Supply Chain Management PDF

Chapter 1 - A supply chain is a group of independent organisations connected together through the products and services that jointly or separately add value in order to deliver them to the end consumers. - In 1980s supply chain management mainly focused on purchasing activities and...

Chapter 1 - A supply chain is a group of independent organisations connected together through the products and services that jointly or separately add value in order to deliver them to the end consumers. - In 1980s supply chain management mainly focused on purchasing activities and cost reduction related activities. - Business environment has changed, which includes globalisation, more severe competition, heightened customer expectation, technological impact and geopolitical factors - Competition is moving from organisation vs organisation to supply chain vs supply chain - Organisation survival is no longer solely dependent on its own ability to compete but rather on the ability to cooperate withing the supply chain - Effective SCM relies on a deep understanding of consumer behaviour to ensure responsiveness and efficiency. Supply chain management must be customer-oriented, integrating all participants to align with this focus. **Definition of SCM**: The author defines SCM as a business management approach viewed through the lens of the supply chain. It involves managing business activities while considering the interconnected relationships with external organizations in the supply chain, enhancing overall strategic effectiveness. - Supply chain is formed and can only be formed if there are more than one participating companies - Companies within a supply chain normally do not belong to the same business ownership, and hence there is a legal independence in between - Companies are interconnected on the common commitment to add value to the steam of material flow that run through the supply chain - Material flow, to each company, comes in as the **transformed inputs** and goes as the **value added outputs** **OEM = Original Equipment Manufacturer** **OBM = Original Brand Manufacturer or Focal company** - At the end of a supply chain is the product or service that are created by the supply chain for end consumers - Degree of how well a supply chain can serve their consumer ultimately defines its competitive edge in the market place Suppliers supplier, supplier, OEM, Distribution, Retailer, Consumer **Material flow**: Supply chains have material flows from the raw materials at the beginning of the supply chain to the finished products. It encompasses the journey from the initial supplier of raw materials to the final delivery to the end-consumer. Efficient management of material flow is crucial for maintaining cost-effective and timely production processes, minimizing waste, and ensuring that customer demands are met promptly. **Information flow**: This flow encompasses the exchange of data throughout the supply chain, such as demand forecasts, production schedules, and design updates. Unlike material flow, information flow can move in **both directions---upstream and downstream**---and is often specific to the supply chain's needs. For example, information relevant to a clothing supply chain may not be valuable to a motorbike supply chain **Finance flow**: Finance flow refers to the movement of money within the supply chain, which is essential for its operation. The sole source of finance in a supply chain is the end-consumer, whose spending drives the financial resources. Understanding this single source of finance allows better coordination and alignment across the supply chain. Effective financial management ensures equitable distribution of profits and rewards among participating companies. **Commercial flow**: This flow describes the ownership changes of goods as they move along the supply chain. Ownership transfers occur through buying and selling transactions, from suppliers to retailers to the end-consumer. Commercial flow is present only in supply chains **involving multiple companies**; if all processes are internal to one company, ownership does not change, and no commercial flow exists. **Customer Orientation** - End consumer is not part of supply chain, the supply chain only extend from the very raw material suppliers to the retailer Arguments: 1. All supply chain supplies, every member of the supply chain supplies, consumer DON'T**, it demands**. Fundamental function of a supply chain is to supply. Supply chain treats consumer as the object which it serves. If supply chain contains the consumer within itself, then it will have no object to serve and no recipient to take the supply and will lose its purpose. 2. Supply chain adds value to the product, but the consumer DON'T. Consumer consumes the product and decrease its market value. 3. Supply chain is always specialised and a consumer is always general. Putting consumer as part of a supply chain will not be helpful in understanding the nature of a supply chain. - The end consumer is the most important factor of all as far as its management is concerned - Everything a supply chain does is driven by the needs and wants of the end consumer - Supply chain management are populated with the approaches, activities as well as the strategies that are aiming at delivering products or services to satisfy end consumer - End consumer provides vital information and practical assistance to the decision making in the process of supply chain management - Supply chain management is simply and ultimately the business management, whatever it may be in its specific context, which is perceived and enacted from the relevant supply chain perspective - Supply chain management means take into consideration and engage external organisations in the decision making in order to achieve the ultimate business objectives - Supply chain management is therefore a new perspective towards the old activities - Supply chain management is captured by the three conceptual components: **Supply chain configuration, Supply chain relationship, Supply chain Coordination** - It is about how a supply chain is constructed from all its participating firms - Includes: how big is the supply base for OEM, how wide or narrow is the extent of vertical integration, how much of OEM operations are outsourced, how the downstream distribution channel is designed - The decision on supply chain configuration is strategic and at a higher level - Is about inter firm relationship across the supply chain although the key focus of relationship is often around the OEM and its first tier suppliers and first tier customers - The type of the relationship is determined by the contents of inter organisational exchanges - The decision on supply chain