier relationship. The authors created a model with the

dimensions buyer’s dependence and supplier’s dependence. The main variable used is the power

dependence between the buyer and supplier. Gelderman and Van Weele highlights different

action plans, i.e., how to manage suppliers given a specific category. To be able to assemble “high

points” in purchasing situations the authors suggest a balanced relationship. Important supplier

strategies are: volume insurance, exploiting power and efficient processing.

6.5 Strategic change in the Kraljic matrix

Gelderman and Van Weele (2002) highlight the conditions for changing positions in the Kraljic

matrix. The company in the study always try to reduce the dependence on the supplier involved,

but in some cases (monopolistic situation) the company must accept a locked in position. In order

to solve that situation, new suppliers need to be introduced. This could be a problem if patents

are part of the locked in relationship. The study also stresses the importance of working with

world-class suppliers because they are performing better both technically and economically. If a

strategic partner is underachieving an alternative is to make the product less complex and find

alternative solutions with new suppliers. Furthermore, moving from the leverage quadrant to the

strategic quadrant might be a good choice for co-design. A general conclusion is that portfolio

approaches is very helpful in positioning commodities in different segments and in developing

purchasing strategies. Furthermore, the Kraljic matrix is useful for discussing, visualising, and


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illustrating the possibilities of differentiated purchasing-and supplier strategies. It can also be

useful for coordinating purchasing and supplier strategies among different fairly autonomous

business units. However the case company doesn’t make any calculations for assessing high or

low in the matrix. As one respondent stressed –“It is better to be roughly right than totally wrong”.

Gelderman and Van Weele (2003) illustrate in their case study a clear tendency that buyers want

to avoid supply risk and thereby position more in the center of the matrix. Regarding strategic

movements in the matrix and the movements to and from the strategic quadrant, three distinctive

situations were found: (1) holding the position and maintain strategic partnership, (2) holding the

position and accept a locked in partnership and (3) moving to another position and terminate

the partnership and thereby find a new supplier. In a move to the strategic quadrant it is about

developing a partnership. Most likely it concerns a commodity positioned in the leverage

quadrant. Furthermore three distinctive measurement methods were found: the consensus

method (strategic discussions), one-by-one method (one key variable per dimension) and the

weighted factor (a number of factors for each dimension). The consensus method has some

attractive features and is based on reasoning and discussions. The last remark is that experienced

portfolio users always include additional information with reference to the overall business

strategy, the situation in the supply market and the capacities and intension of the individual

suppliers.

Canïels and Gelderman (2005) empirically looked at the relative power and total interdependence

for a number of portfolio-based purchasing strategies. The result of the study, among Dutch

purchasing professionals, is that there appear to be a significant difference in the power positions

between the purchasing strategies within each quadrant, and that it might be associated with

differences in power and dependence positions. The choice of a specific purchasing strategy

within each quadrant is yet unclear but can be associated with differences in power and

dependence between the buyer and the supplier. New findings concerned the fact that positions

in the bottleneck and the strategic quadrants were associated with supplier dominance while the

other two quadrants had a more balanced power structure. This means that when a strategic

relationship was maintained in the strategic quadrant, there was supplier dominance. The authors

mean that one could have expected a more balanced power structure, because of the general

thoughts by Kraljic of using power dependence as a key element when designing strategies in


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the strategic quadrant. Furthermore, the perceived supply risk by the buyer was strongly

associated with the power balance between the buyer and the supplier.

The structure of the power balance highlighted by Canïels and Gelderman (2005), can be

extended to Fredriksson (2007) and his conclusions regarding “triadic sourcing”. He suggests in

his study that triadic sourcing may lead to higher performance since suppliers are put under

competitive pressure. This involves among other things product development. However, more

than two suppliers used in this hybrid strategy is not a good choice because of the fact that the

number of interfaces grows exponentially with the number of suppliers involved. This limit the

resources spent on managing each interface. On the other hand, one supplier would take away

the positive tension created by competition.

6.6 Towards Knowledge Based Sourcing

Purchasing practice and theory never stops developing. It really is a dynamic and evolving subject

in both theory and practice. Looking back at the recent three decades of purchasing

development, an evolution pattern starts emerge. Depend how one would like to take out of it;

the pattern may be presented in different ways. Here we frame the evolution pattern into two

perspectives, each of which has four key stages. The first perspective is on the operational focuses

and the second perspective is mainly on the characteristics changes.

The operational focus perspective classifies the purchasing function into four stages:

Stage one can be called ‘Product centred purchasing’. The operation is basically

concentrated exclusively upon the purchasing of the tangible products and its outcomes

on the overall businesses. It is usually measured in the five rights (right price, right time,

right quantity, right quality and from the right sources).

Stage two can be called ‘Process centred purchasing’. It is predominantly process

focused operation. It moves beyond the direct outcomes of the purchasing activities and

into the processes through which the outcomes are delivered. This means that the

managers realised that the processes are the enablers, and often the controllers of the

purchasing outcomes.

Stage three can be called ‘Relational purchasing’. The focus of the operation is not just

on the process but also on the inter-organisational relationships. The relationship has

been taken on as the key management instrument to enhance the product quality and


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technological advances; it also had massive positive impact on the supplier integration

and development.

Stage four can be called ‘Performance centred purchasing’. It focuses on the optimum

business performances as a whole and managing the purchasing function’s contributions

to the overall business performances. In this way, the purchasing function has been

strategically connected to the business’s ultimate objectives and delivery. It is a system

approach.

The characteristics focus perspective classifies the purchasing function into four stages:

Stage one is ‘passive’ in character. In this stage the purchasing can be defined as lack of

strategic directions and is mainly reactive to operational requirements. High proportion

of purchasing manager’s time is on routine operations with low visibility to the supply

chain. The supplier selection is based on price and availability only.

Stage two is ‘independent’ in character. In this stage the purchasing may have adopted

the latest technology and process, but may have not got the strategy that aligned with

the competition. Links between purchasing and technical disciplines may have been

established; performance based on cost reduction; top management recognises the

importance of professional development and the opportunities in purchasing

contributing to profitability.

Stage three is ‘supportive’ in character. Purchasing starts to support firm’s competitive

strategy by adopting purchasing techniques and products which strengthen the firm’s

competitive position. Suppliers are considered as key competitive resource. The supply

market, products evolution and suppliers capabilities are continuously monitored and

analysed.

Stage four is ‘integrative’ in character. In this stage purchasing strategy fully integrates

with firm’s purchasing function. Multifunctional teams and cross functional training of

purchasing professional begin to take hold. Open and close communication with other

functional departments is hard wired into the processes. Purchasing is measured in terms

of its contribution to the overall success of the firm.

It is interesting to notice that the four stages in both perspectives can be broadly matched with

little obvious impediment.


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However, it will take a more rigorous approach to declare the theoretical match and to create a

new stage model for the purchasing development. The discussion presented here merely opens

the scope of discussion and hopefully stimulate further thinking and debate.

But there is no doubt that the purchasing function has now become a much more sophisticated

process and has much wider and deeper impact to the business performance. It is moving away

from the short-term towards long-term; from a function to processes; from transactional to

relational; from cost saving to performance enhancing. The picture of purchasing in the future

perhaps can be described as the knowledge-based purchasing, which is built on the knowledge

about whole business objectives and stakeholders’ interest, the knowledge about the suppliers

and their capabilities and potential, the knowledge about the people and their emotion towards

relationship and culture; and the knowledge about technology up-taking.

