KENYATTA UNIVERSITY

SCHOOL OF BUSINESS

DEPARTMENT: MANAGEMENT SCIENCE DEPARTMENT

UNIT CODE & NAME: BMS 317 – PRINCIPLES OF SUPPLY CHAIN NOTES

WRITTEN BY: Ms. PERRIS CHEGE

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Introduction

Traditionally most organizations viewed themselves as entities that existed independently

from others in order to survive. “Survival; for the fittest” was thus the driving corporate
strategy.

It was often the case that relationship with supplier (upstream) and downstream with
customers e.g. distributors, or retailers were viewed as adverbial rather than co-operative.
Even today some companies will seek to achieve cost reduction or profit improvement at the
expenses of their suppliers or customers (supply chain partner).

Companies like this do not realize that simply transferring cost upstream or downstream
does not make them any competitive.

This is because all costs will make their way to final market place to be reflected in the price
paid by end user.

The leading edge costs recognize the fallacy of this convectional approach and instead seek
to make supply chain as a whole more competitive through value it adds and the costs that it
reduces overall.

They have realized that real competition is not company against company but rather
supply chain against another supply chain.

What is supply chain?

Definition

1. Supply chain is the network of organizations that are involved through upstream and
downstream linkages, in the different processes and activities that produce value in the
form of product and services in the hands of the ultimate customers.

2. Supply chain is a set of approaches used to efficiently integrate suppliers, manufacturers,

and warehouses and stores so that merchandise is produced and distributed at the right

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 quantity, to the right locations and at the right time in order to minimize system wide
costs while satisfying services level requirements.

3. Supply chain is the management of upstream and downstream relationships with

suppliers and customers to deliver superior customer value at less cost to the chain
supply as a whole.

4. Is a network of connected and interdependent organizations mutually and co-operatively

working together to control and manage the flow of material, information and finances
from supplies to the end user.

This definition leads to several observations;

i. Supply chain management considers every facility that has an impact on cost and plays a
role in making the product conform to customer’s requirements.

ii. The object of supply chain management is to be efficient and cost effective across the
entire system, and that total system wide costs, from transportation and distribution to the
inventory of raw materials work in the process and finished goods are minimized.

iii. It encompasses the firms activities at all levels from the strategic level through the
tactical, to the operational level.

Logistic management.

The concept of supply chain management is an extension of logistic management.

Logistic management is the process of planning, implementing and controlling the efficient cost
effective flow and storage of materials within the organization.

In–process inventory, finished goods and related information from point of origin to the point of
consumption for the purpose of conforming to the customer requirements.

Logistic management is primarily concerned with optimizing flows within the organization
through internal integration.

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Supply chain management recognizes that internal integration is not enough thus the need to
extend the internal linkages to other firms so as to achieve a cost effective chain.

Stages in evolution of supply chain integration

Stage 1. Baseline

This is a stage of complete independence. All business function such as production or purchasing
does their own things in complete isolation from other business functions e.g. production
department would seek to optimize it unit costs of manufacture by long production runs without
regard for the buildup of finished goods inventory and the impact it will have on the need for
warehousing space and the impact on working capital.

Material flow customer service

Purchasin Material Productio Distributio

Sales
g Control n n

Stage 2: Functional integration

The companies have recognized the need for at least a limited degree of integration between
adjacent functions e.g. purchasing and material control, distribution and marketing etc.

Material flow customer service

Purchasing Production
Distribution &
management &
& material control marketing
storage

Stage 3: Internal integration

This stage requires the establishment and implementation of ‘end- to end” planning frame work.

(end –to -end internal integration).

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It involves integrating the departments within the organization so that they work together in
harmony and as a team.

Material flow customer services

Procurement
Production Distribution
department

Stage iv: External integration

This stage represent true supply chain integration .The concept of linkage and co-ordination
that was achieved in this stage iii is now extended upstream to suppliers and downstream to
customers.

Internal supply
Suppliers Customer.
Chain (business)

Distinction between logistics and supply chain management.

Logistic is essentially a planning orientation and frame work that seeks to create a single plan for
the flow of information and product through business.

Supply chain seeks to achieve linkage and co-ordination between processes of other entities
(businesses) in the pipeline i.e. suppliers and customers and the organization itself e.g. one goal
of supply chain management might be reduce or eliminate the buffer inventory that exist between
organization in a chain through sharing of information on demand and current stock levels. (This
is a concept of “co-managed inventory”

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 THE CHANGING LOGISTICS SUPPLY CHAIN ENVIRONMENT.

As the competitive context of business continues to change bringing with it new complexities
and concerns for mgt, it should be recognized that the impact of these changes are reflected
on logistics.

The most strategic issues that confront business organization are challenges in the area
of logistics.

This challenge includes:

a) Customer services explosion

A customer in today’s market place is more demanding not just for products quality but also
for service.

In “commodity market” customers perceives little technical difference between completing

offers hence the need for the creation of differential advantage through added value. A prime
source of this added value is customer service i.e. consistent provision of time and place
utility.

Products do not have value until they are in the hands of the customers at the time and place
required. Customer service may range from on-time delivery through after sale –support.

In this way, significant differentiation of the total offer (i.e. the core product plus the service)
can be achieved.

The attainment of service excellence can only be achieved through closely integrated
logistics strategies.

The ability to become a world class supplier depends upon the effectiveness of one’s
operating systems as it does the presentation of the product, the creation of image &
influencing of customers perception.

Managing the logistics of service delivery on a consistent basis in the crucial source of
differential advantage.

b) Time compression
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 Time has become crucial issue in management.

Product life-cycles are shorter than ever, industrial customers & distributors requires just –in-
time deliveries & end users are ever more willing to accept substitute product if their first
choice is not instantly available.

There is need to improve the quality of the feedback from the market place & to link this
more directly into the firm research and development efforts. All this is necessary if the
business is to remain alive.

The concept of logistic lead-time should therefore apply i.e. how long does it take to convert
an order into cash. The firm should ensure that orders are serviced soonest possible i.e.
shorten the lead time as much as possible. To counter the competitive impact of short order
cycle, working capital & resources should be committed to an order.

To overcome these problem & to establish enduring competitive advantage & by ensuring
timely response to volatile demand, logistics lead-time management is required.

c). Globalization of industry

Trend towards globalization is strategic issues that provide a challenge for logistic
management.

In a global business, materials & components are sourced worldwide, manufactured off-
shore & sold in many different countries perhaps with local customization.

The only role left for national companies will be to cater for specific & unique local demand.
For global companies, management of logistic process has become an issue of central
concern.

The profit/loss on individual product depends upon the extent to which the global supply
chain pipeline is managed because the costs involved in transactions are so great.

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A company like caterpillar has dispersed assembly operations to key over-seas & use global
logistics channel to supply parts of off-shore assembly plants & after –markets. When
appropriate, a company will use third party Company to manage distribution & even final
finishing. Thus local market needs can be catered for from a standardized production process
to customization.

The challenge to a global company is how to achieve the cost advantage of standardization
while still catering for local demand for variety to provide the specific product demand by
each market.

d) Organizational integration

The classical business organization is based upon strict functional divisions &
hierarchies.

In this convectional organization, material managers manage material, production

manages production, marketing manages marketing etc.

It is difficult to achieve close integrated customer –focused material flow yet these
functions are component of a system that needs some overall plan or guideline to fit
together.

To achieve a position of sustainable competitive advantage, tomorrow’s org will be faced

with the need to dispense functional managers.

Instead a broad based interrogator oriented toward the achievement of marketable

success, based upon managing processes & people that deliver service.

A generalist will be required to integrate material management with operations

management & delivery.

Knowledge of system theory & organization behavior will become a pre-requisite for
these new type managers

They will be market-oriented with a sharp focus upon customer service as the primary
source of competitive advantage.

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The new rules of competition

We are now entering the era of ‘supply chain competition’. The fundamental difference
from the previous model of competition is that an organization can no longer act as an
isolated and independent entity in completion with other similarly “stand –alone”
organizations .Instead, the need to formulate ways that will make the firm to be more
competitive.

This could be achieved through:

i) Creation of value delivery systems that are more responsive to fast –changing markets
and that are much more consistent and reliable in the delivery of that are much more
consistent and reliable in the delivery of that requires that the supply chain as a whole
focused on the achievement of these goals.

In the past the ground rules for the marketing success were obvious; strong brands,
backed up by large advertising budgets and aggressive selling.

This formula now appears to have lost its power. Instead, the argument is that companies
must recognize that increasingly, it is through their capabilities and competencies that
they are complete.

Essentially, this means that organization creates superior value for customers.

ii) By managing their core processes better than competitors manage theirs.

These core processes encompass such activities as new product development, supplier
development, order fulfillment and customer management.

By performing these fundamental activities in a more cost –effective way than

competitors, it is argued; organizations will gain the advantage in the marketplace.

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iii) Management inbound and outbound logistics.

One capability that is now regarded by many companies as fundamental to success in the
marketplace is the management inbound and outbound logistics. As product lifecycles
shorten, as customers adopt just-in-time practices and as sellers ‘markets become buyers
markets' then the ability of the organization to respond rapidly and flexibly to demand
can provide a powerful competitive edge.

iv) Product availability in many markets

A major contributing factor influencing the changed competitive environment has been
the trend towards ‘customization’ & product availability in many markets and move from
commoditization. A commodity market is characterized by perceived product equality in
the eyes of customers resulting in a high preparedness to buy substitute product.

Customers are less royal to special brands but instead will have a portfolio of brands
within a category from which they make their choice. In institutions such as this, actual
product availability becomes a major determinant of demand.

There is evidence that more and more decisions are being taken at point of purchase and
if there is a gap on the shelf where brand “x” should be but band “y” is there instead,
then there is a strong probability that brand “y” will win the sale.

v) Delivery lead times and flexibility.

It is not only in customer markets that the importance of logistics process excellence is
apparent .In business –to –business and industrial markets it seems that product or
technical features are of less importance in winning orders than issues such as delivery
lead times and flexibility.

This is not to suggest that product or technical features are un –important –rather it is that
they are taken as a ‘given’ by customer .Quite simply ,in today’s market place the order
winning criteria are more likely to be service –based then product-based.

vi) Consolidation of demand. (Reduction of customer base)

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Firms are seeking to do more for fewer customers. These strategies will be “vertical’
rather than “horizontal” in that the organization will seek to do more for fewer customers
rather than looking for more customers whom to sell the same product .

The car industry provides a good example of this phenomenon with “lead” suppliers
taking on much greater responsibility for the delivery of entire systems of modules to the
assembly line.

Such a transition from volume –based growth will require a much greater focus on
managing the core processes that we referred to earlier.

A parallel development in many markets is the trend towards a consolidation of demand.

In other words consumers–as against customers –are tending to grow in size whilst
becoming fewer in number .The retail grocery industry is a good example in that most
northern European countries a handful of large retailers account for over 50 percent of all
sales in any one country.

This tendency concentrate of buying power is being accelerated as a result of global

competition and the fact that in most industries there is a worldwide over capacity .The
impact of these trends is that these more powerful customers are becoming more
demanding in terms of their service requirements from suppliers thus the need to
consolidate them so as to be able to meet their specific needs.

vii) Reduce the supplier base.

