Business Plan, Supply Chain Strategy, Collaboration Relationships

The following topics are discussed in this section:

Business Plan

  • A business plan is a written document that describes the overall direction of the firm and what it wants to become in future.

(Definition) Business Plan is a statement if long-range strategy and revenue, cost and profit objectives usually accompanied by budgets, a projected balance sheet and a cash flow (source and application of funds) statement. A business plan is usually stated in terms of dollars and grouped by product family. The business plan is then translated into synchronized tactical functional plans through the production planning process (or the sales and operations planning process). Although, frequently stated in different terms (dollars vs units), these tactical plans should agree with each other and with the business plan.

  • Key function such a finance, engineering, marketing and operations typically have input into the plans.

  1. Finance
    The finance function manages and tracks the sources of funds, amounts available for use, cash flows, budgets, profits and return on investment.
  2. Engineering
    The Engineering function is responsible for research and development and the design and redesign of products that can be made most economically.
  3. Marketing
    The Marketing function focus is on analysis of the market place and how the form positions itself and its products.
  4. Operations
    The goal of the operations function is to meet the demands of the market place via the organization’s product. Operations also manage the manufacturing facilities, machinery, equipment, labor and materials as efficiently as possible.
  • The functional roles collectively support the success of the supply chain.

Supply Chain Strategy

  • Functional strategies underlying supply chain management must articulate with the business plan.
  • The purpose of supply chains is to be globally competitive.
  • Time, distance and collaboration are basic elements in modern supply chains that impact the chains ability to respond to competitive changes in the global market place.

Collaborative Relationships

  • In the virtual corporation and virtual networks, we can and therefore we must share ideas and data to be competitive.
  • What do these strategic partnerships look like in action? Suppliers, manufacturers and customers all come together on design teams to create products that will not only satisfy customer demand but will be efficient to produce, assemble, transport and store.

Partnership Criteria

  • Seven factors need to be carefully researched and considered when forming a supply chain strategy:
    • Add value.
    • Improve Market Access.
    • Strengthen Operations.
    • Add Technological Strength.
    • Enhance Strategic Growth.
    • Share Insights and Learning.
    • Increase Financial Strength.
  • Every potential partner organization has its strengths or core competencies.
  • It’s only a successful strategic alliance if the partnership results in a “win-win” for both parties.
  • Effective partnerships are a combination of shared risks, resources, rewards, vision and values.

Building Collaborative Relationships

  • In order to build the foundation of collaborative partnership, the partners must:
    • Initiate management tasks.
    • Overcome barriers to collaboration.
    • Build levels of communication.
    • Determine levels of collaborative intensity.
    • Examine strategic importance versus difficulty to determine product categories.
  • Initiate Management Tasks
    • Once the collaboration is official, it’s critical that top management demonstrate their enthusiastic commitment to the partnership.
    • This process begins with determining the specific contribution of each party and the criteria for measuring that contribution.
    • In early stages, relationships should emphasize equity in profits among all parties. Equity will help motivate all parties to work toward the good of the whole.
    • The next talk is to define roles for each party, taking care to avoid redundant efforts. Conflicts can occur if these roles make one party more dependent upon another than they wish to be. To alleviate this common problem, networks should avoid sequential interdependence, in which the second party cannot begin work until the first party is done. Instead, they should establish reciprocal interdependence, in which the exchange of tasks and services occur in both directions. Examples of this include CPFR (Collaborative Planning, Forecasting and Replenishment).
    • Since no contract can cover all contingencies, the next task is to create a policy for resolving conflicts.
  • Overcome Barriers to Collaboration

    Building successful collaboration requires overcoming predictable obstacles, including the following challenges:

  1. Sub Optimization

    Sub optimization refers to a solution to a problem that is best from a narrow point of view but not from a higher or overall company point of view.

  2. Individual Incentives that Conflict with Organizational Goals
  • Incentives, such as sales force bonuses, structured without thought for the supply chain strategy, can often be counterproductive.
  • These practices create a great deal of excess inventory as well as variability in demand that the manufacturer must then deal with. Instead sales goals must be aligned with actual demand.
  1. Working with Competitors

    One firm may try to win market share at the expense of the other. Such relationships should be kept at arm’s length to ensure fairness and extra caution must be devoted to sharing information. Companies may pretend to embrace collaboration when they really only want access to information for their own benefit.

  2. Bottlenecks Caused by Weak or Slow Partners

    If the firm is not willing to invest un a technical and social change process, the only alternative may be to find a more willing or able partner who can keep up with the networks collaboration curve.

  3. Technology Barriers
  • When potential partners have incompatible systems, it increases the difficulty of sharing data.
  • Incompatible and / or antiquated hardware infrastructures can also prove a barrier to collaboration.
  1. Power-Based Relationship
  • Rather than building relationships based upon trust and mutual benefit, the nucleus firm may use its leverage to dedicate the terms of relationships to other members.
  • While the profits of the nucleus firm increase, other members of the network may suffer losses. When this occurs, the disadvantaged partner may rebel.
  • Resistance may result in redundancy, loss of overall profitability for the chain or an actual reversal of the power relationship. Once in power, the mistreated party may retaliate instead of using the opportunity to develop equitable relationships along the chain.
  1. Underestimated Benefits
  • When collaboration is viewed as another type of process reengineering, the partners generally measure the results in reduced cost and cycle time rather than return on investment (ROI), which is a better long-term indicator.
  • Simply measuring efficiency increases will fail to account for some of the true long-term benefits or collaboration.
  • This may lead managers to reject a collaborative venture based on a failure to see gains such as removal of reduplicated efforts, enhanced innovation and better use of total system assets and processes.
  1. Culture Conflicts
  • Cultures tend to be egocentric and thus tens to resist external collaboration. They feel that their ways are the best ways of doing things and will often reject a different way without even considering it.
  • Culture conflicts are increased when each company relies on its own sources of information and unable to see the impact of its choices on other areas of the network. When companies don’t see the negative results of their actions, they can’t learn from their mistakes.
  • Another potential culture conflict can arise when managers delay or prevent collaboration. Such managers generally have safeguarded their positions by not sharing information so that they may be sought for their expertise.
  • Others feel that collaboration is a fad or a bad idea altogether. Still others talk about collaboration, but they are only interested in receiving the benefits from a partner without reciprocating.
  • Build Levels of Communication

    Communication between partners can take place on different levels; not all collaborations dependent upon the same degree of intensity of communication.

    Four levels of communication:

  1. Transactional with Information Sharing

    At this level of communication, each partner has access to a single source of data about matters such as workflow, forecasts and transactions. Contracts are generally medium term.

  2. Shared Processes and Partnership

    At this level, partners collaborative in specific processes such as design. They share knowledge across the network, contracts are longer term.

  3. Linked Competitive Vision and Strategic Alliance

    At this level, supply chain partners function as virtual entity, working out even the highest level of strategy together. The partners develop considerable trust and achieve social and cultural understanding as well as information sharing. Strategic alliances may last for decades.