Chapter 7: Supply Relationship and Integration

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7.1 Supply Relationship

Supply relationship can be either on the upstream side with the suppliers or on the downstream

side with the buyers. If the relationship is solely observed between one supply and one buyer, it

is also called dyadic relationship. Supply relationship can be defined as the cross organisational

interaction and exchange between the participating members of the supply chain. This means

that the relationship is between organisations not individual people within the same supply chain

where the material flows defines the border line. However, for the inter-organisational interaction

that falls outside of the main streams of the material flows, then it may not be called collaborative

relationship or partnership relation, but may not be the supply relationship.

One of the most common organisational relationships is what’s called the partnership relation. A

partnership is defined as a specific relationship arrangement where parties agree to cooperate to

advance their mutual interests. Since humans are social beings partnerships between individuals,

businesses, organisations, and varied combinations thereof, have always been commonplace. In

the most frequent instance, a partnership is formed between two or more businesses in which

partners cooperated to achieve and share business advancement and profits or losses.

In supply chain management, relationship between the participating members is in fact more a

dimension rather than an element. This means that supply relationship cannot be understood as

something that you either have it or you don’t; instead it is a dimension from which various

different relationship postures can be identified, such as arm’s length relation; short term

contractual relationship, long-term partnership relation and so on. It is almost like a variable that

may take different values under different circumstances. Then the question is how, in practice,

one might measure the ‘value’ of relationship?

This is a difficult question. Amongst many known attempts, a relatively more convincing one is

that if a relationship is a form of interaction and exchange, then a specific relationship can be

measured by the contents of the exchange.

Since relationship is ultimately about exchange, and hence, so long as we know what has been

exchanged in between we should be able to pigeonhole it to a specific type. For example, if the


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buyer and supplier have only exchanged on the price and volume of the goods, we can very safely

assess that they are having an arm’s length relationship; on the other hand if the two companies

have been exchange their vision, mission and value, have joint design and product development

and coordinated production and so on, one can safely assess that the relationship between them

is close and highly engaging.

The traditional supplier-buyer relationship has been limited to almost single point contact of

purchasing officer on the buyer side and the sales person on the supplier side. The purchasing

decision is largely based on the unit price. Information sharing is very limited if not at all in

existence. The relationship tends to be antagonistic and adversarial.

Supply Chain Management Framework is dependent on developing close relationships with key

customers and suppliers. In other words, supply chain management is relationship management.

For this reason, there is a need for a tool that can be used to structure the key relationships that

are identified when implementing the customer relationship management and supplier

relationship management processes. This tool is the partnership model and the GSCF definition

of partnership follows. A partnership is a tailored business relationship based on mutual trust,

openness, shared risk and shared rewards that results in business performance greater than

would be achieved by the two firms working together in the absence of partnership.

Partnerships can take multiple forms and the degree of partnership achieved can reflect tight

integration across the firm boundaries, or only limited integration across the boundaries. Since

partnership implementation requires significant managerial time commitments and often other

resource commitments, the goal is to fit the type of partnership to the business situation and the

organisational environment. The types of partnership are Type I, Type II and Type III. These are

called “types,” not “levels” because there should be no implication that higher levels are better

than lower levels. The goal should be to have the correct amount of partnering in the relationship.

7.2 The Partnership Model

The model separates the drivers of partnership, the facilitators of partnership, the components of

partnership and the outcomes of partnership into four major are as for attention (see Figure 7).

Drivers are the compelling reasons to partner, and must be examined first when approaching a

potential partner. Facilitators are characteristics of the two firms that will help or hinder the


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partnership development process. Components are the managerially controllable elements that

can be implemented at various levels depending on the amount of partnership present.

Outcomes measure the extent to which each firm achieves its drivers. The partnership model

provides a structure for assessing the drivers and facilitators, and component descriptions for the

prescribed type of partnership.

Drivers. Why add managerial complexity and commit resources to a supply chain relationship if

a good, long-term contract that is well specified will do? To the degree that business as usual will

not get the supply chain efficiencies needed, partnership may be necessary. By looking for

compelling reasons to partner, the drivers of partnership, management in the two firms may find

that they both have an interest in tailoring the relationship. The model separates the drivers into

four categories: asset/cost efficiencies, customer service improvements, marketing advantage,

and profit stability and growth. All businesses are concerned with these four issues, and the four

can capture the goals of managers for their relationships.

Facilitators. The nature of the two firms involved in partnership implementation will determine

how easy or hard it will be to tailor the relationship. If the two firms mesh easily, the managerial

effort and resources devoted to putting the correct relationship in place will be lower for the

same results. The elements that make partnership implementation easy or hard are called

facilitators. They represent the environment of the partnership; those aspects of the two firms

that will help or hinder partnership activities. There are four major categories of facilitators:

corporate compatibility, management philosophy and techniques, mutuality and symmetry.


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Components. While drivers and facilitators determine the potential for partnership, the

components are the building blocks of partnership. They are universal across firms and across

business environments and unlike drivers and facilitators, are under the direct control of the

managers involved. In other words, they are the activities that managers in the two firms actually

perform to implement the partnership. There are eight components of partnership: planning,

joint operating controls, communications, risk/reward sharing, trust and commitment, contract

style, scope and investment. The components are implemented differently for Type l, Type II and

Type III partnerships. Action items are identified for the drivers and the components so that both

parties’ expectations are met.


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Outcomes. A partnership, if appropriately established and effectively managed, should improve

performance for both parties. Profit enhancement, process improvements, and increased

competitive advantage are all likely outcomes of effective partnerships. Specific outcomes will

vary depending upon the drivers which initially motivated the development of the partnership. It

should be noted, however, that a partnership is not required to achieve satisfactory outcomes

from a relationship. Typically, organisations will have multiple arm’s length relationships which

meet the needs of and provide benefits to both parties.

The Partnership Building Session

Using the partnership model to tailor a relationship requires a one and one-half day session. The

correct team from each firm must be identified and committed to a meeting time. These teams

should include top managers, middle managers, operations personnel and staff personnel. A

broad mix, both in terms of management level and functional expertise, is required in order to

ensure that all perspectives are considered.

The success of the partnership building process depends on the openness and creativity brought

to the session. The process is not about whether to have a business relationship; it is about the

style of the relationship. The partnership building session is only a first step in a challenging but

rewarding long-term effort to tailor your business relationship for enhanced results.

7.3 Strategic Alliance

Strategic alliance is defined as an informal or formal arrangement between two or more

companies with a common business objective. They are seen as a manifestation of inter-

organisational cooperative strategies that entails pooling of skills and resources by the alliance

partners in order to achieve one or more goals linked to the strategic objectives of the

cooperating firms. They usually will take one of the three structural types:

Horizontal alliance: that is between companies on the same level of different supply

chains, which is also referred to as inter-channel alliances.

Vertical alliance: that is between the firms on the different levels of the same supply chain,

which also referred to as the intra-channel alliances.

Lateral alliance: that is developed between the client company and logistics service

provider firms.


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Those logistics providers usually will serve many different supply chains and thus they are often

seen from any supply chain as the ‘lateral’ rather than internal.

Companies embarked on the business of strategic alliances do so for many reasons:

Sharing complementary resources

Sharing market risks

Achieve economy of scale and economy of scope

Joint development and collaboration

Create value through synergy as the partners achieve mutually benefit gains that neither

would be able to achieve individually

Cost saving and customer value adding

Strategic alliances between businesses usually do not start by the ‘love at the first sight’. They

must be contemplated and planned dispassionately, and they call for a continuous process of

initiation and development. Statistics show that 70% of newly created strategic alliances decease

within one year of operation. This may not be as alarming as it sounds. Alliances, perhaps, are

supposed to be so. Strategic alliance is fundamentally informal to start with and will certainly

enjoy a cosy but flexible relationship. It is perfectly alright for the parties to decease the alliance

without costing them an arm or leg if the experience is not what was expected.

