Strategic Logistics Management 3rd Edition PDF

Website addresses and links were correct at time of publication. The editors Prof. G.H. Nieman: BCom (Acc), MBA (UP), PhD (Vista). Prof. Nieman is professor emeritus and former head of the Department of Business Management at the University of Pretoria. Mr G. de Villiers: PrEng BSc (Civil Eng)...

Website addresses and links were correct at time of publication. The editors Prof. G.H. Nieman: BCom (Acc), MBA (UP), PhD (Vista). Prof. Nieman is professor emeritus and former head of the Department of Business Management at the University of Pretoria. Mr G. de Villiers: PrEng BSc (Civil Eng) (UP), BCom Hons (Transport Econ) (Unisa), BEng Hons (Transport Eng) (UP), MSc (Logistics) (Aston, UK). Mr de Villiers is logistics specialist at ARUP in Johannesburg. He lectures part-time at the University of Pretoria and the University of Lugano in Switzerland. Mr W. Niemann: BCom (Bus Man), BCom Hons (Bus Man), MCom (Supply Chain Management) (UP). Mr Niemann is a lecturer and the programme manager for supply chain management and logistics at the Department of Business Management, University of Pretoria. The contributors Dr R. Bredell: BCom (Stellenbosch), MBA (PU), DCom (RAU). Dr Bredell is the manager of enterprise risk management at PBMR (Pty) Ltd and a part-time lecturer in supply chain risk management at the University of Johannesburg. Ms Y. Ditchfield: BEcon (Gen), BEcon Hons (Transport Economics), MEcon (Transport Economics) (Stellenbosch). Ms Ditchfield is the former academic head at the Centre for Logistics Excellence. She is a part-time lecturer at the University of Johannesburg. Mr P. Durlinger: BEng (Industrial Engineering) (Eindhoven University of Technology). Mr Durlinger is a part-time lecturer at Eindhoven University of Technology in the Netherlands and the general manager and senior consultant of Durlinger Consultancy. Dr C. Eresia-Eke: BEng Hons (Electrical) (University of Port-Harcourt, Nigeria), PgDip, MBA (Rivers State University of Science and Technology, Port-Harcourt, Nigeria), PhD (UKZN). Dr Eresia-Eke is a senior lecturer in business management at the University of Pretoria. Mr J. Grundling: MCom (Industrial Psychology) (Unisa). Mr Grundling is the director of the Centre for Entrepreneurship at the Tshwane University of Technology. Dr P. Linford: BCom (Transport Economics) (Unisa), BCom Hons and MCom (Logistics Management) (RAU), DBA (Supply Chain Management) (NMMU). Dr Linford is the executive officer of Edulog, an organisation creating capacity in manufacturing business logistics and supply chain management, and a part- time lecturer at the University of Pretoria. Mr A. Meyer: BCom (Supply Chain Management), BCom Hons (Bus Man), MPhil (Supply Chain Management). Mr Meyer is a lecturer in supply chain management and logistics in the Department of Business Management, University of Pretoria. Prof. M. Mkansi: BAdmin (UL), MSc (University of Bolton), PhD (University of Bolton), SAP certified. Prof. Mkansi is acting head of the Department of Operations Management at the University of South Africa. Mr K. Mocke: BCom cum laude (Entrepreneurship), BCom Hons (Bus Man), MPhil cum laude (Supply Chain Management) (UP). Mr Mocke is a lecturer in supply chain management and logistics in the Department of Business Management, University of Pretoria. Mr M.P. Poulter: BCom, MSc (UKZN), MCIPS. Mr Poulter is a consultant in purchasing and supply management with Afriled Unité, and the former head of the School of Business at the University of Natal, Pietermaritzburg. Ms L. Steynberg: MA cum laude (Tourism) (Potchefstroom). Ms Steynberg is a lecturer in the Department of Management and Entrepreneurship at the Tshwane University of Technology. Mr T. van der Merwe: BCom Hons (Marketing), MCom (Bus Man) (UP). Mr van der Merwe is the parts and supply chain manager at Hastings Deering (Australia), one of the largest Caterpillar dealers in the world. Dr T.C. Voortman: BTh (Unisa), LicTh cum laude (BTC), LicTh Hons (BTC), MBA (Wales), MA cum laude, DPhil (RAU). Dr Voortman was formerly co-head of the Department of Transport and Supply Management, University of Johannesburg. He is now the director at the National Center of Excellence in Supply Chain & Logistics in Yanbu Al Sinaiyah, Saudi Arabia. Abbreviated contents PART A Introduction to supply chain management Chapter 1 Introduction to supply chain management PART B Supply chain elements Chapter 2 Sourcing Chapter 3 Contract management Chapter 4 Warehousing Chapter 5 Inventory Chapter 6 Operations and manufacturing Chapter 7 Reverse logistics Chapter 8 Transport Chapter 9 Customer service Chapter 10 Logistics information systems PART C Supply chain integration Chapter 11 Logistics channels and network design Chapter 12 Alignment of supply and demand Chapter 13 Management strategies PART D Other strategic considerations Chapter 14 Global logistics Chapter 15 Integrated supply chain risk management Chapter 16 Humanitarian logistics PART E Case studies Contents PART A Introduction to supply chain management Chapter 1 Introduction to supply chain management 1.1 Introduction 1.2 Forces of change 1.3 Defining logistics 1.4 Defining supply chain management 1.4.1 Supply chain management processes 1.5 Third-party logistics 1.6 Fourth-party logistics 1.7 Historical development 1.8 Porter’s value chain and competitive advantage 1.8.1 Primary activities 1.8.2 Secondary activities 1.9 Linking the value chain with logistics and supply chain management 1.10 Role of logistics and supply chain management in competitive advantage 1.11 Conclusion PART B Supply chain elements Chapter 2 Sourcing 2.1 Introduction 2.2 Basic objectives of procurement 2.2.1 Objectives from a general managerial level  2.2.2 Objectives from an operational or functional perspective 2.2.3 Objectives from a buying plan perspective 2.3 The procurement process 2.4 New developments in procurement 2.4.1 Procurement coordination and integration 2.4.2 Supplier base management 2.4.3 Supply chain management (strategic sourcing) 2.4.4 Value-added partnerships 2.5 Role of procurement in the value chain and supply chain 2.6 Strategic sourcing strategies 2.6.1 Phase 1: Classification 2.6.2 Phase 2: Market analysis 2.6.3 Phase 3: Strategic positioning 2.6.4 Phase 4: Action plans 2.7 Conclusion Chapter 3 Contract management 3.1 Introduction 3.2 Uses of contracts 3.2.1 Reduce work, cost and time needed 3.2.2 Legalise transactions and create long-term relationships 3.2.3 Reduce lead times 3.2.4 Provide guidance in terms of responsibilities 3.2.5 Ensure quality 3.2.6 Enhance the supply chain 3.2.7 Are essential due to the nature of work 3.2.8 Ensure continuous supply 3.3 Managing the contract content 3.3.1 Deliverables 3.3.2 The term of a contract  3.3.3 Contract compensation arrangements 3.3.4 Dispute prevention 3.4 Managing the contracting process 3.4.1 Planning 3.4.2 Organising 3.4.3 Directing or executing 3.4.4 Control 3.5 Outsourcing and service level agreements 3.6 Conclusion Chapter 4 Warehousing 4.1 Introduction 4.2 Defining warehousing 4.3 Why firms use warehouses and distribution centres 4.3.1 Movement 4.3.2 Storage 4.3.3 Information transfer 4.4 Warehouse design and layout 4.4.1 A smart layout increases productivity and lowers cost 4.4.2 Optimising layout and design by using flexible/expandable racking 4.4.3 Taking the right steps towards effective warehouse layout and design 4.4.4 Smart warehouse layout planning guidelines 4.5 The grouping of products within the warehouse 4.6 The categorisation of inventory in the warehouse 4.6.1 Categorising inventory in the warehouse according to demand frequency 4.6.2 Categorising inventory in the warehouse according to pick destination  4.6.3 Categorising goods in the warehouse according to special storage requirements and health and safety requirements (Occupational Health and Safety Act) 4.7 Cross-docking 4.8 Typical activities performed in a warehouse 4.9 The most common warehousing problems 4.9.1 Storage space utilisation 4.9.2 Product handling problems 4.9.3 Warehousing equipment problems 4.9.4 Labour intensity associated with warehousing 4.9.5 Information gaps between warehousing and manufacturing or retailing 4.9.6 Costing and budgeting is often difficult 4.10 Organising for warehouse management 4.11 Performance management 4.11.1 Measuring warehouse performance 4.11.2 Productivity of staff 4.11.3 Stock turnover ratio 4.11.4 Warehouse yard turnaround of inbound and outbound docked vehicles 4.11.5 Measuring warehouse staff performance 4.12 Materials handling equipment 4.13 Conclusion Chapter 5 Inventory 5.1 Introduction 5.2 The purpose of inventory 5.2.1 To create a cushion for uncertainties 5.2.2 To hold batch stock 5.2.3 To provide for seasonal stock or anticipation stock 5.2.4 To provide for strategic stock  5.2.5 To provide for long-term price changes 5.2.6 To ensure smooth production processes 5.2.7 To meet certain legal requirements 5.2.8 To overcome supply-side disappointments 5.2.9 To compensate for a shutdown in production 5.3 Common types of inventory 5.3.1 Cycle stock 5.3.2 Safety stock 5.3.3 Anticipation stock 5.3.4 Seasonal stock 5.3.5 Promotional stock 5.3.6 Dead stock 5.3.7 Non-conformance stock 5.4 Inventory holding costs 5.4.1 Capital cost 5.4.2 Cost of obsolescence 5.4.3 Handling and storage costs 5.5 Inventory and inventory management 5.6 Demand and inventory 5.6.1 Dependent demand and independent demand 5.6.2 Random demand and predictive demand 5.6.3 Fast demand and slow demand 5.7 Analysis of demand 5.7.1 Average demand 5.7.2 Total demand 5.7.3 Measurements of demand variability 5.7.4 Standard deviation and safety stock 5.8 Forecasting 5.8.1 Qualitative forecasting  5.8.2 Quantitative forecasting 5.9 Value of inventory items 5.10 Ordering systems 5.10.1 Ordering dependent demand items 5.10.2 Ordering independent demand items 5.10.3 Economic order quantity 5.10.4 Re-order point system 5.10.5 Variable order quantities 5.10.6 Lot-for-lot system 5.10.7 Target inventory level system 5.10.8 Period order quantity system 5.10.9 Periodic ordering 5.10.10 Time-phased order point system 5.10.11 Kanban system 5.10.12 Order modifiers 5.11 Conclusion Chapter 6 Operations and manufacturing 6.1 Introduction 6.2 Importance of operations management 6.2.1 Core function of any organisation 6.2.2 Financial implications of operations management 6.2.3 Improved operations and manufacturing management 6.2.4 Operations management as a performance measure 6.2.5 Operations management as a source of sustainable competitive advantage 6.3 Developing an operations and manufacturing strategy 6.3.1 Stages in developing the strategy 6.3.2 Corporate objectives 6.3.3 Market analysis  6.3.4 Product and/or service profiling 6.3.5 Strategic sourcing 6.3.6 Logistics concepts 6.3.7 Manufacturing process alternatives 6.3.8 Production streaming 6.4 Conclusion Chapter 7 Reverse logistics 7.1 Introduction 7.2 Reverse logistics as a critical area of a supply chain 7.3 Reverse logistics activities and channels of distribution 7.3.1 Value carriers 7.3.2 Return of unsold goods 7.3.3 Product returns and exchanges 7.3.4 Product recalls 7.3.5 Waste management 7.4 Financial implications of reverse logistics 7.5 Environmental management: ISO 14 000 7.6 Conclusion Chapter 8 Transport 8.1 Introduction 8.2 Function of transport 8.3 Demand for transport 8.4 Importance of transport 8.5 Modes of transport 8.5.1 Setting the scene 8.5.2 Road transport 8.5.3 Rail transport 8.5.4 Water transport 8.5.5 Air transport  8.5.6 Pipeline transport 8.6 Transport mode comparison 8.7 Transport costing 8.8 Transport operations 8.9 Terminals and freight logistics hubs 8.10 Transport infrastructure 8.10.1 Roads 8.10.2 Rail 8.10.3 Ports and shipping 8.10.4 Airports and airlines 8.11 Regulatory environment 8.12 Challenges of urban goods transport 8.13 Future developments in transport 8.13.1 