  4. Backward Integration (Mergers and Administrations)
  • Outsourcing current functions isn’t the only way to forge links in a chain. Mergers or acquisitions may involve two companies in the same till rather than horizontal supplier-customer partners.
  • Although mergers would seem to provide the deepest level of trust and communication, the sudden clash of business, regional and national cultures involved often requires years of work to align attitudes, technology and business practices.
  • Determine Levels of Collaborative Intensity
    • Determining the level of collaborative intensity that each relationship requires depends on cost, quality, delivery, reliability, precision and flexibility.
    • Cost speaks for itself, but cost and quality often are inversely proportional.
    • Quality and delivery reliability are usually measured by number of defects allowed or late orders and are often collectively rated by members of an exchange using supplier history.
    • Precision is measured as degree of variance from specifications.
    • Flexibility is the ability of the supplier or manufacturer to deliver in varying quantities when given a specific number of days’ notice.
    • These criteria are strongly influenced by four factors related to the product or service:
      • Strategic Importance
      • Complexity
      • Number of Suppliers
      • Uncertainty
  • Examine Strategic Importance vs Difficulty to Determine Product categories

    If a partnership requires more than one of the intense collaboration levels – for example, when there is a limited number of suppliers and uncertainty about an item’s availability – then the need for higher collaborative intensity can be turned as “high strategic importance”.

    This model can be used to determine which suppliers are most appropriate for each of the four types of goods:

  1. Commodity Materials
  • Low strategic importance
  • Low supply chain difficulty

They require suppliers whose priority is cost reduction. These item are best purchased at arm’s length. Which of your suppliers can provide the best cost reduction on the commodity items you need?

  1. Bottleneck Materials
  • Low strategic importance
  • High supply chain difficulty

Efforts must be made to ensure that the need for these items is fulfilled. Therefore, some level of ongoing relationship with a particular supplier may be called for.

  1. Leveragable Materials
  • High strategic importance
  • Low difficulty levels

They call for collaboration to maximize both cost savings and reliability through means such as bulk purchasing by multiple members of the supply chain.

  1. Direct or Core Competency Materials
  • High strategic importance
  • High difficulty

Require strategic partnerships for longer periods of time to ensure availability and quality.

Features and Benefits of Collaboration

Collaborative Relationship Features Benefits
Joint development of shared processes. Lower costs.
Open sharing of information and knowledge. Improved quality.
Jointly developed performance metrics. Better customer service.
Open two-way communications. Reduced inventories.
Network wide visibility. Rapid project results.
Clear roles and responsibility. Reduced cycle times and lead times.
Joint problem solving. More effective working relationships.
Commitment to the relationship. Enhanced commitment to one another.

Organizational Strategy

The following topics are discussed under this section:

Goals of Organizational Strategy

  • Whatever strategy the corporation adopts to satisfy customers, grow, compete, organize itself and make money the supply chain has to operate in a manner that furthers those goals.
  • Four types of organizational strategy:
    • Customer focus and alignment
    • Forecast driven enterprise
    • Demand driven enterprise
    • Product type driven supply chain

Customer Focus and Alignment

  • When it comes to supply chains, its’s what’s good for the customers that counts and not what’s good for the nucleus company or even what seems to be good for the supply chain itself.
  • Supply chain management needs to be focused on giving the final customer the right product at the right time and place for the right price.
  • It’s about the balance of quality, price and availability (timing and place) that’s just right for the supply chain’s customer.
  • There are some basic premises that can help you get started in determining the appropriate balance:
    • Serving the end user customer is the primary driver of the supply chain decisions.
    • Organizations in the supply chain have to make a profit and stay in business to serve the customer.
  • Functional teams in the organization will provide their input and research on the optimal balance for the supply chain to meet customer needs.
  • Design engineers or better yet design teams from across the network design products that are right for the end customer and can be sold profitably.
  • Market research looks for the true, and not always obvious, needs in potential consumers that the supply chain can be engineered to satisfy profitably.
  • Logistics strategy begins with data about customer demands for availability of materials, components, service or finished products, depending upon the customer and then it looks for ways to move products in a cost effective way with acceptable risk.
  • Successfully managing for sustainability requires a strategic mindset, involving numerous personal and financial resources and a commitment from suppliers from first to lower tiers of the supply chain as well as consumers further up the supply chain.
  • Departments must cooperate with other departments in their organization and with their counterparts at suppliers.
  • This type of collaboration between supply chain partners necessitates breaking down cultural barriers and building a culture of trust to ensure that the focus is an end-to-end supply chain activities and not just discrete supply chain processes.
  • Creating and managing a sustainable supply chain requires an organization to be informed, exercise leadership and cooperate with all supply chain partners in achieving positive results on the triple bottom line.

Forecast Driven Enterprise

  • This strategy is one in which the nucleus firm, usually the manufacturer, utilizes a forecast an estimate of future demand as the basis of its organizational strategy.
  • It’s difficult to predict even the most stable demand – say, for a product like diapers.
  • The chain of demand begins at the far retail end of the supply chain and works its way back towards the source of raw materials used in marking the product. The traditional way of attempting to satisfy their demand is to forecast it.

(Definition) Safety Stock is a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.

Demand Driven Enterprise

  • The bullwhip effect is driven by demand forecasts. The solution is to replace the forecasts with actual demand information.
  • In the demand driven chain, supply management is focused on customer demand.
  • Instead of manufacturers planning their operations based on factory capacity and asset utilization, the demand driven supply model operates on customer centric approach that allows demand to drive supply chain planning and execution moving the “push-pull frontier”, back up the chain at least to the factory.
  • Instead of producing to the forecast and sending finished products to inventory, the production process is based on sales information.
  • There is no fixed production schedule in a strictly demand driven supply chain.
  • Product is turned out only in response to actual orders “on demand”.
  • Note, however, that on the supplier side of the plant, forecasts still determine delivery of raw material. The art of forecasting remains crucial, even in a demand driven chain.

Pull system entails the following:

  • In production, the production of items only as demanded for use or to replace those taken for use.
  • In material control, the withdrawal of inventory as demanded by the using operations. Material is not issued until a signal comes from the user.
  • In distribution, a system for replenishing field warehouse inventories where replenishment decisions are made at the field warehouse itself, not at the central warehouse or plant.

When a supply chain works in response to forecasts it’s called a Push chain or push system and it entails the following:

  • In production, the production of items at required times based on a given schedule planned in advance.
  • In material control, the issuing of material according to given schedule or issuing material to a job order at its start time.
  • In distribution, a system for replenishing field warehouse inventories when replenishment decision making is centralized, usually at the manufacturing site or supply facility.
  • Everything in a push system is pushed downstream from one point to the next according to schedules based on the forecasts.
  • The challenge in changing from forecast driven (push) to demand driven (pull) system is in reducing inventory without also lowering customer satisfaction.
  • The decision to switch to a demand-pull process trades one type of risk for another:
    • In the forecast-push process, the risk is related to the buildup of inventory all along the chain. Not only does inventory cost money while it sits in a retail stock rooms, distribution center or production storage area, it runs the risk of becoming obsolete or irrelevant for a number of reasons. In a world of rapid innovation, inventory obsolescence is a very real threat.
    • In the demand-pull, make-to-order model, on the other hand, the risk is that orders will begin to come in above capacity and all along the chain there will be expensive activity to run the plant overtime, buy more and faster transportation or sweet-talk customers into waiting for their orders to be filled or substituting a different product.
  • Running short pf stock is also a risk in the forecast driven chain. Forecasts can be wrong in either direction. That’s why the safety-stock builds up at each point where orders come in.
  • One technique to prepare for uncertain demands is Kitting, which is preparing (making / purchasing) components in advanced, grouping them together in a Kit, and having them available to assemble or complete when and order is placed.
  • In reality, most organizations pursue a push-pull strategy and the point where push moves to pull is the key strategic decision.
  • Once that decision has been made, building a demand driven enterprise can require significant changes in sully chain processes. The following are some major steps:
    • Provide access to real demand data along the chain for greater visibility of the end customer.
      • The first requirement is to replace the forecasts with real data. The only supply chain partner with access to these data first hand is the retailer.
      • Visibility is a necessity for building a pull system and pioneers like Walmart have led the way in that regard.
      • With point of sale scanning and radio frequency identification (RFID) a retailer can alert its suppliers to customer activity instantaneously.
      • Instead of producing to monthly forecast, manufacturers with that kind of immediate signal from the front lines can plan one day’s production runs at the end of the preceding day. They produce just enough to replace the sold items.
    • Establish trust and promote collaboration among supply chain partners.
      • Collaboration is implied in the sharing of information.
      • In return of receiving real-time data that allow reduction of inventory, suppliers and distributors have to agree to change their processes in whatever ways may be necessary to make the new system function without disrupting customer service.
    • Increase agility of trade partners.
      • Because the inventory buffers with not exist or will be much reduced in this demand-driven supply chain, the trade partners need to develop agility-the ability to respond to the variability in the flow of orders based on sales.
      • When making to forecast, a plant can run a larger volume of each product to send to inventory. But when making to order, the plant may have to produce several different types of products in a day. There will be no room for long changeover times between runs of different products; therefore, equipment, processes, work center layouts, staffing, or siting or all these things may have to change to create the capacity required to handle the new system.