Figure 7.3 Continuous processes of alliance development


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As illustrated in the diagram, the starting point is the matching of the strategic intent of both

parties, which is based on their careful analysis and decisions in respect to the strategic choice

and supply chain configuration at a high level. The strategic intention of alliance can only become

the reality when the agreed alliance is implemented and put to practice.

But the implementation is usually facilitated, affected, or constrained by many factors (the 4 Cs,

in the model) including the whether the two parties have compatible goals, cooperative culture,

complementary skills and commensurate risks.

If all goes well the alliance is expected to produce some positive result through synergy; and they

are usually evaluate don the value-adding, efficiency and effectiveness, cost, and shred risks. The

evaluated results of the alliance will then be reviewed to see if they have met both parties’

strategic intentions. That completes the cycle of alliance development model.

It is anticipated that continuing success of the alliance will rely on the continuing process of those

described steps.

7.4 The Power of Partnership

Why do some strategic alliances succeed, while others fail?

Understanding the ways in which companies in a supply chain improve performance by forging

strategic links with other firms requires a close look at the nature of the relationships and how

the partners behave.

Strategic alliances have become a common feature of supply chains, with managers of companies

along the chain integrating their processes to enhance competitiveness.

Yet research shows that alliances do not guarantee success – and little is known about why some

strengthen the market position of the partners while others do not.

Evelyne Vanpoucke and Ann Vereecke set out to understand which aspects of an alliance are

more likely to deliver success. Their paper – “The Predictive Value of Behavioural Characteristics

on the Success of Strategic Alliances” – explores how behavioural features of an alliance – such


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as trust and commitment, and how partners communicate and manage the relationship – impact

performance.

Their research provides valuable insights into ways supply chain managers can structure their

partnerships to increase margins in complex markets.

7.5 Strategic Alliances: Collaboration as a Resource

Companies in a supply chain develop long-term co-operative relationships to achieve economies

of scale and share logistical capacities and thus cut costs while maximising services.

Integrating processes that allow for better communication, co-operation and the co-ordination

of production creates value for customers. Integration of this kind also helps firms become more

flexible, strengthening their position in markets where there are frequent changes in volume,

product mix and schedules.

However, past research has shown that merely integrating certain practices does not ensure that

an alliance will succeed. While scholars have examined the individual impact of various

behavioural characteristics within alliances – such as trust, interdependence, co-ordination and

commitment – they have not considered these in combination or alongside other aspects of the

relationship.

Suspecting that more fundamental factors may be at work in successful alliances, Vanpoucke and

Vereecke explored how a range of factors affect the success of alliances that are highly integrated

and in which the partners focus their efforts on coordinating logistics, purchasing and other

operations.

While past research has understood the performance of alliances in terms of the resources

deployed by the partners, this study stressed the value of collaboration between firms as a

resource in itself and how a proactive long-term view of a relationship can lead to closer co-

operative links.

7.6 Behavioural Characteristics and Results


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Vanpoucke and Vereecke examined how three important behavioural characteristics affect an

alliance’s performance: its underlying attributes, how the partners communicate, and how they

manage the relationship:

Attributes: The researchers predicted that success is influenced by:

Interdependence: Firms seek to manage uncertainty through interdependence, and

even though a company may not be in a position of power vis-à-vis its partner, it can still

influence performance.

Trust: A company needs to be able to rely on an alliance partner, and partners

demonstrate goodwill by being genuinely interested in each other’s welfare.

Commitment: A company’s commitment to an alliance can be measured by its

willingness to commit time, money and facilities to the relationship.

Co-ordination: Each party to an alliance will expect the other to perform in certain ways

if mutual objectives are to be achieved consistently.

Communication: The success of an alliance will also depend on how the partners handle

information, and, in particular, the degree of:

Sharing: Sharing knowledge about production and planning – but also about market

changes and company goals – is crucial if companies are to gain logistical (strategic?

long-term?) advantages from an alliance.

Processing and quality: Information shared between partners needs to be clear,

accurate, up-to-date, appropriate, precise, reliable, complete and exchanged frequently.

Participation: Companies need to plan and set goals jointly and should be willing to

discuss their practices and processes openly. In joint R&D projects, for example, partners

need to understand each other’s competencies and share information on technology.

Management: The ability of managers to move supply chain alliances forward is crucial

to success, and studies have demonstrated that leadership and performance

measurement can improve results.

The research team surveyed logistics and purchasing managers from a random sample

of Belgian companies with more than 50 employees in the primary goods, chemical,

pharmaceutical, consumer goods, media and informatics industries.


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The team asked the managers: ”What are the characteristics of the least successful and the most

successful strategic alliances?”

The results indicate that:

The principal attributes of an alliance – interdependence, trust, commitment and co-

ordination – are the key to its success, because they determine how the partnership can best

generate cost and service benefits;

Good communication in an alliance will help improve services;

While managing the alliance well helps reduce costs.

Practical implications: Clues to Success

The research results offer a way of predicting whether or not an alliance will succeed.

Because interdependence, trust, commitment and co-ordination (the main attributes of an

alliance) emerge from the study as the key factors in determining success, they are better

predictors of performance than other behavioural characteristics.

This suggests that building trust and coordinating activities are the cornerstones of a successful

supply chain alliance. Managers of the companies in an alliance need to ensure that their

employees understand that the arrangement offers their company significant benefits.

Although efforts to improve communication and apply management tools are of great value to

an alliance, they are less crucial. Good communication will benefit services because information-

sharing and high-quality data help companies detect supply problems or changes in demand,

allowing them to react or adapt faster and improve customer service. Applying management

tools such as leadership and performance measurement can help alliance partners reduce costs.

By offering insights into the role behavioural characteristics play in strategic alliances, this study

has practical implications for purchasing, logistics and customer-service managers within a supply

chain. The research indicates that:

Behavioural characteristics are important, so managers should not underestimate the

time and energy required to create and sustain a strategic alliance;

Both formal mechanisms (such as leadership and performance measurement) and

informal ones (such as trust and co-ordination) are needed for success;


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Purchasers will gain the most from strategic partnerships by focusing on all three

behavioural characteristics: alliance attributes, communication between partners, and

managerial skills;

Companies with limited resources can choose their focus according to whether they want

to reduce costs or improve services.

Depending on their priorities, managers can use these results to identify which elements

of an alliance need most attention and which practices are most likely to improve

performance.

7.7 Integrating the Supply Chain

The supply chain has always been about companies working together. These relationships have

always involved some degree of collaboration to solve bottlenecks in the supply chain and

overcome bumps in demand or supply. As Chris Newton, a senior research analyst with AMR

Research, notes, “Traditionally these activities have been very silo based, and not a lot of real

collaboration was going on.” The problem was that the interaction between the individual players

in the supply chain was primarily human-to-human. The speed with which information traveled

limited the utility of that information. Take for example, the shape of the supply chain with the

advent of the American Industrial Revolution. In those days (1930's) Ford and GM had to have

the total supply chain captured internally, essentially due to lack of communication and

connectivity. If others made products or performed services they needed, they could not find out

about it, or if they did, the costs associated with having outsiders provide the product or services

was much higher than they could replicate internally. With the advent of the telephone these

companies were able to move away from this centralised or internalised concept; thereby

allowing them to create a network. So, when the cost to do something internally was more than

doing it outside the company, they could more efficiently have it done outside. This started the

expansion of the supply chain.

