procurement chain management2
TRANSCRIPT
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The Landscape changed
In 2001, Nike reported a profit shortfall due to
inventory buildup, shortage for others, and late
deliveries.
In 2000, CISCO was forced to announce 2.25 Bwrite-down for obsolete inventory.
In 1999, Apple had huge customer dissatisfaction
because of shortage of G4 chip supplied by
Motorola.
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What went wrong?
In the examples, the difficulties reflect problems withprocurement chain strategies.
Nike, CISCO, Apple have short product life cycles.
When technologies changed, uncertainties related to
customer demand increased. Procurement landscape changed significantly with the
introduction of independent, private, and consortium-basede-market places.
With changes in procurement landscape, both problems
and opportunities also changed.
But, Nike, CISCO, and Apple were not able to react tothese changes and formulate a new corporate andprocurement strategy.
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The need for a good strategy
The most important requirement for sustainability
is a well-formulated corporate strategy;
A corporate strategy, in turn, requires forming sub
strategies such as product strategy, procurement
strategy, marketing strategy, and so on. And,
A firm should continually evaluate its corporate
strategy and its sub strategies and ensure that theyare appropriate for a changing environment.
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Competitive Strategy let managers answer
questions such as
Relative to competitors, how should my firm
satisfy customers?
What products and services should we offer?
Should we focus on cost or should we focus more
on service and quick response?
How much customization should we allow on our
products? Compare the competitive strategies of: Lands End
and a local retailer.
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Competitive Strategy and procurement Strategy
The relationship
Competitive strategy
New Product
Development
Marketing &
SalesOperations Distribution Service
procurement Strategy
Supplier
Strategy
Operations
Strategy
Logistics
Strategy
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See the Dell example Matching competitive and
procurement strategies
Suppose Dells competitive strategy is to deliver a product
within 72 hours of receiving an order but is product
suppliers, on average take 7 days to resupply inventory,
then, Dell is not going to be able to accomplish its
competitive strategy.
There is a lack of strategic fit.
Also, look at Dells competitive strategy.
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The Dells competitive and procurement
strategies
Competitive strategy: provide a large variety ofcustomizable computer-related products at a reasonableprice and to let customers select from thousands ofconfigurations.
procurement strategy: Two possible options: 1. Efficientprocurement limiting variety and exploiting economies ofscale or 2. High flexibility and responsiveness producing alarge variety of products.
Dells procurement Strategy is No. 2 Consequently, Dell focuses on designing easily
customizable products, common platforms andcomponents that can be assembled quickly.
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Achieving Strategic Fit Achieved
The steps involved
Step 1: Understanding the customer and
procurement uncertainty
Step 2: Understanding the procurementcapabilities
Step 3: Achieve strategic fit
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First, take a look at two types of uncertainties Demand
Uncertainty and procurement chain uncertainty
Demand uncertainty: arises because of changingcustomer needspredicting demand for a product orservice absolutely is impossible. This is an externalfactor controlled by the customer.
Procurement chain uncertainty, in contrast, arisesbecause of uncertainties within a procurementprocess.
While a firm would like to meet 100% of customer
demand, it may not be able to do so because itsprocurement is unable to because of multiple reasonsthat were listed under procurement uncertainty.
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Demand uncertainty
(customer-induced)
Usually products that are less mature (electronics,computers) have greater demand uncertainty (unlikeSalt or milk).
Forecasting demand for such products is very difficult
and usually not very accurate.
With forecasting difficulties, matching demandagainst product and services supply is difficult.
For uncertain demand products, prices are not steady
and varies depending on demand levels.
At the same time, a firm could earn greater marginfrom uncertain demand products.
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Procurement chain uncertainty, on the contrary, arises
due to constraints within a procurement
procurement uncertainty: The portion ofuncertainty introduced by procurement attributessuch as: production breakdowns, low productyields, poor quality and rework, procurementcapacity is limited (because of limited productionfacilities, availability of raw materials, labor, andnumerous other factors);
Supply capability is inflexible and cannot increasewith increased product demand;
Also, changes in production process could lead tobottlenecks.
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Step 1: Therefore, understand both demand and procurement
chain uncertainties
Identify the needs of the customer segment beingserved (retail, wholesale, discount, high-endcustomers)
Quantity of product needed in each lot (large,small)
Response time customers will tolerate
Variety of products needed
Service level required Price of the product
Desired rate of innovation in the product
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Step 2: Evaluate procurement capabilities
A procurement can rarely meet all demands of allof its customers. Why?
How many of the following demands of customerscan we meet?
Responding to wide range of product demands
Meeting short lead times
Handling a large variety of products
Meeting high service level possible
Where do we compromise?
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Given procurement limitations, responding to
customer demand would require a compromise
How responsive should a procurement be?
Quicker response implies increased costs
(responsiveness).
Delayed response implies lower costs (efficient).
Therefore, a firm must compromise between
quicker response and lower costs and strike a
balance that suits its objectives. See the graph.
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A comparison of cost and responsiveness
High Low
Low
High
Responsiveness
Cost
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Efficient and Responsive procurement chains A Comparison
Efficient Responsive
Primary goal Supply demand at the lowest
cost
Respond quickly to demand
Product design strategy Min. product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense of
greater cost
Aggressively reduce even if
costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost
modes
Greater reliance on responsive
(fast) modes
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3. Achieving Strategic Fit
Now that a firm has assessed customer needs, demand
uncertainties, and procurement chain constraints and
uncertainties, it is time to make the two fit with each
other.
How?