Performance-based standards (PBS) 8.13.2 Electrification of freight traffic 8.13.3 Driverless trucks 8.13.4 Road container economics 8.13.5 Truck and trailer lift axles 8.13.6 Light rail – DVB cargotram 8.13.7 City refuse disposal by cargotram (light rail) 8.13.8 Driverless freight trains 8.13.9 Double-stack rail transport 8.13.10 Freight shuttle system 8.13.11 Logistics platform of Zaragoza (PLAZA) 8.13.12 Terminal of the future 8.14 Conclusion Chapter 9 Customer service 9.1 Introduction 9.2 Defining customer service 9.3 Elements and concerns of customer service 9.4 Basic customer service dimensions 9.5 Establishing a customer service strategy 9.5.1 Customer strategy based upon customers’ reaction to stockouts 9.5.2 Customer/revenue trade-offs 9.5.3 ABC analysis 9.5.4 The customer service audit 9.6 Measures of customer service performance 9.7 Conclusion Chapter 10 Logistics information systems 10.1 Introduction 10.2 Decentralised and centralised systems 10.2.1 Decentralised systems 10.2.2 Centralised systems 10.3 Types of centralised supply chain system 10.3.1 Material requirements planning and manufacturing resource planning 10.3.2 Enterprise resource planning (ERP) 10.3.3 ERP II 10.3.4 ERP III 10.3.5 ERP vendors and packages 10.4 Future trends: Industry 4.0 10.4.1 Industry 4.0 challenges 10.4.2 Industry 4.0 opportunities 10.4.3 Concept of the connected factory in Industry 4.0 10.5 Conclusion PART C Supply chain integration Chapter 11 Logistics channels and network design 11.1 Introduction 11.2 Strategic planning 11.3 Distribution channel 11.4 Logistics network 11.5 Systems analysis process 11.5.1 Methodology 11.6 Logistics master plan 11.7 Conclusion Chapter 12 Alignment of supply and demand 12.1 Introduction 12.2 Challenges of aligning supply and demand 12.2.1 Managing complexity in supply chains 12.2.2 Managing variability in supply chains 12.3 Traditional approaches to align supply and demand 12.3.1 Improving demand forecasting 12.3.2 Improving production and inventory planning 12.3.3 Reducing supply lead times 12.4 Reducing the lead time gap 12.5 Reducing the supply lead time 12.5.1 Supply chain integration 12.5.2 Technology enables supply chain efficiency 12.5.3 Establish a lean supply chain 12.5.4 Increase the flow of goods and information 12.5.5 Design products for the supply chain 12.5.6 Actual demand decreases supply lead time horizon 12.5.7 Postponement 12.5.8 Align distribution with customer requirements 12.6 Increasing the demand lead time 12.6.1 Push the planned demand penetration point up the chain  12.6.2 Push the actual demand penetration point up the chain 12.7 Conclusion Chapter 13 Management strategies 13.1 Introduction 13.2 The essence of strategic supply chain management 13.3 Integrated governance 13.3.1 Exerting leadership 13.3.2 Supply chain design 13.3.3 Supply chain practices 13.4 Choosing suitable supply chain strategies 13.4.1 Lean strategy 13.4.2 Agile strategy 13.4.3 Hybrid strategy 13.4.4 Kanban strategy 13.4.5 Vertical integration strategies 13.4.6 Horizontal integration strategies 13.5 Aligned strategies 13.6 Adherence to the norms, values and aspirations of supply chain members 13.7 Cohesive supply chains 13.8 Integrated environmental assessments 13.8.1 Effects of needs assessments on supply chain models 13.8.2 Trend assessments: effects on supply chain management 13.9 Strategic supply chain management challenges based on the trends assessment 13.9.1 Managing increasing complexity in the supply chain 13.9.2 Establishing highly responsive businesses and supply chains 13.9.3 Establishing an agile supply chain  13.9.4 Installing data-sharing and collaborative technologies throughout the supply chain 13.9.5 Technology and connectivity 13.10 Excellent end-to-end customer service 13.11 Measuring supply chain performance 13.12 Conclusion PART D Other strategic considerations Chapter 14 Global logistics 14.1 Introduction 14.2 Global logistics and South Africa 14.3 The global scene 14.4 Forces shaping the supply chain environment 14.5 Controllable and uncontrollable elements of global logistics 14.5.1 Uncontrollable elements 14.5.2 Controllable elements 14.6 Alternative global distribution strategies 14.6.1 Exporting 14.6.2 Licensing 14.6.3 Joint ventures 14.6.4 Ownership 14.7 Channel intermediaries 14.8 Global trade documents 14.8.1 Export documentation 14.8.2 Import documentation 14.9 Incoterms 14.9.1 Use of Incoterms 14.9.2 Grouping of Incoterms 14.10 Conclusion Chapter 15 Integrated supply chain risk management 15.1 Introduction 15.2 The philosophy of risk 15.2.1 Uncertainty 15.2.2 Risk perception 15.3 Supply chain management and the risk management concept 15.3.1 The impact of globalisation on supply chain management 15.3.2 The application of integrated supply chain risk management 15.3.3 Typical supply chain risks 15.3.4 Supply chain risk profile 15.4 Implementation of integrated supply chain risk management 15.5 Integrated supply chain risk management (ISCRM) process 15.5.1 The supply chain risk management process 15.6 Conclusion Chapter 16 Humanitarian logistics 16.1 Introduction 16.2 Defining humanitarian logistics 16.3 Disaster management cycle 16.4 Humanitarian supply chains 16.5 Performance measurement 16.6 Information technology in humanitarian logistics 16.7 Conclusion PART E Case studies Case study 1 Wood from Africa cc Case study 2 Bestway Case study 3 Cargo Carriers Case study 4 Airbus Case study 5 Richards Bay Port Case study 6 Finestone Case study 7 Are SA 3PLs and 4PLs really adding value? Index Preface The first edition of this book was well received by academic institutions. Feedback from these institutions and users of the book has resulted in amendments to many of the chapters for this new edition. We hope that the result is an even more worthwhile manual. Chapter 4, which deals with warehousing, has been restructured and reduced substantially, and Chapter 5 on inventory management has been revised so as to be more student friendly. Chapter 8, on transport, has been completely rewritten, and we have added figures to Chapter 12, which considers the alignment of supply and demand, in order to make it more readable. Chapter 13, which discusses management strategies, has been aligned to the supply chain, and new Incoterms have been added to Chapter 14. The previous edition’s section on broad-based black economic empowerment has been deleted. There is a new chapter on humanitarian logistics (Chapter 16), which has become an important application for countries and organisations supplying aid to disaster areas, and for countries in need of support. This is, to our knowledge, the first time that a full chapter on this topic has been published in a supply chain textbook. We want to thank our publishers, Van Schaik, for their assistance and patience with the updating of this book. Please feel free to send your feedback on any aspect of the book to giddi@lantic.net. Gideon Nieman (Editor-in-Chief)  PART A Introduction to supply chain management Chapter 1 Introduction to supply chain management  1 Introduction to supply chain management GERARD DE VILLIERS, GIDEON NIEMAN & WESLEY NIEMANN LEARNING OUTCOMES After completing this chapter you should be able to describe the different types of logistics define business logistics define supply chain management explain the concepts of third-party and fourth-party logistics explain Porter’s value chain describe the primary and secondary activities of the value chain. 1.1 INTRODUCTION This chapter aims to set out the role of logistics and supply chain management in firms. Logistics has been with us since the time that people and countries started waging war. Supply chain management is a concept that developed in the 1990s, and was derived from the role of logistics (flow of goods) and the management of supply in firms. Procurement as a function of supply was first recognised as an important management function in the 1930s. For many years, procurement, materials management and logistics were regarded as the responsibility of either operations or marketing departments. The late 1980s saw the shift in focus to supply management, and later to supply chain management. It was at this time that Porter developed his theory of the value chain, and how this could improve the competitive advantage of firms. It brought logistics to the forefront as the primary function in firms, and created secondary functions in support of the logistical flow of goods. This chapter defines all these concepts, and provides an overview of the development of logistics and supply chain management. 1.2 FORCES OF CHANGE At the time of writing, the past decade has been a period of rapid change for business. In order to survive in a fluctuating business environment coupled with tough global economic conditions that have been present since 2008, firms have to be responsive to external opportunities as well as threats, thereby transforming themselves. According to Coyle, Langley, Novak and Gibson (2013: 7–12), it is important to examine the major external drivers of change shaping the business landscape. GLOBALISATION Globalisation is the most cited change factor identified by business people, and has taken on various forms. In essence, globalisation is the movement towards an integrated global economy, which has led to a more intense economic and geopolitical environment. Globalisation also leads to the compression of time and distance, and the disappearance of traditional political boundaries. Business leaders cannot rely on traditional sources of supply or markets. Instead, they have to function in the global arena in order to remain competitive. THE EMPOWERED CONSUMER Today’s consumers are more empowered, educated and informed than ever before. The internet allows them access to a wealth of information, available at their fingertips. E-retailers, online catalogues and social media platforms provide a world of choice. Consumers can compare prices, service and quality with extreme accuracy. They therefore demand competitive prices, customised product offerings, convenience and flexibility. Their service expectation is often constant, placing increased pressure on logistics systems and various supply chains. TECHNOLOGY Technology is a major force changing the dynamics of business. Consumers and firms have access to information at any time. Various search engines, such as Google, Yahoo and Bing, make it possible to gather and obtain timely information. Technology makes it possible to tap into the world, creating unbelievable opportunities for collaboration. It has opened the global economy for developing economies in the Far East and Africa. Many firms with a traditional base in a developed country are now outsourcing to developing countries with great success. 