relationship is both strategic and operational - Refers mainly to the intern firm operational cooperation within supply chain - It involves coordination of **continuous material flows from the suppliers to the buyers and through to the end consumer** in a preferably JIT manner - The decision on the supply chain coordination **tend to be operational** - Production capacity, forecasting, manufacturing, scheduling, even customer services will all constitute the main contents of the coordination activities in the supply chain - All three key supply chain management focuses have one thing in common. They all deal with the external organisation in the same supply chain, which makes concept more supply chain rather than organisationally internal **Development trends** - SC & SCM never stand still and the subject has been continuously evolving - This development is partly propelled by the changes of overall business environment and heightened competitions in the global market place 1. **From Functional to Process Perspective:** - Shift from focusing on isolated business functions to understanding and managing them as integrated processes. - Recognizing that a process-based approach, rather than a siloed functional view, better addresses supply chain challenges. 2. **From Operational to Strategic Viewpoint:** - Early SCM efforts aimed at cost reduction, such as improving logistics and purchasing. 3. **From Single Enterprise to Extended Enterprise:** - The traditional focus on individual enterprise management is being replaced by supply chain management. - Competition now occurs between entire supply chains rather than individual companies, requiring a broader, collaborative management approach. 4. **From Transactional to Relationship-Based Engagement:** - Previously, business relationships were mainly transactional, focused on cost and price negotiations. - The new approach emphasizes building long-term, strategic relationships that include knowledge sharing, incentives, and collaboration beyond simple transactions. 5. **From Local to Global Expansion:** - Supply chains have evolved from local and regional networks to global connections. - Companies are increasingly operating on a global scale, leveraging advantages such as lower labour costs and first-mover benefits in international markets. - Trends are not always positive and encouraging - Now we have enough risk to support that supply chain risks are now continuously growing to the level that is higher than ever before and supply chain integration still remains as the major management shortfall across all industrial sectors **Chapter 2** - **Global markets have converged** over past three decades, driven by the widespread influence of mass media and the economic rise of emerging powers - Convergence has enabled companies to market and source products worldwide, benefiting from expanded opportunities and resources - Companies aim to maximize profit by accessing growth markets and lowering supply chain costs through cheaper resources - Collaboration in technology and market presence across borders strengthens their competitive position - Global supply chains are more efficient than local ones, leading to higher economic productivity - World becoming more interconnected, 21^st^ century is predicted to be the global century characterized by shifting economic and political powers - Diverse industries from emerging economies will increasingly shape global supply chains, creating a dynamic and complex landscape that emphasizes international collaboration and efficiency 1. **Borderless:** Modern supply chains are no longer restricted by national borders, allowing global sourcing, marketing and manufacturing. This borderless nature extends beyond physical goods to include brands, technologies, and financial networks. 2. **Cyber connected:** The global business environment has become a highly interconnected network driven by cyberspace. Advanced technology enables spontaneous and continuous data exchange, making global supply chains efficient and responsive. The reliance of digital connections is crucial for managing multinational operations in a seamless, secure, and timely manner 3. **Deregulated:** The removal or reduction of trade barriers worldwide has fostered free trade and open markets. Economic zones like the EU and the North America free trade agreement have promoted a more level playing field for international commerce. 4. **Environmental consciousness:** There is a growing focus on the environmental impact of global supply chains. Sustainability and eco friendly practises are becoming essential, driven by consumer demand and regulatory pressure from governments and organisational like the environmental protection agency 5. **Social responsibility:** Business are increasingly judged by their ethical practises, such as fair trade and corporate social responsibility. Consumers now factor in a company's social impact when making purchasing decisions, prioritizing brands that are committed to ethical standards and social accountability **Strategic Challenges in global supply chains** 1. **Market dimension** - **Demand volatility:** Global market fluctuations make it difficult for supply chains to maintain responsiveness. Changes in consumer demand impact supply chain elements like asset configuration, capacity synchronization, and lead time management, often leading to the **Bullwhip effect.** This couses inefficiencies, higher costs, poor service delivery - **Root causes:** Economic shifts, geopolitical instability, rapid technological advancement, and emerging economies contribute to this unpredictability. The quick pace of innovation and competition from new market players disrupt existing supply chains, making it hard for them to adapt swiftly - **Market sentiment:** Emerging economies introduce products that challenge established players, creating significant price and quality competition, leading to drastic market shifts - Over the past decade, customer, loyalty has significantly diminished. The rise of online and mobile marketing channels has made brand-switching easier for consumers. - **Commoditization**: Many products have become more similar, and customers, both B2B and end consumers, are now more price-sensitive. This increased transparency in the market encourages price based competition - **Forecasting challenges**: Lack of advanced forecasting and planning tools means companies often struggle to anticipate and respond to sudden changes in consumer demand, exacerbating supply chain inefficiencies 2. **Technology dimension** - **Development lead time challenge:** - **Disruptive technology:** - **Challenges in the supply chain network:** 3. **Resource dimension** - **Resourced based Perspective:** Global supply chain strategies are driven by the need to discover and utilize new resources worldwide, while also optimizing existing resources for better economic outcomes Key strategic challenges arise from efficiently deploying critical resources such as financial capital, workforce, intellectual property, natural resources, infrastructure, and other asset -- related resources - **Efficient use of resources:** Global supply chains often extend their sourcing operations to international markets to secure scarce resources at lower costs. Offshoring and outsourcing are popular strategies aimed at reducing operational expenses and enhancing competitiveness. By sourcing labour, materials, and energy from overseas companies can achieve significant cost savings. 