Product Type Driven

  • Company can have more than one supply chain, depending upon the types of products that are passing along the chain and other variables.

Functional Products

  • Functional products that change little from year to year have longer life cycles (perhaps more than two years), relatively low contribution margins, and little variety. Because demand for them is stable, they are fairly easy to forecast, with a margin of error of about 10%, very few stock out and no end-of-season mark downs.
  • The appropriate supply chain for these products should emphasize predictability and low cost with performance indicators such as the following points:
    • High average utilization rate in manufacturing.
    • Minimal inventory with high inventory turns.
    • Short lead time (consistent with low cost).
    • Suppliers chosen for cost and quality.
    • Product design that strives for maximum performance and minimal cost.
  • However, make-to-order functional products, such as replacement parts for customized equipment, usually have long lead time (six months to a year).

Innovative Products

  • Innovative products have unpredictable demand, relatively short life cycles (three months for seasonal clothing) and high contribution margins or 20 to 60 %.
  • They must have millions of variants in each category, an average stock out rate from 10 to 40 %, and end-of-season markdowns in the range of 10 to 25 % of regular price.
  • The margin of error on forecasts for innovative products is high -40 to 100 % but the lead time to make them to order may be as low as one day and generally is no more than two weeks.
  • The supply chain for innovative products should emphasize market responsiveness rather than physical efficiency, with performance indicators such as the following:
    • Excess buffer capacity and significant buffer (or safety) stock of parts or finished items.
    • Aggressive reduction or lead time.
    • Suppliers chosen for speed, flexibility, and quality (rather than cost).
    • Modular design that postpones differentiation as long as possible.
  • Innovative products, with their high margins and unpredictable demand, justify the extra expense for holding costs.
  • The idea that the same types of product can be either functional or innovative implies that one company might have more than one supply chain.
  • New information technology makes it possible to have multiple, dynamic chains that can accommodate different product and information flows.

  • Staples
    • These have steady, year-round demand and low margins, for example: white underwear.
    • It is advised to stock staples only in relative outlets in small quantities and transporting them in truckload quantities.
    • A full truck, is cost-effective for the shipper than a partially loaded vehicle.
  • Seasonal Products

These could include outdoor patio furniture, holiday décor, etc. for which the demand is more predictable since it is tied to the holiday or season.

  • Fashion Products

These are innovative items, with unpredictable demand. For example, Zara, the Spanish clothing manufacturer has two supply chains, one for staples and other for fashion clothing. To get the faster response time, Zara uses European suppliers for the fashion items. But for the more predictable demand items, it uses eastern European supplier that have poor response time (not a concern) and lower cost.

  • In addition to varying supply chain by product type there are several other variables to consider – store type and time in season or product cycle.

Business Strategy and Competitive Advantages

Following topics are discussed in this section:

Business Strategy

  • Least cost relates to a lower cost flow than competition for an otherwise equivalent product or service.
  • Differentiation relates to a product or service with more features, options or models than the competitive.
  • Focus relates to weather the product or service is designed for a broad audience or a well-defined market segment or segments.
  • Common business strategies that are generic to many industries and manufacturers include the following variations:
    • Best Cost
      Creates a hybrid, low cost approach for providing a differentiation product or service.
    • Low Cost
      Focuses on delivering low price and no frills basics with prices that are hard to match.
    • Broad Differentiation
      Creates product and service attributes that appeal to many buyers looking for variety of goods.
    • Focused Differentiation
      Develops unique strategies for target market niches to meet unique buyer needs.
    • Focused Low Cost
      Designed to meet well-defined buyer needs at a low cost.

Competitive Advantages

  • Competitive advantages mirror the strategies used to create them
  • A competitive advantage exist when an organization is able to provide the same benefits from a product or service at a lower cost than a competitor (low cost advantage), deliver benefits that exceed those of competitor’s product or service (differentiation advantage) or create a product or service that is better suited to a given customer segment than what the competition can offer (focus advantage). The result of this competitive advantage is superior value creation for the organization and its customers.

Low-Cost Advantage Strategies

  • A low-cost strategy should not be confused with target cost.

(Definition) Target Costing is the process of designing a product to meet a specific cost objective. Target costing involves setting the planned selling price, subtracting the desired profit as well as marketing and distribution costs, thus leaving the required manufacturing or target cost.

  • In many cities, this strategy had resulted in the opening of numerous “dollar stores” where majority of the products are only one dollar and the selection is huge.
  • Providing a product or service at the lowest price is generally not compatible with either differentiation or focus (niche marketing) strategies.
  • The lower profit margins provided by this approach are more consistent with mass marketing.

Product or Service Differentiation Advantage Strategies

  • Determining how to differentiate a product or service begins with a competitive analysis of other firms in the market to see what they have to offer.

(Definition) Competitive Analysis is an analysis of a competitor that includes its strategies, capabilities, prices and costs.

  • Once a firm has analyzed the offerings of competitors, it may differentiate its products and services in a number of ways. This is known as product differentiation.

(Definition) Product Differentiation is a strategy of making a product distinct from the competition on a non-price basis such as availability, durability, quality or reliability.

  • Supply chain strategies appropriate to product differentiation include:
    • Modular design combined with postponement to allow last-minute customization to meet specific consumer demands.
    • Minimal inventory of the base model to prevent obsolescence and expand the inventory of options.
    • Collaboration with suppliers to develop innovative designs, numerous options appealing to different customer tastes, artistic design and so on.

Focus Advantage Strategies

Niche Marketing (vs Mass Marketing)

  • Firms can choose to develop products and services for a mass market or for a relatively small slice of a layer market – a market niche.
  • Depending upon the niche, sourcing may focus more on finding special expertise or high-quality materials rather than on low-cost labor.

Responsiveness

  • Perhaps the most obvious example of responsiveness is the fast-food industry that grew up in the last half of the 20th century, led by McDonalds.
  • Supply chains designed for responsiveness may rely on substantial supplies of safety stock to avoid outages (overstocked seasonal items typically go on sale at the end of the season).
  • They may also have multiple warehouse to place products nearer to user.
  • Third-party providers of rapid transportation, such as package delivery services were developed to suit the needs of such supply chains.