1.3 DEFINING LOGISTICS Logistics is not a new concept, and has probably existed since the first goods were traded. It has always been an important feature of industrial and economic life, but has only recently been defined as a major function or concept in its own right. Different terminology has been used over time to describe the respective elements and functions of logistics. Generally, the logistics family of terms can be split into the types discussed below, based on the main areas of activity. MILITARY LOGISTICS Military logistics is well known in the military environment, and focuses on getting the right support to the right place at the right time. This includes rations, ammunition, equipment, vehicles, spare parts and medical services. Although the concepts used in managing military logistics are similar to the other types, the deployment is very specific and is confined to the military to a large extent. ENGINEERING LOGISTICS Engineering logistics refers to concepts such as integrated logistics support, life cycle analyses, system operation and support, and maintenance management. Similar to military logistics, the milieu in which engineering logistics is applied differs significantly from the typical production, consumer or marketing environments. BUSINESS LOGISTICS Business logistics refers to the concept as applied in the commercial environment, as well as the supply and demand of raw materials and finished goods. In practice (and in this book), the term has lost the descriptor business, and only the word logistics is used. The Council of Supply Chain Management Professionals (CSCMP) defines logistics management as follows (http://www.cscmp.org): Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements. They suggest the following boundaries and relationships (http://www.cscmp.org): Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order  fulfilment, logistics network design, inventory management, supply/demand planning, and management of third party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved at all levels of planning and execution – strategic, operational and tactical. Logistics management is an integrating function, which coordinates and optimises all logistics activities; it also integrates logistics activities with other functions, including marketing, sales manufacturing, finance and information technology. Figure 1.1 provides a schematic presentation of the concepts of logistics, supply and distribution management. Figure 1.1 Logistics, supply and distribution management PRODUCTION LOGISTICS Production logistics refers to the logistics that occur in the production environment: the phase between raw materials and finished products. The concept excludes physical supply and distribution, and interfaces on the inbound side with manufacturing resource planning (MRP); on the outbound side, distribution requirements planning (DRP) is excluded. REVERSE LOGISTICS Reverse logistics refers to the need for activities such as handling return loads; disposal of packaging materials, obsolete products and materials; as well as the return (or recycling) of appliances, components and equipment. This concept interfaces with waste management, because the distribution of solid waste from origin to destination, namely the disposal site, is the reverse of distributing goods and products to the same origins of solid waste. See Chapter 7 for more information on this topic. This brings us to the concept of supply chain management. 1.4 DEFINING SUPPLY CHAIN MANAGEMENT In order to operate successfully in today’s volatile global business environment, firms need to become much more involved with their suppliers and customers. Many years ago firms were vertically integrated, meaning that they owned some of their suppliers and/or customers. Today the situation looks completely different, as firms sell business units or outsource many of their activities in order to build strategic partnerships with other specialist firms that excel at what they do best. This approach to conducting business is the ultimate way in which firms can remain competitive, and is core to the practice of supply chain management. The rise of technology and information exchange, as discussed in section 1.2, has made global collaboration possible. Supply chain management is the most recent term to be added to the field of logistics. It requires the control of a complex web of organisations and operations, as Fawcett, Ellram and Ogden (2014: 5) indicate in Figure 1.2. Figure 1.2 Supply chain management Source: Fawcett, Ellram & Ogden (2014: 5) Firms do not exist in isolation. Any firm, large or small, which aims to meet the needs of its various customers and stakeholders, will need resources in order to do so; and will acquire many of its materials, equipment, facilities and supplies from other firms. The performance of a firm is influenced to a greater or lesser extent by the actions of the firms that make up the supply chain. The term supply chain management was first used in its popular sense by Oliver and Webber (1982) and then replicated by Houlihan (1984) to describe the management of materials flows across organisational borders. Since then several researchers have investigated the concept of supply chain management (Ellram, 1991; Christopher, 1992; Harland, 1994; Lamming, 1996; Handfield & Nichols, 1999), establishing its theoretical and operational basis as it is known today. The influence of supply chain thought on organisational strategy has also been significant, reflecting the truth of what Christopher (1992), Macbeth and Ferguson (1994) and several other authors have claimed that competition takes place between supply chains rather than between individual firms. When looking at the broader picture one can conclude that supply chain management is a set of inter- and intra-firm processes, which produces and delivers goods and services to customers. Supply chain management is becoming central to the survival of many firms in the global business environment. Competition between effective supply chains rather than individual firms will determine the future of business. Supply chain management is not just another name for logistics. It has elements that are not typically included in a definition of logistics, such as information system integration, and coordination of planning and control activities. The main difference between logistics and the supply chain is that logistics is focused on activities, processes and management in terms of the flow of materials in a specific firm. Logistics has never focused on the interrelationships with upstream and downstream entities. The supply chain, on the other hand, endeavours to integrate elements that are clearly beyond organisational borders. Supply chain management is generally considered to involve integration, coordination and collaboration across firms and throughout the supply chain. The concept includes the broad array of activities required in order to plan, implement and control sourcing, manufacturing and delivery processes from the point of raw material (origin) to the point of ultimate consumption. According to Stank, Keller and Daugherty (2001: 30), logistics is traditionally viewed as a value-adding supply chain process. Logistics customer value is generally created through efficacy, efficiency and/or differentiation. Therefore, a primary goal of supply chain management is to create or enhance the value provided to the end customer. Ideally, a firm should attempt to fulfil customers’ orders and simultaneously meet all their expectations – delivering 100% of the exact items and quantities ordered on time, damage free and with accurate invoicing. Although perfection is an admirable goal, it is not always attainable at reasonable cost. The focus should be on creating as much value for the end customer as is profitable, and doing this requires coordinated effort among all firms in the entire supply chain. For the purposes of this book the following definition of the CSCMP is preferred (http://www.cscmp.org): Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. The following boundaries and relationships apply in supply chain management (http://www.cscmp.org): Supply chain management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive and high-performing business model. It includes all of the logistics management activities noted above, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance, and information technology. 1.4.1 Supply chain management processes According to Lambert (2008: 9), the structure of activities in and between firms is an important foundation for the establishment of high-performance supply chains. Firms have to move from a functional focus to the integration of activities in supply chain processes. Lambert (2008: 10) identifies the following supply chain management processes:  Customer relationship management Customer service management Demand management Order fulfilment Manufacturing flow management Supplier relationship management Product development and commercialisation Returns management In conclusion, Christopher (2011) suggests that logistics is essentially a planning orientation and framework that seeks to create a single plan for the flow of products and information through a business, while supply chain management builds on this framework and seeks to achieve linkage and coordination between processes of other entities in the pipeline, such as suppliers and customers and the company itself. It is clear that we are entering the era where the actual supply chains compete, as opposed to the products, commodities or companies. 1.5 THIRD-PARTY LOGISTICS Today, firms are investing significant time and money towards collaboration with suppliers, customers and logistics service providers. Many firms nowadays make use of outsourced logistics service providers to perform the traditional logistics function on their behalf. Third-party logistics (3PL) refers to the management structure where a third party fulfils certain roles and responsibilities regarding the provision of logistics services between the suppliers (first party) and the clients or customers (second party). This is also known as contract logistics or outsourcing, and is illustrated in Figure 1.3. Figure 1.3 Third-party logistics The typical services rendered by a 3PL include transportation, warehousing, packaging, freight consolidation, information technology and financial services. See Table 1.1 for types and characteristics of 3PL service providers. Examples of 3PLs include Barloworld Logistics, Value Logistics, Imperial Logistics, UTi Worldwide, Hellmann Worldwide Logistics and Caterpillar Logistics. Table 1.1 Types and characteristics of 3PL service providers Type Characteristics Transportation based Offers a transportation service and a comprehensive set of other logistics offerings Warehouse and Offers comprehensive warehousing services distribution based Forwarder based Independent agent with forwarder roles Often non-asset owners that provide a wide range of logistics services  Type Characteristics Shipper/management Focuses on the management of the shipping based process from beginning to end Provides technology, such as a transportation management system, and integrated freight management services to eliminate heavy process and cumbersome features such as claims and accounting (freight payment and accounting) Provides management of carrier relations for ongoing rate maintenance and negotiation Gives information, such as freight data and matrix reports, for better visibility and control on future logistics outcomes Finance based Provides freight payment and auditing, cost accounting and control, and tools for monitoring, booking, tracking, tracing and managing inventory Information based Significant growth and development in this category of internet-based, business-to-business, electronic markets for transportation and logistics services Source: Developed from Robinson (2014) 1.6 FOURTH-PARTY LOGISTICS The concept of fourth-party logistics (4PL) began to emerge roughly in 1996, with Accenture registering the term as a trademark. They defined it as “an integrator that assembles the resources, capabilities and technology of its own organisation and other organisations to design, build and run comprehensive supply chain solutions” (Gattorna, 2006: 206). In essence this means that one company is able to outsource the entire management of its supply chain to another company. This would include all the assets, planning and management of the process. The 4PL provider gathers together all the constituent parts required, such as systems, transport providers, order management and inventory management, with a view to providing the client with a fully integrated supply chain. In return the client pays an appropriate fee and concentrates on its core business. Fourth-party logistics (4PL) presents a solution that incorporates the advantages of both outsourcing and insourcing to provide