4. **Time dimension** - **Importance of time:** Time is crucial factor, even small differences in responsiveness can significantly impact a company's competitiveness Companies measure their efficiency based on how quickly materials move through the supply chain, as delays can increase costs and reduce responsiveness - **Agility and responsiveness:** Achieving agility is one of the main focuses of SCM, which is the ability to respond to sudden changes in market. Investments are needed to enhance production capacity, facilities, or inventory levels but these come with higher costs - **Operational time challenges:** Lead-time, the time taken from customer order to product delivery, is a major issue. Achieving short lead-times globally is difficult, especially when dealing with dispersed customer bases and production sites - **Interrelation of challenges:** Time-related challenges are interconnected with other aspects of supply chain management. Comprehensive strategy is required to understand these interrelations and plan for long-term sustainability. **How global supply chains responded** - There is not a one size-fits-all solution to overcome global challenges 1. **Collaboration:** Instead of competing, many supply chains have embraced collaboration. This involves working together to achieve shared goals, which could include technological advancements, product development, logistic efficiency, or market expansion Collaboration varies by project, and partners are called collaborative partners or partners. **Reasons:** 1. **Sharing Resources:** Companies share complementary resources, such as equipment, facilities, or knowledge to reduce duplication of costs 2. **Achieving synergy:** Partnering firms often create greater value together then they could separately. 3. **Risk sharing:** Collaboration distributes risks between partners. By sharing investments and marketing strategies, companies can collectively bear uncertainties, reducing impact on any one party 4. **Innovation:** Collaboration fosters innovation, especially in technology and research 2. **Supply chain integration** - **Nature of supply chains:** Supply chains are networks of multiple firms working together, often across the globe. These firms can be independent, and relationships between them can be strained or competitive - **Definition of Integration** Supply chain integration involves close coordination of operations and processes among members firms under a shared vision and value system. It contains: - High visibility - Low inventory levels - High capacity utilisation - Short lead times - High-quality output Effective integration is crucial to manage global challenges and optimize supply chain performance - Degrees of Integration: No supply chain is 100% or 0% intergraded. Integration varies based on how much a focal company integrates with its suppliers and customers Arc of integration concept: Introduced by Frohlich and Westbrook, the arc illustrates varying degrees of integration: 1. **Narrow Arc**: Limits Integration, Involving fewer supply chain elements 2. **Broad Arc**: Extensive integration, encompassing a wide range of suppliers and customers The extent of integration is particularly critical when dealing with global supply chains that span across multiple regions and organisations **Divergent product portfolio** 1. **Concept and rationale:** - Importance of diversification - Divergent product portfolio becomes especially relevant in a global market characterized by volatility and diversity 2. **Advantages of diversification:** - A divergent product portfolio makes the supply chain more adaptable to varying demands across global markets - By offering a wide range of products or business sectors, companies can better meet the diverse needs of consumers 3. **Risk mitigation:** - Diversification reduces the impact of market risks associated with global volatility. - If one product or market sector underperforms, other successful products can stabilize the supply chain - Over time, market fluctuations can balance out, making the divergent portfolio a valuable risk management tool **Develop the Blue ocean strategy** 1. **Concept:** - It suggests creating uncontested market space instead of competing head on in overcrowded markets - By focusing on innovation and creating new demand, companies can make competition irrelevant 2. **Effectiveness** Companies that adopt this strategy can overcome challenges more efficiently and achieve sustainable growth by innovating rather than competing directly. The idea is to find new market spaces that are easier to capture if approached creatively **Pursuing world-class excellence** 1. **Definition:** Achieving long-term success in the global market requires world-class excellence, which means being outstanding in multiple performance areas. 2. **Four dimensions of excellence**: - **Operational excellence**: Supply chains must optimize productivity, efficiency, cost-effectiveness, quality, and customer service to deliver high value consistently. - **Strategic Fit**: Alignment between internal capabilities and the strategic goals of the company, ensuring that the supply chain supports the organization's long-term objectives. - **Adaptability**: World-class supply chains must be flexible and able to respond to changes in the business environment, ensuring resilience and long-term success. - **Unique value:** Creating and implementing unique, effective practices that yield positive market results. **Key Insight**: The essence of world-class excellence lies in executing common tasks in an extraordinary way, distinguishing leaders from the rest. Current trends in global SCM 1. **Rising supply chain volatility and market uncertainty** Demand volatility is a major concern for global supply chain executives, with over 74% identifying poor forecasting and increasing volatility as significant challenges. Many companies lack strategies to manage this volatility effectively, risking the \"bullwhip effect,\" where small changes in consumer demand lead to larger disruptions upstream. The growth of cyber markets and mobile media has increased market visibility, making it easier for customers to switch to competitors offering lower prices or better value. To address this, companies are improving visibility across their supply chains and focusing on forecasting accuracy and flexible capacity. On the downstream side, companies are deepening collaboration with key customers to respond to demand shifts proactively. 