As the power of distribution channel continues to shift from supplier to buyers, there is a
trend to firms to reduce their supplier base. In other words they want to do business with
fewer suppliers and often on longer-term basis.

The successful companies in the coming years will be those that recognize these trends
and seek to establish strategies which are based upon establishing closer relationships
with key accounts. Such strategies will focus upon seeking innovative ways to create
more value for these customers.

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viii) Product innovation.

Whereas the competitive model of the past relied heavily on product innovation this will
have to be increasingly supplemented by process innovation .The basis of completing in
this new era will be:

Competitive advantage = Product excellence + Process excellence

For many companies in the investment has mainly concentrated on product excellence
and less on process excellence.

This is not to suggest that product innovation should be given less emphasis –far from it –
but rather more emphasis needs to be placed on developing and managing processes that
deliver greater value for key customers.

It has already been commented that product life cycles are getting shorter. What we have
witnessed in many markets is the effect of changes in technology and consumer demand
combining of produce more volatile markets where products can be absolute almost as
soon after reaching the market.

There are many current examples of shortening life cycle but perhaps personal computer
symbolizes them all. In this particular case we have seen rapid developments in
technology which have firstly created markets where none existed before and then almost
as quickly have rendered themselves obsolete as the next generation of product is
announced.

Such shortening of life cycles create substantial problems for logistics management. In
particular, shorter life cycles demand shorter lead times –indeed our definition of lead
time may well need change.

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Lead times are traditionally defined as the elapsed period from receipt customer order to
delivery. However, in today’s environment there is a wider perspective that needs to be
taken .The real time is that time wider perspective that needs to be taken from the
drawing board ,through procurement ,manufacture and assembly to the end market. This
is the concept of strategic lead time and the management of this span is the key to success
in managing logistics operation.

There are already situations arising where the life cycle is shorter than the strategic lead
time. In other words the life of a product in the market is less than the time it takes to
design, procure, manufacture and distribute the same product. The implications of this are
considerable both for planning and operations .In a global context the problem is
exacerbated by longer transportation times involved.

Ultimately, therefore, the means of achieving success in such markets is to accelerate

movement through the supply chain and to make the entire logistic system far more
flexible and thus responsive to these fast –changing markets.

Whilst there are many implications of these pressures for the way we manage logistic
there are four key issues in achieving firms competitive advantage will be recurring
themes throughout the course: responsiveness, reliability, relationship and resilience.

Four key issues in achieving firm’s competitive advantage

1. Responsiveness

In today’s just –in- time world, the ability to respond to customers requirements is ever
shorter time-frames has become critical. Not only do customers want shorter lead times,
they are also looking for flexibility and increasingly, solutions to their problems .

In other words the supplier has to be able to meet the precise needs of customers in less
time than ever before .The key word in this changed environment is agility.

Agility implies the ability to move quickly and to meet customer demand sooner. In a
fast –changing market place agility is actually more important than long term strategy in
a traditional business planning sense. Because future demand patterns are uncertain by
definition this makes planning more difficult and in a sense, hazardous.

In the future, organizations must be much more demand –driven than forecast driven. The
means of making this transition will be through the achievement of agility, not just within

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the company but across the supply chain. This is because agility is not a single business
concept but it is a concept that extends from one end of the supply chain to the other.

2. Reliability

One of the main reasons why any company carries safety –stock is because of
uncertainty. It may be:

Uncertainty about future demand, Uncertainty about supplier’s ability to meet a delivery
promise, Uncertainty about the quality of material or components.

Significant improvements in reliability can only be achieved through reengineering the

processes that the best way to improve quality is not by quality control through inspection
but rather to focus on process control. The same is true for logistics reliability.

A key to improving reliability in logistics processes is enhanced pipeline visibility. It is

often the case that there is limited visibility of downstream demand at the end of the
pipeline. Thus the manufacturer of synthetic fibers may have a little awareness of current
demand for the garments that incorporate those fibers in the material from which they are
made. If a means can be found of opening up the pipeline so that there is clear end –to
end visibility then reliability of response will inevitably improve.

3. Relationships

The trend towards customers seeking to reduce their supplier base has already been
commented upon. In many industries the practices of ‘single sourcing’ is widespread. It is
suggested that the benefits of such practices include; improved quality, innovation
sharing, reduced cost, unlocking of the could be tied capital etc.

Vertically integrated businesses continue to dismembered refocused and transformed into

virtual ones held together not by ownership and financial engineering but closely
integrated core business processes. Where once vertical integration produced rivalry and
mistrust within the supply chain, new competitive pressures are demanding speed and
flexibility, which themselves require greater openness and trust.

In fact the ability to manage process innovation and integration are becoming as
important capabilities as product innovation.

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 4 Resilience

This is the ability of the firm to return back to its original or desired state after disturbances.

This can be achieved through; flexibility, agility, maintaining safety stock, upstream ad down
stream visibility, supply chain collaboration and creation of a supply chain risk management
culture.

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Handout Two

SUPPLY CHAIN STRATEGY

Strategies in supply chain that can give a firm competitive advantage in the market place.

Effective logistics management can provide a major source of competitive advantage i.e. position
of enduring superiority over competitors in terms of customers’ preference.

The bases for success are mainly based on the “three Cs” triangle i.e. Company, Customers &
Competitors.

The three “Cs” can be used to explain the relationship between logistics & competitive
advantage.

Customer
Needs, seeks benefit acceptable price

Value differentiation Value differentiation

Asset & utilization

Asset & utilization

Company Cost differentiation Competitor

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 Source of competitive advantage is found on the ability of the organization to differentiate
itself in the eyes of customers from its competitors.

The organization should also be operating at lower cost hence at a greater profit.

Successful companies therefore have either productivity advantage or they have value
advantage or a combination of the two.

The productivity advantage gives the product or offering a differential plus over competitors
offering.

1. Productivity advantage.

In many industries there is one competitor who will be the low cost producer & will have the
greatest sales volume in the sector.

This is a substantial evidence that “big is beauty” when it comes to cost advantage.

This is partly due to economies of scale which enables fixed cost to be spread over a greater
volume but more particularly to impact of experience curve.

Real cost per unit

Cost

As the volume of sales increases the

real cost per unit decreases

Q1 Q2 Q3

Quantity

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Research has shown that all costs not just production cost declines as the volume of production
increases.

Traditionally it was believed that the main route to reduce cost was gaining great volume of
sales.

However it has also been recognized that logistic management increases efficiency and
productivity and hence contribute significantly to reduce the costs per units.

Logistics management can provide a multitude of ways to increase efficiency and productivity
hence contribute significantly to reduced unit costs.

2. Value advantage.

Product is purchased not for itself but for what it promises to deliver.

These promises could be benefits that may be tangible or intangible. They may not relate to a
specific product feature but rather things like image, hope and reputation.

A product may be seen to out –perform its rival in some functional way/aspects.

Unless the product or service we offer can be distinguished from its competitors, a strong
likelihood is that it will viewed as a “commodity”& consumers will go to the cheapest supplier.
Thus the importance of seeking additional value (differential plus) to our offering to mark it out
the competition.

How to gain value differentiation.

1. Segmented approach .to the market – (value - segment)

The company should scrutinize the market closely to come up with products that are distinct
from competitors.

This create product differentiation which can be achieved through product design, packaging,
after sales service etc which creates “differentiated appeal”

Adding value through differentiation is a powerful means of achieving a defensive advantage in

the market.

Adding value in service

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 Markets are becoming more sensitive. There is a trend in the market toward sensitive in the
strength of the “brand” and consequent more towards “commodity market” status.

This means it is becoming more difficult to complete purely on basis of brand or corporate
image.

It’s no longer possible to compete effectively on the basis of product cost difference. Thus the
need to seek differentiation through other means other than technology.

A number of companies have responded to this by focusing upon services as a means of

competitive edge.

Services in this context relate to the process of developing relationships with customers
through provision of augmented offer e.g.

 Delivery service

 After sales services

 Financial packages

 Technical support etc

In practice successful companies will often seek to achieve a position based upon both
productivity advantage and value advantage.

This can be explained using a simple matrix.

Value advantage cost and service leader

market
commodity service leader
market

Commodity market Cost leader

Productivity advantage

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Companies should strive to move from commodity market diagonally to cost & service leader.

Companies found in the bottom left hand corner of the matrix, the world is not a comfortable
place for them. Their products are indistinguishable from their competitors’ offerings & have no
cost advantage or service advantage.

These are typically commodity market & their only strategy is to move to the right i.e. cost
leadership or upward toward service leadership.

Cost leadership has traditionally been based upon the economies of scale gained through sales
volume as explained by the experience curve.

This can be achieved more efficiently through “logistic management’ i.e. logistic

re-engineering customers in all industries are seeking greater responsiveness and reliabilities
from suppliers;

This can be achieved through:

 Seeking greater responsiveness & reliability from supplies reduced lead time

 Just in delivery (JIT)

 Value –added services

This creates services excellence for customers.

Gaining competitive advantage through logistics.

Logistic management can be argued has the potential to assist organization in achieving both cost
productivity advantage and value advantages.

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There are a number of ways in which productivity advantages can be enhanced through
logistics:

 Capacity utilization

 Inventory reduction

 Closer integration with suppliers

Value advantages can be achieved through

 Responsiveness

 Superior customer services

 Reliability

The organizations that will be the leader in the market are that will be the leaders in the
market are those that have achieved the twin peak of excellence i.e. cost leadership & service
leadership.

The underlying philosophy behind logistic concept is the of planning & coordination the
material flow from the source to user as an integrated system rather than managing goods
flows as a series of independent activities.

Logistic management therefore has a goal of linking market place (customers) the
distribution network, manufacturing process and procurements at a lower cost & service
enhancement.

Some logistics strategies that can take the organization to the top right hand corner of the
matrix are:

 Greater responsiveness

 Reliability

 Reduced lead time

 JIT delivery

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 Value added services

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 Dynamics of supply chain problems and possible solutions

Customers demand/supply is rarely perfectly stable i.e. keeps on changing, businesses must
forecast demand in order to properly position inventory & other sources

Problems

i. Forecast error in demand

ii. Lead time variability –time between orders

iii. Batch ordering

iv. Price fluctuation

v. Product promotion

vi. Inflated orders

vii. Volatile demands “quick response” logistic

viii. Unreliable suppliers –strategic partnership

ix. Quality problems.

Possible solutions

i. Safety stock creation

ii. Vender managed inventory

iii. Just in time replenishment (JIT)

iv. Strategic partnership

v. Reliable distribution network (distribution network (distribution logistics

vi. Matching demand with supply of the right goods, in the right quantity & right
time.

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 vii. Compression of lead time (short time lead) much flexibility) supply direct to
the point of usage

viii. Logistic information system

ix. Reliability &responsiveness of customers

x. Flexible manufacturing systems (FMS)

xi. Material requirement planning (MRP)

xii. Emphasis on quality.