maximum overall benefit. It differs from traditional 3PL arrangements in four main respects: The 4PL organisation is often a separate entity established as a joint venture (JV) or long-term contract between a primary client and one or more partners. It acts as a single interface between the client and multiple logistics service providers. All aspects of the client’s supply chain are managed by the 4PL organisation. It is also possible for a major third-party logistics provider to form a 4PL organisation within its existing structure. A separate management company is established as a JV or long- term contract between the primary client and at least one other partner, which contributes the start-up capital for the venture, as well as assets and expertise for ongoing operations. The 4PL organisation is a supply chain integrator and acts as a single interface between clients and the full scope of supply chain services. It is staffed with the most skilled individuals from the founding partners and should regularly be assessed against global benchmarks. It operates according to the following models:  Industry solution model. To coordinate and manage the distribution operations of its primary clients initially, and then those of other related companies within the industry Supply chain partners model. To manage an integrated industry supply chain, consisting of manufacturers, materials suppliers, 3PL providers and management consultants Benefits of the 4PL organisation include the following: It addresses strategic failures or 3PL services with a single point of contact to manage all aspects of the client supply chain. It addresses financial failures of 3PL services by releasing capital, through selling logistics assets to the 4PL organisation or on the free market. It addresses operational failures of 3PL services because the new entity allows the creation of a totally new culture. It realises revenue opportunities by selling the supply chain services to external clients. It retains corporate supply chain knowledge. It improves accountability. The 4PL concept addresses the shortfalls of traditional 3PL arrangements and offers the opportunity to achieve substantial incremental benefits. In addition, the concept can be extended to an existing 3PL, thus converting it into a 4PL. This concept is illustrated in Figure 1.4.  Figure 1.4 Fourth-party logistics It is difficult to mention specific examples of fourth-party logistics service providers in South Africa, but Barloworld Logistics, Unitrans Global Logistics, DHL, AFGRI Logistics and Transnet Freight Rail all demonstrate some or all of the components. 1.7 HISTORICAL DEVELOPMENT Logistics have always been fundamental to the production, storage, and movement of goods and products. Rushton, Oxley and Croucher (2000) identify the following distinct stages in the development of distribution and logistics. 1950S AND EARLY 1960S Distribution systems were unplanned and unformulated. The haulage industry and manufacturers’ own account fleets broadly represented distribution. 1960S AND EARLY 1970S The concept of physical distribution was developed. Manufacturers, who developed distribution operations to reflect the flow of their product through the supply chain, recognised the benefits. 1970S Companies recognised the need to include distribution in the functional management structure of the organisation. The structure and control of the distribution chain changed. There was a decline in the power of the manufacturers and suppliers and a marked increase in that of the major retailers who developed their own distribution structures, based on the concept of regional distribution depots. 1980S Rapid cost increases and the clearer definition of the true costs of distribution saw a significant increase in professionalism in terms of distribution. Centralised distribution, severe reductions in stockholding and increased computerisation characterised industry. The growth of the third-party distribution service industry has been of major significance, and it is here in particular that developments in information and equipment technology are to be found. The concept of, and need for, integrated logistics is now recognised by most participants in logistics and supply chain management. 1990S Relevant issues during this period include supply chain alignment with company and market culture, agility in the supply chain, extensive use of internet communication rather than dedicated electronic data interchange (EDI) links, much higher profiles for logistics and supply chain management, and significant savings in supply chain management. 2000S Mobile technology, with cellular communication providing access to the internet and consequently the highest form of communication mobility, are becoming qualifiers for doing business. The focus of logistics and supply chain management is changing from a re- engineering tool to a facilitator for growth and development. 2015 AND BEYOND Volatility in the global financial market, political instability and natural disasters are causing major difficulties regarding the alignment of supply and demand. Firms invest substantial time and resources in ensuring that their supply chains can bounce back to their original state after a disruption, placing supply chain resilience high on the agenda. Firms are embracing cloud computing, business analytical tools and artificial intelligence in their operations. The use of predictive analytics, planning tools and machine learning is on the increase. 1.8 PORTER’S VALUE CHAIN AND COMPETITIVE ADVANTAGE The value chain is a concept from business management that was first described and popularised by Michael Porter in his 1985 bestseller: Competitive advantage: creating and sustaining superior performance. Competitive advantage, Porter (1985) argues, can be understood only by looking at a firm as a whole. Cost advantages and successful differentiation are found in the chain of activities that a firm performs to deliver value to its customers. Advantage or disadvantage can occur during any one of five primary and four secondary activities. Together, these activities form the value chain for every firm. The value chain is illustrated in Figure 1.5.  Figure 1.5 The value chain The value chain categorises the generic value-adding activities of an organisation. The primary activities include inbound logistics, operations (production), outbound logistics, marketing and sales, and services (maintenance). The support activities include administrative infrastructure management, human resource (HR) management, research and development (R&D), and procurement. The costs and value drivers are identified for each value activity. The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning. Its ultimate goal is to maximise value creation while minimising costs. Let us consider the elements of the value chain. 1.8.1 Primary activities The primary activities of the value chain include the following: Inbound logistics include activities such as receiving, storing, listing and grouping inputs to the product. Also included are  functions such as materials handling, warehousing, inventory management, transportation scheduling and managing suppliers. Operations include machining, packaging, assembly, maintenance of equipment, testing, operational management, and so on. Outbound logistics refers to such activities as order processing, warehousing, scheduling transportation and distribution management. Marketing and sales are activities that make or convince buyers to purchase the company’s products. Included are advertising, promotion, selling, pricing, channel selection, retail management, and so on. Service has to do with maintaining the product after sale, thus guaranteeing quality and/or adding value in other ways, such as through installation, training, servicing, providing spare parts or upgrading. Service enhances the product value and also allows for after-sales (commercial) interaction with the buyer. 1.8.2 Secondary activities The secondary activities of the value chain consist of the following: Porter (1985) refers to procurement as a secondary activity, although many procurement professionals would argue that it is (at least partly) a primary activity. In this book we see procurement as a driving force in the value and supply chain. Included are activities such as purchasing raw materials, servicing, supplies, negotiating contracts with suppliers, securing building leases, and so on. With technology development, Porter (1985) refers to such activities as R&D, product and/or process improvements, (re)design, developing new services, and so on. Human resource management includes recruitment and education, as well as compensation, employee retention and other  means so as to fully capitalise on human resources. The firm’s infrastructure, such as general management, planning procedures, finance, accounting, public affairs and quality management, can make the difference between success and – despite the best intentions in the world – failure. The margin reflects the reward in exchange for the risks run by the firm. All activities need to be performed in such a way that the total value generated by the firm is more than the sum of its costs (Van Weele, 2005). In order to analyse the (lack of) competitive advantage, Porter (1985) suggests using the value chain to separate the company’s activities into detailed, discrete areas. When broken down in a sufficient level of detail, the relative performance of the firm can be determined. Customer value is a function of factors that usually fall into one of three broad categories: those that differentiate the product, those that lower its costs, or those that allow the organisation to respond to customer needs more quickly. The value chain framework helps one to analyse the contributions of individual activities in a business in relation to the overall level of customer value the firm produces, and ultimately to its financial performance. If each part of the business produces value, the firm should be able to charge more and/or incur lower costs, either of which will lead to a higher profit margin. Note that the primary activities are similar to the concept of line functions: activities directly involved in developing, making, or marketing a particular product or service. Meanwhile, the support activities, similar to the concept of staff functions, provide support for the firm as a whole (Miller, 1998). The value chain framework first highlights the importance of customer value. It also provides a useful sense of direction by offering a generic checklist for firm assessment. Finally, it reminds us that virtually everything an organisation does can be managed to improve the firm’s overall ability to create value. However, the value chain does not provide a sense of how the various activities interact. As you will see in section 1.9, this limitation can be overcome by adopting a process or systems view of the business. 