2. **Market growth relies on global customers and supplier networks** There is a strong trend towards expanding relationships with international customers and suppliers. Over 85% of companies anticipate growing complexity in their supply chains due to globalization, necessitating higher product variety and regional customization. On the supply side, dynamic supplier networks are becoming essential. Nearly 30% of companies expect to reduce in-house manufacturing and rely more on outsourcing and offshoring. 3. **Cost optimized supply chain configuration** - **Outsourcing and cost control:** These improvements are expected to come from reducing end-to-end supply chain costs rather than increasing price. Globalizing supply chain operations and outsourcing functions are crucial strategies for cost control. Outsourcing is increasingly common in various industries as companies seek cost advantages in emerging markets and improve their supply chain flexibility. Key areas for outsourcing include product development, supply chain planning, and shared services. - **Hidden costs and management challenges:** Despite the focus on cost reduction, globalization has not significantly lowered process and management expenses. Hidden costs may increase as supply chains become more global and complex. Leading companies are proactively addressing these hidden costs by adopting new methods like *Total Supply Chain Cost Engineering*. This comprehensive approach calculates and manages total supply chain costs across all functions and interfaces, from sourcing and manufacturing to logistics and transportation. 4. **Risk management involves end to end supply chain** - **Growing importance of risk management** Managing risk has become a critical challenge in global supply chains. New demands from customers have intensified this need, especially as cost pressures force customers to push risks, such as inventory holding, upstream to suppliers. This approach doesn't eliminate risk but shifts it within the supply chain. Effective risk mitigation requires comprehensive end-to-end strategies, such as advanced inventory management, joint production planning, and better resource allocation. - **End to end risk mitigation strategies** Leading companies manage risk across all nodes of the supply chain. By maintaining lean operations, they carefully control demand planning, only ordering what is needed to fulfill confirmed orders. 5. **More emphasis on supply chain integration and empowerment** - **Challenges with integration** Despite the widespread acknowledgment of the benefits of integrated supply chains, many companies struggle to implement effective integration. Nearly one-fourth of survey participants highlight the failure of organizations to engage in coordinated planning to address external challenges, demonstrating that true integration is still more of a goal than a reality. - **Empowering supply chain functions** Successful companies are empowering their supply chain managers to lead transformative efforts, ensuring optimal decision-making for all supply chain functions. These companies have integrated supply chain operations under unified leadership, promoting end-to-end optimization and seamless collaboration with upstream and downstream partners. Chapter 3 **Supply chain design and planning** 1. **Importance of design and planning** Effective supply chain management requires comprehensive planning and design of the overall structure and value-adding processes. Managers need to consider factors like vertical integration, outsourcing, location, capacity planning, and strategies to minimize costs and maximize value. 2. **Supply chain configuration** Configuration determines how supply chain member are connected to deliver products or services. It includes decision on the number of suppliers, geographic grouping, and the choice of distribution channels Companies can configure supply chains differently depending on industry needs, market environment, and product life cycles. 3. **Historical evolution of multinational supply chains** **1930s-1940s**: European multinationals like Unilever and Philips used a "loose" configuration, allowing national subsidiaries significant autonomy, driven by the slow pace of international transport and communication. **1950s-1960s**: American multinationals like GM and Coca-Cola adopted a more centralized approach. Subsidiaries relied heavily on the U.S. for resources, taking advantage of America\'s economic dominance and technological advancements. **1970s-1980s**: Japanese companies like Toyota and Sony established global strategies cantered on their domestic bases. By setting up overseas production facilities, they achieved large-scale efficiencies and global experience advantages. 4. **Network configurations** - Stable network: features tiered, long term relationship with suppliers and distributors, offering high control over operations and quality standards. It may lack flexibility - Dynamic network: Utilize short-term relationship to enhance flexibility and adapt quickly to changes in demand and technology. It carries higher operational risk and potential quality control issues. **Choosing the right configuration** The choice between a stable and dynamic network depends on a company\'s strategic goals and market requirements. Stable networks are suited for control and consistency, while dynamic networks excel in adaptability and innovation. **Extent of Vertical Integration** 1. **Definition:** Vertical integration refers to the ownership of multiple stages of the production or supply chain. It differs from general supply chain integration and focuses on how much of the supply chain an organization directly controls. A company with a **narrow span** of vertical integration relies heavily on external suppliers and customers. In contrast, a company with a wide span owns and controls many supply chain tiers, from raw materials to distribution. 