Choosing Business Strategies

  • While some firms may focus primarily on one business strategy, others may pursue a mix strategies.
  • For example, providing high quality at the lowest price is a challenge. But not all the strategies are mutually exclusive.
  • Product differentiation and niche marketing fit well together. Either responsiveness or low cost may be a key competitive factor that differentiates a firm from its market rivals.
  • Once an organization has decided on a business strategy, it uses these choices to drive the organizational strategy and eventually the supply chain strategy.

Supply Chain Alignment with Business Strategy

(Definition) Strategic Plan is a plan that describes how to marshal and determine actions to support the mission, goals and objectives of an organization. It generally includes an organization’s explicit mission, goals and objectives and the specific actions needed to achieve those goals and objectives.

The supply chain strategy is a complex and evolving means that organizations use to distinguish themselves in the competitive content to create value for their customers and investors.

Many organizations now also use mission and vision statements to give clarity to their purpose.

All the strategies are linked and dependent.

(Definition) Business Strategy is a plan for choosing how to compete. Three generic business strategies are:

  1. Least Cost
  2. Differentiation
  3. Focus

(Definition) Organizational Strategy of an enterprise which identifies how a company will function in its environment. The strategy specifies how to satisfy customers, how to grow business, how to compete in its environment, how to manage the organization and develop capabilities within the business and how to achieve financial objectives.

Supply Chain Strategy is then a strategy for how the supply chain will function in its environment to meet the goals of the organization’s business and organization strategies.

Competitive Advantages are closely related to business strategy because they outline the advantages the organization should realize once it has decided how it will compete.

Accounting and Financial Statement Basics

The Flow of Funds

  • The flow of money or funds goes upstream from customer to producer and from producer to supplier as intermediate or final products or service are paid for.
  • This funds flow is not linear since some upstream payments may occur long before the final good or service is even purchased.

Why is it critical to improve the flow of funds within a supply chain? There are several advantages to better flows:

  • It reduces cash-to-cash cycle time.

    (Definition) Cash-to-cash cycle time is an indicator of how efficiently a company manages its assets to improve the speed or turnover of cash flows.

    What is considered a normal duration for cash-to-cash cycle time will differ by supply chain, industry and organizational strategy.

    It is not necessarily possible to compare cycle times without understanding the relevant strategies for each business. However, an organization’s cycle time is a bench mark for its own continuous improvement.

  • The improved turnover of funds improves customer-supplier relationships through lower perceptions of risk, improved reliability and better communications which in turn tend to further improve relationships, yielding a win-win situation throughout the supply chain.
  • Improved cash flow tend to reduce imbalances between the layer and smaller players in the supply chain. Consistent rules for integrated cash flows across the supply chain help avoid the situation in which sizable retailers request more liberal payables terms from manufacturers and large manufacturers do the same with their smaller suppliers.

Spend Management

  • The initial efforts in supply chain management focused primarily on cutting costs because the supply chain constituted one long cost center. It was all about removal of waste, time, unnecessary motion, defects and extra costs.

(Definition) Spend Management is managing purchases of goods and services in a supply chain, including outsourcing and procurement activities.

  • Spend management often deal with consolidating internal demand across business functions, divisions or extended partners and/ or consolidating suppliers to find areas of purchasing and transportation quantity rate discounts.
  • Relative to financial performance, spend management involves managing the outflow of funds in order to buy goods and services. Spend management may also need to coordinate closely with accounts payable because payment timing is vital to spend management execution.
  • While spend management is used by supply chain managers to control external costs, many organizations use a system such as standard costing to control internal costs related to the goods or service being produced.

Standard Costing

(Definition) Standard Costs are the target costs of an operation, process or product, including direct material, direct labor and overhead charges.

(Definition) Standard Costing or Standard Cost Accounting System is a cost accounting system that uses cost units determined before production for estimating the cost of an order or products. For management control purposes, the standards are compared to actual costs and variances are computed.

Standards are targets that the organization sets to show the expected or desired outcome of an activity. These are periodically reviewed and changed as needed.

Some additional terms in standard costing:

  1. Cost of Goods Sold (COGS)

    An accounting classification used for determining the amount of direct materials, direct labor and allocated overhead associated with the products sold during a given period of time.

  2. Current Price

    The price currently being paid as opposed to standard cost. A related term is marked price, which is going price for an item on the open market.

  3. Usage Variance

    Deviation of the actual consumption of materials as compared to the standard.

  4. Cost Variance

    In cost accounting, the difference between what has been budgeted for an activity and what it actually costs.

Each cost has two components that are set as standards: Volume and Rate.

Cost = Volume X Rate
Direct Material Costs = Qty. Purchased X Unit Cost
Direct Materials Used = Qty. Used X Unit Cost
Direct Labor Cost = Standard Hours X Hourly Rate
Overhead Cost = Cost Driver X Total Overhead
Total Cost Driver

Volume: It is how many units of resource is purchased or used.

Rate: It is the cost per unit of that resource.

  • When volume has variances from the standard, it is a usage variance.
  • When the rate has variances, it is a cost variance.
  • Both variances are tracked separately and their sum should equal the total variance. Variances can be positive or negative. Negative variances occur when costs are greater than expected; positive variances occur when costs are less than expected.
  • Overhead costs are allocated costs based on a cost driver. A cost driver is simply a measurable aspect of an operation that is used to approximate how much of the overhead should be associated with the units produced.
  • A frequently used cost driver is direct labor hours.

Uses of Standard Costing

  • Standard costing is used to estimate the cost of goods sold before all costs are known with certainty. It also provides benchmark targets for use during production. Thus it is a method of controlling a process during production rather than only being applied by documenting after production is complete.
  • Inventory can be valued using standard costing, although other methods also exist.
  • If standard costing is used at an organization, efficiency can be calculated using a formula:

Efficiency = (Standard Hours of Work / Hours Actually Worked) X 100%

Financial Statements

Financial statements help managers and investors track the financial results of an organization’s activities.

Balance Sheet

(Definition) A financial statement showing the resources owned, the debts owned and the owner’s share of a company at a given point in time.

  • The balance sheet is often called “snapshot” of the company’s financial position, because it is a static view of financial value or net worth at a point in time, usually the last day of the fiscal year, though it could also be for the end of any reporting period, such as month or quarter. It gets its name from the fact that it has two major sections that have to be in balance – assets on the one hand and liabilities and owner’s equity on the other.

Assets = Liabilities + Owner’s Equity

  • The balance sheet sections are always in balance because owner’s equity is simply the difference between assets and liabilities.
  • The balance sheet shows the increase or decrease in assets, liabilities and owner’s equity from year to year.

(Definition) Accounts Receivable are the value of goods shipped or services rendered to a custom on which payment has not yet been received and usually includes an allowance for bad debts.

(Definition) Accounts Payable are the value of goods and services acquired for which payment has not yet been made.

  • These two balance sheet amounts are used to calculate the cash-to-cash cycle time, which measures how many days the organization’s working capital is invested in managing the supply chain.

(Definition) Working Capital is the current assets of a firm minus its current liabilities.

  • Working capital is important to the supply chain because these are the funds the organizations has readily available to invest in normal operations.

Income Statement

(Definition) A financial statement showing the net income over a given period of time.

  • Income statement is cumulative and dynamic, meaning that the statement covers business results over a period of time, such as a quarter or a year, rather than being a static snapshot.
  • The income statement shows managers, investors and creditors whether the company has made or lost money during the given period of time.

