by David Jacoby
A supply chain executive needs the clout to redirect the cost focus of rationalisation and even synchronisation to the other side of the supply chain matrix, to customisation and innovation. He or she will need strategic vision and a willingness to lead multi-party initiatives in order to accomplish bold bottom-line and top-line improvements.
Financial skills are highly important in the world of collaborative SCM. Extended SCM crosses business units and boundaries between divisions, regions and companies. Instead of each player having a clear territory, many have smaller, shared roles in longer supply chains. Costs and benefits are distributed among multiple trading partners. For example, in a long supply chain where upstream and downstream partners benefit from radio frequency identification (RFID), which one(s) should bear the burden of investing in the tags and software?
Volatility has also magnified the need for financial skills. Volatile fuel costs have led carriers, especially airlines, to become experts at hedging, analysing profitability by customer and route, and deconstructing budget variances. Manufacturing firms need to decide how much supply chain risk to take. For example, how much quality risk or supply chain risk is acceptable for a lower unit cost? Financial and risk management tools are becoming a more important part of the supply chain professional’s toolbox.
Structuring a staff development programme
Executive development should combine mentoring, rotation outreach and training. Mentoring can be formal or informal; models exist for both approaches. Job rotation is needed to successfully reach the integrated stage, since people need to understand the job responsibilities of the departments with which they must deal. There are several forms of outreach. John Deere, Honda and Harley Davidson have had academic outreach programmes. Saudi Aramco sends its executives on one-year externships to learn best practices from other leading organisations.
There are numerous certification programmes for staff development, for instance those offered by professional associations such as APICS, CSCMP and ISCEA (see Appendix 3 for a list of abbreviations). Table 10.3 overleaf shows the coverage of some of these programmes.
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Table 10.3 Topics addressed by selected professional supply chain certification programmes
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Source: Boston Strategies International
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Engaging suppliers
A crucial part of sourcing is suppliers’ engagement. Partner suppliers help to achieve cross-enterprise supply chain improvements and increase value for money paid. The first step in a supplier performance management programme is to stratify the suppliers and clearly outline the standards that they must meet in order to gain more business. Most buying organisations classify their suppliers into at least three categories: transactional, preferred and partner.
Transactional suppliers have no established criteria. They meet some basic minimum level of acceptability to be able to register as a supplier, but have no better likelihood of being selected for a given assignment than any other registered supplier. They must compete via requests for proposal (RFP) or requests for quotation (RFQ).
Preferred suppliers have a history of delivering high-quality work. They share more information about their business, for example about their technology development plans, than transactional suppliers. They have an established basis for acceptable cost based on historical rates or costs, and have clearly defined their market positioning compared with competing firms.
Partner suppliers are the chosen, sometimes single source for vital products or services. Buyers feel comfortable enough with their quality to share their target cost levels, and suppliers feel comfortable enough to share technical information with the buyers. Buyers and suppliers share plans and other information well in advance to increase the chances of continued work together on major initiatives.
A comprehensive partner supplier programme guides suppliers from being mere commodity suppliers through five levels of partnership arrangements towards establishing what is a strategic partnership, which involves value-added, alliance and strategic suppliers – a simplification of the five-step partnering continuum developed by a leadership specialist, Michael Maccoby (see Figure 10.6). Value-added suppliers have a framework agreement to provide a focused service, as FedEx has with the US Postal Service (USPs) to handle airport-to-airport mail delivery (leaving the USPs with the local last-mile delivery). Alliance suppliers participate in joint development with the buyer, such as that of an oil contractor, Halliburton, with companies for the development of oilfields. Strategic partners establish a common vision based on mutual needs and strategies, as Northwest Airlines and KLM had for 15 years under the Wings Alliance before they merged in 2008. Companies that form true partnerships collaborate closely with suppliers to achieve not only lower total cost, but also faster speed to market, more innovation and better quality. One example of such a partnership (according to Maccoby) is between a Swedish-Swiss automation technology manufacturer, ABB, and a Canadian mining producer, Cominco. Through the partnership, ABB was able to avoid the costs of bidding and get lower-cost solutions by engaging the creativity of Cominco staff on how best to implement a complex project. The two companies claim business process improvements, lower life-cycle costs and enhanced innovation. Unlike some partnerships, the companies have no written contract, instead relying on senior-level commitment and vision.7
Figure 10.6 The partnering continuum
Source: Maccoby, M., “Learning to Partner and Partnering to Learn”, Research Technology Management 40(3), May-June, 1997, slightly adapted by the author
Supply chain organisation maturity model
In summary, organisations progress through four stages of maturity, each one corresponding to one of the supply chain strategies. In addition, they are characterised by the progression of sophistication in the articulation of the strategy (see Table 10.4):
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Table 10.4 Supply chain organisation maturity model
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Source: Boston Strategies International
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The mission, vision and values progress from being informal to being documented, known throughout the organisation and motivating employees.