2. **Historical example** Ford exemplified extensive vertical integration by producing most components of the Model T in-house, from steel mills to glass manufacturing. The company even controlled rubber plantations for tyre production. This strategy allowed Ford to claim near-complete self-sufficiency, with minimal dependence on external suppliers. **Purpose and Challenges**: Ford's strategy aimed at market control and profit capture. While initially successful, the rigid system struggled with flexibility and adapting to consumer preferences, like offering only one model in one colour, which eventually limited Ford\'s competitiveness. 3. General Motors strategy: More flexible with a lower extent of vertical integration. GM relied on independent suppliers and introduced a **full line products strategy**, offering a diverse range of car models and colours tailored to different customer need 4. **Strategic implications** The level of vertical integration significantly influences a company's operations, performance, and adaptability. The optimal approach depends on the industry context. The decision on vertical integration must align with the company's strategy, market conditions, and product lifecycle requirements **Outsourcing and offshoring** 1. **Concept of Vertical Disintegration** The opposite of vertical integration is vertical disintegration, where a company outsources a significant portion of its operations to external suppliers. This is a strategic decision aimed at maximizing value and minimizing costs across the supply chain. Outsourcing, often called the \"make-or-buy\" decision, involves contracting out strategically important activities, such as design, manufacturing, or IT services, to external suppliers. The primary goal is to reduce costs while enhancing value creation. 2. **Definition and Clarification** Outsourcing involves a detailed process, including identifying potential suppliers, negotiating contracts, and continuously reviewing outsourced operations. 3. **Benefits of outsourcing** Companies outsource to focus on competencies, gain a competitive edge, increase flexibility, improve responsiveness, and optimize their return on investment by reducing fixed assets Examples: **Dell**: Outsourced manufacturing to Taiwan while focusing on design and downstream services. **Benetton Group**: Outsourced 80% of manufacturing to independent small manufacturers to lower costs and manage demand fluctuations. 4. **Vertical Integration Perspective:** Outsourcing reduces a company's vertical integration level, making the supply chain more agile and responsive. The trend of increased outsourcing in manufacturing has led to more flexible and adaptable supply chains, crucial in managing global market volatility 5. **Offshoring** Offshoring Involves relocating company to other countries to benefit from lower costs and local resources. It differs from outsourcing because ownership may remain with the original company. Offshoring is about leveraging geographical advantages without necessarily changing the control of operations 6. **Types of Outsourcing** - **Business process outsourcing:** Marketing/call centers Research& Development Engineering Human resources Knowledge process - **Business function outsourcing:** Financial auditing IT services Logistic services - **Facility and Manpower Outsourcing** Capital equipment leasing Hiring external experts 7. **Complexity of Implementation:** Outsourcing involves intricate decision-making and management coordination. It requires a structured process, from identifying suppliers to contract negotiation and ongoing review. The strategic complexity means that outsourcing decision should be carefully planes and executed **Outsourcing decision-making steps** 1. **Understand competitive environment:** Assess the market landscape and the level of competition 2. **Clarify strategic objectives:** Define the goals and processes that align with the company's long term vision 3. **Analyse Market need:** Identify current and future demands in the market 4. **Identify internal resources and competencies:** Evaluate the organization's strengths and limitations 5. **Make or buy decision:** Decide whether to produce internally or source externally 6. **Identify strategic suppliers:** find suppliers who can add significant value to the supply chain 7. **Decide on relationships:** Determine the type of partnerships or supplier relationships needed 8. **Performance evaluation:** Continuously review and measure the effectiveness of outsourcing decisions. Tools for Outsourcing decisions: - **Logic decision tool**: A step by step flowchart that guides managers on whether to outsource an activity or keep it in house. Key questions include: Is the activity strategically important? Does the company have specialized knowledge? Is the company's performance superior in this activity? Is there significant potential for performance improvement? - **Matrix decision tool**: A strategic framework that plots outsourcing decisions based on: 1. **Importance to business: Ranging from high to low** 2. **Competitive position: Ranging from strong to weak** 3. **Outcomes:** **High importance, strong position:** continue investing and maintaining capabilities **Medium importance, neutral position:** Form partnerships or consolidate resources **Low Importance, Weak position:** Opt for outsourcing or sell/license the activity These tools help managers visualize options, clarify decision criteria, and make informed outsourcing decisions that align with business strategy **Outsourcing risks** Outsourcing comes with potential risks that companies must consider, including: **Impact on personnel**: outsourcing may negatively affect employee morale and job security **Loss of control**: Critical tasks or components outsourced could compromise the company's competitiveness **Creating future competitors**: Suppliers might become strong future competitors **Supply Disruptions**: Dependence on a single supplier increases the risk of severe disruptions **Location decisions** Selecting the right geographical location for supply chain operations is another crucial strategic choice. Factors to consider include: **Operational objectives**: Choosing a location aims to serve customers better and minimize operational costs **Impact of location**: Relocating supply chain functions can significantly affect labour costs, material costs, currency exposure and regulatory compliance **Business outcomes**: A location change influences overall business performance, supply chain efficiency, and environmental impact. **Complex considerations**: Decisions must account for a wide range of factors, from labour costs to environmental regulations. The chosen location must balance both supply-side needs and demand-side requirements. **Key factors influencing locations decisions** Location decisions are critical for supply chain efficiency and are influenced by both supply-side and demand-side factors: Supply-side factors: - Labor cost and skill - Land costs - Energy costs - Logistic convenience - Community factors Demand-side factors - Demand seasonality - General affordability - Brand image - Customer convenience Total supply chain cost The location design affects the total supply chain cost, which consists of: **Physical cost**: Involves all opearational expenses required to transform raw materials into final product, such as production, labor, logistics, and taxation costs **Market cost**: Represents the potential losses if the supply chain fails to deliver products at the right time, location, and quality, causing unsold inventory or customer dissatisfaction **Weighted scoring method for location decision** A structured approach, known as the weighted scoring method, helps managers evaluate and justify location choices: 1. Step 1: Identify the evaluation criteria that align with strategic business goals. 