Supply-Chain Management Presented by Renaldo de Jager 11-1
Supply-Chain Management The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer 11-2
The Supply Chain s Strategic Importance Supply chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and final products, and deliver them through a distribution system Competition is no longer between companies; it is between supply chains 11-3
Supply Chain Management Important activities include determining 1. Transportation vendors 2. Credit and cash transfers 3. Suppliers 4. Distributors 5. Accounts payable and receivable 6. Warehousing and inventory 7. Order fulfillment 8. Sharing customer, forecasting, and production information 11-4
How Supply Chain Decisions Impact Strategy Low-Cost Strategy Response Strategy Differentiation Strategy Supplier s goal Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell) Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers) Share market research; jointly develop products and options (e.g., Benetton) Primary selection criteria Select primarily for cost Select primarily for capacity, speed, and flexibility Select primarily for product development skills Table 11.1 11-5
How Supply Chain Decisions Impact Strategy Low-Cost Strategy Response Strategy Differentiation Strategy Process characteristics Maintain high average utilization Invest in excess capacity and flexible processes Modular processes that lend themselves to mass customization Inventory characteristics Minimize inventory throughout the chain to hold down cost Develop responsive system with buffer stocks positioned to ensure supply Minimize inventory in the chain to avoid obsolescence Table 11.1 11-6
How Supply Chain Decisions Impact Strategy Low-Cost Strategy Response Strategy Differentiation Strategy Lead-time characteristics Shorten lead time as long as it does not increase costs Invest aggressively to reduce production lead time Invest aggressively to reduce development lead time Productdesign characteristics Maximize performance and minimize costs Use product designs that lead to low setup time and rapid production ramp-up Use modular design to postpone product differentiation as long as possible Table 11.1 11-7
Supply Chain Risk More reliance on supply chains means more risk Fewer suppliers increase dependence Compounded by globalization and logistical complexity Vendor reliability and quality risks Political and currency risks 11-8
Supply Chain Risk Mitigate and react to disruptions in 1. Processes 2. Controls 3. Environment 11-9
Supply Chain Risk Reducing risk in supply chains Process risk at McDonald s Process risk at Ford Controls at Darden Restaurants Control risk at Boeing Environmental risk at Hard Rock Café Environmental risk at Toyota 11-10
Ethics and Sustainability Personal ethics Institute for Supply Management Principles and Standards Ethics within the supply chain Ethical behavior regarding the environment 11-11
Principles and Standards for Ethical Supply Management Conduct LOYALTY TO YOUR ORGANIZATION JUSTICE TO THOSE WITH WHOM YOU DEAL FAITH IN YOUR PROFESSION Table 11.2 11-12
Supply Chain Economics Supply Chain Costs as a Percent of Sales Industry % Purchased All industry 52 Automobile 67 Food 60 Lumber 61 Paper 55 Petroleum 79 Transportation 62 Table 11.3 11-13
Make-or-Buy Decisions Choice between internal production and external sources 11-14
Outsourcing Transfers traditional internal activities and resources of a firm to outside vendors Utilizes the efficiency that comes with specialization Firms outsource information technology, accounting, legal, logistics, and production 11-15
Supply Chain Strategies Negotiating with many suppliers Long-term partnering with few suppliers Vertical integration Joint ventures Keiretsu Virtual companies that use suppliers on an as needed basis 11-16
Many Suppliers Commonly used for commodity products Purchasing is typically based on price Suppliers compete with one another Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery 11-17
Few Suppliers Buyer forms longer term relationships with fewer suppliers Create value through economies of scale and learning curve improvements Suppliers more willing to participate in JIT programs and contribute design and technological expertise Cost of changing suppliers is huge 11-18
Vertical Integration Vertical Integration Raw material (suppliers) Examples of Vertical Integration Iron ore Silicon Farming Backward integration Steel Current transformation Automobiles Integrated circuits Flour milling Forward integration Distribution systems Circuit boards Finished goods (customers) Dealers Computers Watches Calculators Baked goods Figure 11.2 11-19
Vertical Integration Developing the ability to produce goods or service previously purchased Integration may be forward, towards the customer, or backward, towards suppliers Can improve cost, quality, and inventory but requires capital, managerial skills, and demand Risky in industries with rapid technological change 11-20
Joint Ventures Formal collaboration Enhance skills Secure supply Reduce costs Cooperation without diluting brand or conceding competitive advantage 11-21