Role of technology & innovative strategy in supply chain.

i. Research & development –biotechnology

ii. Product design (computer aided design

iii. Communication through email, internet, intranet & extranet

iv. Automation of company biz activities

v. E commerce –electronic point of sale

vi. Product re-engineering

vii. Inventory management JIT replenishment

viii. Reduction of waste e.g. overhead costs e.g. labor, transport, shortage cost will be reduced
(i.e. saves in cost)

ix. Quality product

x. Introduction of new production is quicker electronically

xi. Supplier management

xii. Customer management

xiii. Lead time management –through time compression

xiv. JIT manufacturing

SOURCING AND MANAGEMENT OF SUPPLIERS

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SOURCING

This is the process of identifying, selecting, and developing suppliers.

Sourcing can be done at; strategic, operational and tactical levels of management

Tactical and operational sourcing is concerned with lower level decisions relating to;

 High profit
 Low risk
 Buying of non-critical items
 Adaptive decisions on how and where specific supply requirements are to be sourced.

Strategic sourcing is concerned with top level long term decisions relating to:

 High profit
 High risk supply items
 Low profit-high supply risk items
 Formulation of long-term purchasing policies
 Defining supplier base
 Partnership sourcing
 Reciprocal sourcing
 Intra-company trading
 Globalization
 Purchase of capital items
 Environmental and ethical issues

The sourcing process

The sourcing process involves;

 Identification or re-evaluation of a need

 Defining or re-evaluation of user’s requirement
 Deciding to buy or make the product in-house
 Identifying the type of purchase
 Conduct market analysis
 Identify possible suppliers
 Pre-screen the possible suppliers
 Evaluation of the remaining supply base
 Choose suppliers
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  Supplier delivering the product/offering the service
 Post purchase/make performance evaluation

Market analysis

Analysis of the market is mostly a strategic activity which is necessitated by the need for;

 Forecasting firm’s requirements

 Price trend in the market
 Effects of material costs on financial returns
 Determining availability of alternative source of material/service
 Guidance on security of supply sources
 Provide information on social, political, economic and technological factors that
may affect the supply.

Sources of data for market analysis

Sources of data include;

 Field research
 Secondary data from national, and international institutions; businesses, NGOs, etc

Areas of sourcing information

Areas of sourcing information include;

 Analysis of the market conditions

 Directives (reference by other firms)
 E-sourcing
 Locating supplier sources

SUPPLIER APPPRAISAL

To appraise is to examine, assess, or evaluate someone or something in-order to ascertain or

judge their ability, quality, success or needs.

Supplier appraisal should be undertaken where:

o Suppliers is not certified e.g. not iso 9000:2000 certified

o In purchase of high risk-high profit item
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 o Purchase of non-standard item
o Expenditure on capital item
o For the purpose of supplier development
o When entering a JIT arrangement
o When contemplating joining supplier’s association
o When engaging in global sourcing
o When establishing e-procurement with long-term strategic supplier
o When negotiating outsourcing contracts
o Before agreeing to subcontract
o When negotiating service level agreements.

Suppliers can be located by checking a wide range of information sources- websites, yellow
pages, purchase research services, purchasing records, exhibitions, trade journals, trade
associations. Informal exchange of information, and sales people,

Problems with on-line sources include too much time spent in searching for information; low
data quality; data duplication; outdated data and the power and flexibility of available search
methods.

EVALUATION OF SUPPLIER PERFORMANCE

Supplier should be evaluated from perspectives of:

a. Finance This can be on the basis of; value of capital assets, profitability, scale of
borrowing and ration; of debts to assets; possibility of takeover or merger; number of
major customers; and sufficiency of capital.

b. Production capacity and facilities e.g. machinery, plants /equipments /tools, maximum
productive capacity; utilization; proportion of capacity utilized by major customers;
capacity to utilized for if business is awarded by purchaser; systems used for capacity
planning; range, state, adequacy and machinery used; plant layout; innovation and design
–reputation for design and innovation; design and research facilities; Qualification of
R&D and design staff; willingness to participate in collaborative projects.

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 c. Human resources – staff strength in each department ; staff utilization; qualifications;
empowerment and team work; trade union membership; effects industrial disputes; staff
turnover; customer focus by staff etc.

d. Quality –quality approval; TQM; inspection and testing materials statistical controls;
evaluation of quality; guarantee on elimination of the need to inspect incoming JIT
deliveries.

e. Performance –similar projects undertaken; current project; distinctive features of

projects; innovations to be introduced; referees.

f. Environmental and ethical considerations –responsibility for environmental

management ; sustainable sources of materials; life cycle cost of suppliers product;
facilities for waste minimization; energy savings provided by the suppliers product;
ethical policy; guidelines and procedures provided for the confidentiality of information
provided by a customer; guidelines on receipt of gifts and hospitality ;principles on
conflicts of interest.

g. Information Technology e.g. Ownership of a website; information provided in the

website; business activities processed electronically; ways used to reduce or eliminate
paper transactions; shorten order cycles; reduce inventory; provide real time information
on product availability and inventory and integrate its supply chain.

Approved suppliers may be graded into partnership; preferred, approved; confirmed and
one off categories.

Reasons for evaluating supplier performance

They include:

 The need to improve supplier performance;

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  Determine retaining or removing a supplier from an approved list;

 Making decision about where to place specific order;

 Suppliers have incentive for continuous improvement;

 Determine how to distribute for an item among several suppliers to better manage risk.

Methods of supplier performance rating

They include:

a) Subjective method (Questionnaires with a numerical rating scale completed by a number of

reviewers; questionnaires with a numerical rating scale completed by a number of reviewers.

b) Survey method (research organization conducts the survey)

c) Comparative method (supplier evaluated independently by evaluators on agreed factors such

as price quality, delivery etc

d)Weighted point method (a weighted factor is established for each of the areas that indicates
the value of that area in relation to each of the other factors .Score is then multiplied by the
weight and then averaged );

e) Percentage based method (percentage systems measure percentage of quality defects or late
deliveries).

f) Cost based method (evaluates supplier performance on total non productive costs associated
with each supplier’s performance. On productive costs are estimated cost of no –compliance
such cost rejection –performance index is calculated as purchase order price plus non productive
cost over purchase order price.

Service levels are performance requirements that are usually defined in contracts for outsourcing
and the provision of internal support service. Service level agreements usually prescribe
penalties for no compliance with the prescribed levels. The service level should be reasonable;
priotised by the customer (critical major; urgent, important and minor etc.); should be easily
monitored and readily understood.

The ten Cs of supplier evaluation

29
They are competency; capacity, commitment; control systems; cash resources and financial
stability; cost; consistency; culture; clean and communication.

Policy issues in sourcing

Policy issues in sourcing include;

i) Supplier base optimization or rationalization (Determination of approximate number of

suppliers a purchaser will do business)

ii) Outsourcing or make or buy (non –core functions transferred to specialists, partnering (non –
adverbial collaborative relationships)

iii) Reciprocity (giving preference to suppliers that are also customers of buying organization)

iv) Intra Company trading (buying certain materials from a member of the group of companies);
local suppliers (those in the same locality with the company)

v) Purchasing consortia ( a collaborative arrangement under which two or more organizations

combine their requirements for specified range of goods and services to gain price, design
supply availability and assurance benefits resulting from greater volumes of purchase ).

SUPPLIER BASE

Supplier base relates to the number, range, location and characteristics of the vendors that
supply the purchaser .They may be broad, lean, narrow, single sourced, local national,
international, diversified or specialized, they can relate to a family of related products and
suppliers or the totality of vendors with whom a purchaser does business.

Supplier base optimization or rationalization is the determination of approximate number of

suppliers a purchaser will do business.

Optimization at controlling costs and elimination of suppliers who do not meet purchaser’s
performance requirements.

Supplier base rationalization results in savings in:

 Administrative costs partnerships and supplier associations

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  Improved standardization

 Elimination reduction in unplanned purchases

 Lower total production costs.

Possible risks of a reduced supplier base

These risks include:

 Overdependence on a single supplier

 Danger of supply disruption supplier’s suppliers:

 Loss of suppliers’ goodwill;

 Reduced competition

 Failure to seek new or more competitive suppliers.

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OUTSOURCING - MAKE OR BUY DECISION

Outsourcing has been focused by many industrial manufacturers, firms considers outsourcing
everything from procurement function to production & manufacturing.

Executive are focused on stock value and huge pressure is placed on organization to increase
profits is by reducing costs through outsourcing. More recently between 1998& 2000,
outsourcing in electronics industry has increased from 15% of all components to 40%.

Consider for instance athletic shoe industry with products that require significant investment in
technology .No Company in this industry has been successfully as Nike. Nike Company
outsources almost its manufacturing activities .The Company focuses mainly on research &
development on one hand marketing sales & distribution on the other hand.

This strategy allowed Nike Company to grow in the 1990s at an annual rate of about 20%.
Outsourcing strategy connects not only customers & employees but also cheap manufacturers,
components distributors, logistics companies and system integrators.

All the suppliers see the demand and do not rely on their own forecasts based on information
flowing from multi points in the supply chain .The company is also able to build a dynamic
replenishment system to help reduce supplier inventory costs.

Apple computers also outsource most of its manufacturing activities .The Company outsources
70% of its components .The company focuses on internal resources and outsources other
facilities to give apple product their unique outlook and feel.

Unfortunately the land scale may change for companies the relied heavily on outsourcing
e.g.

-In 2001 Nike reported an expected profit shortfall due to inventory buildup in some products,
shortages for others & late deliveries .The Company blamed both the week US economy &
complications with the implantation with the implementation of supply planning system.

-In 1999 Apples ability to satisfy customer demand was reduced significantly due to shortage in
the G4 micro –chips supplied by Motorola

-In 2000 Cisco was forced to announce a $2.25 billion write-down for obsolete inventory.

This was the result of a significant reduction in demand for telecommunication infrastructure ti
which Cisco was not able to respond effectively.

OUTSOURCING BENEFITS

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Throughout the 1990s strategic i.e. out sourcing the manufacturing of key components was used
as a tool to rapidly cut costs, some of the motivations for outsourcing are;

1. Economic of scale

An important objective in outsourcing is to reduce manufacturing costs through the aggregation

of orders from different buyers. This aggregation allows suppliers to take advantage of
economics of scale both in purchasing and in manufacturing.

2. Risk pooling

Outsourcing allows buyers /the firm to transfer demand uncertainty risks to the major contact
equipment manufacturer(s). One advantage that the manufacturer get is that they aggregate
demand from many buying companies and thus reduce uncertainty thus can reduce components
inventory levels while maintaining or even increasing service level.

3. Reduce capital investment.

Another important objective in outsourcing is to transfer not only demand uncertainty to the
equipment manufacturer but also capital investment. The equipment manufacturer can make this
investment because it is implicitly shared between many of the equipment manufacturers’
customers.

4. Focus on core competency

By carefully choosing what to outsource, the buyer is able to focus on its core strength i.e. the
specific talent, skills and knowledge set that differentiate the company from its competitors and
give it an advantage in the eyes of the customer e.g. Nike Company focuses on innovation,
marketing, distribution and sales not on manufacturing

5. Increased flexibility

Flexibility has three main issues;

a) The ability to better react to changes in customer demand

b) The ability to use the suppliers technical knowledge accelerate product development
cycle time

c) The ability to gain access to new technologies and innovation

These are critical issues in industry where technology changes are very frequent e.g where
products have a short –life- cycle like in fashion products.