As communication and Information Technology (IT) solutions became more common and user-

friendly from the 1960’s to the present, the FAX machine and computer enabled companies to

extend the reach of information at faster speeds. Coupling this with more efficient means of

transportation, goods were able to move greater distances at higher rates of speed. Increased

reach and speed of information and the physical flow of goods shortened inventory cycle times,


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as well as time to market. The supply chain was becoming more fluid, but was far from being

integrated.

Today, the Internet has allowed companies to move these functions to web-based networks

where clusters of businesses that typically do business with each other come together via the

connectivity of the Internet. Companies can collaborate and communicate with each other

through a single Internet interface. When all the participants in the supply chain become

connected electronically, allowing the unfettered flow of information, the supply chain becomes

fully integrated.

Utilising web-based technologies, companies are starting to integrate their supply chains in a

system-to-system manner, minimising the need for human contact, human data entry or any sort

of human involvement. Moreover, data can move in real-time and disparities in size of companies

are becoming less critical as software providers come up with solutions that allow small

companies to connect with large customers through the Web. While the applications to connect

companies with their trading partners are far from free, the Internet is a relatively inexpensive

medium, unlike a value-added network (VAN) that charges a per-transaction fee for data

transmission. e-Commerce is driving a revolution of the supply chain, as we have known it. With

processes that once took days or week now taking minutes to perform, the potential for cost

savings through improved efficiency is greater than ever. Fortuitously, e-Commerce solution

providers have come forward with new tools that enable supply chain participants the

opportunity to connect and collaborate via web-based networks. While analysts, consultants,

solutions providers and enterprises continue to debate how companies ultimately will integrate

those new tools into their operations and the shape of the supply chain of the future, there is a

consensus forming around one vision for the next-generation supply chain. The underlying theme

is connectivity. As a result, we are moving from production based supply chain to a fulfilment-

based model. In industrial age, production was the primary business activity. In the technology

age, fulfilment becomes the primary business activity. The trading networks that are set up turns

the chain upside down and creates a demand chain where customer orders drives the business

activity. Consequently, fulfilment of customer demand is the key. It is no longer about just tossing

the customer a product; it is also about improving customer relationships through better

customer service.


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7.8 Benefits of the Integrated Supply Chain

How the benefits of an integrated supply chain are perceived or even measured will largely

depend upon whether you are a supplier, customer or third party provider like a shipper. Or, it

may depend upon how you view yourself. An obvious benefit is reduction of inventories. Moving

from the source, hold, sell and supply mode of operation to the sell, source and supply mode. Or,

put another way, from “just in case” inventory management to “just in time” inventory

management. Better inventory management allows increased turns in the inventory cycle, which

reduces holding costs while increasing cash flow. By having better information and better access

to that information, customer service can be substantially improved by being able to make more

timely and accurate sales, replenishment and shipping decisions. Emerging technologies allow

trading partners to collaboratively plan, track orders through the fulfilment process, maximise

process efficiency based upon historical performance data and provide superior service to the

point of delivery.

Finally, process automation across the extended enterprise reduces the amount of manual

process and potential error. This removes the opportunity for incorrect data entry. Incorrect data

or information causes reliance upon confusing and contradictory information, which often leads

to customer dissatisfaction and disputes between trading partners. Not only does this reduce

cycle time, if it occurs repeatedly over time it is likely to cripple the very relationship that is the

heart of the business process. The companies that adopt the collaborative tools and processes

available today, and into the future, will find that the ultimate benefit of participating in a

networked supply chain is a significant competitive advantage over their competitors that do not

participate. In that case, supply chain integration does become the end game.

Chapter 8: Challenges of Supply Chain Management

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It is vivid that the paradigm of business management will soon be joined to the paradigm of

supply chain management. To precisely predict the future of supply chains is arduous. However,

what’s useful and predictive is to identify and explore some challenges that we better prepare

ourselves for.

There are presently many issues, conditions and evolutions that have led to present challenges

in supply chain management and many could be foreseen into the future.

8.1 Creating Customer Centric Supply Chain

Traditional supply chains have been developed from factory outwards so that the company’s

business model may be continued without major change. The management emphasis was on

how to ensure the production process could be most efficiently run and products could be most

cost effectively distributed. The marketing was to find the customer that fit to the products rather

than to make the products that fit to the market.

In today’s highly competitive global market place, the market favours whichever the supply chain

that satisfies them best. Therefore, the first challenge today is that the supply chain managers are

facing is to transform the supply chains from supplier-centric to customer-centric. The strategic

aim of the supply chains must be on the higher levels of customer responsiveness. The agility

rather than the cost becomes the key diver. The supply chains must be designed to get the

customer on the driving seat.

Coordination and operational integration of the supply chain members must be significantly

strengthened to counter balance the increased instability of market behaviour.

A culture change is anticipated towards the 21st Century supply chain management. This change,

already in progress, is expected to renovate the business model from supplier centric to customer

centric. The customer centricity idea represents a renewed paradigm that will have profound

implications through every aspect of supply chain management. Research shows that close

connectivity to customer will significantly improve supply chain effectiveness and market

performance.


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Traditionally, customer connection has been left to only small part of the supply chain. In the

traditional systems, the dealers and service/repair shops have most information about the

consumer. However, in future’s supply chain, more information is shared across the network.

Online communities, embedded systems, connected online configuration and ordering is paving

the way for future supply chain to have more information about consumers. It will also have better

intelligent analytics to produce and use the information. Across industries, demand planning with

customers in the centre will become a standard process for synchronising supply and demand.

Customer centricity also will play a pivotal role in customer collaboration on product innovation.

Already more and more supply chains support customer product configuration and specification,

and collaborate extensively with customers on product design.

There were many models for transforming the organisation to customer centric approach.

However, one that has persisted is the McKinsey 7S framework. It was developed in the early

1980s by Tom Peters and Robert Waterman. They were two consultants working at the McKinsey

& Company consulting firm. The basic premise of the model is that there are seven internal

aspects of an organisation that need to be aligned if it is to be successful.

Among the seven elements of McKinsey 7S framework, three are what they call the “Hard”

elements and four are “Soft” ones. The “hard” elements are easier to define or identify. The

management can directly influence them. These are strategy statements; organisation charts and

reporting lines; and formal processes and IT systems. The “soft” elements, on the other hand, can

be more difficult to describe, and are less tangible and more influenced by culture. However,

these soft elements are as important as the hard elements if the organisation is going to be

successful.

8.2 Dynamics in SCM

A very big challenge is how to survive the dynamics of the never ending supply chain evolution.

The future of supply chain will face unprecedented dynamics in terms of structural dynamics,

technological dynamics, and relationship dynamics.

Structural dynamics


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From a system dynamics point of view, the flow structure of a supply chain is a typical dynamic

system with lows and stock; there are feedbacks and delays. From managerial experience

perspective, it is even more so; there are fluctuations of demand, overproduction, high inventory,

capacity miss-match, backlogs of unfulfilled orders, delayed delivery and soon. The trouble is that

the supply structure is growingly more complex, and market volatility is set to increase too. There

is little doubt the dynamic behaviour of a supply chain is only to be exacerbated. A number of

factors are at play, which is continuously contributing to the increased structural dynamics.

The first factor is that business around the world is becoming more specialised, and they

become so rightly for their competitive advantages, utilisation of resources and returns

on investment. This trend is leading to more inter-connections of the specialised

operation in the supply chain networks. Specialisation gives rise to the need of

coordination in between. Thus increase the complexity of the system and more triggers

for dynamic changes.

