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BUILDING HIGH PERFORMANCE

RELATIONSHIPS WITH SUPPLIERS
Douglas M. Lambert, Ph.D.
Raymond E. Mason Chair in Transportation and Logistics
Fisher College of Business
The Ohio State University
Supply Chain Management
Supply Chain Management
…is the integration of key business processes
from end user through original suppliers, that
provides products, services, and information
that add value for customers and
other stakeholders.
[The International Center for Competitive Excellence, 1994]
[The Global Supply Chain Forum, 1998]
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Tier 1
Supplier
Tier 2
Supplier
Logistics
Purchasing
Marketing & Sales
R&D
Customer
Consumer/
End-user
PRODUCT FLOW
Production Finance
Manufacturer
Information Flow
RETURNS MANAGEMENT
PRODUCT DEVELOPMENT AND COMMERCIALIZATION
SUPPLIER RELATIONSHIP MANAGEMENT
MANUFACTURING FLOW MANAGEMENT
ORDER FULFILLMENT
DEMAND MANAGEMENT
CUSTOMER SERVICE MANAGEMENT
CUSTOMER RELATIONSHIP MANAGEMENT
SUPPLY CHAIN MANAGEMENT
Integrating and Managing Business Processes Across the Supply Chain
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”,
The International Journal of Logistics Management, Vol. 9, No. 2 (1998), p. 2.
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Tier 1
Customers
Tier 2
Customers
Tier 3 to
Consumers/
End-users
Tier 2
Suppliers
Tier 1
Suppliers
Tier 3 to
Initial
suppliers
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Members of the Focal Company’s Supply Chain
Focal Company
Non-members of the Focal Company’s Supply Chain
Managed Process Links
Not-Managed Process Links
Non-Member Process Links
Monitored Process Links
Types of Inter-company Business Process Links
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Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues
and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 7.
Sales Marketing Production
FUNCTIONAL INVOLVEMENT
IN THE SUPPLY CHAIN MANAGEMENT PROCESSES
Information Architecture, Data Base Strategy, Information Visibility
Research &
Developmen
t
Logistics Purchasing Finance
Business
Processes
Demand
Management
Forecasting
Manufacturing
Capabilities
Sourcing
Capabilities
Competitors’
Initiatives
Customer Relationship
Management
Logistics
Capabilities
Manufacturing
Capabilities
Sourcing
Capabilities
Customer
Profitability
Account
Management
Requirements
Definition
Customer Service
Management
Alignment of
Logistics
Activities
Coordinated
Execution
Prioritization of
Customer
Knowledge of
Customer
Operations
Manufacturing Flow
Management
Production
Planning
Integrated
Supply
Order Fulfillment
Network
Design
Made-to-Order
Material
Constraints
Distribution
Cost
Role of Logistics
Service in
Marketing Mix
Product Development
and Commercialization
Process
Specifications
Material
Specifications
R & D Cost
Product
Design
Logistics
Requirements
Priority
Assessment
Cost-to-
Serve
Tradeoff
Analysis
Process
Requirements
Environmental
Requirements
Differentiation
Opportunities from
Manufacturing
Capabilities
Prioritization
Criteria
Supplier Relationship
Management
Integrated
Planning
Supplier
Capabilities
Total Delivered
Cost
Material
Specifications
Capabilities Required
for Competitive
Positioning
Inbound
Material Flow
Manufacturing
Cost
C
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T
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S
S
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R
S
Business
Functions
Returns Management
Note: Process sponsorship and ownership must be established to drive the attainment of the supply chain vision and
eliminate the functional barriers that artificially separate the process flows.
Information Architecture, Data Base Strategy, Information Visibility
Knowledge of
Marketing
Programs
Product
Design
Reverse
Logistics
Capabilities
Remanu-
facturing
Material
Specification
Revenue &
Costs
Source: Adapted from Douglas M. Lambert, Larry C. Guinipero and Gary J. Ridenhower, “Supply Chain Management: A Key to Achieving Business Excellence in the 21
st
Century”, unpublished
manuscript as reported in Keely L. Croxton, Sebastián J. García-Dastugue and Douglas M. Lambert, “The Supply Chain Management Processes”, The International Journal of Logistics
Management, Vol. 12, No.2 (2001), p. 31.