Income = Revenues – Expenses

  • These are the key terms to be familiar with:
    • Profit

      It is money remaining from revenues after deduction of certain expenses.

    • Profit Margin

      It is the difference between the sales and cost of goods sold…sometimes expressed as percentage of sales.

      This measures the degree of financial success for a business.

    • Gross Profit Margin

      It is the difference between total revenue and the cost of the goods sold.

    • Net Profit

      It is figured by deducting all expenses, not only the cost of goods sold, from revenues.

  • Supply chain managers can use an income statement to determine the effect of supply chain expenses on net income.
  • Operating expenses such as sales bonuses or general and administrative expenses (all cost that cannot be linked to specific unit sold) are called period costs because they must be expensed in the period in which they are incurred.
  • COGS are called product costs. Product costs are accounted for in the period in which the units are sold even though many of these costs may be incurred in earlier periods.
  • Matching refers to reporting related revenues and expenses together in the period in which they were incurred. For example, sales expenses incurred to make a sales should fall in the period the sales was made. When they do not, accountants use adjustments called “accruals” to account for the period differences.

Statement of Cash Flows (Funds Flow Statement)

(Definition) A financial statement showing the flow of cash and its timing into and out of an organization or project (over a given period of time).

(Definition) Cash Flow is the net flow of money into or out of the proposed project organization. It is the algebraic sum, in any time period, of all cash receipts, expenses and investments.

  • There are three factors that determine cash flows:
    • Sales
    • After-tax operating profit margin
    • Capital requirements
  • The purpose of a statement of cash flows is to show lenders, investors and creditors whether the organization has sufficient cash to pay debts, bills and dividends to owners because cash, not net income, is needed to make these payments. The after-tax net income on the income statement is not the same as cash flow, but it is the starting point for the statement of cash flows.
  • Being able to read and understand a cash flow statement is important because it enables you to assess if the firm is:
    • Generating enough cash to fulfill its minimum obligations to lenders, investors and governments (taxes).
    • Generating extra cash that can be used to repay debt, purchase additional assets for growth or invest in new products.
  • This information is particularly helpful for financial managers, who use it along with a cash budget when forecasting their organization’s cash positions.
  • Depreciation is a predetermined incremental reduction in the value of fixed assets, such as property, plant and equipment on the income statement to account for their deterioration over time. This provides organizations a tax benefit to offset the investment in fixed assets.
  • Since depreciation reduces net income on the income statement but doesn’t reduce actual cash levels, depreciation is added back on the statement of cash flows to determine the actual cash flow.

Tax Savings and the Supply Chain

Paying less in taxes around the world translates into increased earnings per share.

Procurement and Taxes

  • Multinational corporations may decide to set up a central, global procurement and sourcing center.
  • In this way the supply chain benefits from various efficiencies created by consolidation of staff and equipment. If, in addition, the company locates the global facility in a low-tax region, the tax savings will magnify the savings from efficiencies of scale. This works because tax authorities generally levy taxes on separate streams of corporate income depending upon where they are earned. The global procurement center thus becomes subject to the tax policies of its country of residence.

Taxes & Logistics Networks

  • Organizations can also realize tax savings by combining tax planning with logistics reengineering projects.
  • While they are cutting lead times, reducing manufacturing costs and shaving transportation outlays they can also reduce their global tax liability by closing facilities in high-tax jurisdiction and moving them to countries with lower tax rates.

Taxes & Information Technology

A particularly intriguing tax-saving strategy is the purchase of supply chain software to improve planning and responsiveness. The cloud be an enterprise resource planning (ERP) system or a system with more limited application.

Competing Values

  • Whenever you are discussing supply chain financials, remember that each department in an organization has its own particular priorities based on its activities and those priorities may compete with each other.
  • For instance, the primary objective of marketing is to maintain and boost revenue and it strives toward that by providing great customer service.
  • Although the finance function is also interested in increasing revenues its primary focus is on keeping costs and investment expense low.
  • Production wants the lowest operating cost it can achieve. Those conflicting viewpoints may spill over into how each function views financial departments and metrics.

Supply Chain Management Benefits

The numerous benefits of marketing supply chain management practices, systems and technologies include:

  • Improved market knowledge.
  • The three Vs – Increase velocity, increased visibility, and reduced variability in the flows of goods and services, funds and information.
  • Integrated operations.
  • Improved management of risk.
  • Increased sustainability.

Improved Market Knowledge

  • With supply chain management in place, partners in the supply chain begin to share their knowledge about the market place and in particular about their customers.
  • Although, market intelligence can be purchase from outside sources, it’s most advantageous (and less expensive) to gather it from your partners.
  • There are a myriad of sources and documents containing valuable customer information that can be shared between supply chain partners, including transaction records, customer survey results, sales and service representative knowledge and information from distribution points such as retailers, internet sites or kiosks.
  • Purchased data may be more useful in acquiring new customers than in managing relationships with existing customers.

The Three Vs

  • Following are the key elements of a successful supply chain strategy:
    • Visibility
    • Velocity
    • Variability

Increased Visibility

(Definition) Visibility is the ability to view important information throughout a facility or supply chain no matter where in the facility or supply chain the information is located.

  • With better visibility, a supply chain manager or employee can see the results of activities occurring in the chain and is made aware of minor, incremental changes via technological processes.
  • Better visibility has resulted in greater velocity.

Increased Velocity

  • There are four types of flows in a supply chain:
  1. Physical materials and services
  2. Cash
  3. Information
  4. Returns (or reverse flow) of products for repair, recycling or disposal
  • Supply chain management impacts the velocity of these four flows in a positive manner.

(Definition) Velocity is a term used to indicate the relative speed of all transactions, collectively, within a supply chain community. A maximum velocity is most desirable because it indicates a higher asset turnover for stock holders and faster order-to-delivery response for customers.

  • Methods of increasing the velocity of transactions along the supply chain include the following:
    • Relying on more rapid modes of transportation (if there is a net benefit after the increase in transportation costs).
    • Reducing the time in which inventory is not moving by using Just-in-Time delivery and lean manufacturing (the less time inventory spends at rest, the less likely it is to suffer damage or spoilage. Increased velocity reduces the expenses involved in warehousing inventory).
    • Eliminating activities that do not add value, thus reducing the time required to accomplish supply chain activities.
    • Speeding up the flow of demand and cash as well as the velocity of inventory (the more rapidly payments are received from customers, the sooner the money can be put to work in the business or deposited at interest. Information about demand changes is crucial when the competitive strategy is responsiveness).

Reduced Variability

(Definition) Variability is the natural tendency of the results of all business activities to fluctuate above and below an average value, such as fluctuations around average time to completion, average number of defects, average daily sales, or average production yields.

  • Variability decreases with good supply chain management.
  • Supply chain management works to reduce variability in both supply and demands much as possible.
  • The traditional offset against variability is safety stock. If greater visibility along the chain results in greater velocity, supply chain managers should also be able to reduce the amounts of safety stock required to match supply to spikes in demand.
  • Supply chain management serves to reduce both demand and supply variability. Demand variability has many sources, but a primary source that can be controlled is bullwhip effects.
  • The bullwhip effect is an extreme change in the supply position upstream that is generated by a small change in demand downstream in the supply chain.

  • Supply variability typically increases in waves down the chain starting with small amounts at the resource extraction sites and culminating in the largest amounts at the retail end of the chain.

Two Additional Vs

Variety

Variety refers to the mix of products and services in a portfolio that must alter to meet changes in customer demand.