The geographical expansion of supply chains around world also exacerbates the dynamic

behaviour, as the delays in logistics and visibilities are worsened. It has also brought in

the unstable factors such as different legal and financial systems, cultural and religious

conflicts, indigenous market related ethical issues.

The rapid growing environmental concerns around world have already started to reshape

the supply chains.

Not only the resourcing strategies, but also the production and logistics processes have felt the

significant impact. Carbon footprint has become the KPI for many supply chains across industries,

which they never heard of in just few years back. Consequently, the structure of the supply chains

will have to change.

Technological dynamics

Business and consumers have no doubt got great opportunities through the Innovation and

technology advancement. However, the transformation to new technologies can be a very

arduous and challenging process as it prompts series of dynamic changes to the supply chains.


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Competition in new technology advancement, desperate need of the new technology in the

supply base, pressure to upgrade the equipments are common directions in the changing

dynamics of technology.

Relationship dynamics

Many people believe the operating core of supply chain management is that of relationships with

the suppliers and buyers including the end consumers. Hence, the external business relationship

management for a company has become the centre piece of today’s and arguably the future’s

supply chain management. However the conceptual alignment of this conception the academic

as well as the practitioners’ circles has always been a quagmire, as there are many apparently

conflicting approaches towards managing the relationships.

It is now emerging, that no single existing relationship model so far can possibly serve all business

needs because of the underlying dynamism. There are basically two key dynamisms in the

relationship management, one is the portfolio dynamism and the other is longitudinal dynamism.

The portfolio dynamism addresses a portfolio different relationship approaches that fit to a

corresponding portfolio of business models. Thus, in often times, business will need to harness

with a number of different supply chain relationships to different suppliers based on product

categories, market segmentations, development strategies, and financial circumstances and so

on. The longitudinal dynamism addresses the changing relationship posture along the time

continuum. In this way the relationship management becomes a powerful instrument to achieve

the supply chain responsiveness and supply chain agility. It is anticipated that the future supply

relationship management will hinge on a combined approach that addresses both the portfolio

and longitudinal dynamisms.

Surviving the supply chain dynamics

The Triple-A supply chain model proposed by Professor Hau Lee (2007) from Stanford University

is a useful blueprint to survive the supply chain dynamics.

Lee said that he had studied in-depth the supply chains of more than 60 companies from around

the globe.“ All those companies…at greater speed and cost-effectiveness – the popular grails of

supply chain management,” Lee wrote. “Of course, companies’ quests changed with the industrial


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cycle. When business was booming, executives concentrated on maximising speed, and when the

economy headed south, firms desperately tried to minimise supply chain costs.”

But then Dr. Lee offers this provocative statement: “Companies whose supply chains became

more efficient and cost-effective didn’t gain a substantial advantage over rivals.” In fact, Lee says

that often, the supply chain performance of those companies deteriorated.

Why? Because high-speed, low-cost supply chains are unable to respond to unexpected changes

in supply and demand.

Lee says that what matters more are three other attributes – the “triple-A’s” of agility, adaptability,

and alignment.

Agility: I don’t think hardly anyone would dispute that each year, markets, supply and demand

are becoming more dynamic and volatile.

Many companies, he says, play off speed against cost, but the winners respond both quickly and

cost efficiently.

Of course, this is especially true for the increasing number of industries bedeviled by increasingly

shortened product lifecycles, where slowness of response versus rivals can deliver an often fatal

blow to the product line or even the entire company.

Lee equates “agility” with being able to respond rapidly to changes in supply, demand, market

conditions, etc. It is, in a sense, similar to the notion of “sense and respond” that is increasingly

driving the strategies of supply chain leaders. (See Time to Integrate Supply Chain Planning and

Execution.)

So how do you get there? Lee offers six principles:

1. Improve connections with partners to share changes in supply and demand more quickly

(harking back to his seminal work previously on “the Bullwhip Effect”);

2. Improve collaboration with suppliers on product design;

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3. Increase use of postponement strategies to delay adding value or differentiation as late

as possible in the supply chain process.

4. “Bulk up” a bit more on small, inexpensive components that often cause supply chain

bottlenecks;

5. Build more flexibility into logistics systems that can react to disruptions, using third

parties as appropriate;

6. Build a small team that is skilled in enacting contingency and back-up plans.

Adaptability: Agility can be thought of as relating to fairly short-time horizons. Adaptability, on

the other hand, has a more strategic orientation.

Leading companies “keep adapting their supply chain networks so they can adjust to changing

needs [and I would add “strategies],” Lee writes. “Adaptation can be tough, but it’s critical in

developing a supply chain that delivers a sustainable advantage.”

In addition to short-term fluctuations to supply, demand and product lifecycles, markets

themselves are constantly changing, and more rapidly than before, especially with the global

economy. The supply chain strategies and networks that once served the company well can soon

become obsolete as the market shifts occur.

“The best supply chains identify structural shifts, sometimes before they occur, by capturing the

latest data, filtering out noise, and tracking key patterns,” Lee says.

Alignment: Perhaps the toughest dimension.

“Great firms take care to align the interests of all the firms in their supply chain with their own,”

Lee says. “If any company’s interests differ from those of the other organisations in the supply

chain, its actions will not maximise the chain’s performance.”

That can happen even within a company, of course. Lee says that in one point in the early 1990s,

HP’s chip division went on a very low inventory strategy, which lengthened lead times. That

impacted even its own internal customer, the printer division. As a result, the printer division kept


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high inventories as a buffer, when it would have been less expensive for HP as a whole to keep

more chip inventory than the more expensive printers.

Of course, getting this cross supply chain is not easy and, from my view, rarely done in any

meaningful way. Toyota is one example of a company that is thought to practice this approach,

but it’s hard to find many other examples. Lee says printer RR Donnelly encourages paper and

ink suppliers to innovate and shares any resulting savings with them.

Lee says that failure to reconcile these conflicting interests is a key reason the Vendor

Management Inventory (VMI) programs fail to work, when VMI could really be a key strategy to

reduce total supply chain costs.

So, how are the challenges of alignment overcome? First, you start with alignment of information,

“so that all companies in the supply chain have equal access to forecasts, sales data, and plans.”

Second, the channel master needs to more clearly define supply chain “identities” – in other

words, making very clear the roles and responsibilities of each partner in a way that minimises

conflict.

Third, set up the relationships so that when any one company tries to “maximise returns, they

also maximise the supply chain’s total performance.” Companies must try to understand and

predict how partners will react given current incentives, and make changes to get better

alignment to overall supply chain goals.

8.3 Current issues in SCM

Strategic insights

Earlier purchasing was wedded to routine in many companies. For the last two decades though,

no company can allow purchasing to lag behind other departments in adjusting to worldwide

changes (Kraljic, 1983). The recognition of the SCM as a key and vital area, both in the private

and public sectors, has focused attention on its effectiveness. In a number of organisations, cost-

effective supply chain is a matter of survival as purchased goods and services account for up to

80 per cent of sales revenue (Quayle, 2003), while in the public sector there is an ever-increasing

demand for savings in the procurement process (Groznik et al., 2008).


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However, there is (in line with the contingency theory) no single best way of organising/leading

the supply chain that is effective in all situations and there is no universal set of choices that is

optimal for all SCs (adapted from (Fiedler, 1964), (Gingsberg & Venkatraman, 1985)). In order to

optimise the SC the following five configuration components are critical: operations strategy,

outsourcing strategy, channel strategy, customer service strategy and asset network Cohen &

Roussel, 2005). The four main approaches towards production are make to stock, make to order

(see e.g. (Gunasekaran&Ngai,2005) for a comprehensive review of make to order SC challenges),

configure to order and engineer to order (Cohen & Roussel, 2005) – they considerably affect the

correct strategy.