The structure moves from the pre-supply chain format to rationalisation, synchronisation, customisation and innovation.
Career paths advance from on-the-job training inside the company to external and internal training programmes, and later on include alliances and externships.
The culture moves from being hidden and based on historical power relationships, to being rational and transparent in the synchronisation stage, and then on to being a learning organisation and a creative self-regenerating one during the innovation stage.
11 Leveraging information technology
Supply chain management has become more about the management of information than the movement of goods, especially given the much greater customer interaction that comes in the customisation and innovation stages. Data and information exchange define the discipline, through electronic data exchange (EDI), extensible markup language (XML), networks and wireless access. Data security is a requirement. Value-added services – and more specifically value-added information services – are becoming an important part of every business.
Many companies have built their supply chain success on information technology (IT) and accessibility. FedEx and UPS know where millions of small packages are at any point in time and manage the flow as they move around the world. The price of a package delivery is indirectly related to the confidence that it will get there on time (which is in turn related to information capabilities) and partly to the ability of a consumer to track and trace it (which is directly related to information capabilities). Iron Mountain does likewise in the United States with millions of business and hospital records. Jabil Circuit is able to create custom supply chains for its clients because it has excellent information flow.
A complete
supply chain information system has 11 components, which are outlined below. They are generally built on the framework of enterprise resource planning (ERP) (see Figure 11.1). ERP applications come with an SCM module for demand planning, but the SCM module typically only contains part of the analytics that are needed to successfully execute the four SCM strategies (see Table 11.1 on page 172). Therefore, many companies supplement their ERP systems with best-of-breed software applications for their supply chain activities. These are independent applications for which interfaces are often built to link them to the ERP data set.
Figure 11.1 Supply chain system components
Source: Author’s adaptation of material from Boston Strategies International
The components of a complete SCM IT capability are:
Computer-aided design and manufacturing (CAD/CAM)
Network design
Supplier relationship management (SRM), including auctions and electronic requests for quotation (eRFQS)
Demand planning, including distribution resource planning (DRP)
Advanced planning and scheduling (APS)
Warehouse management system (WMS)
Transportation management system (TMS)
Customer relationship management (CRM), including sales force automation (SFA)
Financials, including asset management and pricing
E-commerce
Product life-cycle management (PLM)
Computer-aided design and manufacturing
Computer-aided design and manufacturing (CAD/CAM) supports SCM by working out how products can be manufactured for the least cost. Most waste in downstream SCM processes is created in the early stages of a product’s conception and development. Architects and design engineers regularly use CAD to develop and refine their work, and automakers use CAM to monitor and adjust machine speed and increasingly control advanced robotics.
As organisations progress towards synchronisation, CAD can be used to create modules for low-cost manufacturing and assembly, including modular inputs. CAM can be used to identify plant bottlenecks using constraints management and throughput analysis. At the customisation stage, design for configurability makes the product customisable by the end-user. At the innovation stage, CAD/CAM ensures that the design can be easily prototyped, which will accelerate new product launch.
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Table 11.1 Supply chain IT requirements at each supply chain stage
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Source: Boston Strategies International
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Network design
At the rationalisation stage, companies often consolidate the number of warehouses and distribution centres that they operate to reduce total logistics cost. At this stage, the network design tool must have total cost modelling capability. At the synchronisation stage, network design applications help set up cross-docking operations that reduce pipeline inventory and compress end-to-end cycle time. At the customisation stage, forward stocking is needed to accommodate finish-to-order operations, so traditional network design tools may need to be supplemented with another tool that can model the finish-to-order operation and the outbound distribution in order to get end-to-end total cost. At the innovation stage the tools forward-integrate to get closer to the customer in order to receive continuous market feedback. At this stage, the modelling of extended operations all the way to the customer will be required, especially if the trunk line and the “last mile” had hitherto been handled by a different carrier.