33
Other benefits of outsourcing include

 Freeing management time

 Reduced staff costs;

 Cost certainty

 Reduced staff management problems

 Improved consistency of service

These benefits outsourcing come with new and considerable risks consider how IBM benefited
was hurt by outsourcing.

Illustration;

When IBM decided to enter the personal computer (PC) marked in that 1981, the company did
not have the infrastructure in place to design and build a PC rather that the time to develop these
capabilities, the company outsourced almost all major components of the PC e.g. micro-
processors was designed and built by Intel and the operating system (software was provided by
Microsoft. IBM was able to get these computers to the market within 15 months of starting the
design by tapping into the exercise and resources of these companies.

Within 3yrs, IBM had replaced Apple as the number one supplier of PC and had a market share
of over 40%

However, the down side to IBMs strategy soon became clear as competitors such as Compaq
were able to enter the market by using the same suppliers as IBM .By the end of 1995 ,IBM’s
market share had fallen to less than 8% behind market leader Compaq.

IBM examples reveal two Main Risks associated without sourcing

1. Loss of competitive knowledge

Outsourcing critical components to suppliers may open up opportunities for competitors (as in
the IBM PC). Similarly outsourcing implies that companies lose their ability to introduce new
designs based on their own agendas rather than the suppliers’ agenda.

Outsourcing of the main manufacturing components from suppliers may prevent the
development of new insight, innovations and solutions that typical requires cross-functional team
work.

2. Conflicting objectives

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Supplier and buyer usually have different and conflicting objectives .For instance increased
flexibility is a key objective of the buyer when outsourcing the manufacturing of various
components .This implies an inability to better match supply and demand by adjusting
production rates as needed .Unfortunately, this objective is in direct conflict with the suppliers
objectives of long term, firm and stable commitment from the buyer.

Indeed, this is an issue to the supplier because unlike the buyer their profit margin is small and
they there focus on cost reduction rather than flexibility.

Similarly product design issues are affected by the conflicting objectives of suppliers and buyer.
Again buyer insisting on flexibility would like to solve the design problem as fast as possible
whereas suppliers focus on cost reduction that typically implies slow responsiveness to design
change.

Other risks may include:

 Problems of flexibility

 Overdependence on suppliers

 High staff turnover

 Poor project management skills

 Lack of commitment to the client or industry

 Shallow expertise

 Insufficient documentation

 Lack of control over larger suppliers

 Poor staff training

 Product cultural mismatches between customer and provider organizations.

Outsourcing is a management strategy by which major non –core functions are transferred to
specialists ,efficient ,external providers. Activities not outsourced include resource intensive
(high labor or capital costs ); relatively discrete ;require specialist competencies ;characterized
by fluctuating work patterns in loading and throughput ;subject to quickly changing markets ,for
which it is costly to recruit, expensive investment.

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In outsourcing manufacturing, the following decisions need to be made:

A) Strategic make or buy decisions on what products to make; what investment to make
machines and labor to make the products; ability to development new product and processes as
the knowledge and skills gained by manufacturing in house may be critical for future
applications and the selection of suppliers as they may need to be involved in design and
production process

B) Tactical make or buy decisions which deal with the issue of a temporary imbalance of
manufacturing capacity-fall or rise in demand

C) Component makes or buy decisions –made at the design stage and relate to whether a certain
component should be made or bought

Quantitive factors that favour making include

 Change to use idle capacity and resources

 Potential lead time reduction

 Possibility of scrap utilization

 Greater purchasing power with larger orders of a particular material

 Large overhead recovery base

 Exchange rate risks

 Cost of work is known in advance.

Quantitive factors in favor of buying include

 Quantities required too small for economic production

 Avoidance of costs of specialist machinery or labor and reduction inventory

Qualitative factors in favor of making are

 Ability to manage resources

 Commercial and contractual advantages

 Worries are eliminated regarding such matters as the stability and continuing viability of
maintaining secrecy.

Qualitative factors in favor of buying include

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  Spread of financial risk between purchaser and vendor

 Ability to control quality when purchased from outside

 Availability of vendor’s specialist expertise, machinery and /or patents

 Manufacturing capacity of the purchaser.

Purchasing can be outsourced in the following circumstances:

a) Where purchasing is a peripheral rather than a core activity –low generalized skill
requirements: internally focused responsibilities; well defined or limited tasks, jobs that
are easily separated from other work and no supply restrictions.

b) Where supply base is small and based on proven cooperation and there are no supply
restrictions.

c) Well defined or limited tasks; jobs that are easily separated from others; jobs that have no
supply restrictions.

d) Where there is small supplier base providing non –strategic, non critical low cost /low –
risk items .In such cases, purchasing may be outsourced to specialist purchasing and
supplier’s organization or buying consortia.

Drivers outsourcing include; Quality, cost, finance; core business and cooperation.

REASONS FOR OUTSOURCING

Reasons for outsourcing are classified into two.

1. Dependency on capacity

In this case the firm has the knowledge and the skills required to produce the components but for
various reasons, decide to outsource due to lack of manufacturing capacity e.g. materials, space
transport facilities etc.

2. Dependency on knowledge

In this type of dependency, the company does not have resources skills and knowledge required
to produce the components but have the capacity to do so. The firm decides to outsource in order
to have access to needed skills.
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FACTORS TO CONSIDER IN MAKE OR BUY DECISION

1. Nature of the product; bulky perishable

2. Awareness of new technology

3. Market conditions; changes in world market, economic and market conditions

4. Firms’ financial structure

5. Mgt of make or buy portfolio

6. Length of scheme –short term or long term relationship with suppliers

7. Personnel to be involved

8. Procedures to analyze situation and develop solutions

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THE VALUE CHAIN.

Value chain entails strategies that provide superior value in the eyes of the customers.

Competitive advantage cannot be understood by looking at a firm as a whole. It can only be

understood by looking at discrete activities a firm perform in; designing, producing, delivering
and marketing and support its product.

Each of these activities can contribute to a firms relative cost position and create basis for
differentiation.

Value chain disintegrates a firm into strategically relevant activities in order to understand the
behavior of cost and existing potential for differentiation.

A firm gain competitive advantage by performing these strategically important activities more
cheaply or better than competitors.

TYPES OF VALUE CHAIN ACTIVITIES

Value chain activities can be grouped into two:

i) Primary activities .this activities include: inbound logistics, operations, outbound logistics,
marketing, sales and services

ii) Support activities .this includes: infrastructures, human resource management

technology development, and procurement.

Firm Infrastructure

Human Resource Management

Technology Development

procurement

Inbound Operatio Outboun Marketin services

logistics ns d logistics g and
sales

a) Primary activities

i) Inbound logistics

39
These are all activities linked to receiving, handling and storing inputs into the production
system, including warehousing, transport and stock control.

ii) Operations

All activities in the transformation of inputs to out puts as the final product(s). In manufacturing
enterprise, these would include production, assembly, quality control aid packaging. In a service
industry, these include all activities involved in providing their service such as advice,
correspondence and preparation of documents by a legal firm.

iii) Outbound logistics

These are activities involved in moving the output from operations to the end user, including
finished goods, warehousing, order processing, order picking and packaging, shipping, transport,
maintain ace of a dealer or distribution network.

iii) Marketing and sales

These are activities involved in informing potentials customers about the products, persuading
them to buy and enabling them to do so, including, advertising, promotion, mark & research and
dealer /distribution support.

iv) Service

Activities involved in the provision of services to buyers offered as part of the purchase
agreement after the purchase has been made, including installation, spare part delivery,
maintenance and repair, technical assistance, buyer enquires and complaints.

b) Support activities include:

i) Firm infrastructure or general administration including activities, costs and assets e.g.
building and machineries relating to general management safety and security, management
information systems and the formation of strategic alliances.

ii) Human resource management

They all activities involved in recruiting, hiring, training, development and compensating the
people in an organization.

iii) Technology development

They are activities relating to product design and improvement, improvement of production
processes and resources utilization, including research and development, process design
improvement, computer software, computer aided design and engineering and development of
computerized support system.
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iv) Procurement

All activities involved in acquiring resource inputs to the primary activities, including the
purchase of fuel, energy, raw materials, components, sub assemblies, merchandise and
consumable items from external vendors.

IMPORTANCE OF VALUE CHAIN

Customer value

Supply chain management is an important component of fulfilling customer’s needs and

providing value.

Equally important supply chain mgt determines the availability of product /service, how fast they
will arrive in the market and at what cost.

Our definition of supply chain management implies that the ability to respond to customer’s
requirement is the most basic function of SCM. This function includes not only the physical
attributes of the products distribution related information such as production of delivery status
and the ability to access this information.

Supply chain management also can affect the importance of customers’ value of price by
significantly reducing costs. Customer value drives changes and improvement in the supply
chain; some forced by customers and competitors activities and other undertaken to achieve
competitive advantage.

Customer value is also very important for determining what services are required to retain
customer. A company’s supply chain strategy is determined by the type of product /service it
offers and value elements of this offering to the customer e.g. if customer requires one stop
shopping, this would entail carrying a large number of product and options even if this is costly
to the firm in terms of inventory management.

If customer value innovative products, then companies that produce them need to apply their
supply chain strategies to supply these products efficiently while demand lasts.

If a company offers personal customization of its products then its supply chain needs to be
flexible enough to provide the infrastructure needed for this offering. Thus the supply chain
needs to be considered in any product and sales strategies and could in itself provide competitive
advantage leading to increased customer value. These activities are integrating functions that cut
across the traditional functions of the firm.

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Competitive advantage is derived from the way in which firms organize and perform these
activities within the value chain.

To gain competitive advantage over its rival a firm must deliver value to its customer by
performing these activities more efficiently than its competitors and by performing the activities
in a unique way that create grater differentiation.

If the firm does not have competitive advantage in these activities, the argument is that the firm
should consider outsourcing from firms that can provide that cost value advantage.

Customer’s values are the way customers perceive the entire company’s offerings including the
product, services and other intangible.

Understanding & Conformation to Customer Requirements

The firm should understand what customer requires at a given point in time in order to match
supply and demand.

The ability to offer what customer want and needs is a basic requirement to which supply chain
management contributes by creating availability and selection.

If supply exceeds demand there are inventory costs throughout the supply chain; if demand
exceeds supply there are costs sales and possibly lost market share well as lost good will. If
product demand is predictable market mediation is not an issue .However, when dealing with
product with high demand variability e.g. fashion items, the nature of their demand can create
huge costs to lost sales or excess inventory. These variability products require responsive supply
chain that stress short lead time, flexibility and speed cost efficiency. When the supply chain does
not match the product characteristics as per customer requirements, then there is major
implication in the ability to conform to the market.

Conformance to customer requirements is also achieved through attention to customer access i.e
the ability to easily find and purchase a product e.g. providing mail, phones and web access in
addition to it instead of retail store can enhance the customers ability to purchase the product
conveniently .Finally access includes the perception of providing the customers with a store or
website layout that make it easy to find purchase the product they are seeking for.