One of the main consequences of the lack of information exchange/coordination in the chain is

the so-called bullwhip effect, which was first theoretically described in the 60s (Forrester, 1961)

and practically in the 80s with the case of Pampers diapers. The fluctuation of demand namely

increases as we move up the supply chain; small fluctuations at the end of the chain can be

propagated to considerably larger fluctuations for e.g. the original equipment manufacturer. The

main reasons for bullwhip are (Chopra & Meindl, 2007):

Rewards system local optimisation employees rewards

Information processing lack of information planning on the base of the orders not final

customer demand

Barriers lot sizing long lead-times

Pricing policy price fluctuation quantity discounts another important decision is whether

push or pull system should be used. The Figure 1 shows the percentage of companies in

various industries that use different strategies.

Figure 1: Operations strategies by industry: Source: (Cohen & Roussel, 2005)


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8.4 Business renovation in SCM

After successful strategy preparation, companies have to identify areas of possible improvement

in quality of product or service, lead times or operational costs. This step takes an integral view

of all organisations involved into the supply chain in order to renovate their operations towards

supply chain excellence. Business Renovation (BR) or business process renovation and

informatisation efforts integrate the radically strategic method of Business Process Re-

engineering (BPR) and more progressive methods of Continuous Process Improvement (CPI) with

appropriate IT infrastructure strategies. BPR is a thorough re-engineering strategy that critically

examines current business policies, practices and procedures, rethinks them and then redesigns

the mission-critical products, processes and services (Prasad, 1999). BPR seeks improvements by

elevating efficiency and effectiveness of the business process that exist within and across

organisations. On the opposite, CPI refers to minor and specific changes that one makes in an

existing business process (Harmon, 2003). CPI relies on building a fundamental understanding of

customers‟ requirements, process capability, and the root cause of any gaps between them by

developing culture of continuous improvement in the areas of reliability, process cycle times,

costs in terms of less total resource consumption, quality, and productivity. Six Sigma and Total

Quality Management (TQM) are examples of approaches to CPI. BR argues for a balanced

approach between radical changes and continuous improvements. Table 1 summarises

comparison of BPR, TQM and Six Sigma on the basis of goal, level of change, scope, focus and

other characteristics.

According to Jacobson (Jacobson, 1995), we view business renovation as an umbrella concept for

strategic IS planning, and both BPR and CPI since thorough and effective renovation should

combine both, radical shifts (BPR) with those that permanently increase business efficiency and

effectiveness (CPI).


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Since direct changes can have a detrimental result, companies develop business models (Kovacic

et al., 2001). A business model is an abstraction of a business that shows how business

components are related to each other and how they operate. Its ultimate purpose is to provide a

clear picture of the company’s current state and to determine its vision for the future. There are

several reasons producing business models (Eriksson & Penker, 2000):

A business model helps us understand the business: one of the primary goals of business

modelling is to increase understanding of the business and to facilitate communication

about the business.

A business model is a basis for creating suitable information systems: descriptions of the

business are very useful in identifying the information systems necessary to support the

business. Business models also act as a basis for engineering requirements when a

particular information system is being designed.

A business model is a basis for improving the current business structure and operation:

as it shows a clear picture of the business current state, a business model can be used

to identify the changes necessary to improve the business.

A business model provides a polygon for experiments: a business model can be used to

experiment with new business concepts and to study the implications of changes for the

business structure or operation.

A business model acts as a basis for identifying outsourcing opportunities: using a

business model the core parts of a business system can be identified. Other parts

considered less important can be delegated to external suppliers.

Table 1: Comparison of BPR, TQM and Six Sigma


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The main purpose of developing and analysing business models is to find revenue and value

generators inside a reversible value chain, or a business model's value network. An example of

AS-IS and TO-BE process models are shown in Figures 2 and 3 (developed on a case of a company

in oil industry).


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8.5 Supply chain risks

The risk of disruptions caused by both factors within SC and outside environmental forces is a

topic of increased importance. Supply chain risk management is therefore a field of escalating

importance and is aimed at developing approaches to the identification, assessment, analysis and

treatment of areas of vulnerability and risk in SCs (Neiger et al.). Various trends that enhance

exposure to risks, such as the increased use of outsourcing, globalisation, reduction of the

supplier base; reduced buffers, increased demand for on-time deliveries or shorter product life

cycles (Norrman & Jansson, 2004) are increasing the importance of SCRM. The sources of risks

can be from suppliers‟, customers‟ or internal environment shown in the figure below:


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The recently developed model (shown in Figure 5) sheds more light on the prediction of

suppliers‟ connected risks. It is based on the premise that different suppliers (and their second

and third tier suppliers) operate in different markets and environments; therefore their turbulence

and the forces influencing a supplier also differ. While a certain supplier strategy (e.g. ordering

large batches to decrease procurement costs or single-source suppliers with long contractual

commitments) may be acceptable in a non-turbulent environment, it may be detrimental in a

more turbulent one (e.g. in the presence of quick technological advances such as microprocessors

or large commodity price swings). Considering all of this, the same supplier attributes, strategy

and structure may pose considerably different risks of disruption. Therefore, a comprehensive

approach to SCRM has to include supplier-associated turbulence as well as various sources of

uncertainty due to supplier attributes such as strategy, structure and performance.

In order to distinguish between the different kinds of risks, the sources of uncertainty were

separated into two different constructs:

endogenous uncertainty: the source of uncertainty/risk is inside the SC and can lead to

changing relationships between focal firm and suppliers, the most notable kinds are

market and technology turbulence. Market turbulence is likely to arise from the

heterogeneity and rapid changes in the composition of customers in the market and their

preferences. It means continuous changes in customers‟ preferences/demands, in

price/cost structures, and in the composition of competitors. Technological turbulence

refers to the degree to which technology changes over time within an industry and the

effects of those changes on the industry. Technological turbulence arises from changes

in the underlying technologies of products or services and their rates of obsolescence.

Technical dynamics includes how fast the related technology is changing, as well as

breakthroughs in the manufacturing process, and mass production techniques (Hsu &

Chen, 2004);

exogenous uncertainty: the source of uncertainty/risk is from outside the SC. These risks

are further divided into the two most notable kinds; namely discrete events (e.g. terrorist

attacks, contagious diseases, workers‟ strikes) and continuous risks (e.g. inflation rate,

consumer price index changes).


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The current approaches only offer a limited estimation of the risk of supplier non-performance.

The proposed approach (see (Trkman&McCormack, 2009a) for more details) enables the

estimation of the risks and helps the company to make a more informed decision as to how much

risk it is willing to take and which risks will it mitigate (either with dual/multiple sourcing or with

the change of supplier).

Dual sourcing is namely an important topic – while it may increase the costs due to activities

connected with supplier search and qualification it can considerably decrease the costs of supplier

non-performance or even bankruptcy (see e.g. (Sheffi, 2001), (Wang & Zhao, 2007)).