1.9 LINKING THE VALUE CHAIN WITH LOGISTICS AND SUPPLY CHAIN MANAGEMENT Christopher (2011) discusses how competitive advantage can be gained through logistics. He suggests that Porter managed to raise the importance of competitive relativities in achieving success in the marketplace. Section 1.8 covered the concept of Porter’s value chain, but it is clear that logistics also play an important role in both primary activities (inbound logistics, operations, outbound logistics, marketing and sales, services) and support activities (infrastructure, human resource management, technology development, procurement). We stated earlier that supply chains compete, and it is important to understand that the support activities are integrating functions that cut across the various primary activities within the firm. According to Christopher (2011), competitive advantage is derived from the way in which firms organise and perform these discrete activities within the value chain. The discussion of the definitions of supply chain management highlights the fact that the supply chain is where these activities are managed, so as to provide the increased value of Porter’s value chain. When raw material is sourced for the manufacturing of products that have to be delivered to the end user, value is continually created and added every time the individual raw materials, components, works- in-progress and finished products are used, incorporated, or handled in the distribution activities. Hence, it is fair to conclude that logistics and supply chain management (included in the primary and support activities of Porter’s value chain) are the facilitators through which value creation takes place from origin to destination. The objective remains to achieve competitive advantage while reducing logistical costs, and at the same time improving customer service. 1.10 ROLE OF LOGISTICS AND SUPPLY CHAIN MANAGEMENT IN COMPETITIVE ADVANTAGE Logistics management, and more specifically the integrative perspective of supply chain management, provides the means whereby the needs of the customers are satisfied through the coordination of materials and information flow from origin to destination. Wickham (1998: 192) states that a competitive advantage is present if the business consistently offers the customer something that is different to what competitors are offering, and if that difference represents something valuable to the customer. Traditionally, each of the logistics elements, such as transport, inventory management, procurement and warehousing (on both inbound and outbound sides of the supply chain) were optimised in isolation. Supply chain management integrates those individual elements and provides a complete picture, in which the focus is on total logistics costs and not individual costs. This therefore represents some form of cost saving that must be offered to the customer. The best example of the implementation of a total logistics cost perspective is when a decision has to be made regarding the number of depots in the logistics network. From a secondary transport perspective (delivering to the market) it is clear that a decentralised network with many depots close to the market will incur the lowest transport costs. However, multiple depots will definitely incur significantly higher warehousing costs, which suggests that centralisation might be the better option. If the managing director were to listen to the transport manager, the answer would be decentralisation, while the warehouse manager would be convinced that centralisation is the best option. However, if both costs were to be considered and the decision made according to total logistics costs, it is clear that the answer would be somewhere between one centralised facility and a multitude of small depots near the market. Another example is the crucial role that transparent information plays in the supply chain. If one knows where inventory is located (information management system) one does not have to stock it in all the possible places (reduced inventory levels in the network). These illustrations explain the role of logistics in providing competitive advantage: by optimising individual logistics elements from a supply chain perspective rather than in isolation. 1.11 CONCLUSION This chapter defined logistics and supply chain management. It also discussed Porter’s value chain and its primary and secondary functions. The historical changes in logistics were also discussed, to give the reader a sound understanding of how the discipline has developed over the years. The starting point for understanding logistics and supply chain management is to be able to define the associated concepts. Globalisation of trade, the rapid development of information technology and the ever-changing consumer demands, are transforming the competitive landscape of firms. Porter’s value chain is a modern approach to meeting these challenges, and enables firms to create a competitive advantage. Positioning the firm in the right place within the value chain is important, and firms have to rethink strategies and actions in relation to logistics and the supply chain as a whole. END-OF-CHAPTER ACTIVITIES ASSIGNMENTS 1. Compare and contrast logistics management with supply chain management. 2. Discuss the ways in which logistics contributes to economic value in a firm. 3. Discuss the ways in which supply chain management contributes to economic value in a firm. 4. Visit a manufacturing firm and analyse their organisational plan; then present it in Porter’s format of a value chain. 5. Visit a manufacturing firm and develop a schematic representation of their supply chain. Include all product, financial and information flows. CASE STUDY 1: RAINBOW Rainbow’s value-added products are promising spring chickens Samantha Enslin Rainbow Chicken, South Africa’s largest chicken producer, runs a complex operation to produce the right size bird at the lowest cost. The group’s recent shift into valued-added products such as ready-to-eat whole chicken, chicken mayonnaise mix and chicken nuggets is a small but promising part of its business. The core is still producing 4 million broilers a week. For Miles Dally, Rainbow Chicken’s chief executive, the business, which he joined in February 2003, is no longer focused on producing huge volumes of chicken and then deciding through which channels to sell the product. Previously, this resulted in a volatile low-margin business, and slow winter sales forced Rainbow to make up by pushing high volumes in summer. The chicken market in South Africa is valued at R13.5 billion a year, of which Rainbow has a 30% share, followed by competitor Astral Foods and then imports. Rainbow’s strategy now is to produce what the food service sector and consumers want to ensure consistent demand – the right size chicken at the lowest cost. Dally’s strategy is paying off, with attributable profit rising 15% to R171 million in the six months to September, which was dampened by a higher tax rate. But the growth was despite a 27% rise in the price of yellow maize, a key cost in the chicken business, between March and September. For the feed operation, higher maize prices lifted Epol’s revenue, which supplies mainly the chicken business and some external customers. The group’s headline earnings before interest, tax, depreciation and amortisation margin for the year to March 2006 was 14.1% compared with 6.9% in the year to March 2003. In the year to March, Rainbow reported a 73% rise in attributable profit to R389.8 million. Among initiatives to meet the needs of customers, Rainbow now supplies the retail market with a family pack of individually quick frozen (IQF) chicken based on consumers’ preference for four thighs, four drumsticks, four wings and no breast. The company has added flavoured IQF portions. IQF is the biggest part of the retail chicken market. For the food service sector, including fast food operations, caterers and restaurants, which contribute 32% to Rainbow’s R2 billion revenue, the group supplies chicken portions to suit exact needs. Dally said the group was benefiting from growth in quick service restaurants such as KFC and Chicken Licken. Owned by Yum Restaurants International, KFC has more than 400 outlets in the country, of which 70 were opened in the past three years. Murray Willows, the chief concept officer at Yum, said: “We have a very good relationship with Rainbow Chicken, which last week won KFC’s supplier of the year, and we have both grown together.” For KFC, which has been in South Africa for 35 years, the past eight years had been particularly good, with double-digit sales growth, he said. Yum does not disclose the financial results of its South African operation. For Rainbow to meet customers’ different requests, it requires a finely tuned operation that requires stringent bio-security controls and improved husbandry. Every year 175 000 grandparent chicks are flown in from Cobb in the UK to Rainbow’s grandparent farm in Carolina in Mpumalanga. These grandparent chicks produce 10 million eggs. Of these hatchings, it takes 20 weeks to rear to egg-laying age. They lay for 40 weeks and the  eggs take three weeks to hatch. These hatchlings become parent chicks and are moved to parent farms, where they are reared for 20 weeks. They lay eggs for 40 weeks and the eggs take three weeks to hatch. This batch becomes broiler chicks that grow for 35 days until ready for processing. Chicken is the favoured animal protein in South Africa, far outstripping red meat. Last year 22.4 kg of chicken was (sic) eaten per capita compared with 13 kg of red meat. To the advantage of chicken producers, red meat prices have also risen by more than 25%. Although Rainbow’s chicken prices in the six months rose on average 5.5%, this did not dent volumes, which grew 6.6%. In the year ahead, the business climate might get tougher, not only because consumers could trim their spending. Cost pressures from higher oil and maize prices could dampen the group’s performance. The maize price in September was 68% higher than a year ago. Dally said: “For the full year we are still seeking real growth, but it is likely to be lower than the previous year.” The group is also looking to secure new business from restaurants and hotels. Rainbow will spend about R160 million on expansion projects, including upgrading existing or building new coops to boost capacity and on mills for its feed operation to improve efficiency. Johan de Bruijn, an analyst at Sanlam Investment Managers, said: “The outlook for Rainbow is positive due to strong demand for chicken. This demand should remain robust for the next year or two, although growth will slow.” The weaker rand should reduce pressure from imports, mostly from Brazil. Although imports, which are largely dark meat and offal, are not a huge threat to Rainbow, which sells into other markets, rising maize costs will reduce margins. “Then we will see if Rainbow’s move up the value chain will have the desired effect of reducing the cyclicality of the chicken business,” said De Bruijn. Source: Business Report. Pretoria News, 9 January 2007, p. 17 QUESTIONS 1. Identify Rainbow’s value chain. 2. Identify Rainbow’s supply chain. 