Technological
Capabilities
Marketing Plan
& Resources
Technical
Service
Customer
Knowledge
Customer
Opportunities
Product/Service
Gaps in Market
Sales Growth
Opportunities
Design for
Manufacturability
Knowledge of
Customer
Requirements
Knowledge of
Customer
Requirements
Competing
Programs in
Customer Space
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Tier 1
Supplier
Tier 2
Supplier
Logistics
Purchasing
Marketing & Sales
R&D
Customer
Consumer/
End-user
PRODUCT FLOW
Production Finance
Manufacturer
Information Flow
RETURNS MANAGEMENT
PRODUCT DEVELOPMENT AND COMMERCIALIZATION
SUPPLIER RELATIONSHIP MANAGEMENT
MANUFACTURING FLOW MANAGEMENT
ORDER FULFILLMENT
DEMAND MANAGEMENT
CUSTOMER SERVICE MANAGEMENT
CUSTOMER RELATIONSHIP MANAGEMENT
SUPPLY CHAIN MANAGEMENT
Integrating and Managing Business Processes Across the Supply Chain
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”,
The International Journal of Logistics Management, Vol. 9, No. 2 (1998), p. 2.
Supply Chain Performance = Increase in Profit for A, B, C, and D
Manufacturer
C
Retailer/
End User
A
Wholesaler/
Distributor
B
P&L for
C as supplier
P&L for
B as supplier
∆ Revenue
- ∆ Cost
∆ Profit
∆ Revenue
- ∆ Cost
∆ Profit
Supplier
D
P&L for
A as customer
∆ Revenue
- ∆ Cost
∆ Profit
P&L for
B as customer
∆ Revenue
- ∆ Cost
∆ Profit
P&L for
C as customer
∆ Revenue
- ∆ Cost
∆ Profit
Total Cost Report
for D as supplier
∆ Cost = ∆ Profit
Source: Adapted from: Douglas M. Lambert and Terrance L. Pohlen, “ Supply Chain Metrics”, The International Journal of Logistics Management,
Vol. 12, No. 1 (2001), p. 14.
CRM
SRM SRM SRM
CRM CRM
Customer Relationship Management (CRM) & Supplier
Relationship Management (SRM): The Critical Supply Chain
Management Linkages
Supplier Relationship
Management Process
Supplier Relationship
Supplier Relationship
Management Process
Management Process
Relationships with major suppliers are corporately managed as partnerships
while purchase order transactions become simplified and integrated with the
supply process.
Required Behaviors
Product/service agreements are developed
and managed with key suppliers and
segments of non-key suppliers.
Teams work with suppliers to maintain costs
and improve service.
Goal is to improve the profitability of both the
focus firm and the suppliers.
Purchase order transactions are integrated
with the supply process to improve
productivity and all areas of supplier
performance.
Supplier Relationship Management Teams
Supplier Relationship Management Teams
From
To
MIS
R&D
MKTG
LOG
ACCT
Purchasing
MIS
R&D
MKTG
LOG
ACCT
Sales
MIS
R&D
MKTG
LOG
ACCT
Buyer Seller
MIS
R&D
MKTG
LOG
ACCT
Source: Keely L. Croxton, Sebastián J. García-Dastugue, Douglas M. Lambert, and Dale S. Rogers, “The Supply Chain Management Processes,”
The International Journal of Logistics Management, Vol. 12, No. 2, (2001), p. 15.
Process Interfaces
Customer Relationship
Management
Customer Service
Management
Demand Management
Order Fulfillment
Manufacturing Flow
Management
Product Development
& Commercialization
Returns Management
Strategic Sub-Processes
Review Corporate, Marketing,
Manufacturing and Sourcing
Strategies
Identify Criteria
for Categorizing Suppliers
Provide Guidelines for the Degree
of Customization in the
Product/Service Agreement
Develop Framework of Metrics
Develop Guidelines for Sharing
Process Improvement Benefits
with Suppliers
Operational Sub-Processes
Differentiate Suppliers
Prepare the Supplier/Segment
Management Team
Internally Review the Supplier/
Supplier Segment
Identify Opportunities
with the Suppliers
Develop the Product/Service
Agreement and
Communication Plan
Measure Performance and
Generate Supplier
Cost/Profitability Reports
Implement the Product/Service
Agreement
Supplier Relationship Management
Customer Relationship
Management
Strategic Sub-Processes Process Interfaces Activities
Customer Service
Management
Demand Management
Order Fulfillment
Manufacturing Flow
Management
Product Development
& Commercialization
Returns Management
The Strategic Supplier Relationship Management Process
Review Corporate, Marketing,
Manufacturing and Sourcing
Strategies
Identify Criteria
for Categorizing Suppliers
Provide Guidelines for the Degree
of Customization in the
Product/Service Agreement
Develop Framework of Metrics
Develop Guidelines for Sharing
Process Improvement Benefits
with Suppliers
Outline metrics of interest
Relate metrics to the supplier’s impact on
profitability and the profitability for the supplier
Identify product & service components that are key
to the organization’s success now and in the future
Profitability / Growth / Stability
Technology
Capacity
Innovation
Quality
Volume purchased
Criticality / service level required
Sophistication / Compatibility