2. Step 2: Assign weights to each criterion based on their relative importance 3. Step 3: Rate each location against these criteria 4. Step 4: Calculate weighted scores and review the results to make an informed decision Capacity planning **Definition**: Capacity planning involved aligning the production and operational capabilities of each member in the supply chain. It focuses on ensuring that the supply chain can handle demand efficiently without bottlenecks **Capacity bottlenecks**: The overall capacity of a supply chain is only as strong as its weakest link. This means the minimum capacity in any part of the chain dictates the entire system's output. Identifying and resolving bottlenecks is crucial **Capacity formula**: The formula Csc = min(C1,C2,...,Cn) illustrates that the smallest capacity in the supply chain members determines the overall capacity Three levels of capacity planning 1. **Internal capacity planning:** This involves synchronizing the internal operations of an organization. Managers must coordinate activities across departments to prevent inefficiencies and overcapacity. Include: - **Managing safety inventories** - **Using smaller batch sizes** - **Ensuring synchronized material flows** 2. **External capacity coordination:** Companies must align their capacity with other members of the supply chain. This involves close collaboration to manage interdependencies and ensure a smooth flow of operations. Effective external coordination prevents disruptions and inefficiencies 3. **Capacity Responsiveness:** The supply chain needs to adapt to changes in market demand. This requires a flexible approach that synchronizes capacity with customer needs and market conditions. It ensures that the supplain can quickly scale up or down as required **Bullwhip effect** In supply chain management refers to the phenomenon where small fluctuations in customer demand at the retail level become increasingly elevated as they move up the supply chain, impacting distributors, manufacturers, and suppliers. This effect can lead to significant inefficiencies, including excessive inventory, missed production \*schedules, and higher costs. Key characteristics of the bullwhip effect: 1. **Oscillation**: demand, orders, or inventory levels experience an up-and-down movement over time 2. **Amplification**: As the fluctuations travel upstream from retailers to suppliers, the magnitude of the changes grows significantly 3. **Phase lag**: There is a delay between the demand signal at the customer end and the response in the upstream supply chain 1. Enganced information shaing: Use systems like EDI, POS, and we-based IS to share data transparently 2. Reducing batch ordering: Smaller, more frequent orders minimize fluctuations 3. Capacity and production coordination: Better synchronizing production and order fulfullment 4. Safety stock strategies: Appropriate safety stocks help mitigate demand oscillations 5. Inventory optimization: Techniques like JIT, VMI, and QR can reduce excess inventory and improve responsiveness **Implementation**: These solutions require inter-organizational collaboration and effective coordination in planning, inventory, and production to create a stable supply chain. Chapter 6 **Strategic Role of Purchasing** - Purchasing is a critical component of supply chain management. It focuses on sourcing materials and services and connects the supply chain's sourcing side with the delivery end of suppliers. - **Classical Definition**: Purchasing involves obtaining materials/services of the right quality, in the right quantity, from the right source, and delivering them to the right place at the right price. - **Composite Definition**: Purchasing is a comprehensive process managed by a designated organizational unit. This process involves acquiring materials/services of the appropriate quality, quantity, and price while managing supplier relationships. It supports the organization's overall strategy and competitive advantage. **Importance of Purchasing Management** - Purchasing management implements and supports supply chain strategies. It focuses on cost savings, quality improvement, and maintaining strong supplier relationships. - The role of purchasing in delivering cost efficiency and quality is vital, as illustrated through a simplified income statement showing the financial structure of a company. **Example and Profit Analysis** - The income statement shows total sales, costs of purchased services/materials, salaries, overheads, and profit. A scenario is presented where shareholders demand doubling profits. - The challenges include the difficulty of doubling sales in a declining market and impractical strategies like cutting salaries by 25% or eliminating all overhead costs. - The example highlights the complexity of increasing profits through sales and cost management, emphasizing the strategic role purchasing plays in managing expenses effectively. The purchasing function is crucial for boosting company profits, as even a small cost reduction can significantly increase profitability. A flowchart outlines the purchasing process, from requesting quotations to selecting suppliers and delivering goods. Beyond operations, purchasing also involves strategic decisions like make-or-buy, supplier base rationalization, and supplier development to optimize costs and improve supplier relationships. **6.2 Purchasing Portfolio and Kraljic Model** The **Kraljic Purchasing Portfolio Model** provides a framework for managing purchasing and supplier relationships based on two dimensions: **supply risk** and the **financial impact** of purchased products. Dr. Peter Kraljic introduced this model in 1983, and it has since become a widely used strategy in supply chain management. **The Four Categories of the Kraljic Model:** 1. **Leverage Products**: - **Description**: These products have a significant impact on the company's financial results but come with low supply risk. Examples include commonly available materials like wood for furniture production. - **Strategy**: Competitive bidding is recommended because alternative suppliers are available, making it easy to negotiate favorable terms. 