It has been suggested that the role of customer service is to provide time and place utility in the
transfer of goods and services between buyers and sellers. There is no value in the product or
service until it is in the hands of customers or consumers.

Customers needs or requirements can be examined under the following headings:

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  Firm accessibility

 System flexibility

 Stock availability

 Just in time delivery

 Frequent delivery

 Delivery reliability

 Clear claim procedure

 Order complete

 Technical support

 Documentation i.e. quality of the document /error rates e.g. on invoice.

All these issues are capable of quantification and measurement against customer requirement
similarly they are all capable of comparison against competitive performance.

Customer requirements /needs are a multi faceted concept .It is increasingly important as mean
of gaining and maintains differentiation in the market place.

Since no two customers are alike it must be recognized that service /product must be tailored to
meet the needs of different customers .Logistic management can play a key role in enhancing
customer lifetime value through increasing customer satisfaction and enhancing customer
retention. To achieve this will require the development of market driven logistic strategies and
redefinition of service objective based upon customer specific requirement.

Identifying value attributes in service & product (product selection approach)

Many products come in large variety, styles color and shape .It is difficult for distributors and
retailers to stock all or most of the configuration and combination of products .It is difficult
retailers and distributors to build large and diverse inventories.

However successful business trends exists that can enable a firm to identify value attribute of the
service /product mainly through selection.

1. Specializing in offering one type of product /services

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 2. Mega stores that allow one stop shopping for a large variety of products

3. Mega stores that specializes in one product are

How create value in a service/product

Value attribute can be created through;

a) Build to order model: This is where the configuration of the product /service is
determined only when an order is placed by the customer

b) Keeping large inventories at major distribution centers (DCs)

This strategy is suitable for products with long manufacturing lead time e.g. motor vehicles.
The DCs allows the manufacturers to reduce inventory levels by taking advantage of pooling
risks and delivering the vehicle quickly to customers. Dealers can order cars that they do not
have on their lot from regional warehouse that can ship the car out in a day.

c) Offering a fixed option that cover most customers requirements e.g. Honda offers a
number of option on its cars This compatibility and configuration options adds customer value.

d) Price & brand

Price of product or service are essential parts of customer value although price may not be
the only factor a customer considers there may be a narrow price range that acceptable for
certain products.

Price leaders achieve their competitive position through reducing costs passed to the
customers of their products or services. An important factor affecting the product price is its
brand internet and self service culture has had an impact on customer behavior. Shoppers buy
products whose brand name guarantee quality in their mind.

However price and brand name can promote a sense of quality and prestige making some
products command higher prices than others e.g. brand name such as Mercedes cars and
Rolex watches in it may be as large part of prestige and perceived quality.

The products high margins will require a focus on service level that add value to a product or
a service hence the supply chain needs to be more responsive; the increase in supply chain
costs will be offset by the higher margins.

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e) Value –added services

Many companies cannot complete on product price alone in an economy that has an
overabundance of supply (competition) they therefore need to consider other ways of adding
value to their offerings .These ways will differentiate their products from those of
competitors and provide them with more profitable pricing structures.

Value added service e.g. support and maintenance, installation ,delivery etc can be a major
factor in the purchase of some products especially in technical products .Indeed many
companies are adding more services in their products.

This is due in part to commoditization of products, where only the price matters and all other
products features are identical reducing profitability and competitive advantage from the sale
of product alone.

f) Relationship and experience

Customer value can also be created through increased connection between the firm and its
customers through development of a relationship. Strong relationship require an investment
of time from both the customer and the firm.

The learning relationship, where companies build specific user profit and use this
information to enhance sales as well as retain another example is another example of
providing customer value.

Other Way of creating value includes:

- Creating a compelling personality brand i.e. district offering that customer can identify
with:

- Delivering a seamless experience across the channel and touch point i.e. make sure that
customers experience and information are the same no matter access method used

- Care about customers and their income

- Value customers time

- Measure what matter to customer : the quality of the customer experience as opposed to
internal company measures

- Design to morph –i.e. the ability to change practices based on customer requirement

- Honest operational excellence.

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Measuring value attributes (customer value measures)

i) Service level:

Service level is the typical measures used to quantify a company market conformance service
level usually relate to the ability to satisfy customers’ delivery date e.g. percentage all orders
sent on or before the promised delivery date

Many companies consider this measures so critical to their ability to succeed in today’s
market that they invest heavily in decision support system that allow them to quote their
delivery dates accurately by analyzing information from the entire supply chain.

Ability to achieve service level has a bearing on supply chain cost and performance e.g. of
demand variability and manufacturing and information lead time determines the amount of
inventory that need to be kept in the supply chain.

When setting the level that should be used for a particular offering it is important to
understand customer value e.g. customers may value ability to customize the product more
than they value immediate delivery itself.

ii) Customer satisfaction

- Customer satisfaction surveys are used to measure sales department and personnel
performance as well as to provide feedback for necessary improvement in products and
services

- Indeed, more important than what customer say about their satisfaction is customer
loyalty which is easier to measure than customer satisfaction. This can be accomplished
by analyzing repurchase pattern based on internal database.

- An addition option is to learn from customer defection rate. Unfortunately, identify such
as customer is not easy as most dissatisfied seldom cancel their accounts completely;
instead they gradually shift their spending /activities making partial defection.

iii) Supply chain performance measures

- Supply chain performance affects the ability to provide customer value especially in the
most basic dimension of availability of products

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 - Various methods can be used to measure effectiveness of supply chain performance.

e.g. Total supply chain costs. This includes the total cost to manage order processing
material acquisition, inventory management information costs etc the survey found that
leading companies should have total cost between 4& 5 percent sales.

Cash to cash cycle time

The number of days between paying for raw materials and getting paid for the product
.Survey shows that the best company 30days of cycle time.

Flexibility and responsiveness

2 wks for best class companies the main constrain should be material availability not
internal manufacturing.

Delivery performance to request

The percentage of order that is fulfilled on or before the customer requested date. Survey
shows best class performance is at 94%

Additional customer value measures

- growth rate in number of active customers

- customer retention

- customer defection rate

- customer acquisition costs

SUPPLY MANAGEMENT TOOLS AND TECHNIQUES

1. Agile and lean approaches

One of the biggest challenges facing organization is the need to respond to ever increasing level
of volatility in demand. For various reasons, products and technology life cycle are shortening.
Competitive pressure forces more frequent product changes and consumer demand greater
variety than ever before.

47
To meet this challenge the organization need to focus its efforts upon greater agility. Agility is
the ability of the firm to match supply and the market demand. An agile firm can respond to
demand in a shorter time-frame both in terms of variety change and volume

In other words the firm is able to quickly adjust its output to match market demand and switch
rapidly from one product/variant to another.

To a truly agile firm, demand volatility is not a major problem.

Leanness

Lean approach to manufacturing seeks to minimize inventory of component and work in progress
and move towards J.I.T environment wherever possible.

It is pre occupied with reduction of waste and optimal resource utilization. However leanness
may be an element of agility by itself it will not enable the organization to meet the precise needs
of the customer more rapidly. Leanness may make a firm to be least agile

A key response is the presence agile partner upstream and downstream of the local firm. Whilst
organization may have internal processes that are capable of rapid response, their agility will still
be constrained if they face long replenishment lead time from suppliers.

The back drop against which lean thinking was originated was the Japanese automobile industry
of the 1970s .This was an industrial concept typified by the volume manufacture of relatively
standard products (i.e. low level of variety) and focus of achieving efficiencies in the use of
resources and in maximizing economies of scale.

In this type of situation i.e. standard products and relatively predictable demand experience has
shown that lean practices work well.

However in the market environment where demand uncertain, the levels of variety are high and
consequently volume per stock unit is low, them a different response must be achieved.
Effectiveness in this context means the ability to respond rapidly to meet the precise needs of an
often fragmented market place.

Where demand is predictable and replenishment lead time is short, then lean type approach will
be appropriate. Where demand is unpredictable and lead time are long, then agility approach is
appropriate.

In reality, within the same firm it is likely that there will exist the need for both lean and agile
supply chain solutions since some products will have predictable demand whilst for other

48
demand will be far more volatile .this give rise for the need of multiple supply chain solution
hybrid strategy.

The four element of an agile supply chain

a. Its market sensitive: i.e. the supply chain is capable of reading and responding to real
demand.

b. It’s a virtual supply chain: the use of information technology to share data between
buyers and suppliers make supply chain to be information based rather than inventory
based. Electronic data interchange and internet have enabled the parties in the supply chain
to act upon real demand.

c. Share information through process alignment i.e. collaborative working between buyers
and suppliers, joint product development, common systems shared information companies
are focusing more on managing their core competencies and outsourcing all their activities.

d. Partners are linked together as a network

There is growing recognition that organizations cannot complete as stand –alone activities but
rather as supply chain.

In today’s challenging global market the route to sustainable advantage lies in being able to make
best use of respective strength and competencies of network partners to achieve greater
responsiveness to market needs

The two approaches /techniques tend to share one weakness i.e. they frequently lead to stock
level being higher or lower than necessary particularly where demand is uncertain especially
incase of joint demand or derived demand.

The classic economic order quantity (EOQ) model tend to channel our thinking towards the idea
that there is some optimal quantity to order EOQ model arrives at this optimum by balancing the
holding cost of inventory against the costs of issuing replenishment order and or the cost of
production set up.

The foundations of agility

It will be apparent that agility is not a single company concept but rather it extends from one of
the supply chain to the other.

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The concept of agility has significant implications for how organizations within the supply
/demand network relate to each other and how they can best work together on the basis of shared
information.

To bring these ideas together, a number of basic principles can be identified as the starting
point for the creation of the agile supply chain.

1. Synchronizes activities through shared information.

Synchronization implies that all parties in the supply chain are “marching to the same drum beat”
In other words, through shared information and process alignment there is an effect one set of
numbers and a single schedule for the entire supply chain.

This some what utopian vision is increasingly becoming reality as web –based technology
enables different entities in a network to share information on real demand, inventory and
capacity in a collaborative context.

In the fast moving consumer goods (FMCG) sector there is a growing number of examples of
supply chain synchronization made possible by the retailers ‘increasing willingness to share
point –of –sale data with manufacturers .One such instance is the web –based system established
by the UK ‘s biggest retailer ,Tesco. The Tesco information exchange (TIE) is an extranet that
enables Tesco suppliers to access their own sales data, item by item.

This data is updated several times a day and potentially can provide manufacturers with means to
link their production schedules to Tesco replenishment requirements.

With the automobile industry most of the volume car manufacturers have established ‘seamless’
processes with their first tier suppliers based upon providing immediate access to production
plans and schedules .

This enables just-in –time deliveries to be achieved without the need for major buffers of
inventory at their first tier level.

In the US the ‘quick response initiative in the apparel industry has linked retailers to garment
manufacturers and also to the fabric producers through shared information.

The impact of this collaboration has been a significant improvement in the competitiveness of
that industry.