Volume

Volume is the amount of product being produced in a given time.

A supply chain must be flexible enough to expand and contract volume to meet changes in demand for mass customized products and services.

Integrated Operations

  • Supply chain management fosters integrated operations by requiring everyone in the supply chain to form partnerships with suppliers or customers.
  • Integrated networks, like intranets, extranets, and the internet, play an important role in forming these partnerships.
  • Supply chain management uses networks to tie together the various software applications associated with specific activities within supply chain processes.
  • Enterprise resources planning software packages enable companies around the globe to not only manage their operations in one plant but to facilitate enterprise wide integration and even cross-company functionality.

Improved Management of Risk

(Definition) Supply Chain Risk is based on decisions and activities that have outcomes that could negativity affect information or goods within a supply chain.

(Definition) Risk Management is the process of identifying risk, analyzing exposures to risk, and determining how to best handle those exposures.

An organization’s strategy to address supply chain risk includes a risk response plan and risk response planning.

(Definition) A Risk Response plan is a written document defining known risks, including description, cause, likelihood, costs, and proposed responses that also identifies the current status of each risk. This is also called a Business Continuity Planning.

(Definition) Risk Response Planning is the process of developing a plan to avoid risks and to mitigate the effect of those that cannot be avoided.

This type of proactive risk planning benefits the organization in a number of ways:

  • It helps keep the supply chain flexible so that it can continue functioning despite disruptive events, which in turn helps balance the costs of contingency planning against the potential economic, facility, resources, and inventory losses.
  • Risks are shared among supply chain partners who will be prepared to work in concert and play their parts responsibly.
  • It prepares the employee workforce and chain partners with valuable, actionable information and confidence to handle nearly any situation with a well-thought-out strategy based on substantiated risk data.

Increased Sustainability

Sustainability and Green are often used as synonyms in discussions of corporate obligations that go beyond the traditional emphasis on bottom-line profits. Both terms refer to the need for economic activity to operate within limits imposed by natural resources.

Supply Chain Management Objectives

Supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials for transformation into products or perhaps services for distribution to customers.

(Definition) Supply Chain Management is the design, planning, execution, control and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply chain demand, and measuring performance globally.

Other highlights:

  • Supply chain management is about creating net value.
  • There should be value creating activities in the supply chain that transcends the activities of particular entities in the chain.
  • Managing supply chain requires a balancing act among competing interests.

Value Chain and Mapping

Value Chain

A value chain is a string of collaborating players who work together to satisfy market demands for specific products or services.

(Definition) The value chain is made up of the functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment.

The intent of a value chain it to increase the value of a product or service as it passes through stages of development and distribution before reaching the end user.

Not all value chain activities are technically part of the supply chain. Those activities might include:

  • Engineering
  • Marketing
  • Finance
  • Accounting
  • Information Technology
  • Human Resource
  • Legal

Value Stream

(Definition) It is the process of creating, producing and delivering a good or service to the market. For a good, the value stream encompasses the raw material supplier, the manufacture and assembly of good, and the distribution network.

For a service, the value stream consists of supplier, support personnel and technology, the service “producer”, and the distribution channel.

The value stream may be controlled by a single business or a network of several businesses.

A value stream encompasses all the primary actions required to bring a product or service from concept to placing it in the hands of the end user. It also includes timing.

Value Stream Mapping
(Definition) Value stream mapping is drawing the current production process/flow and then attempting to draw the most effective production process/flow.

Mapping the stream aids in process improvement.

Key Objectives

There are five primary objectives that supply chain management can help a company or organization accomplish:

Objective 1: Add Value for Customers and Stakeholders

Supply chain management aims to create value through financial benefits, match the values of its various customers, and appeal to social value of its customers, stakeholders and community.

(Definition) Value is the worth of an item, good or service.

Adding value to a good or service is the responsibility of each entity and process in the supply chain.

(Definition) Value Added is the actual increase of utility from the view point of the customer as a part is transformed from raw material to finished inventory. It is the contribution made by an operation or a plant to the final usefulness and value of a product as seen by the customer.

The goal is to add value at each step in a service oriented value chain as well as in manufacturing oriented supply chain.

Utility may not be the only value, or worth, of a good or service from a customer’s point of view. Price, availability, and attractiveness are also values to consider.

Financial Benefits: Profit and Profit Margin

  • Adding value that customers desires promotes increased sales, which improves the bottom line.
  • In order to be successful and have longevity, any organization must have a positive cash flow.

* Triple Bottom Line (TBL):

  • Term coined by John Elkington 1994.
  • This refers to the concept that corporate success should also be measured in 3 dimensions:
    • Economic
    • Social
    • Environmental

Measuring Value One Stakeholder at a Time

  • When planning any new supply chain activity or monitoring continuing practices, it is important to identify all the stakeholder groups and determine the impact the activity will have on each one.

  • The primary stakeholder in any business is the business itself. A business must be profitable to survive and create value for any other stakeholder group.
  • Customers are also significant stakeholders in supply chain. Each business must create value for its customers as well as profits for itself. Moreover, the end result of each partner’s activities must optimize value for the supply chain as a whole.
  • There are also stakeholders that are external to the supply chain’s business partners and end customers. These include public or private investors, lenders, and communities and governments. To investors and lenders, supply chain value may be defined as capital growth, dividend income, or interest payments and eventual return on invested capital. Value as defined by these external partners must be considered when making business decisions.
  • Communities and local governments may also feel the impact of supply chain operations because they affect community members and their environment, both built and natural. The location of a retail outlet, warehouse, or other supply chain facility will have impact on the community where it is built and maintained. The community, and its political leadership, may judge this impact to be a positive value or a detriment.

Balancing Varied Stakeholder Values

Supply Chain Stakeholders Stakeholder Values
Firms in supply chain Profit margin, market share, revenues, expenses, image and reputation.
End customers Affordable, safe, attractive, useful products; affordable, timely, secure, easy, pleasant services; sustainable manufacturing practices.
Investors Return on Investment (Capital growth, dividend income), comprehensive and comprehensible communications.
Lenders Interest rate, long-term stability, return of principal.
Communities / Environment Tax based enhancement, sustainable manufacturing practices, environmental impact (safety, ethics, convenience, and natural resources), and growth of attractive jobs.
Governments Legality, regulation, overall impact on community members and environment.
Employees Job security, wages and benefits, opportunity, good working conditions, sustainable and safe manufacturing process.

Green, Sustainable Supply Chain Management

  • One value that is important to most of these groups is sustainable manufacturing process and practices, because it impacts so many around the globe.
  • Green Supply Chain Management (GSCM) has been brought to the forefront of most companies’ strategic goals in response to the demands from customers and stakeholders.
  • The objective of supply chain sustainability is to create, protect and grow long term environmental, social, and economic value for all stakeholders involved in bringing products and services to market.
  • Today GSCM requires supply chain managers to integrate environmental thinking into each step within the supply chain. That means that they must employ innovative environmental technologies to provide practical solutions to the environmental problems facing the global community.

(Definition) Green Supply Chain is a supply is a supply chain that considers environmental impacts on its operations and takes action along the supply chain to comply with environmental safety regulations and communicate this to customers and partners.

  • Sustainability figures significantly in supply chain management decisions for the following reasons:
    • Government and regulatory pressures.
    • Good environmental management and sustainability concerns.
    • Public opinion and power of consumer choice.
    • Potential for competitive advantage.
  • In addition to adding value, sustainable supply chain management can make good business sense, which can:
    • Drive growth
    • Reduce costs
  • Without forward looking environmental and social policies and supply chain practices, and organization’s reputation may suffer among investment analysts.
  • Supply chains must create three types of values:
    • Financial
    • Customer
    • Social

Financial Value

One method of increasing the financial value is to reduce costs.