2. **Routine Products**: - **Description**: These are low-cost items that have minimal financial impact and are widely available in the market. Examples include standard components like springs and nuts. - **Strategy**: System contracting and e-commerce solutions are used to handle the complexity and large variety of these products efficiently. Bidding is unnecessary due to the low cost and high availability. 3. **Strategic Products**: - **Description**: These items have a high financial impact and come with high supply risk. They often involve advanced technology and require custom manufacturing. Examples include engines for vehicles. - **Strategy**: Performance-based partnerships are necessary, involving close collaboration with suppliers to ensure the development and supply of these crucial components. 4. **Bottleneck Products**: - **Description**: These components may have a moderate financial impact but come with high supply risk. They are difficult to source and often have few available suppliers. An example is precious metals required for environmental compliance in automobiles. - **Strategy**: Securing the current supply while searching for alternative solutions is critical. Companies may need to explore new designs or materials to reduce dependency on scarce resources. **Key Takeaways:** - The Kraljic Model emphasizes that there is no single best purchasing strategy for all situations. Instead, strategies should be tailored based on the product category and associated risks. - The model highlights the importance of understanding supply risks and financial impacts to make informed purchasing decisions that align with the company's strategic goals. Supplier selection is a critical purchasing task, especially for strategic and bottleneck components, as it directly impacts supply chain competitiveness. The selection process includes: - Setting criteria - Initial contact - Formal evaluation - Price quotation - Financial assessment - Reference checks - Supplier visits - Audits or surveys - Initial testing This process ensures high-quality supplier choices but is adaptable rather than universally fixed Purchasing is continuously evolving in both theory and practice. Over recent decades, an evolution pattern in purchasing has emerged, which can be viewed from two perspectives: operational focus and characteristic changes. The operational focus divides purchasing into four stages. The first stage, called \"Product-Centered Purchasing,\" focuses on buying tangible products, emphasizing the \"five rights\"---the right price, time, quantity, quality, and sources---impacting overall business outcomes **Supplier Selection Criteria and Assessment** Supplier selection is a critical process that involves evaluating and choosing suppliers based on specific criteria to ensure they meet the company's needs. The criteria for assessing a supplier's capability include: - **Quality management policies** and certifications (like ISO 9000) - **Use of advanced techniques** (e.g., Just-In-Time, Electronic Data Interchange) - **Design capabilities**, both in-house and external - **Ability to supply locally or globally** as required - **Consistent performance** in delivery and quality standards - **Flexibility and a willingness to adapt** to changes - **Long-term investment plans** that align with strategic goals **Supplier Selection Tools** Three main methods for supplier selection are described, each with its advantages and limitations: 1. **Categorical Method**: - **Description**: Suppliers are rated on key criteria like quality, delivery, and service using subjective judgments. Ratings are given as good (+), neutral (0), or unsatisfactory (−). - **Limitations**: While simple to use, this method is subjective and can lead to bias, so it is recommended to involve a diverse team to reduce individual biases. 2. **Cost Ratio Method**: - **Description**: This method adjusts supplier costs based on performance data for quality, delivery, and service. Penalties are calculated for each criterion, and these are added to the original price to determine a net adjusted cost. - **Advantages**: More objective than the categorical method, as it uses historical data for calculations. - **Key Insight**: Even if a supplier's quoted price seems lower initially, performance penalties might make another supplier more cost-effective. 3. **Linear-Average Method**: - **Description**: Each criterion is assigned a weight based on its importance, reflecting real-world business priorities. The supplier's scores for each criterion are multiplied by these weights to calculate a total score. - **Benefit**: This method considers the relative importance of different criteria, making it more flexible and realistic. The highest total score indicates the best supplier choice. - **Application**: Weighting can also be applied to other methods to improve their accuracy. **Conclusion** - Each method has strengths and weaknesses, and no single method is perfect. Often, a combination of methods provides a more balanced and accurate supplier selection process. Here's a very general summary of the content on purchasing and its strategic development: **Stages of Purchasing Development** Purchasing has evolved into a more complex and strategic process over time. It has shifted from being a simple, reactive function focused on cost and availability to an integrated and performance-driven approach. The development stages range from basic, transactional operations to advanced strategies that emphasize relationships, processes, and overall business performance. 1. **Process-Centered Purchasing**: Emphasizes improving internal processes to enhance purchasing outcomes. 2. **Relational Purchasing**: Focuses on building strong relationships with suppliers to drive quality and innovation. 