3. What is the difference between the value chain and value-added products? Explain by referring to the case study. CASE STUDY 2: PAMBA EASY MEALS Pamba Easy Meals is a relatively small soya food processor in Tzaneen. After a modest beginning the company moved from strength to strength and is currently the biggest of its kind in the Limpopo province. The company has been growing at an average growth rate of 10% over the past three years. In spite of negative market conditions during the past 12 years, the company has managed to survive. The companies’ viability is insured through quality improvement, product innovations and unique customer service. Pamba Easy Meals is a relatively small manufacturer of soya based products, serving the geographical markets of Limpopo, Mpumalanga, Gauteng, North-West province, Namibia and Botswana with a broad product line. Pamba market their products through a network of sales representatives. The representatives report that there is a strong pressure to increase the service to retail chain stores. They report that the retail buyers are raising questions about the number of stock outs that they have recently been experiencing. These buyers have even suggested that they might switch to other brands, if the service is not improved. Pambas’ product lines focus on varying additions of dehydrated vegetables, herbs and spices, vegetable oils, starches, flavourants, rice and noodles. Other products are gravy, custard, jelly powder, cooldrink powder, milk-blend powder and rooibos tea. Pamba caters for the lower income groups in the rural areas, which are dependent on non-perishable foods. The target market is served mainly by agricultural cooperatives and Pamba is the main supplier of soya products. Other target markets are retailers, caterers, and pre-packers of ration packs, wholesalers as well as entrepreneurs involved in primary school feeding schemes. All products are delivered on order as stipulated. Pamba makes use of their own transport for distribution to the outsourced warehouses. Although they strive to maintain low transport costs, the costs are still high due to the negative effects of economic fuel factors and fleet maintenance. Products are produced in Tzaneen. Production takes place in large batch quantities in order to maintain low production costs, and to ensure consistent production quality. As items are packed they are generally transported to the warehouses in mixed truckloads. Product inventories are normally stored around the country in five outsourced warehouses. The sales representatives call on customers and generate orders, which are sent by email to these outsourced warehouses. The outsourced warehouses then arrange transportation to the retail customer. Orders are generally small, amounting to five or six cases per order, or about 150 kg to 200 kg at a time. These orders are delivered using contract carriers, selected individually by each outsourced warehouse. The costs are then billed to Pamba. Transport costs are high, because of the small shipments. Delivery schedules vary by carrier; some provide fast and reliable service, while others have been erratic to the point that customers have commented on poor delivery service. The location of the current customer base is 60% in Limpopo, 20% in the North-West province, 10% in Mpumalanga, 5% in Botswana and 5% in Namibia. Pamba’s management is divided into two major departments. One is marketing and sales, and the other is production. (There are also several smaller staff units for human resources, purchasing and finance.) Production is the older of the two. Marketing came about almost as an afterthought and had a difficult time establishing credibility within the company. Production is responsible for scheduling production as well as arranging transportation and maintaining inventory in the warehouses. Staff members are motivated by a production bonus on a weekly basis. Staff are informed of marketing and production objectives as well as any problems that may have occurred or may occur. Employees receive in-house training and current employees fill new positions. Staff are encouraged to improve their housing, by means of loans granted by the company. All staff members receive the benefits of a pension fund as well as a medical aid fund. Due to the above-mentioned incentives, the company maintains a high level of team spirit and motivation, with low personnel turnover. Customer service is improved by constant communication with the sales representative network. In the event of an emergency, customer service is rendered as per cost. Pamba takes products not sold and damaged back for credit. No order is too big or small for Pamba. The local crops of soya beans do not fulfil the local demands, therefore necessitating soya bean imports. The meat industry also makes use of texturised vegetable protein, leading to a further shortage of soya beans. Currently there is only one supplier of texturised vegetable protein in South Africa, situated in Mokopane, approximately 150 km south-west from Tzaneen. This main supplier has obligations in terms of foreign contracts,  leading to shortages. Due to the volatile exchange rate, it is too costly to import soya beans. Over the past months there has been an erratic supply of the basic raw material leading to Pamba being unable to meet its demands. There are a variety of role players in the soya food industry. Competitors in Pamba’s market are Nutritional foods, Imana, Ayos and Umgeni. As in most industries there are many new entries, but they do not survive and leave the market quickly. Pamba’s quality, product differentiation, price and service offerings are most competitive. QUESTIONS 1. Draw and discuss the supply chain of Pamba Easy Meals. Identify all activities and flows. 2. Identify at least five major logistics issues that you would like to address. 3. Draw and discuss the product flow of the current distribution channel. 4. Does Pamba make use of a 3PL service provider? Substantiate your answer with evidence from the case study. 5. Describe the value chain of Pamba and how logistics support the value chain approach. 6. Propose three improvements to the supply chain of Pamba. REFERENCES AND RECOMMENDED READING Christopher, M. 1992. Logistics and supply chain management: strategies for reducing cost and improving service. London: Financial Times/Pitman. Christopher, M. 2011. Logistics and supply chain management, 4th ed. London: Financial Times/Prentice Hall. Coyle, J.J., Langley, C.J., Novak, R.A. & Gibson, B.J. 2013. Managing supply chains: a logistics approach, 9th ed. Mason, OH: South-Western College. Ellram, L.M. 1991. Supply chain management: the industrial organisation perspective. International Journal of Physical Distribution and Logistics  Management, 21: 13–22. Fawcett, S.E., Ellram, L.M. & Ogden, J.A. 2014. Supply chain management: from vision to implementation. Harlow, Essex, Great Britain: Pearson Education. Gattorna, J.L. 2006. Living supply chains: how to mobilise the enterprise around delivering what your customers want. Harlow, Great Britain: FT Prentice Hall. Handfield, R.B. & Nichols, E.L. 1999. Introduction to supply chain management. Upper Saddle River, NJ: Prentice-Hall. Harland, C. 1994. Perceptions of requirements and performance in European automotive aftermarket supply chains. Unpublished Ph.D. thesis. Warwick: University of Warwick. Houlihan, J.B. 1984. Supply chain management. Proceedings of the 19th Int. Tech. Conference BPICS, 101–110. Hugo, W.M.J., Badenhorst-Weiss, J.A. & Van Biljon, E.H.B. 2004. Supply chain management: logistics in perspective. Pretoria: Van Schaik. Lambert, D.M. 2008. Supply chain management: processes, partnerships, performance. Sarasota, FL: Supply Chain Management Institute. Lamming, R.C. 1996. Squaring lean supply with supply chain management: lean production and work organisation. International Journal of Operations and Production Management, 16(2): 183–197. Macbeth, D.K. & Ferguson, N. 1994. Partnership sourcing: an integrated supply chain approach. London: Pitman. Miller, A. 1998. Strategic management, international ed. Boston: Irwin/McGraw- Hill. Oliver, R.K. & Webber, M.D. 1982. Supply chain management: logistics catches up with strategy. In M. Christopher (Ed.), Logistics: the strategic issues. London: Chapman and Hall. Porter, M.E. 1985. The competitive advantage: creating and sustaining superior performance. NY: Free Press. Robinson, A. 2014. Third party logistics services explained: the different types of 3PLS, and the various levels of outsourcing. Available at: http://cerasis.com/2014/02/07/third-party-logistics-services/ (accessed on 25 February 2016). Rushton, A., Oxley, J. & Croucher, P. 2000. Handbook of logistics and distribution management. London: Kogan Page. Stank, T.P., Keller, S. & Daugherty, P. 2001. Supply chain collaboration and logistical service performance. Journal of Business Logistics, 22(1): 29–48. Van Weele, A.J. 2005. Purchasing and supply chain management: analysis, strategy, planning and practice, 4th ed. Andover, Hampshire: Thomson  Learning. Wickham, P.A. 1998. Strategic entrepreneurship: a decision-making approach to new venture creation and management. London: Pitman.  PART B Supply chain elements Chapter 2 Sourcing Chapter 3 Contract management Chapter 4 Warehousing Chapter 5 Inventory Chapter 6 Operations and manufacturing  Chapter 7 Reverse logistics Chapter 8 Transport Chapter 9 Customer service Chapter 10 Logistics information systems  2 Sourcing GIDEON NIEMAN LEARNING OUTCOMES After completing this chapter you should be able to discuss the importance of procurement objectives identify the different procurement objectives on different levels discuss the different steps in the procurement process explain the main criteria that should be used in selecting suppliers identify the new developments in procurement explain the role of procurement in the value chain explain the role of procurement in the supply chain discuss the portfolio approach for setting up differentiated procurement strategies discuss Kraljic’s classification matrix explain Kraljic’s procurement portfolio matrix. 2.1 INTRODUCTION Sourcing (or procurement) is the power supply of the supply chain. Together with operations, it forms one of the two critical functions in the supply chain. The procurement process links members in the supply chain and assures the quality of suppliers in that chain. Procurement is a determinant of revenues, costs and supply chain relationships, and it supplies the goods and services that are either transformed or reshaped into saleable goods and services. The procurement function’s actions are critical to creating the goods or services that meet the basic needs of consumers, be they individuals or firms. One problem in procurement has always been terminology. One of the issues is the difference between purchasing and procurement. The procurement process encompasses a wider range of supply activities than those included in the purchasing function. In procurement, the buyer participates more in related material activities and strategy. In essence, procurement tends to be broader and more proactive, with some focus on strategic matters, as opposed to the typical implementation of the purchasing concept (Dobler & Burt, 1996: 36). The purpose of this chapter is to consider the objectives of procurement, and to discuss the procurement process and its role in the value and supply chain. The chapter ends by setting out strategic direction through procurement portfolio management. 2.2 BASIC OBJECTIVES OF PROCUREMENT Dobler and Burt (1996: 41–51) believe that the objectives of procurement and supply management should be viewed from three levels: 1. The general managerial level 2. The functional and operational level 3. A detailed level at which precise strategic buying plans are formulated 2.2.1 Objectives from a general managerial level According to Hugo, Van Rooyen and Badenhorst (1997: 9), the objective of successful procurement is regarded as buying the right requirements in the right quantities at the right time and at the right price from the right source, and with delivery at the right place. Dobler and Burt (1996) put it more simply: procurement is the acquisition of goods and materials of the right quality from the right supplier in the right quantity at the right time at the right price. This is generally referred to as “the five rights of procurement”. In practice, most procurement departments will have problems fulfilling these objectives equally, and therefore aim rather to seek a reasonable balance among them. 2.2.2 Objectives from an operational or functional perspective The specific objectives of procurement (Hugo et al., 1997: 9) are to align with the vision, mission and values of the organisation ensure the smooth functioning of business activities by way of an adequate and uninterrupted flow of goods and/or services to the firm buy goods and services of the required quality competitively at the lowest possible price to ensure maximum value for money keep inventory losses and investment in inventory at a minimum, while taking into account safety and economic considerations continually find and develop alternative sources of supply ensure sound and lasting relations with reliable suppliers  achieve healthy cooperation and coordination with other departments of the firm train, develop and maintain capable and motivated personnel create policies, procedures and systems that will ensure that the administrative costs of procurement are kept to a minimum. All strategic procurement decisions are based on these functional objectives. These objectives apply in principle to all categories of buying and to all types and sizes of organisation. 