Consider quality/cost implications of various
differentiation alternatives
Select boundaries for degree of differentiation
Outline options for sharing the benefits of process
improvement
 The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
Potential
Categorizing Packaging Suppliers at
Masterfoods USA
- Under development
- Intensive care
- Temporary
- Not in stable stage
- Either a niche/core supplier
that the company can grow
- Open relationship
- Long term relationship
- Large % of spend
- Focus on our business
- Not a current supplier
- Reasons for interest:
• Size
• Technology
• Innovation
• Diversity
Unique offering
Niche
Core
Assessment
 The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
Bottlenecks
Cooking Oil
Strategic
Chicken
Beef
Promotional Sauces
Non-Critical
Straws
Leverage
Cups
Napkins
Low Volume of Spend High
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H
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Comparing Suppliers on Complexity and Volume
Source: Judy Hollis, Vice President, Wendy’s International
Improve product quality
Improved order fill rates
Improve manufacturing processes
Reduce cost of direct material
Improve plant productivity
Reduce purchased goods inventories
Reduce work in process inventories
Reduce finished goods inventories
Improve asset utilization and rationalization (warehousing & plant)
Improve investment planning and deployment
Increase productivity
Reduce freight and indirect labor/warehousing costs
Optimize physical network/facilities
Reduce order management costs
Reduce general overhead/management/administrative costs
Reduce information systems costs
Reduce human resources costs/improve effectiveness
Supplier Relationship Management’s Impact
%
Net Profit
Profit from
Operations
Taxes
Total
Expenses
Gross
Margin
Cost of
Capital
Inventory
Total
Assets
Current
Assets
Fixed
Assets
Other
Current
Assets


+
+
Sales
Economic
Value
Added
=
Cost of
Goods Sold
Source: Adapted from Douglas M. Lambert, and Terrance L. Pohlen, “Supply Chain Metrics,” The International Journal of Logistics Management, Vol. 12, No. 1 (2001), p. 11.
×


Capital Charge
How Supplier Relationship Affects Economic Value Added (EVA
®
)
Is cost
dependent on
unit volume?
Is
resource
dedicated to a
specific
product
line?
Place in
contribution
pool
Charge
Applicable
Segment
Charge
Applicable
Segment
Variable
Non-Variable
Indirect
NO
NO
YES
YES
Assigning Costs to Segments
Assigning Costs to Segments
SUPPLIER PROFITABILITY ANALYSIS:
SUPPLIER PROFITABILITY ANALYSIS:
A CONTRIBUTION APPROACH WITH
CHARGE FOR ASSETS EMPLOYED
SUPPLIER A SUPPLIER B SUPPLIER C SUPPLIER D
COST OF GOODS SOLD
VARIABLE MARKETING & LOGISTICS COSTS:
ASSIGNABLE NONVARIBLE COSTS:
SALARIES
ADVERTISING
INVENTORY CARRYING COSTS LESS:
GROSS MARGIN
TRANSPORTATION
RECEIVING
ORDER ROCESSING
SALES
PLUS: DISCOUNTS AND ALLOWANCES
MARKET DEVELOPMENT FUNDS
SLOTTING ALLOWANCES
CO-OP ADVERTISING
NET MARGIN
Other Costs
(will depend on situation)
CHARGE FOR ACCOUNTS PAYABLE
CONTRIBUTION MARGIN
SEGMENT CONTROLLABLE MARGIN
Other Costs
(will depend on situation)
 The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
The Three Components of Total Costs
Warranty costs
Customer dissatisfaction costs
Environmental costs
Product liability costs
• Post-Ownership Costs
Risk costs
Conversion costs
Supply chain/Supply network costs
Downtime costs
Cycle time costs
Non-value-added costs
• Ownership Costs
Planning costs
Taxes
Purchasing price
Quality costs
Financing costs
• Acquisition Costs
Sysco Sales and Earnings History
Sysco Sales and Earnings History
0
5
10
15
20
25
30
F
Y
7
0
F
Y
7
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F
Y
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F
Y
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Y
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7
F
Y
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8
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Y
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9
F
Y
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0
F
Y
8
1
F
Y
8
2
F
Y
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3
F
Y
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4
F
Y
8
5
F
Y
8
6
F
Y
8
7
F
Y
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8
F
Y
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9
F
Y
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0
F
Y
9
1
F
Y
9
2
F
Y
9
3
F
Y
9
4
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
0
100
200
300
400
500
600
700
800
900
Sales
Net Earnings
5 Yr. CAGR: Sales = 11.3% Net Earnings 19.1%
10 Yr. CAGR: Sales = 10.1% Net Earnings 14.5%
20 Yr. CAGR: Sales = 14.6% Net Earnings 16.0%
30 Yr. CAGR: Sales = 16.6% Net Earnings 18.1%
Sales
(Billions)
Net Earn.