3. **Performance-Centered Purchasing**: Aligns purchasing strategies with the company's overall business goals and performance metrics. **Characteristics of Purchasing Stages** - **Passive**: Basic and reactive, focusing on cost and availability. - **Independent**: Utilizes technology but lacks strategic alignment. - **Supportive**: Begins to support the company's competitive strategy. - **Integrative**: Fully integrates with the company's broader strategy and goals. **Future Outlook** Purchasing is becoming more sophisticated, with a stronger emphasis on long-term, relational, and performance-enhancing strategies. It involves deeper knowledge of business objectives, supplier capabilities, and technology, moving towards a holistic, knowledge-based approach. Chapter 7 **7.1 Supply Relationship Defined** - **Supply Relationships**: These refer to the interactions and exchanges between organizations within the supply chain. Relationships can occur on the supplier side (upstream) or the buyer side (downstream) and vary in terms of engagement and collaboration. - **Types of Relationships**: - **Arm\'s Length Relationship**: Minimal interaction, usually focused on price and volume. - **Close, Engaging Relationship**: Involves shared values, joint product development, and coordinated efforts, often leading to better outcomes and efficiency. - **Partnerships**: Defined as cooperative arrangements where businesses work together to achieve shared goals. Partnerships are more dynamic than static, with varying levels of commitment and engagement depending on the situation. **7.2 Close Partnership** - **Traditional vs. Modern Relationships**: Traditionally, supplier-buyer relationships were limited, focused mainly on price, and often adversarial. Modern approaches emphasize collaboration, information sharing, and long-term engagement. - **Toyota\'s Model**: The Japanese automotive industry, led by Toyota, pioneered close partnerships with suppliers, influencing global supply chain practices. Key aspects include: - **Reduced Supplier Base**: Focusing on fewer but more strategic suppliers to foster deeper relationships. - **Long-Term Contracts**: Establishing trust and long-term stability between partners. - **Single Sourcing**: Preferring a single, committed supplier to manage volume and quality effectively. - **Early Involvement**: Engaging suppliers early in product design and development to add value. - **Quality-Driven Focus**: Shifting from price-based purchasing to quality-centric practices, aiming for zero defects. - **Just-In-Time (JIT) Systems**: Synchronizing supplier production with buyer needs for efficient, low-inventory operations. **Overall Trend** Supply relationships are evolving to become more integrated and performance-focused, emphasizing collaboration, mutual trust, and strategic alignment to drive overall business success. **Close Partnership** - **Modern Focus**: Modern supply chains emphasize close, long-term relationships between buyers and suppliers, moving away from the traditional, transactional approach. Trust and commitment are central to these partnerships, as they provide stability and shared benefits. - **Key Success Factors**: Lamming's model outlines nine factors crucial for successful partnerships, including competition nature, sourcing decisions, transparent information exchange, synchronized capacity, just-in-time delivery practices, quality attitudes, and strategic integration. - **Examples**: Successful partnerships often involve small supplier bases, early supplier involvement, and quality-driven purchasing practices, as seen in the Toyota model, which has influenced global supply chain management. **Strategic Alliance** - **Definition**: Strategic alliances are formal or informal partnerships between companies to achieve common goals. These alliances can be: - **Horizontal**: Between companies at the same supply chain level. - **Vertical**: Between companies at different supply chain levels. - **Lateral**: Between companies and service providers, often crossing supply chains. - **Benefits**: Companies form alliances to share resources, minimize risks, achieve economies of scale, collaborate on development, and create value through synergies. Alliances are flexible relationships that require careful planning and ongoing adjustment. - **Challenges**: While alliances can be beneficial, they often need careful management and may end if they do not meet expectations. **Relationship Dilemmas** 1. **Dilemma 1: Cooperation vs. Non-Cooperation** - **Explanation**: Illustrated by the Prisoner's Dilemma, this scenario highlights the challenge of trust between partners. While cooperation leads to mutual benefits, fear of betrayal may push partners to act selfishly, undermining the relationship. 2. **Dilemma 2: Positive Gains vs. Constraints** - **Explanation**: High-involvement relationships offer trust and synergy but can also limit a company's ability to adapt or pursue new opportunities. Breaking such relationships may feel like betrayal, creating a tension between stability and flexibility. 3. **Dilemma 3: Cost vs. Benefit of Close Partnerships** - **Explanation**: There is a balance between the investment (time, money, and resources) needed to maintain a close relationship and the benefits gained. If a partnership becomes too close, the costs may outweigh the benefits. Companies must find the optimal level of engagement to maximize efficiency without incurring excessive costs. **Key Insights** - Effective partnerships require a strategic balance of commitment, shared goals, and ongoing evaluation. - Companies must carefully manage the depth of their relationships to maintain flexibility while maximizing the benefits of collaboration. **Supply Chain Integration** - **Definition**: Supply chain integration is the process of aligning and coordinating the activities of independent firms---such as suppliers, manufacturers, distributors, and retailers---so they function as a single, cohesive unit. The goal is to maximize efficiency and convert competitive advantages into profitability. - **Key Elements**: An integrated supply chain ensures that order fulfillment is aligned with actual consumer demand, and suppliers synchronize their production with the needs of the supply chain to deliver products efficiently and at the right cost. - **Example**: Companies like Wal-Mart use integrated systems, such as sharing sales and inventory data with suppliers, to maintain product availability and minimize inventory costs. **Framework for Integration** The framework for supply chain integration includes managing various processes, such as: 1. **Customer Relationship Management** 2. **Customer Service Management** 3. **Demand Management** 4. **Order Fulfillment** 5. **Manufacturing Flow Management** 6. **Supplier Relationship Management** 7. **Product Development and Commercialization** 8. **Returns Management** **Challenges and Importance of Coordination** - **Challenges**: Poor coordination among supply chain members can lead to issues like higher inventory costs, long delivery times, transportation inefficiencies, and lower service quality. - **Importance**: Effective coordination ensures that the supply chain is flexible and can adapt to changes in the market. Managing interdependent activities and ensuring smooth communication are crucial for maintaining performance and minimizing excess inventory or unmet demand.