2.2.3 Objectives from a buying plan perspective The third level of objectives is developed when precise plans are made for each category of materials or services that the firm uses in its operations. These objectives are applied to fulfil the specific needs associated with each type of procurement. The precise set of objectives for each material or service typically varies, because the usage requirements, the operating conditions and the markets in which each material or service is procured usually differ. 2.3 THE PROCUREMENT PROCESS When an organisation procures goods, materials or services, it needs to go through a number of consecutive steps or activities normally referred to collectively as the procurement process. The number of steps in the procurement process will differ for different organisations and procurement situations. For the purposes of this chapter, the purchasing cycle involves the following steps: Determining the needs and specifications Finding, evaluating and selecting suppliers  Placing the order Following up and expediting the order Receiving and inspecting the goods Dealing with faulty consignments Analysing the invoice Closing the order The procurement process will vary in length depending on the type of purchase. If a new product or service is purchased, all the steps in the procurement process will be followed. If it is a repeat purchase, in other words, the product or service is purchased frequently and a supplier (or suppliers) has (or have) already been determined, the purchasing cycle will be shorter. STEP 1: DETERMINING THE NEEDS AND SPECIFICATIONS The procurement process begins with the determination of a need by a user department (also referred to as the internal customer: normally a profit centre, cost centre or a business unit). A user department can be any department that requires a product or service, ranging, for example, from the financial department, which requires stationery and computers; to the production department, which needs raw materials or an in-process inventory for the production process. Numerous methods exist whereby the user department may convey its order to the procurement department, and these may include one or more of the following: A purchasing requisition A bill of materials used in conjunction with a materials requirement planning system A scope of work (SOW) for procurement of goods and services A specification In general, the need is described in a specification. Some of the requirements of a good specification are that it must be concise, clear and unambiguous. This specification can include both functional and technical aspects. The functional specification describes the functionality that the product must have for the user. The technical part of the specification describes the technical properties of the product as well as the activities to be performed by the supplier. Together, the functional and technical specifications are referred to as the purchase order specification. Technical specifications are usually laid down in detailed technical drawings. Specifications generally also include the following: Quality specifications, describing technical and other standards to be met Logistics specifications, indicating quantities and expected delivery time Maintenance specifications, describing how products should be maintained or serviced Legal and environmental specifications, determining that the product should comply with health, safety, environmental and other legislation A target budget, giving an indication of financial constraints within which the supplier should offer a solution In most organisations, these needs are firstly communicated through the annual budgeting process. It is therefore a responsibility of the procurement department to plan ahead by collating these needs in advance: from the departmental budgets to the materials requirements planning system. The user department should ensure that the procurement department knows exactly what type, quality and quantity of the product should be acquired. If there is any uncertainty, the procurement department should seek clarity. It should never assume that it knows what the user department requires, as expensive mistakes can easily be made. It is also important for the user department to do proper long-term planning in terms of its requirements. Failure to do so can lead to urgent orders having to be placed, which often cost the organisation more money. STEP 2: FINDING, EVALUATING AND SELECTING SUPPLIERS The finding, evaluation and selection of a supplier will depend on the type of product or service that is being procured. If it is a straightforward repurchase of a product or service that is purchased frequently, and a supplier or suppliers have already been selected, this step can be eliminated. However, if it is a new product or service, or quality or specification changes have been made to products or services purchased in the past, this step should be included. This is often one of the most crucial steps in the procurement process. An organisation may decide wisely regarding the right product or service, the quality, the timeline and the quantity needed, but if it chooses the wrong supplier all these decisions will come to nothing. A good supplier is an invaluable resource to the organisation requiring its product or service. It makes a direct contribution to the success of the organisation, as it can assist with product development, value analysis and timely delivery of the right quality of product. Selection and management of the right supplier is the key to obtaining the desired level of quality, on time and at the right price; the necessary level of technical support, and the desired level of service. Buyers should take a number of important supplier-oriented actions in order to satisfy this responsibility (Dobler & Burt, 1996). The buyers should develop and maintain a viable supplier base  address the appropriate strategic and tactical issues, such as supplier development, partnerships, supplier involvement and black economic empowerment (BEE) ensure that potential suppliers are carefully evaluated and that they have the ability to be satisfactory supply partners decide whether to use competitive bidding or negotiation as the basis of source selection select the appropriate source or be the team leader responsible for this task contract with the selected supplier manage the selected supplier to ensure timely delivery of the required quality of product at the right price. It should be evident that, with regard to the international market, there is a far larger supplier base available than when purchasing from local suppliers. Not only does this open up a much larger supply base: purchasing from international suppliers may also mean lower prices, better quality and a wider variety of products and services. Figure 2.1 provides a summary of the main criteria that should be used when selecting suppliers. When evaluating and selecting a potential supplier, a number of factors should be considered:  Figure 2.1 Supplier selection criteria Source: Adapted from Coyle, Bardi & Langley (2003: 127) Financial criteria. Price and financial stability are important. The quoted price influences the buying organisation’s costs and, ultimately, the organisation’s profitability and competitiveness in the market. It is better to avoid a supplier with a poor financial record, as it might not be able to guarantee an uninterrupted supply of products or services to the organisation. Quality. Quality is as important as price in the selection process. Quality is usually described in the specification, but it is the responsibility of the procurement professional to compare the actual quality with the specifications the users expect. Quality also includes factors such as lifespan of the product, ease of repair, maintenance requirements, ease of use and dependability. Capability. This refers to the potential supplier’s production facilities and capacity, technical capability, management and organisational capabilities, and operating controls. The general question should be: does the supplier have sufficient qualified personnel and can its infrastructure (equipment and premises) produce the quantities and quality desired? Active trade unions and labour relations problems can influence the supplier’s ability to deliver on time, and may also influence the quality of products and services. It is important to consider the labour relations record of the supplier, and to request a copy of the supplier’s labour turnover record. Inspecting the supplier’s warehouse, inventory policy and transport facilities and infrastructure can provide valuable information regarding its ability to deliver on time, as this will influence the uninterrupted operations of the buying organisation. Another important issue in selection is to take care that a potential supplier does not become a captive supplier. A captive supplier exists when the volume of business conducted with that supplier constitutes more than 50% of the supplier’s total turnover. Reliability. This refers to delivery and performance history. Buyers require consistent and punctual deliveries to ensure a continuous flow of production and operations. In the case of new suppliers, it is therefore imperative that the necessary references be obtained prior to contracting, or that such suppliers first be used on a trial basis involving small quantities. Checking with current and past customers of a potential supplier can provide valuable information on, for example, the supplier’s quality reputation, delivery times and after-sales service.  Other desirable qualities. Some of the other aspects that need to be looked at are the supplier’s attitude, whether the supplier provides installation services, whether it provides training on how to use the equipment, and what type of repair and maintenance service is provided. This is especially important where equipment is concerned. Black economic empowerment (BEE). In South Africa an additional aspect to consider is the BEE status of the supplier. The selection of suppliers is one of the most important steps in the purchasing process, and several activities precede this decision (Van Weele, 2005: 52). This process can include any or all of the following: Setting out the pre-qualification requirements, based on the purchase order specification that the suppliers (who are going to be approached for a quotation) will have to meet Assembling the initial bidders list, which indicates which suppliers could probably do the job Sending out the request for information (RFI), also sometimes called the request for proposal (RFP). The suppliers are contacted to provide references and information about their suitability. At this stage, it may be necessary to conduct a supplier visit or audit in order to obtain a precise idea of their capabilities. Large organisations generally work with approved suppliers lists in order to select the best suppliers. Another approach is to have a pre- qualification meeting for interested bidders and suppliers, where the specifications and other matters are clarified. Only attendees are then invited (or allowed) to submit proposals. Deciding on the supplier shortlist. Based on the information that has been gathered, the most promising suppliers are selected. These shortlisted suppliers will be contacted with a request for quotation. Sending out the request for quotation (RFQ). At this stage, suppliers are invited to submit a bid that meets the requirements  as stipulated in the RFQ. The idea behind this is that suppliers should submit their bids in such a way that they can be compared by the buyer. After receipt of quotations, a technical and commercial evaluation of bids is conducted, which includes a risk analysis. Ultimately one supplier is selected, with whom the delivery of the product or service is negotiated and contracted. These activities are generally referred to as the tendering process. Tenders can be formal or informal and can be open or closed. An open tender is a tender without pre-qualification of suppliers. A closed tender is limited to a small number of suppliers who have been carefully pre-selected (Van Weele, 2014: 35). The process is illustrated in Figure 2.2. Figure 2.2 The search for a suitable supplier Source: Snijder (c2005a) Suppliers can be evaluated by combining qualitative as well as quantitative factors in a weighted comparison. The various factors to be considered are weighted, and each supplier is rated according to these weights. This provides a comparative value or score that can be used to evaluate different suppliers, as shown in Figure 2.3.  