Supplier relationship management
At the most basic level, the SRM module handles transactional purchase order (PO) processing. As the company’s needs advance, SRM often features auctions, which may help reduce cost in the rationalisation phase. In the synchronisation phase, SRM should help track and compute the delivered cost and the total cost of ownership (TCO) so as to reduce the inventory of spare parts needed to operate and maintain the unit. At the customisation phase, SRM is needed to rate suppliers’ performance by customer and order or delivery. And at the innovation phase, SRM is needed to rate and qualify potential partner suppliers according to their historical design collaboration performance.
E-procurement
Although in the 1990s many e-procurement initiatives ran over budget due to cataloguing and data management processes that proved to be overwhelming, electronic procurement is a necessity for cost-efficient SCM. A European company reveals a success story. The number of personnel creating purchase orders had doubled in the past ten years to the point where 80% of the staff initiated purchase orders. Furthermore, most of these (80%) were low-value purchases. The company established e-procurement in two stages. First it created catalogues that provided it with access to 40,000 SKUs, which it viewed as virtual units of storage. At first, its ability to update prices from suppliers and to tie purchased materials to end-products were limited, so it embarked on a second round of improvement and increased the number of available SKUs to 170,000. The experience allowed it to negotiate lower prices as a result of the higher volume of purchases of common items.
Competitive bidding and auctions
Most markets are imperfect. Cost differences stem from differences in manufacturing processes, production volume1 and quality. Costs also vary geographically because of domestic resource costs and natural competitive advantage.2 As a result, some companies pay more than others for comparable purchases. In the 1980s, Brazilian automakers were paying more than automakers in other countries for parts because of Brazil’s import barriers.3
Bidding and auctions level the playing field:
Sealed bid tenders where the item/s go to the lowest bidder. The US and some other governments use this approach.
Reverse auctions, the most common types of auction relevant to SCM, are conducted by buyers to engage the sellers. They start high and are awarded to the lowest bidder.
Combinatorial bids ask for multiple price options from sellers – including bundles of goods or services that the seller proposes – and computes the optimal allocation of business based on the sellers’ proposed bundles as well as the lowest-cost option for each item or service. Companies like The Home Depot, Sears Logistics Services, Wal-Mart and Ford Motor Company have used combinatorial auctions to source transportation services. In transportation, carriers may bid different amounts on a given route, or lane, depending on which other routes they are awarded, since the combination of routes, rather than the number of routes, determines their average vehicle payload and therefore their profits.
Demand planning
Demand planning systems help match demand with supply. For companies at the rationalisation stage, these systems should enable the determination of requirements for all types of inventory, including consigned inventory, which does not have to be paid for until it is consumed, and vendor-managed inventory (VMI), which is paid for but managed by the vendor. Demand planning systems should also monitor the status of inventory by stage of postponed finishing if postponement is being used as a management method. For companies in the synchronisation stage, demand planning modules should also accommodate collaborative planning, forecasting and replenishment and help to design the network by using what-if analysis. For companies in the customisation stage, demand planning systems need to additionally provide accurate available-to-promise information by customer and order to help customer service representatives make commitments that can be met and that meet the customer’s delivery expectations. For companies at the innovation stage, these systems need to help match raw materials and finished goods inventory with demand during new product launches in order to stay synchronised with the pace of products’ introduction.
Advanced planning and scheduling and production control
In most operations, a master schedule establishes the production plan for a certain time horizon (the decision timeframe of handling orders). Production control is the day-to-day execution of the advance plan. APS consists of the range of systems that provide master scheduling and produc
tion control capabilities. The production scheduling system should include logic for determining the most economical lot sizes (planning) and for sequencing and prioritising jobs for maximum efficiency and profitability.
For companies at the rationalisation stage, APS supports lean waste reduction by tightening up the slack in production schedules. For companies at the synchronisation stage, APS needs to interface with pull systems such as JIT. Since APS is driven by schedules and JIT is driven by demand, APS should be used as a guide rather than the rule. Furthermore, computerised maintenance management systems (CMMS) help prevent downtime, thus supporting supply chain synchronisation.
In companies at the customisation stage, APS should be able to layer on the unique supply chain requirements of specific customer segments or even individual customers in order to deliver customised service and even order-specific service. Jabil Circuit, CVS, mail-order fulfilment houses, and gift companies that imprint logos and personal artwork on items like pens and shirts, use APS in this way.
For companies at the innovation stage, APS should help with rapid and early prototyping by allowing pilot production runs under real conditions, so it needs to be flexible enough to handle new product introductions.