8.6 Supply chain frameworks and standards

In order to streamline businesses and bridge the supply chain risks, different frameworks and

standards (SCOR, GS1, MMOG/LE, ISO 9001, ISO 14001, BS OHSAS 18001, BS 25999, ISO/IEC

27001, etc) have been developed. The organisations are facing the challenge which one to

implement and to what extent. The adoption of frameworks and standards causes standardisation

of business operations that is in contradiction with agile supply chain strategies and lean business

models. From the business model point of view the most relevant is the Supply-Chain Operations

Reference (SCOR) model that was developed by the Supply-Chain Council (SCC) to assist

organisations in increasing the effectiveness of their supply chains, and to provide a process-


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based approach to SCM (Stewart). The SCOR model (Figures 6 and 7) provides a common process

oriented language for communicating among supply-chain partners in the following decision

areas: PLAN, SOURCE, MAKE, DELIVER and RETURN.

SCOR is a top-down analytical method that help organisations break out of the box and see

where they fit into the SC. SCOR provides three-levels of process detail. Each level of detail assists

a company in defining scope (Level 1), configuration or type of supply chain (Level 2), process

element details, including performance attributes (Level 3). Below level 3, companies decompose

process elements and start implementing specific supply chain management practices. It is at this

stage that companies define practices to achieve a competitive advantage, and adapt to changing

business conditions (Figure 7).

As a framework it also facilitates inter and intra supply chain collaboration, horizontal process

integration, by explaining the relationships between processes (i.e., Plan-Source, Plan-Make, etc.).


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It also can be used as a data input to completing an analysis of configuration alternatives (e.g.,

Level 2) such as: Make-to-Stock or Make-To-Order. SCOR is used to describe, measure, and

evaluate supply chains in support of strategic planning and continuous improvement.

Although SCOR framework is widely used it has limitations that have to be taken into account.

Cases in literature (Wang et al., 2005) show that limitations for applying SCOR in improving

current inter firm processes regarding graphical presentation, „gaps‟ identifying, and none-

defined business activities that are summarised below:

SCOR can only present business flow in between legal or geographical entities but not

any matrix organisation structure or the concept of „virtual enterprise‟.

SCOR is limited to the presentation of one single supply chain while most of the

enterprises may be associated with multiple channels of markets and products.


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The KPI of SCOR is not always available in the target firm, particular when it involves with

cross-sites information.

Problems sometimes cannot be identified by KPI gaps such as information systems

readiness. Some essential activities are not defined in SCOR standard, for example,

Demand up-size and down-size from order changes, e.g., emergent orders or order

cancelling.

The activities of collaborative design and customer relationships management are not

defined in SCOR.

Researching the link between frameworks or standards and supply chain performance is scarce.

Lockamy & McCormack (Lockamy & McCormack, 2004) have studied the link between SCOR

planning practices and supply chain performance and shown that the supply chain planning

practices related to process integration, collaboration, teaming, process measurement, process

documentation and process ownership have been shown to be important to supply chain

performance, but lack broad implementation by supply chain partners. This suggests that

integrated supply chain management may be more difficult to operationalise in practice than the

popular supply chain press or consultants would have one to believe.

This study also suggests is that some of the best practices proposed as mechanisms for improving

overall supply chain management performance may not have the degree of impact often

presented in the literature. Some best practices help to improve supply chain performance only

in specific decision areas.

8.7 Performance measurement in SCM

A well-known-saying is that: „You Can‟t Manage What You Can‟t Measure‟. Therefore all

frameworks and research efforts emphasise the importance of performance measurement. Before

investigating different performance measures it is important to note that performance measures

have to be closely connected with strategy, business model and also the objectives of a

company/SC. This connection is also shown in Figure 8.


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The starting point for performance measurement is that the metrics should:

be directly related to the manufacturing strategy,

primarily use non-financial measures,

vary between locations,

change over time, as needs change,

be simple and easy to use,

provide fast feedback to operators and managers,

be intended to foster improvement rather than just monitor (Persson&Olhager, 2002).

Performance measurement focuses on two connected but still separable areas, namely the

measurement of performance of each supplier and the measurement of supply chain as a whole.

The classic metrics for supplier performance measurement are replenishment lead time, on-time

performance, supply flexibility, delivery frequency, quality, viability, information coordination

capability etc. (Chopra &Meindl, 2007). According to the recent survey the most important

measures are quality of delivered goods, on time delivery and flexibility of supply (Gunasekaran

et al., 2004).

Since balanced scorecard (Kaplan & Norton, 1996) is in general one of the most widely used

models for performance measurement its application to supply chain area has also been


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proposed. Such an example is presented in (Park et al., 2005) who derived the objectives for SCM

from financial, customer, business process (both internal and external) and learning and growth

perspective. As shown performance measurement is closely connected with process renovation

outlined in the previous section (see e.g. (Theeranuphattana& Tang, 2008) as an example of

performance metrics for each of the supply chain processes.

Different performance measures can also be used at various decision areas of the SCOR model;

for example supplier delivery performance and purchase order time are suitable metric for

“SOURCE” while utilisation of resources or percentage of defects are more relevant for “MAKE”

phase (see e.g. (Gunasekaran et al., 2004) for more details). The review of customer and internal

facing metrics is also shown in Figure 9.

One of the increasingly popular approaches for both measurement of effectiveness and

prediction of changes due to renovation of supply processes is the use of simulations. They

enable the preparation of the models of current and desired state (Caridi et al., 2004) and can be

used to estimate the risks of different events (Cho & Eppinger, 2005). In connection with business

process modeling they can be used to compare different configurations of business processes

(Roeder & Tibken, 2006). Figure 10 shows the analysis of different scenarios (with the increasing

use of e-procurement) and the consequent changes in lead times.


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8.8 Supply chain informatisation

Final issue in SCM is supply chain informatisation which is by far an easy task. Information

technology is an important enabler of effective supply chain management. Much of the current

interest in SCM is motivated by the possibilities that are introduced by the abundance of data

and the savings inherent in sophisticated analysis of these data (see e.g. (Davenport, 2006) for

several successful case studies). SC must move from mere cooperation and coordination to true

collaboration which requires a foundation of trust and commitment. According to Ruppel

(Ruppel, 2004) core issues of SC informatisation are:

ability to secure since trust is important from relationship point of view. From

technological point of view a company can attempt to protect itself from exploitation

while maintaining an open collaborative system by its ability to secure SCM systems.

return on investment (ROI) which is a panacea oversold by vendors (Krizner, 2002).

According to Nickles (Nickles, 1999), ROI may not be the correct indicator when

technology whose purpose is to facilitate relationships is applied. ROI could be applied


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in case of technology that reduce internal costs. The recent slowing down of the economy

has led to a renewed emphasis on the use of ROI assessment.

cost/affordability relative to budget is related to but not the same as ROI. Even if a tool

has the potential for a high rate of return, if an organisation cannot afford the costs

involved in purchasing and implementing the tool they cannot gain the potential

benefits.

fit with business user needs is key to successful technology introduction. It has often

been suggested that technology should not be implemented merely for technology’s

sake, but rather to meet specific business need. SCM informatisation should meet the

needs of business users, while still being compatible with existing systems. Matching or

aligning of users‟ business needs with technology should be a threshold criterion to

ensure appropriate technology choices.

The innovative opportunities coming to the fore with e-business have increased the interest in IT.

From technological perspective SCM spans over internal as well as external systems, which

facilitates information transfer between various organisations. In addition, SCM typically includes

many functional areas within an organisation and is affected by the way the various groups

communicate and interact.

According to Simchi-Levi (Simchi-Levi et al., 2000) ultimate goals (Figure 11) of IT are to collect,

access and analyse information. In practice that SCM systems have to:

collect information on each product from production to delivery or purchase point and

provide complete visibility for all parties involved,

access any data in the system from single-point-of-contact,

analyse, plan activities, and make trade-offs based on information from the entire supply

chain.