Keiretsu Networks A middle ground between few suppliers and vertical integration Supplier becomes part of the company coalition Often provide financial support for suppliers through ownership or loans Members expect long-term relationships and provide technical expertise and stable deliveries May extend through several levels of the supply chain 11-22
Virtual Companies Rely on a variety of supplier relationships to provide services on demand Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands Exceptionally lean performance, low capital investment, flexibility, and speed 11-23
Managing the Supply Chain There are significant management issues in controlling a supply chain involving many independent organizations Mutual agreement on goals Trust Compatible organizational cultures 11-24
Issues in an Integrated Supply Chain Local optimization - focusing on local profit or cost minimization based on limited knowledge Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale Large lots - low unit cost but do not reflect sales Bullwhip effect - stable demand becomes lumpy orders through the supply chain 11-25
Opportunities in an Integrated Supply Chain Accurate pull data Lot size reduction Single stage control of replenishment Vendor managed inventory (VMI) 11-26
Opportunities in an Integrated Supply Chain Collaborative planning, forecasting, and replenishment (CPFR) Blanket orders Standardization 11-27
Opportunities in an Integrated Supply Chain Postponement Drop shipping and special packaging Pass-through facility Channel assembly 11-28
Procurement Fraud Awareness 11-29
What is Procurement Fraud Procurement fraud is a deliberate deception intended to influence any stage of the procure-to-pay lifecycle in order to make a financial gain or cause a loss. It can be perpetrated by contractors or sub-contractors external to the organisation, as well as staff within the organisation. 11-30
Types of procurement fraud Bid rigging/bid splitting Creation of shell companies to facilitate fraudulent payments Collusion between suppliers Purchase order and contract variation orders Unjustified single source awards False invoices for products and services for suppliers who do not exist 11-31
Fraud during the procurement stage Collusion between staff and bidders to award contracts and specify favourable terms and conditions Collusion between bidders to agree that they will not bid competitively for a particular contract Bidders failing to tender in accordance with contract specifications, and then submitting false claims for extra costs under the contract 11-32
Fraud once a contract is awarded Provide inferior goods and services Intentionally override minimum statutory pay and health and safety regulations for financial gain Present false invoices; and/or Provide inflated performance information to attract greater payments than are due 11-33
Our attitudes to procurement fraud Self-deluding: it can never happen to us Refusing to accept: trying to overlook the problem Actively engaged: good control and organised Ask yourself: where does Norwich City Council sit with the above? 11-34
Procurement fraud Red Flags Unusual/unauthorised vendors Large gifts and entertainment expenses Unusual increase in vendor spending Exact amounts Duplicate payments Sequential invoices paid Payments just under authorisation level Employee-vendor address match Multiple invoices paid on same date Slight variation of vendor names 11-35
Global Sourcing Strategies to Achieve Long-Term Success 11-36
A Fundamental Strategic Objective What is Global Sourcing? The business process of identifying, evaluating, negotiating and configuring supply chains across multiple suppliers and geographies Common Reasons for a Global Sourcing Strategy Reducing overall cost structure Availability of new technology and capacity. Often domestic suppliers lack capacity and / or are not making the necessary investments to stay competitive. Establishing alternative sources of supply reduced risk. Access to new designs or specialized intellectual capital. Superior quality. This is typically due to supplier investment in technology and capacity to attract global business. 11-37
Global Sourcing Strategies 1. Develop and implement a plan 2. Take a multi-country approach 3. Move more spend to Low Cost Countries 4. Develop a plan beyond cost savings 5. Create effective Local Procurement Offices 6. Develop a strategy to mitigate risk 11-38
Global Sourcing Plan A typical approach 4. Identify opportunities to leverage and standardize on a global sourcing process 1. Recognize the need for global sourcing and LCC opportuniti es 2. Establish Global Sourcing Steering Committee (include business unit executives) 5. Prioritize opportunitie s (typically by commodity and/or process) 6. Develop LPO and integrate with cross locational / functional commodity teams 3. Understand requirements and strategies of the business units 7. Achieve consensus and communicat e global sourcing strategies 8. Establish aligned approaches and processes Procurement systems Metrics Teams 9. Execute sourcing strategie s as appropria te 10. Measure Performance 11-39