2. Work smarter, not harder.

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Detailed examination of the process that together constitute a supply chain inevitably highlights
the fact that a large proportion of the end –to –end time is ‘non –value –adding”. In other words,
time is being spent on activities that typically create cost but do not create a benefit for the
customer.

Time spent in inventory is a classic example of non –value adding time .Supply chain mapping
can reveal where this idle time occurs; to attack it then requires a review of the processes that
precede or follow that idle time.

Process time is directly correlated with inventory e.g. if it takes three weeks from raising a
purchase order to receiving goods, at least three weeks of inventory will be required to buffer
ourselves during that lead time.

Business process re-engineering (BPR) is the term frequently applied to the activity of
simplifying and reshaping the organizational processes with a goal of achieving the desired
outcomes in shorter time –frames at less cost.

Many processes in the supply chain are lengthy because the constituent activities are performed
in “series’ i.e. in a linear ‘one after the other’ way. It is often possible to re-engineer the process
so that those same activities can be performed in parallel ‘i.e. simultaneously.

Time compression in a supply chain can be achieved not necessarily by speeding up activities,
but rather by doing fewer things –i.e. eliminating where possible non value adding activities.

Many existing practices in business are performed for historical reasons; there was once a
justification may no longer exist.

Supply chains can be transformed in terms of their agility by the rigorous application of process
re-engineering principles.

3 Partners with supplies to reduce in –bound lead times

Conventionally firms have maintained an arms length relationship with suppliers. Suppliers have
often been chosen on the basis of price rather than their responsiveness. A major opportunity
exists for reducing in bound lead times through close working with key suppliers’ powerful way
in which collaboration can improve responsiveness is through adoption of vendor managed
inventory (VMI) practices.

VMI switches the responsibility of the management and replenishment of inventory from the
customer to the supplier. The customer no longer places orders on the supplier but rather shares
with them information on sales, rates of usage or consumption.

51
Using this information the supplier is better able to plan and schedule the acquisition, production
and delivery of the product. Both parties benefit; the customer through higher levels of
availability and reliability and the supplier through a reduction in their need to carry safety stock
and, often, a better use of capacity. .VMI is a classic instance of the application of the principle
of ‘substituting information for inventory’

Increasingly in the defense and aerospace sector the sheer complexity of the products requires a
high level of information sharing with supplier. Thus cross working with key suppliers creates
more responsive supply chains through VMI –type arrangements.

4. Seek to reduce complexity

Complexity comes in many guises in supply chains. Complexity may be generated by multiple
variants of same product e.g. different pack sizes, or by each product in a family having great
different bills of material, or by frequent product changes, and so on.

Complexity can also be generated through cumbersome processes that involve many different
stages and hand –offs

Simplification is an obvious remedy for complexity but one which may not always be available
However, there will often be opportunities to reduce complexity by questioning the reasons why
things are the way they are.

52
For example, is the level of product variety greater than the customer actually requires? Often
product, proliferation is driven by sales or marketing departments and may not actually achieve
additional sales but spread the same total demand over a greater number of stock keeping units.

Includes; innovation, customer relationship management and supplier relationship management.

The way businesses are organized can have significant impact upon their agility; those
companies with cumbersome, multi level decision –making processes tend to be far slower to

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respond to market changes that their competitors who give autonomy to self –managed process
teams.

A further reason why process management is critical to agility across the wider supply chain is
that process alignment between entities in that chain is clearly facilitated if organizational
structures are horizontal rather than vertical.

7. Utilize appropriate performance metrics

It is truism that performance measurement shapes behavior. This is particularly the case in
business organizations where formal measurement systems drive the business. In functionally
based organizations these measurements often are based departmental budgets and are
underpinned by objectives such as cost minimization, asset utilization and efficiency, and
productivity improvement. Whist on the face of it these objectives may appear to be desirable,
they will not necessarily encourage agile practices within the organization .If for example a,
manufacturing facility is measured on, say unit cost of production then the incentive will be to
go for big batch sizes to take advantage of economies of scale. However, such actions will
probably lead to a loss of flexibility and the creation of additional inventory. If, on the other
hand, time based metrics. One such widely used measure is ‘perfect order achievement’. A
perfect order is one where customer gets exactly what they want at the time and place they want
it. It will not usually be the case that different customers gets exactly what they want at the time
and place they want it .It will also usually be the case that different customers may well have
different requirements and expectations, so the definition of what constitutes a perfect order will
have to be specific to each segment, channel or even individual key accounts.

A fundamental tenet is customer responsiveness, hence the need to ensure that the primary
measures of business performance reflect this imperative.’ time to market ‘ and ‘time y\to
volume ‘are powerful metrics employed by companies such as sonny and Canon where short life
cycles dictate a focus on rapid response to fast –changing technologies and volatile customer
demand.

In the past, the focus of many companies was primarily on efficiency, i.e a continuing search for
lower costs, better use of capacity, reduced inventories and so on. These are still worthy goals
today but the priority has shifted. Now the emphasis’s must be on effectiveness .In other word the
challenge is to create strategies and procedures that will enable organizations to become the
supplier of choice and to sustain that position through higher levels of customer
responsiveness .This is the logic that underpins the concept of the agile supply chains.

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2. Just in time management (JIT)

There are many new ideas and concepts in business management one of the most significant
principles to become widely adopted and practiced is that just –in –time (JIT)

J.I.T philosophy is based upon simple ideas that whenever possible, no activity should take
place in a system until there is adown stream need for it.

Thus, no product should be made, no component order until there is a downstream requirements

.Essentially, JIT is a “pull” concept where demands at the end of the pipeline pull products
towards the market and behind those products the flow of components is also determined by the
same demand.

This contrast the traditional “push” system where products are manufactured or assembled in
batches in anticipation of demand between the various functions and entities.

The convectional approach to meeting customers requirement is based on some form of

statistical inventory control which typically might rely upon re-ordering when inventory level
fall to a certain pre-determined point –the –so called re-order point (ROP).

J.I.T – the Japanese philosophy

It has often been said that the scarcity of space in industrialized Japan has made the nation
conscious of the need to make the most productive use of all physical resources ,including
inventory –whether this is true is of academic interest only –what is the case is that it is widely
held view in Japan that inventory is waste.

An analogy that is frequently drawn in Japan is that an organization’s investment in inventory is

like a large deep lake. Well below the surface of this lake are numerous jagged rocks, but
because of the depth of the water, the captain of the ship need to have no fear of striking one of
them.

The comparison with business is simple: the depth of the water in the lake represents inventory
and the rocks represents problems. These problems might include such things as inaccurate
forecasts, unreliable suppliers, quality problems, bottlenecks, industrial relations problems and so
on. The Japanese philosophy is that inventory merely hides the problems. Their view is that the
level of water in the lake should be reduced. Now the captain of the ship is forced to confront the
problems – they can not be avoided. In the same way if inventory is reduced, then the
management must grasp the various nettles of forecast inaccuracy, unreliable suppliers and so on.

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The Japanese developed the so-called Kanban concept as a way of lowering water in the lake.
Kanban originated in assembly –type operations but the principles can be extended across the
supply chain and to all types of operations. The name kanban comes from the Japanese for a
type of card that was used in early systems to signal to the upstream supply point that a certain
quantity of material could be released.

Kanban is a “pull” system that is driven by the demand at the lowest point in the chain .In a
production operation the aim would be to produce only that quantity stage up chain in just the
quantity needed at the time they are needed .Likewise this movement now triggers demand at the
next workstation in the chain and so on.

By progressively reducing the Kanban quantity (i.e. the amount demanded for the supplying
workstation) bottlenecks will become apparent. Management will then focus attention on the
bottleneck to remove it by the most cost-effective means possible. Again the Kanban quantity
will be reduced until a further bottleneck is revealed .Hence the kanban philosophy essentially
seeks to achieve a balanced supply chain with minimal inventory at every stage and there the
process and transit quantities of materials and stock are reduced to the lowest possible amount.
The ultimate aim, say the Japanese, should be the “economic batch quantity of 1”

In fact this logic does not necessarily conflict with the traditional view of how the economic
batch (or order) quantity is determined .All that is different is that Japanese are seeking to
minimize the batch quantity by shifting the curve that represents the cost of ordering or the cost
of set –ups to the left. In other words, they focus on finding ways to reduce set-up costs and
ordering costs.

3 The six sigma way

The six sigma route to quality control emerged in the 1980s as Motorola searched for quantities
approach that would drive variability out of their manufacturing process and thus guarantee the
reliable of their product.

The term “six sigma” is largely symbolic referring to methodology and culture for continuous
quality improvement as well as referring to statistical goal, six sigma .The term “sigma” is used
in statistics to measure variation from the mean.

In a business context the higher the value of sigma the more capable the process of delivering an
output within customer specification.

The six sigma process reduces waste and hence saves money while improving customer
satisfaction.

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Six sigma methodologies follow five -stage cycle.

1. Define –What it is that we are seeking to improve

2. Measure –What current capability of the process what averages, what variability in process
output is evident?

3. Analyze –Map the process, use cause and effect analysis and priotise for action.

4. Improve –Re-engineer the process, simplify.

5. Control –Improves visibility of the process, use statistical process control and monitor
performance.

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 STRATEGIC LEAD –TIME MANAGEMENT

Time based competition

Time is money. Not only does time represent cost to the logistic manager but extended lead –
time also imply a customer service penalty i.e. as far as time is concerned there is a direct
relationship between the length of logistic pipeline & inventory that is locked up in it every day
the product in the product in the pipeline incurs lead times also mean a slower response to
customers requirement (which may also have negative implications to the business.

Today customers are time sensitive. They value time & this is reflected in their purchasing
behavior. Buyers tend to source from suppliers with the shortest lead time who can meet their
quality speficification within the shortest time possible.

In the customer markets, customer make their choice from amongst brand is out of stock, they
are likely to but a substitute brand instead. While price was a paramount factor that determined
purchase decision “cost of time” has additional cost that a customer consider.

Cost of time is simply the additional cost that a customer must bear while waiting for delivery or
seeking for alternatives.

PRESSURES THAT HAVE LEAD TO GROWTH OF TIME SENSITIVE MARKETS.

1. Shortening life cycles (Product and Technology lifecycles)

The concept of product life-cycle suggests that for many products, there is a recognized pattern
of sales from launch to final decline.

Sales Introduction Growth Maturity Decline

The product life cycle Time

A feature of the last few decades has been the shortening of the product and technology life
cycles e.g. the case of typewriters.

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The early mechanical typewriter had a lifecycle over 30yrs. This mechanical typewriter was
replaced by electro mechanical typewriters which had a lifecycle of about 10 years. Electro
mechanical type writer gave way to electronic type writer with four years cycle. Now personal
computers have taken over with a lifecycle of one year or less.

In situation like these, time available to develop new product, to launch to meet market demand
should greatly be reduced. Hence the ability to “fast –track” product development,
manufacturing & logistics becomes a key element of competitive strategy.