In order to achieve these goals, major issues (Figure 11) in informatisation are standardisation,

infrastructure e-business, supply chain components and integration. Standardisation is vital for

IT since it allows systems to work together and is a key feasibility factor of SCM implementation.

Infrastructure is a basic component of system capabilities without which some of the goals cannot

be achieved. E-business is an emerging area of business conduct that provides cost-effective way

of SCM. Supply chain components are various systems that are involved directly in supply chain


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planning. These are typically systems that combine short-term and long-term decision support

system elements.

The goal of SCM software is to increase flows through collaboration. However, increasing

collaboration is not merely a matter of making a tool available. Participants must be encouraged

to use the tool share information to make its use effective. Ruppel (Ruppel, 2004) compared

adoption of three information technologies (i.e. group decision support systems, EDI and e-

business) that can be used to improve information flows and the factors that affect their adoption

and use. Comparison indicates that the decision to adopt one of these technologies does not

guarantee its effective use. Those who wish to champion the use of tools have a complex task to

perform not just to foster adoption, but also to encourage successful implementation.

The real challenge of implementation is bridging the gap between IT, process and performance

view (Figure 12). According to Gun Kim Byoung et al., 2008) business processes are key integrator


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providing performance-process-IT relation to elicit the actual impacts. To connect the

performance with IT, business processes are acted as mediators between them. Linkage could be

explained via reliance level of a business process that corresponds to the allied IT system.

Peter Trkman and AlešGroznik (University of Ljubljana, Faculty of Economics, Slovenia), have

addressed in their paper and tackled a vital challenge to provide a comprehensive review of

several inter-connected challenges in supply chain management. Only continuous efforts in each

of the mentioned areas assure efficiency and success. Nevertheless, optimal decision making is

not possible since the choice set is too complex and generally unknown, due to the large number

of possibilities and uncertainties.

Therefore SCM optimisation involves a small number of choices at each step of exploration (Lee

& Ahn, 2008).

Global supply chain issues

Supply chains that involve suppliers and/or customers in other countries are referred to as global

supply chains. The introduction of electronic commerce made it much easier to find suppliers in

other countries (e.g., by using electronic bidding for RFQ, see Chapter 6). Plus, it is much easier

and cheaper to find customers in other countries.

Global supply chains are longer and may be very complex. Therefore, information needs to flow,

sometimes in different languages and subject to different regulations. Information technologies

are found to be extremely useful in supporting global supply chain.

Typical problems along the Supply Chain

Supply chains can be very long, involving many internal and external partners located in different

places. Both materials and information flow among several entities, and especially when manually

handled can be both slow and error prone.

Supply chain problems have been recognised both in the military and in business operations for

generations. These problems caused some armies to lose wars and companies to go out of

business. The problems are most apparent in complex or long supply chains and in cases where

many business partners are involved.


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Specific problems along the supply chain

The problems along the EC (Electronic Commerce) supply chain of the toy retailers and other

companies stem mainly from uncertainties, and from the need to coordinate several activities

and/or internal units and business partners.

The major source of the uncertainties in EC is the demand forecast, which may be influenced by

several factors such as consumer behavior, economic conditions, competition, prices, weather

condition, technological development, customers’ confidence and more. As we will show soon,

companies attempt to achieve accurate demand by using methods such as IT-supported

forecasts, which are done with business partners. Other uncertainties exist in delivery times which

depend on many factors ranging from machine failures to roads conditions. Quality problems of

materials and parts may also create production time delays, and a labor strike may interfere with

shipments.

Several other possible factors may create supply chain problems (see Ayers [2000] for details). A

major symptom of poor SCM is poor customer service - people do not get the product or service

when and where needed, or they get it in poor quality. Other symptoms are high inventory costs,

interferences with production or operation, loss of revenues, and an extra cost of special and

expedited shipments.

Pure EC (Electronic Commerce) companies are likely to have more problems because they do not

have a logistics infrastructure and are forced to use external logistic services. This can be both

expensive, plus it requires more coordination and dependence on outsiders who may not be

reliable. For this reason large virtual retailers such as Amazon.com and eToys are developing

physical warehouses and logistics systems.

Solutions to supply chain problems – an overview

Supply chain problems have existed in military organisations for thousands of years and in

industrial organisations since the beginning of the industrial revolutions. Solutions to these

problems have existed for generations. However, with the arrival of the information and Internet

revolutions, new and very effective solutions had to be developed.


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Preliminaries

The solutions to supply chain problems, regardless if they are online or offline, involve a

combination of tools and techniques, some of which are manual while others are IT supported.

The theory and practice of supply chain problem resolution is beyond the scope of this book. The

interested reader should refer to Handfield and Nichols [1999], Ross [1998], Chase et al., [1998],

and Gattorma [1998]. In this chapter we will present only a few interesting EC-related solutions.

However, before we present these solutions, it is worthwhile to list some generic activities that

must precede IT or EC solutions, or must be done concurrently with them.

Most organisations are simultaneously members of multiple supply chains. Work in any

chain may impact others. So it is necessary to look at all the major ones simultaneously.

Understanding of each major chain is a must. Using flow charts and process maps

(software is available) is recommended.

Both internal and external portions of the chains must be studied.

The performance of existing supply chains need to be measured and compared in order

to find problems (opportunities). Benchmarking is recommended.

Supply chain performance is measured in several areas including: customer service and

satisfaction, cycle times, delivery, responsiveness, cost, quality, products (services)

offered, and assets utilisation.

The supply chain may require business processes reengineering (BPR) before a software

solution is attempted. (See ch.3, in Handfield and Nichols [1999].)

It is essential to develop and maintain relationships with business partners and with key

employees in these organisations (See Chapter 4 in Handfield and Nichols [1999].)

Opportunities for SCM improvements exist in several places along the supply chain. Potential

candidates include:

Manufacturing processes

Warehousing operation

Packaging and delivery

Material inspection/receiving

Inbound and outbound transportation

Reverse logistics (returns)

In-plant material handling

Vendor management program


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Customer order processing

Invoicing, auditing and other accounting activities

Collaboration procedures with partners

Employee training and deployment

Labour scheduling

Use of teams and empowerment of employees

Automation of processes

Use of software for facilitating all the above

Inventory management and control

Let’s examine inventory management in more detail.

Using inventories to solve supply chain shortages

A most common solution in the offline world is building inventories as an ‘insurance’ against the

uncertainties. This way products and parts flow smoothly. The main problem with this approach

is that it is very difficult to correctly determine inventory levels, which must be done for each

product and part. Furthermore, if the finished products are customised, as in some EC situations

(e.g., Dell computers), one cannot have an inventory of finished goods; only components can be

stocked. If inventory levels are set too high, the cost of keeping the inventory will be very large.

If the inventory is too low, there is no sufficient protection against high demand or slow delivery

times, and consequently revenues (and customers) may be lost. In either event, the total cost,

including opportunities and reputation lost, and bad reputation, can be very high.

Proper SCM and inventory management requires coordination of all different activities and “links”

of the supply chain so that goods can move smoothly and on time from suppliers to customers.

This keeps inventories low and cost down. The coordination is needed since supply chain partners

depend on each other but don't always work together toward the same goal.

To properly control the uncertainties mentioned earlier, it is necessary to identify and understand

the causes of the uncertainties, determining how uncertainties will affect other activities up and

down the supply chain, and then to formulate ways to reduce or eliminate the uncertainties.

Combined with this is the need for effective and efficient communication among all business

partners. To do the above effectively and efficiently, we need to use information technologies as

the major enabler.

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