(Millions)
* All net earnings data is before accounting changes.
FY03 Sales +11.9%; Net Earnings +14.5%
Source: Neil Theiss, Senior Director, Supply Chain Management, Sysco Corporation.
CUSTOMER
A
NET SALES
COST OF GOODS SOLD (VARIABLE MFG. COST)
MANUFACTURING CONTRIBUTION
VARIABLE MARKETING & LOGISTICS COSTS:
SALES COMMISSIONS
TRANSPORTATION
WAREHOUSING (HANDLING IN AND OUT)
ORDER PROCESSING
CHARGE FOR INVESTMENT IN ACCTS. REC.
CONTRIBUTION MARGIN
ASSIGNABLE NONVARIABLE COSTS:
SALARIES
SEGMENT RELATED ADVERTISING
SLOTTING ALLOWANCES
INVENTORY CARRYING COSTS
SEGMENT CONTROLLABLE MARGIN
CHARGE FOR DEDICATED ASSETS USED
NET SEGMENT MARGIN
SPECIAL PACKAGING
COST OF GOODS SOLD
VARIABLE MARKETING & LOGISTICS COSTS:
ASSIGNABLE NONVARIABLE COSTS:
SALARIES
ADVERTISING
INVENTORY CARRYING COSTS LESS:
GROSS MARGIN
TRANSPORTATION
RECEIVING
ORDER ROCESSING
SALES
PLUS: DISCOUNTS AND ALLOWANCES
MARKET DEVELOPMENT FUNDS
SLOTTING ALLOWANCES
CO-OP ADVERTISING
NET MARGIN
CHARGE FOR ACCOUNTS PAYABLE
CONTRIBUTION MARGIN
SEGMENT CONTROLLABLE MARGIN
SUPPLIER
A Supplier Customer
CHARGE FOR DEDICATED ASSETS USED
NET SEGMENT MARGIN
 The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
COMBINED CUSTOMER COMBINED CUSTOMER- -SUPPLIER PROFITABILITY ANALYSIS: SUPPLIER PROFITABILITY ANALYSIS:
A CONTRIBUTION APPROACH WITH CHARGE FOR ASSETS EMPLOYED A CONTRIBUTION APPROACH WITH CHARGE FOR ASSETS EMPLOYED
“ I ask my executives to run
the business as if it is the only
asset their family has, they can’t
sell it, and they are going to own it
for 100 years.”
Warren Buffett
Berkshire Hathaway
Customer Relationship
Management
Operational Sub-Processes Process Interfaces Activities
Customer Service
Management
Demand Management
Order Fulfillment
Product Development
& Commercialization
Returns Management
The Operational Supplier Relationship Management Process
Differentiate Suppliers
Prepare the Supplier/Segment
Management Team
Internally Review the Supplier/
Supplier Segment
Identify Opportunities
with the Suppliers
Develop the Product/Service
Agreement and
Communication Plan
Measure Performance and
Generate Supplier
Cost/Profitability Reports
Implement the Product/Service
Agreement
Manufacturing Flow
Management
Perform supplier profitability analysis or total cost
analysis
Assess potential growth, strategic value and
drivers
Identify Account/Commodity Manager
Select team members
Product purchased
Sales growth
Criticality of supplier
Sales opportunities
Cost reduction opportunities
Service improvement opportunities
Develop and follow implementation plan
Meet regularly with key customers
Measure by supplier and for the supplier
Revenue Costs
Profitability Other: service, quality
Report performance
Outline and draft the PSA
Gain commitment of the company’s functions
Gain supplier acceptance of PSA
Agree on a communications and continuous
improvement plan
 The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
2) What processes should be
linked with each of these
key supply chain members?
1) Who are the key supply
chain members with whom
to link processes?
3) What level of integration and
management should be applied
for each process link?
Supply Chain
Management
Processes
Supply Chain
Network
Structure
Supply Chain
Management
Components
SUPPLY CHAIN MANAGEMENT: Elements and Key Decisions
SUPPLY CHAIN MANAGEMENT: Elements and Key Decisions
Source: Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The
International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 4.
THANK YOU
THANK YOU
DO YOU HAVE ANY
DO YOU HAVE ANY
QUESTIONS??
QUESTIONS??