Cut cost to yield net gain at the bottom line:

  • Cost cutting needs to aim for net gains at the bottom line.

(Definition) Inventory optimization software is a computer application having the capability of finding optimal inventory strategies and policies related to customer service and return on investment over several echelons of a supply chain.

  • Changes at any one point in the system will create changes elsewhere, therefore changes have to be viewed historically. Supply chain management necessitates cross-functional team work for the lateral chain. If a leaner supply chain can deliver the same customer satisfaction with a great profit, then cost cutting is justified.

It takes money to make money:

  • The end result should be net gain.
  • If an improvement in the supply chain brings in more revenue than the cost of investment, then it is justified.
  • Purchasing automated machinery to improve warehousing, upgrading hardware and software, training managers in team building and other investments may be necessary to build and maintain a competitive supply chain.
  • The ultimate aim must always be for creation of value at the customer’s end of the chain with sufficient profits to satisfy the needs of other stakeholders.
  • Typical measures of success in the use of invested money and assets more generally are:
    • Return on Investment (ROI)
    • Return on Assets (ROA)

(Definition) Return on Investment (ROI) is a relative measure if financial performance that provides a means for comparing various investments by calculating the profits returned during a specified time period.

(Definition) Return on Assets (ROA) is defined as net income for the previous 12 months divided by total assets.

Gains should be equally distributed:

  • Possibly the most common mistake in this regard is to send all cost savings all the way to the consumer’s end of the chain. If all efficiencies are plowed into retail price reductions, the supply chain itself will suffer from lack of financial sustenance.
  • Investors require a competitive return on loans and equity. The maintenance and upgrade to the chain’s infrastructure requires virtually continuous investment.
  • Employees have to be compensated at a competitive arte, trained in new processes and products, and more fundamentally, recognized for their contributions.
  • Teamwork among supply chain entities can create improved value for customers for a net financial gain that is equitably shared by all stake holders.

Customer Value

(Definition) Market Driven is responding to customer needs.

  • The ultimate goal of market-driven supply chain management must always be to deliver products and services that the customer values and of course will pay for.
  • Depending up the market being served, a supply chain may be managed so that it delivers one or more of these values to its end customers:
    • Quality of product or service
    • Affordability
    • Availability Service
    • Sustainability

Social Value

  • Generally a supply chain’s contribution to the society come from three factors:
    • Creating a positive good by delivering socially desirable and useful products or services.
    • Avoiding or reducing negative environmental side effects from extraction, processing and construction.
      (Definition) The Reverse Supply Chain moves items from the consumer back to the producer for repair or disposal.
    • Integrating sustainability into the supply chain.
  • The SCOR model has applicability in sustainable chain management.

Objective 2: Improve Customer Service

(Definition) Customer Service is the ability of a company to address the needs, inquiries and requests from customers.

OR

(Definition) Customer Service is a measure of the delivery of a product to the customer at the time specified.

Fundamental attributes of basic customer service:

  1. Availability is the ability to have the product when it is wanted by a customer.
  2. Operational Performance deals with the time needed to deliver a customer order.
  3. Customer Satisfaction takes into account customer perception, expectations and opinions based on the customer’s experience and knowledge.

Objective 3: Effectively Use System Wide Resources

  • Resources can be in form of employees, raw materials, equipment, etc.
  • Being effective means that supply chain gets the right product and the right amount to the right customer at the right time.

Objective 4: Efficiently Use System Wide Resources

(Definition) Efficiency is a measurement (usually expressed in percentage) of the actual output compared to the standard output expected. It measures how well something is performing relative to existing standards. Efficiency is inward-focused, in that a company looks internally to determine how a supply chain process can be done less expensively, in less time, and with fewer resources.

Efficiency is one of the measures of capacity in a supply chain environment.

Capacity is all about what can be accomplished by employing all the resources in the supply chain network that includes work centers, storage sites, people and equipment.

(Definition) Capacity has few meanings:

  1. The ability of a system to perform its expected function.
  2. The ability of a worker, machine, work center, plant or organization to produce output per time period.
  3. Required mental ability to enter into a contract.

When a supply chain is operating at high efficiency, it means that its utilizing its resources well to produce the level of output in a production plan within the time allowed.

Objective 5: Leverage Partner Strengths

(Definition) A Partnership in a supply chain is a relationship based on trust, shared risk and rewards aimed towards achieving a competitive advantage.

Well-chosen partners will benefit from a high level of mutual trust, respect of each other’s expertise and contributions and shared vision.

A strong and useful partnership will yield a combination of the following as it performs the functions needed by your organization:

  • Adding value to products, such as shorter time to market.
  • Improving market access, such as providing new market channels.
  • Building financial strength through increased income and shared costs.
  • Adding technological strength if there is internal expertise in use of more advanced software and systems.
  • Strengthening operations by lowering systems costs and cycle times.
  • Enhancing strategic growth to break through barriers to new industry and opportunities.
  • Improving organizational skills that facilitate shared learning and insights of both firms’ management and employees.

Supply chain management technologies and practices can help a company select the appropriate sales partners and support them by:

  • Providing timely and accurate information.
  • Helping them deal successfully with channel customers.
  • Aiding them in leveraging their strengths such as innovation, speed, high quality, low costs, etc.

Stages of Supply Chain Management Evolution

Stage 1: Multiple Dysfunction

The nucleus firm lacks clear internal definition and goals and has no external links other than transactional ones.

In the dysfunctional organization, this is what tends to happen:

  • Internal activities tend to be undertaken impulsively rather than according to plan.
  • Management provides only the most general sense of mission, communicated perhaps by pep talks at the best or threats at worst.
  • Forecasting tends to be mostly guess work, often inflated by unwarranted marketing optimism.
  • Products are designated without advice from other areas that could provide guidance, such as manufacturing or marketing.
  • Warehouses are cited near each market, stocked with an overabundance of inventory in anticipation of big sale, and staffed with manual laborers who have little training.
  • Trucks and trains are unloaded when they arrive and loaded when an order comes in, without much advance warning in either case.
  • There may be flaws of payments (but collection may be poorly executed) as well as materials but the exchange of information tends to be tied mostly to giving orders internally, accepting bids and sending invoices.
  • Material requirements planning (MRP) takes place at basic level, involving a Bill of Material (BOM), a master schedule, and current on-hand/on-order data.

Stage 2: Semi Functional Enterprise

The nucleus firm undertakes initiatives to improve effectiveness, efficiency, and quality within functional areas.

There is little or no overlap in decision making from one department to another.

An individual firm undertakes initiatives to improve specific functional areas. For example:

  • The largely manual operations in warehouses may be augmented by the addition of basic materials – handling equipment.
  • Inventory management may find ways to reduce levels of inventory within the firm’s own facilities.
  • Procurement might take advantage of new purchasing strategic to obtain supplies and services at the lowest possible prices.
  • The traffic department may reduce transportation costs by strategic selection of carriers and routes.
  • Some departments may institute more effective hard skills training and adopt strategies for making jobs more challenging.
  • Marketing may develop more reliable research and forecasting techniques.
  • Manufacturing resource planning (MRP II) software may be in peace and the company may have cross-functional integration of planning processes.
  • When the nucleus firm concentrates only on improvements within its separate departments, it may find its efforts wasted through lack of communication.