The following shows the effects of being late into the market & slow responsiveness to meet
demand

Shorter life cycles make timing crucial

Problems of Late entrant
i) Less time to make profit
Market
ii) Higher risk of obsolescence

Sales Firm A Late entrant

Obsolete
Firm B
stock

Time

It is not just time to market that is important. Once products reach the market the ability to
respond quickly to demand is equally important.

The lead-time to re-supply a market also determines the organizations ability to exploit demand
during product life-cycle.

Companies that can achieve reduction in the order –to deliver cycle will have a strong
advantage over their low competitors.

2. Company’s drive for reduced inventories.

Companies in the recent years have a universal move to reduce their inventories. Whether
inventory is in form of raw materials, components, work in progress or finished goods pressure
59
has been to release the capital locked up in stock at the same time reduce the holding cost/
storage cost.

The same companies that have reduced their inventories have also recognized the advantage they
gain in terms of improved flexibility and responsiveness to their customers.

Such companies require that suppliers provide a just –in time delivery service.

Timeliness of delivery means delivery of the complete order at the time required by customer
.this shortens the delivery pipeline & reduces cost.

3. Volatile market /demand uncertainty

Volatile market makes reliance on forecasts dangerous. A continued problem for most
organizations is inaccuracy of demand forecasts due to market volatility .While many forecasting
methodology, the root cause of this problem is that forecast error increases as lead –time
increases forecast error increases more proportionately over time.

Due to competitive activities demand volatility is tending to increase. This often due to
unexpected responses to promotion or price changes and intermediaries re-ordering policies. In
such a situation it becomes difficult to predict short-term changes in demand.

The convectional response to such a problem has been to increase the safety stock to provide
protection against forecast errors.

Lead time should also be reduced to reduce forecast errors .This can be achieved through
automation .The requirement is to look the different stages in the supply chain to see how time as
a whole can be reduced through re-engineering the way the supply chain is structured.

The concept of lead – time.

Lead –time can be viewed from two perspectives:

From customers view point .This is the elapsed time from order to delivery.

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From suppliers perspective .Is the time it takes to convert an order into cash & indeed the total
time that working capital is committed i.e. from when materials are first procured to when
customers payment is received .lets examine these two lead concepts.

1. The order –to –delivery cycle (buyer or perspective)

From marketing point of view the time taken from receipt of customers order to delivery is very
critical.

In today just-in –time environment short lead times are a major source of competitive advantage

Equally important is the reliability & consistency of that lead time.

Reliability of delivery is more important than the length of order cycle because the impact of
failure to deliver on time is more severe than the need to order further in advance .Pressure from
customer will continue to be for deliveries to be made in ever –shorter time-frame.

Components of order to delivery cycle.

1) Customer places an order ‘order entry

2) Order processing

3) Order assembly e.g. packaging

4) Transport

5) Order receipt (by customer)

Each of these steps in the chain consumes time because of bottleneck, inefficient process &
fluctuation in the volume of orders. There will be variation in time taken for these various
activities to be completed.

The overall effects can lead to substantial reduction in the reliability of delivery.

In those situations where orders are not met from stock but may be manufactured, assembled or
outsourced lead time will clearly extend further with the possibility of still greater variation in
total order to delivery time.

2. Order –to –cash cycle (seller /suppliers perspective)

The basic concern of ay organization is how long it takes to convert an order into cash.

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Time taken will depend to the length of the pipeline from the sourcing of raw materials through
the finished product.
From the moment when decision are taken on the sourcing & procurement of raw materials &
components through manufacturing assembly to final distribution time is being consumed.
The control of this total pipeline is the true scope of logistic lead –time management.
Fig 5.8 illustrates the way in which cumulative lead time build-up from procurement through
payment.

Cumulative
Lead time
Procurement
To payment

Raw material
Stock

Sub assembly
Production

Intermediate stock

Product assembly

Finished stock at
Central warehouse

In transit

Regional distribution
Centre stock Fig 3: Strategic lead time management

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The longer the pipeline from source of material to final use the less responsive to change in
demand the system. It is also the case that ends of demand making it difficult to link
manufacturing, procurement decision to market place requirement, hence need for safety stock.

Logistics pipeline management

Pipeline management is the process whereby manufacturing & procurement lead –time are
linked to the needs of market place.
Pipeline management also seeks to meet the competitive challenges of increasing the speed of
response to the market place.

Goals of logistic pipeline management are:

i. Lower costs
ii. Improve quality
iii. Increase flexibility
iv. Faster response

This can be achieved through:

 Reducing the pipeline length

 Speed up the flow through the pipeline

 Reducing non-value adding activities e.g storage

Steps in pipeline management

Step 1: bring managers of different functions to debate & agree the element in the pipeline that
add value & those that are non-adding value.

Step 2: Note how much time is consumed in both value adding & non –value adding activities.

It should be noted that:

 Most of the value is added early in the process

 It is more expensive to hold inventory /stock

 Most time is spent as the product is configured and or packaged in specific form

 Time is spent on transit as well as regional storage

 Most sellers are concerned with customers order cycle rather than the entire pipeline

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Pipeline management is concerned with removing the blockages that occur in the pipeline which
lead to inventory build up& lengthen response times.

Sources of these blockages are such things as:

 Extended set up e.g. of machine

 Change –over time inventory

 Excessive inventory

 Inadequate pipeline visibility

The lead –time gap

Most organizations face a fundamental problem. The time it takes to procure, make & deliver the
finished product to customer is longer than the time customers are prepared to wait for it. This is
a concept of lead –time gap.

Procurement Manufacturing Delivery

Logistics lead time

Customers order cycle

Order fulfillment

Lead time gap

Customers order cycle refers to the length of time that a customer is prepared to wait
from when an order is placed through to when goods are received

The competitive nature of the market & nature of the product will influence the customers
willingness to wait e.g. a customer may be willing to wait for three weeks or more for
delivery of a car with particular option but only a day for delivery of new set of tyres.

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The ways to cover the lead –time gap is by seeking to forecast market requirements &
then to build inventory a head of demand. However care must be taken to avoid
inventory problems.

The gap can also be reduced by shortening the end to –end pipeline time, avoiding
unnecessary holding of stock whether raw materials, work –in progress of finished
inventory will also help to reduce lead-time gap.

The other way of reducing lead-time gap is through improved visibility of demand which
is achieved through sharing information on requirements along the supply chain on a
continuous basis.

Summary

In a world of shortening product life- cycle, volatile demand & constant competitive
pressure, the ability to move quickly is critical. It is not just a question of speeding up the
time it take to get new product to the market but rather the time it take to replenish
existing demand.

Market today is often “time sensitive” as well as “price sensitive” thus research is for
logistics solutions that are more responsive but low-cost.

Time compression in the pipeline has the potential both to speed up response time & to
reduce supply chain cost –the key to achieving this dual goal is through forecasting on
the reduction of non –value adding activities and particularly time spent on inventory.

Where in the past, logistics systems were very dependent upon a forecast, with all
problems that entailed, now the focal point has become lead-time reduction.

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Handout Seven

Supply Risk Management

Introduction

Today’s market is characterized by turbulence and uncertainty. Demand in almost every

industrial sector is more volatile than in the past.

Product life cycle has shortened significantly and competitive product introductions make life-
cycle demand difficult to predict.

Vulnerability of supply chain to disturbance or disruption has increased. It is not only the
effect of external attacks but also the impact of changes in business strategy.

Many companies have experiences a change in their supply chain risk profile as a result of
changes in their business model e.g. the more the adoption of lean practice, outsourcing and
tendency to reduce the size of supplier base potentially increase supply chain vulnerability to
risks.

The unforeseen risks have severe financial effects across the supply chain network as a whole
e.g. disruption of the supply chain may have an impact on share price once the problem becomes
public.

Illustration

Land lover, part of the motor company, announced that it might have to halt production of its
discovery four wheel drive vehicle because its sole supplier of chassis –UPF –Thompson had
gone into liquidation.

It was estimated that it could take up to six months for an alternative source of supply to be
brought on stream. .At some significant cost, land rover had no alternative but to finance the
supplier to enable the production of chassis to continue with its operation.

Supply chain risks can be external or internal

External risks may arise from natural disasters war terrorist, epidemics or government imposing
legal restrictions.

Internal risks refer to risks that arise as a result of how the supply chain is structured and
managed .this means that these risks can be influenced by managerial actions e.g. outsourcing,
lean practice, and reduction of supplier base.

Why are supply chains more vulnerable?

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By definition: Supply chain vulnerability is an exposure to serious disturbance arising from
risks within the supply chain as well as risks external to the supply chain.

Reasons why modern supply chain have become more vulnerable.

1. A focus on efficiency rather than effectiveness

Business model are very much based upon the search for greater level of efficiency in the supply
chain. Experience highlighted that there are opportunities in many sectors of industry to reduce
cost on inventory through just-in –time practices. JIT have widely been adopted and
organizations are becoming increasingly dependent upon suppliers.

This model becomes less viable as volatility increases. The challenge in today’s business
environment is how –best to combine “leans” practices with an “agile” responses.

2. The globalization of supply chains

There has been dramatic shift away from local manufacturing and marketing strategy of the past.
Now through off- shore sourcing, manufacturing and assembly, supply chains extend from on
side of the globe to the other e.g. components may be sourced in Taiwan, sub assembled in
Singapore with final assembly in US, for sale in the world markets.

Usually motivation for offshore sourcing and manufacturing is cost reduction.

However this cost is typically limited to cost of purchase or manufacturing. Only rarely are total
supply chain cost considered.

The results of these cost –based decision is often higher levels of risk as a result of extended lead
times, greater buffer stock and potentially higher levels of obsolesce –particularly in short life –
cycle market.

A further impetus to the globalization of supply chains has come from the increase in cross –
border merger, and acquisition as well as absorption

3. Focused factories and centralized distribution

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Most companies have adopted practices of centralized production and distribution. Significant
economies of scale can be achieved in manufacturing if greater volumes are produced on fewer
sites. Some companies have chosen to produce fewer products exclusively at single site.

As a result production costs may be lower but the product has to travel greater distance often
across many borders.

Incidentally flexibility may be lost because the focused factories tend to be designed to produce
in very large batcher to achieve minimum economies of scale.

4. Trend to outsourcing.

One wide spread trend observable over many years has been the tendency to outsource activities
that were previously conducted within the organization.

Companies have outsourced distribution, manufacturing, accounting and information systems. In

some cases these companies might be described as “virtual” companies.

Logistic behind this large scale outsourcing is based upon the view that they focus on the
activates in which they have a differential advantage over competitors. This is leading to the
creation of ‘network organization’ where firms shares information and aligned processes to
achieve greater overall competitiveness.

However outsourcing also brings with it a number of risks not least being potential loss of
control. Distribution in supply can often be attributed to the failure of one of the links .the more
complex the supply network the more links there are and hence greater the risks of failure.

5. Reduction of the supplier base.

A prevailing trend over the last decade or so has been a dramatic reduction in the number of
suppliers from whom an organization typically will procure materials, components, services etc.

In some cases this has been extended to “single sourcing “whereby one supplier is responsible
for the supply of an item .failure of a single source supplier causes major disruptions in the
whole supply chain

Even though there are many benefits to suppliers base reduction, it has been recognized that it
brings with it increased risks. (Refer to Land rover illustration).