In most cases, by offering high responsiveness to
products with high demand uncertainties and
Striving towards more cost efficiencies for productswith low demand uncertainties.
Compare these two products: computers and cheese.
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Let us revisit Dells strategy
Dell proposed a competitive strategy that it will
ship ordered consumer products within 72 hours;
a relatively high response rate.
What are the factors that Dell must consider?
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Dell Achieving Strategic Fit
First, Dell should be able to forecast customer
demand with some degree of accuracy (demand
uncertainty).
Decide how much of this demand uncertainty itcan meete.g. we can offer 72 hours shipment in
the case of jackets and overcoats but not for school
bags (implied demand uncertainty).
Also, note other items that Dell must consider:
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Dell Achieving Strategic Fit
Decide whether its procurement chainfrom manufacturers totrucking companies to warehouses would be able to meet its goal of72 hours shipment.
Decide how much inventory Dell should carry and how muchshould its procurement chain partners carry.
How soon can Dell inform manufacturers of changing fashions anddemands?
Ascertain the flexibility (in procurement of raw materials, mfg.capacity, labor, etc.) that its procurement chain partners have (ordo not have)?
Consider the cost of all of these factors and decide on the
responsiveness spectrum or the zone of fit. See the next slide.
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Remember the following about Strategic Fit
Two key points
there is noright procurement chain strategy
independent of competitive strategy
there isonly a right procurement chain strategyfor a given competitive strategy
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What did we learn
Formulating corporate strategy is easier thanimplementing strategy.
Strategy implementation requires the cooperation ofboth internal and external parties and
In turn, that requires common objectives and commonbenefits.
Strategy is not an one time implementation butsomething that requires constant redesign.
Procurement or supply management is one of thelargest assets in an organization and
The implication of managing it well has significantconsequences to an organization.
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Procurement Chain Management
A Strategic Implementation Process
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Product supply management is nothing but ProcurementStrategy, which is integral to corporate strategy.
A corporations corporate strategy and procurement
strategy must fit with each other or otherwise, both will
fail.
We will discuss the strategic decision making issues of
procurement and also how managers make decisions
related to both corporate and procurement strategy.
The discussions should facilitate understanding of the
issues of strategic implementation.
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The new global business environment
Fierce competition
Introduction of products with shorter and shorter
life cycles
Heightened expectations of customer
Continuing advances in communications and
transportation technologies (e.g. mobile
communication, Internet, overnight delivery)
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Cost impact of managing inventory
It is estimated that the grocery industry could save
$30 billion (10% of its operating cost) by using
effective logistics strategies.
Compaq computer estimates it lost $500 million to$1 billion in sales because its laptops and desktops
were not available when and where customers
were ready to buy them (Compaq does not exist
anymore).
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Managing costs in the supply arena
JIT, TQM, lean mfg. techniques have reduced
manufacturing costs as much as they could.
One area that yet requires improvement:
Inventory Procurement. See the followingexamples:
It takes a typical box of cereals more than 3
months to get from factory to supermarket.
It takes a new car, on average, 15 days to travel
from factory to dealership.
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The Success Stories
In 10 years, Wal-Mart transformed itself bychanging its logistics system. It has the highestsales per square foot, inventory turnover andoperating profit of any discount retailer.
Dell Computer has outperformed the competitionin terms of shareholder value growth over theeight years period, 1988-1996, by over 3,000%
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What exactly is procurement?
All stages and parties involved, directly orindirectly, in fulfilling a customer request
Internally, the procurement process includes allfunctions involved in fulfilling a customer request(product development, marketing, operations,distribution, finance, customer service).
Externally, it includes the suppliers, vendors,
manufacturers, transportation, and distributors,that exist to transform raw materials to finalproducts and supply those products to customers.
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Let us briefly go over how selling a simple box of
detergent through a retail store involves so manyparties and contractual arrangements and why each one
must function effectively to make the process efficient.
A procurement or a supply example
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Buying Cereals from Wal-MartTenneco
Packaging
Paper
Manufacturer
Timber
Company
P&G or other
Manufacturer
Corn
manufacturer
Wal- Mart
Plastic
Producer
Customer
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The Objectives of a Procurement Chain
Primary purpose is satisfying customer needs.
Maximizing the overall value created
Value, measured monetarily, refers to: the difference
between what the final product is worth to the customer
(price the customer is willing to pay) and the effort,
collectively, the procurement chain expends in filling the
customers request (the collective costs)
Therefore, procurement profitability would be: the
difference between revenue generated from the customer
and the overall cost across the entire Procurement chain.
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While managing procurement process is important for
managing costs and profits and delivering value to the
customer, it is not easy to do.
It requires understanding, cooperation, coordination, and
information sharing among several trading partners both
internal and internal.
And, given that there are so many parties, it is indeed a
formidable task to make all of them work towards a common
objective.
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Why should procurement be a challenging
problem?
Procurement chain network is often very
complex
Procurement chain partners have conflicting
objectives. Consequently, making everyone to agree is
not an easy task.
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Conflicting Objectives
in the Procurement Chain
1. Purchasing wants
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities2. Manufacturing wants
Long run production
High quality
High productivity
Low production cost
Tell me why some of these objectives are conflicting.
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Conflicting Objectives
in the Procurement Chain
3. Warehousing wants
Low inventory
Reduced transportation costs
Quick replenishment capability4. Customers want
Short order lead time
High in stock
Enormous variety of products
Low prices
Tell me why some of these objectives are conflicting.
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While we agree on the importance of
procurement, how does it translateinto a corporate strategy?
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Achieving strategic Fit
Matching multiple strategies