Figure 2.3 A comparative value or score to evaluate different suppliers STEP 3: THE PURCHASING CONTRACT After selection of the supplier, a contract will have to be prepared. In some cases (once-off buying), the contract is in fact the purchase order, as it is a legally binding agreement between buyer and supplier. Chapter 3 discusses the need for contracts in the supply chain and how these should be managed. It is critical that the content of the contract as well as the contract process (as described in this section) should be correctly managed. Procurement and supply management have long been focused on reducing the time and administrative costs involved in ordering, receiving and paying for goods and services that are used repeatedly in the course of a firm’s operations. Organisations are moving away from short-term supplier contracts, requiring frequent competitive bidding, towards contracts ranging from five to fifteen years. This approach not only frees up time normally spent by purchasing staff on selecting and negotiating with suppliers but also avoids the costs normally associated with supplier selection and negotiations. Improved relations with suppliers are an added advantage of these long-term contracts, as suppliers will reciprocate the purchasing organisation’s long-term commitment to them through improved service, superior quality and reduced prices. Contracting, especially over the long term, has helped reduce time- consuming paperwork, and thus allows procurement to focus on adding value in the supply chain (Dobler & Burt, 1996). In such cases, the contracting and ordering are separate activities. STEP 4: ORDERING AND EXPEDITING Ordering and expediting require a number of actions: Placement of purchase order Acknowledgement of receipt of order Delivery of goods or services Follow-up on order and deliveries Inspection or checking of goods Return of goods not meeting the requirements Analysis and payment of suppliers’ invoices After the terms and conditions of the contract have been agreed and recorded, the order can be placed. The order form is considered a legally binding contract, and as such it is important that all the information contained on the order form should be correct. Thus, before sending out the order, information such as quantities, specifications, delivery date and place, prices and discounts must be verified. After the information on the order form has been checked, the order can be sent out. Nowadays, most organisations perform this activity electronically, using the internet, email or electronic procurement systems. The order must be sent to the supplier as well as the financial and goods receiving departments, to inform them of the order and date of arrival of the goods; also to the user department, to inform them that the order has been placed. Once the supplier has received the order, it normally sends an acknowledgment form to the buying organisation, to acknowledge the delivery date. Thereafter most procurement departments will conduct follow-up inquiries in order to ensure that the supplier will be able to meet the promised delivery date. The more important the order, the more frequent the follow-ups should be. In cases where it is clear that the supplier will not be able to meet the promised delivery date, for example because of problems with its own suppliers, the buying organisation might even go so far as to help the supplier locate alternative sources of supply. The procurement department is sometimes also expected to expedite (speed up) or de-expedite (delay) an order, should the procuring organisation’s timing requirements undergo unexpected changes. Deliveries are usually made to the receiving department or the warehouse, unless otherwise prearranged with the procurement department. An example of a special delivery is if the item purchased is very heavy or requires special handling equipment, such as a load of sand at a construction site. This ensures that the procurement department remains informed of all deliveries, thus avoiding unnecessary follow-up work for items that have already been received. The items delivered with the packing slip should be inspected and checked against the receiving department’s copy of the order form, so as to verify that the right products have been delivered and that they are in a satisfactory condition. After inspecting the goods, the receiving department should issue a receiving note, indicating to the procurement department, supplier and user department that the goods have been received, and also commenting on their condition. If problems with the delivered products are detected or the organisation is unhappy with the service delivered by suppliers, it is the responsibility of the procurement department to deal with the suppliers. It is common practice for most organisations to work towards maintaining long-term relationships with their key suppliers. Therefore, having negotiated with and knowing the suppliers, the procurement department should be in the best position to resolve any unhappiness in terms of defective products or bad service, while still maintaining good supplier relations. The analysis and payment of the suppliers’ invoices is usually completed by the financial department, due to internal control and auditing requirements. Before payment can be effected, a copy of the receiving note and the order form should be matched with the invoice in order to verify that the right quantities have been received the right price has been used to compile the invoice all other conditions have been met. In summary, the added value of the procurement department during the ordering and expediting phase lies predominantly in developing efficient ordering routines between the buying company and supplier checking that all purchase orders are confirmed by the supplier developing and executing a computer-supported, differentiated method of expediting and inspection maintaining a computer-supported database for critical purchasing and supplier information (preferably arranged according to key technologies) developing a sound procedure for order handling applying effective troubleshooting when necessary. STEP 5: FOLLOW-UP AND EVALUATION The procurement department’s role continues after the contract has been signed and the goods or services have been received. Other things that will require attention are the following: Changing order specifications and quantities  Settling warranty and penalty clauses, and claims Supervising the supply of spare parts and maintenance Supervising compliance with agreements (contracts) Evaluating the performance of suppliers Recording the user experience with regard to specific suppliers and products by means of a supplier rating system is extremely important. After a supplier has been chosen and orders have been placed, it is necessary for the procurement department to measure the performance of the chosen supplier. This will generally be evaluated by means of the criteria used in the selection process. These criteria will differ from organisation to organisation, but can include the following: The price charged by the supplier The supplier’s ability to deliver on time The quality of the products delivered by the supplier The capabilities of the supplier 2.4 NEW DEVELOPMENTS IN PROCUREMENT Procurement must be aligned with the vision, mission and values of the organisation, as well as those of the supply chain as a whole. As organisations pursue different types of business strategy, the role of procurement varies. In recent years, the procurement and supply strategies of industrial firms have undergone major changes. New developments resulting from increased competition and diminishing growth opportunities include the following: Procurement coordination and integration Supply base management Supply chain management (strategic sourcing) Value-added partnerships 2.4.1 Procurement coordination and integration Modern information technology enables firms to improve their materials planning and supply systems internally, as well as in terms of their relationships with suppliers. Information technology can improve productivity within materials activities significantly. An integrated approach to materials management requires close cooperation during production planning, inventory control, quality inspection and purchasing. To achieve successful integration, system standardisation is a prerequisite (Van Weele, 2005). Early procurement involvement in product design and subsequent specification development for important items, typically through cross-functional teams, has become part of the supply function. The use of cross-functional teams in supplier qualification and selection is also a new development in the broadening of procurement’s involvement. The search for synergy between the business units in the organisation when securing supply has become critical to maintaining a competitive advantage. Procurement actively participates in the corporate strategic planning process by continuously identifying threats and opportunities in the firm’s supply environment. The development of strategic, long-term plans for major materials and services is also part of this involvement. 2.4.2 Supplier base management Supplier base management requires procurement to consider the following at all times:  Supplier base reduction The creation of lasting relationships Free exchange of information with core suppliers Development of partnerships and alliances in supply 2.4.3 Supply chain management (strategic sourcing) In firms with several manufacturing plants, important purchasing advantages can be realised by combining joint purchasing requirements. A trend towards leveraged or coordinated purchasing strategies is apparent in many large South African firms, even across national borders. Global sourcing has become common in many firms. As a firm’s competitive position is directly related to the competitiveness of its supply base, companies have adopted a global outlook pertaining to sourcing issues. Components are increasingly sourced at lower prices from foreign countries, and are the reason why large manufacturing organisations have set up international purchasing offices (IPOs) in different regions of the world. The total cost of ownership (TCO) has become a critical function for competitive advantage, and involves activity-based costing (ABC). Total cost of ownership implies that buyer and supplier check the activities (and therefore costs) of both organisations for waste, for example: Over-capacity and over-production Standstill in materials flow and stocks Inefficient transport Overlap in activities and unsuitable processes (generally caused by the principal’s specifications) (Snijder, c2005a). Environmental problems are becoming more an