Stage 3: Integrated Enterprise

This firm breaks down silo walls and brings functional areas together in process such as sales and operations planning (S&OP) with a focus on companywide processes rather than individual functions.

Historically, this shift in supply chain strategy is associated with the late 1980s and early 1990s, the same time when personal computers were becoming more powerful, reliable and affordable.

There are a few key milestones that mark this phase:

  • Introduction of manufacturing and enterprise-wide software.
  • Increased cross-functional communication and training.
  • Centrally located and easily accessible database and files.
  • Periodic sales and operations planning meetings attended by representatives for all departments involved.

This stage is marked differently from the previous one because of the following:

  • The focus on business processes is facilitated with the increased availability of e-mail, file transfers, powerful databases, and enterprise wide software applications. Cross functional cooperation becomes must faster and easier and takes place almost instantaneously across functions, time zones, and international boundaries.
  • A variety of initiatives reduce the time it takes to get an order from a supplier, create the product, and deliver it to the customer, including MRP II and ERP:
    • MRP has been upgraded to MRP II, a breakthrough development that allows cross-functional communication between manufacturing a finance.
    • Enterprise Resource Planning (ERP) extends that process by adding modules for each functional area until the most advanced version tie together entire companies. Further advances have reached through the corporate wall to tie supply chain partners together.
  • Product design in some firms is now a team effort in which production engineers and other stake holders, such as marketing and purchasing, collaborate with design engineers to “design for marketing”, “design for logistics” or “design for the environment”. This approach results in products that are on target for customer desires and are ready to be manufactured without making costly modifications in processes, equipment or staffing.
  • There are improvements in customer service due to absolute segmentation of markets and more efficient replenishment policies suited to each segment.
  • Inventory is treated more strategically as just-in-time procedures, more accurate demand planning and improved logistics work together to make fulfillment more efficient and reliable.
  • Warehousing and transportation decisions are carried out in tandem to achieve the optimal balance of cost-effectiveness and customer service.
  • Warehouse management benefits from more advanced equipment and automation.
  • At this point the nucleus firm may begin to take a step toward integration with the external members of the chain by contracting with a logistics supplier, such as UPS, to “insource” by using its expertise to help optimize logistics decision.

Stage 4: Extended Enterprise

The firm integrates its internal network with the internal networks of selected supply chain partners to improve efficiency, product/service quality or both.

The starting point is generally one inside/outside partnership that points the way toward the completely networked enterprise.

What is unique to this stage is the following:

  • There is an initial exploratory collaboration between a channel master and one or several partners in chain often a manufacturer and are component supplier or a retailer and one supplier of finished goods.
  • With MRP II merged with other functional applications and transformed into ERP, enterprise wide planning software is able to link the entire internal supply chain together on one platform.
  • The networked enterprise is built on intranets, extranets, peer-to-peer networks, the internet, or a combination of those platforms. Partners begin to synchronize their ERP systems across corporate boundaries so they can share data as necessary for their efficient collaboration.
  • Cross-functional approaches are implemented with certain processes such as CPFR (Collaborative Planning, Forecasting and Replenishment). Stage 4 companies institute periodic sales and operations planning meetings in which representatives of sales and marketing, production (or operations), and other functions meet to coordinate demand planning and production scheduling.
  • In stage 4, there are advances in e-commerce such as interactive sites where customers can order products and services, track their shipment and communicate with customer service immediately upon their arrival.

Vertical Vs Horizontal Integration

Shift from Vertical to Lateral (Horizontal) Supply Chain Management

  • Vertical integration, or vertical supply chain management, refers to the practice of bringing the supply chain inside one organization.
  • It is difficult for one corporation to garner the expertise needed to excel in all elements of the supply chain, and it increases their risk, so corporation around the globe have turned instead to outsourcing those aspects of their business in which they judge themselves to be least effective.
  • Lateral supply chain management has replaced vertical integration as the favored approach to managing the myriad activities in the supply chain.
  • We usually assume that the customer-producer-supplier illustrations refer to three separate companies. This is, of course, not necessarily the case; the entities could be departments within one company.

Vertical Integration

  • By bringing many supply chain activities in-house and putting them under corporate management, vertical integration solves the problem of who will design, plan, execute, monitor and control supply chain activities.
  • A vertically integrated enterprise may grow from an entrepreneurial base by adding departments and layers of management to accommodate expansion, or it may be built through mergers and acquisitions.

  • The primary benefit of vertical integration is control.
  • A department or wholly owned subsidiary with no independent presence in the market place can’t deal with competitors to sell its components or services at a higher price.
  • Its operations are completely visible to the parent company (at least in theory) and can be synchronized with other company functions by directives from the top.
  • Its schedules, work force policies, locations, amounts produced, all aspects of its business are controlled by the overarching management.

Lateral Integration

  • When corporate ownership turns instead to outsourcing various activities, it loses control of these aspects of the supply chain and will deal separately with members of the chain as supplies or customers.
  • Each of them will focus on their core competencies such as extraction or production and deal with each other through discrete transactions or by longer-term contracts.

**Some Japanese companies favor an intermediate form of integration called KEIRETSU.

(Definition) KEIRETSU is a form of cooperative relationship among companies in Japan where the companies largely remain legally and economically independent, even though they work closely in various ways such as single sourcing and financial backing.

A member of KEIRETSU generally owns a limited amount of stock in other member companies

A KEIRETSU generally forms around a bank and a trading company, but “distribution” (Supply Chain) KEIRETSU alliances have been formed of companies ranging from raw material suppliers to retailers.

  • Rely on lateral supply chain:
    • To achieve economies of scale and scope.
    • To improve business focus and expertise.
    • To leverage communication and production competencies.
  • Despite the benefits of the lateral chain, however, synchronizing the activities of a network of independent firms can be enormously challenging.
    What each firm gains in scale, scope, and focus, it may lose in ability to see and understand the larger supply chain processes or to care about them.

  • Horizontal doesn’t quiet capture the complexity of the global supply network with multiple connections around the world and information shared on networks connected all along the chain.

The SCOR® Model

(Definition) The SCOR® model is a process reference model developed and endorsed by non-profit corporation, the Supply Chain Council (SCC), as the cross-industry standard diagnostic tool for supply chain management.

  • SCOR process model does not apply to all business processes, only to those involved in the supply chain as the chain extends two tiers in both directions from the company at the core.

  • The main focus of the model is on the chain’s management process:
    • Plan
    • Source
    • Make
    • Deliver
    • Return

    These processes, which are not traditional functional areas or departments – exists within the member firms of the chain. All the processes are carried out by the central triad of chain members.

    The members at each end of the chain perform only two processes:

    • The supplier’s supplier handles only delivery and returns.
    • The customer’s customer manages only sourcing and returns.
  • SCOR® Applications:
SCOR (10.0) Apply to following activities: SCOR (10.0) Does not apply to following activities:
All customer interaction from order entry through paid invoice. Sales and marketing (defined as demand generation).
All product transactions (defined as physical materials & services), including equipment, spare parts, bulk product, and software, among others. Research & technology development.
All market interactions from understanding aggregate demand through order fulfillment. Product development.
Some elements of post-delivery customer support (but it does include returns as fundamental process).
  • SCOR does not address the following but assumes that they exist:
    • Training
    • Quality
    • Information Technology
    • Administration (other than SCM administration)
  • The SCOR model assumes that the product has already been designed and tested for production.