Emerging Markets Multi Country Approach China is the primary Low Cost Country (LCC) But near shore countries need to part of strategy Brazil, Mexico and Argentina are viable markets and closer to US based companies Eastern Europe is growing and EU allows for free trade across borders Africa? 11-40
Emerging Markets Multi Country Approach Weighted preference of top low-cost countries Brazil, 8% Argentina, 9% Mexico, 10% India, 14% Hungary, 10% Poland, 12% Czech Rep, 14% China, 23% China, 19% USA EU Accenture Survey 2004 11-41
Financial Benefits Increasing Procurement Spend Leading Companies expect to double the spend volume in LCC over the next 3 years, from 14% to 28% Increase in overall savings expected to be ~10% Benefits Cost reductions averaging 19% from 14% to 28% Total Cost of Ownership reductions averaging 12% Downside Inventory Investment increase of 3% Increased Transportation / Logistics cost 2% Cost reduction benefit is significant 11-42
Moving Beyond Cost After cost saving companies need to: Ensure new suppliers will last over time Help new suppliers to grow with you Add new suppliers for additional products How? Evaluate total value and total cost of global sourcing decisions Find personnel with worldwide knowledge and skills Increase visibility of available sourcing data Enhance knowledge of available global suppliers Make global sourcing part of overall company operations Establish a local Procurement Office is Leading Practice 11-43
Local Procurement Office To conduct effective Global Sourcing, companies should establish a Local Procurement Office (LPO) Step 1: LPO must have these fundamental capabilities: Supplier Market Research Supplier Identification & Qualification Savings Opportunity Identification Quality Inspections Logistics Planning and Execution Supplier Database Development Integration into the procurement organization 11-44
Local Procurement Office Cont d Capabilities to achieve success Step 2: To materialize the saving opportunities the LPO should have transactional capabilities: Execute bidding processes Establish and provide Logistics Management Procurement transactions Contract and project management Invoicing and Payments 11-45
Local Procurement Office Cont d Capabilities to achieve success Step 3: To maximize and maintain saving, the LPO should have advanced capabilities: Category management Develop supplier market strategies Inventory management Procurement and Sourcing training 11-46
Risk Mitigation Global Sourcing is not without risks Lengthened supply lead times Increased transportation and logistics costs Supplier delivery concerns Supplier quality Intellectual property Lack of supplier responsiveness Language issues 11-47
Risk Mitigation (cont.) Risks are manageable with time and resources LPO s must work closely with global suppliers Establish risk mitigation strategies Dual source with low-cost suppliers (80% to one supplier, 20% to another) Use low-cost supplier and on-shore supplier Ramp-up supply with new low-cost supplier Pick the right products for low-cost suppliers Should have high labor cost component to outweigh risks 11-48
Summary Worldwide competition is increasing Global Sourcing Companies are looking at 31 40% of annual expenditure China is the primary country but near shore is viable Brazil, Mexico, Argentina, Eastern Europe A corporate strategy for Global Sourcing is critical The LPO is critical to creating and maintaining benefits Must be integrated into core procurement organization 11-49
Vendor Selection 11-50
Vendor Selection Vendor evaluation Critical decision Find potential vendors Determine the likelihood of them becoming good suppliers Vendor Development Training Engineering and production help Establish policies and procedures 11-51
Vendor Evaluation Criteria Weights Scores (1-5) Weight x Score Engineering/research/innovation skills.20 5 1.0 Production process capability (flexibility/technical assistance).15 4.6 Distribution/delivery capability.05 4.2 Quality systems and performance.10 2.2 Facilities/location.05 2.1 Financial and managerial strength (stability and cost structure) Information systems capability (eprocurement, ERP) Integrity (environmental compliance/ ethics).15 4.6.10 2.2.20 5 1.0 Total 1.00 3.9 11-52
Vendor Selection Negotiations Cost-Based Price Model - supplier opens books to purchaser Market-Based Price Model - price based on published, auction, or indexed price Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult 11-53
Logistics Management Objective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities Is a frequent candidate for outsourcing Allows competitive advantage to be gained through reduced costs and improved customer service 11-54
Distribution Systems Trucking Moves the vast majority of manufactured goods Chief advantage is flexibility Railroads Capable of carrying large loads Little flexibility though containers and piggybacking have helped with this 11-55
Distribution Systems Airfreight Fast and flexible for light loads May be expensive 11-56
Distribution Systems Waterways Typically used for bulky, lowvalue cargo Used when shipping cost is more important than speed 11-57
Distribution Systems Pipelines Used for transporting oil, gas, and other chemical products 11-58