Potential supply chain risks

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1. Supply risks: This are risks due to disruption in supply. The risks may be higher due to global
outsourcing, reliance on key supplier, poor management etc.

2. Demand risks: This are risks due to volatility /uncertainty of demand. This could be caused
by parallel interactions where demand for another product affects demand for our product
(competition)

3. Process risks: Are risks from variability in our processes e.g. manufacturing, distribution,
capacity availability etc.

4. Control risks: this are risks caused by disturbances or distortions caused by our internal
control system ,order opportunities batch size and safety stock policies can distant real demand
.our own decision rules and policies can cause “chaos” types effects.

5. Environmental risks: are risks caused by external forces e.g terrorists, war legal restrictions,
epidemics, weather changes etc

Potential supply chain risks

Supply risks Process risks Demand risks Environmental risks

Control risks

It is important for senior management to understand that the risk profile is directly impacted by
the strategic decisions that they take e.g. a decision to transfer production unit from one town to
another should be examined in terms of how it may affect vulnerability from the five risks
sources described above.

Managing supply chain risks

There are seven –stages approaches to the management of supply chain risk, namely:

1. Understand the supply chain

2. Improve the supply chain ‘identify the critical paths

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 3. identify the critical paths

4. Manage the critical paths

5. Improve network visibility

6. Establish a supply chain continuity team

7. Work with supply and customers to improve supply chain risk management
procedure.

1. Understand the supply chain

There is in many companies an amazing lack of awareness of the wider supply demand network
of which the organization is a part. Whilst there is good understanding of the downstream routes
to the market, the same is not always true of what lies upstream of first tier suppliers. First tier
suppliers are often dependent on second and even third tier suppliers for their continuity.

2. Improve the supply chain

“Improving” the supply chain is all about simplification, improving processes reliability,
reducing variability and reducing complexity.

Most organization only responds to needs and opportunities of the time (short term) e.g.
suppliers are chosen because of their ability to meet the demand at a lower price rather than their
reliability in the supply chain.

Variability and complexity add risks to the supply chain .variable means outcomes that are not
always predictable. This can be solved using the six sigma methodology.

Complexity in supply chain can be caused by:

 The number of product and variant offered

 Number of components and or sub –assemblies

 Number of suppliers

 Number of customers

 Different location

e.g. due to competition pressure Motorola Company extended their range of mobile phones.
However there was little commonality of parts across the range. This products variation was

70
made a head of demand to a forecast that was only 3% accurate .the company was forced to
reduce complexity in order to significantly reduce cost and improve its responsiveness.

3. Identify the critical paths

Supply networks are in effects a complex web of interconnected “nodes” and “links”. The nodes
represent firms or facilities such as supplier’s distributors, factories and warehouse. The links are
the means by which the nodes are connected. This links may be physical flows, information
flows or financial flows. Critical paths are those nodes and links that need to be closely managed
and monitored.

The vulnerability of supply network to risk is determined by the risk of failure of these nodes and
links. The challenge to supply chain risk is determined by the risk of failure of these nodes and
links

The challenge to supply chain risk management is to identify which of them is critical i.e whose
effects of failure would be more significant to the performance of the supply chain.

Companies should identify the critical paths that must be managed and monitored to ensure
continuity

Characteristics of critical paths

 Long –lead time

 A single source of supply with no short term alternative.

 Dependence on specific infrastructure (Pinch points) i.e. points through which materials
and products must flow e.g. roads, ports, information system etc.

 High level of identifiable risks (i.e. supply, demand process, control environmental risks)

4. Manage the critical paths

Once the critical paths have been identified, the next step is to know how the risks can be
removed or reduced.

This stage involves development of contingency plan for actions to be taken in the event of
failure.

Cause and effect analysis is another tool that can be used to identify the cause of the problems
with view to removing or avoiding the cause e.g. the problem would be failure of a key supplier
71
If alternative sources are not available at short notice, its necessary carry strategic inventory to
enable the flow through the downstream node to be maintained.

5. Improve network visibility

Many supply chain suffer from limited visibility i.e. a particular entity the network is not aware
of the status of upstream and downstream operations of the level and flow of inventory as it
progress through the chain.In such situation, it can be often weeks and months before problems
become visible by this time, it may be too late to take effective action.

Network visibility can be improved through the use of technology to enhance communication
through the networks .supply chain entities should share information with each other,even if the
information may not always be good news.

6. Establish a supply chain continuity team

All the foregoing stages in the supply chain risk management process require resourced to
undertake them. One way to do this is to create a permanent supply continuity team.

Many companies already have business continuity team in place but they look at risks mainly
from a financial perspective. It is necessary to have a supply chain management team that have
skills necessary to undertake the detailed analysis and implementation involved in the supply
chain risk management process.

The team should maintain a ‘risk register” which identifies the possible points of vulnerability
along with the actions that are to be taken to mitigate that vulnerability.

7. Work with suppliers and customers

Given the complexity of most supply networks, how can risk be better managed upstream and
downstream of the focal firm?

Ideally, if each entity in a network took responsibility for implementing risk management
procedures with their immediate first tier supplier and customers, then a far more resilient supply
chain would emerge.

Just like firms insist that a supplier meet rigorous quality standards in terms of products they
supply, the same practice should be applied in supply chain risk management by requiring
suppliers to monitor and manage their supply vulnerabilities. This can be achieved where an
entity work crossly with first tier suppliers and consumers.

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Achieving supply chain resilience

Resilience implies the ability of system to return to its original or desired state after being
disturbed.

Resilience can be achieved through:

 Flexibility e.g. demand/ supply /flexibility

 Agility –ability to match demand and supply

 Maintaining “slack”/ safety stock

 Up stream and downstream visibility e.g. through use of technology

 Supply chain collaboration

 Developing supply chain risk management culture.

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Handout Eight

ENTERING THE ERA OF NETWORK COMPETITION

Introduction

An increasing number of organizations have nowadays identified that logistics is clearly major
strategic variable. Companies like Dell and Benetton have their success in the market place due
to many things, but there can be doubting role that logistics has played in achieving that success.

Characteristics of companies that are at leading edge in logistics

They;

 Exhibit an overriding commitment to customers

 Encompass a significant span of cross functional control

 Commit at external alliance with suppliers

 Have a highly formalized logistical process

 Place a premium on operational flexibility

 Employ comprehensive performance measurement

 Invest in state –of –the –art –technology

Managing the supply chain as a network

We are now entering the era of “network competition” where individual business no longer
compete as a stand –alone entities but rather as supply chain. The new competition paradigm
places the firm at the centre of interdependence network –a –confederation of mutually
complementary competencies and capabilities which competes as an integrated supply chain
against other supply chains.

To manage in such radically revised competitive structure clearly requires different skills and
priorities. Management must carefully look at both external and internal processes

To make network more efficient in satisfying end –user requirements demand a higher level of
co-operation between organizations in the network.

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Underpinning the successful network organization requires that information of downstream
demand and wage is made visible /accessible to all up stream members in the supply chain.
Supply chain management is concerned with achieving a more cost effective satisfaction of end
customer requirements through buyer/supplier integration. The integration is achieved through a
greater transparency of customer requirements via sharing of information establishment of
seamless process as well as just-in –time replenishment.

Modern business should emphasis the concepts of long term, mutually dependent relationship
with both the suppliers and customers. In the chain the end result of such a relationship is cost
effective and a value adding chain .this network of alliances welds together the supply chain
partners to achieve mutually beneficial goals.

However there are many issuers and challenges facing organizations as they make the
transition to the new competitive environment

The challenges include:

1. Collective strategy development

Traditionally members of a supply chain have considered themselves to be part of marketing

network and so have not shared with each other their strategic thinking .For network to be truly
effective a significant higher level of joint strategy development is required .This means that
network members must collectively agree strategic goals for the network and the mean of
attaining them

2. Win Win thinking

The biggest challenge is to break the often adversarial nature of buyer /seller relationship that
existed in the past. There is now a growing realization that co-operation between partners usually
lead to improve performance generally. The issue then becomes that of determining how the
results of that improved performance can be shared amongst various players. Win –win need
not mean 50/50, but at a minimum all partners should benefit and be better off as a result
of cooperation.

3. Open communication

One of the most powerful drivers of change in marketing networks has been the advert of
information technology. Making the exchange of information between supply chain partner so
easy and advantageous electronic: data interchange (EDI) was an early precursor of the
information highway that now exists to end pipeline visibility to become a reality.

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Open communication lead a much more rapid response to market changes ,with less inventory
and lower risk of obsolesce .For network marketing to work to its fullest potential ,visibility and
transparency of relevant information throughout the supply chain is essential .Cost data should
be shared up stream and downstream and hence each partner s profit is visible to others.

The supply chain of the future

The market and supply chains are always in constant state of dynamic changes and adaptation.
Firms that served us well in the past may no longer work today and will not work in the future.

We have moved from a business environment where suppliers held power often through their
ownership of resources, technology and brands – to a situation where the customer is now in the
driving seat. “Seller market” has become “buyer market”. Marketing philosophy has moved from
the idea of mass market /production to “market of one” served by customization.

Traditionally supply chain business model was based around maximizing efficiencies particularly
through the exploitation of “economic scale”

Tomorrow’s Model
Virtual network
Information based
Customer value
oriented

Mass Production Mass Customization

and marketing (one to one marketing)

Yesterday’s model
Independent
entities
Inventory based
low cost production

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The problem now is that the context has changed we have seen a move from lower quadrant in
the above figure to the upper right quadrant.

However many companies have not recognized the implications of the shift for supply chain
design.

What is now required is supply chains that are agile and are able to cope with rapid changes and
higher levels of variety and even customization .The system need to be able to cope with small
numbers and react in ever short lead times.

The seven major business transformations

1. From supplier –centric to customer centric

Traditionally supply chains have been designed from the factory outward” rather than from the
“customer backward”. The emphasis was on mass production and distribution. The goal in
supply chain design was cost minimization through economies of scale. In today’s competitive
market place the goal must change to attainment of higher levels of customer responsiveness
.Thus agility rather than cost becomes the key driver.

2. From push to pull

Closely linked to the first transformation is the idea of moving from “production push “mentality
which seeked to optimize operations through level scheduling and long planning horizons to a
“demand pull” philosophies in which ideally nothing is made sourced r moved until there is a
demand for it .

The success of such a system requires the highest level of flexibility of all supply chain resources
including human resources.

3. From inventory to information.

Logistic and supply chain management has conventionally been forecast –driven rather than
demand driven. The focus has been :predict demand at appoint in time and then build inventory
against the forecast as the market become more volatile and turbulent ,so too have they become
harder increase

The challenge today is to enable supply chain to become demand driven as a result of better
visibility of real demand through sharing of information .real demand occurs at the end of the
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supply chain and if that information can be captured and shared and upstream ,then dependency
on inventory reduces.

4. From transaction to relationships

There is a growing recognition that the route to sustained profitability is through building long
term relationships with selected customers and suppliers. In the past, the focus was on volume of
scale and market share thus companies were transactional oriented.

Today, customer retention is a key measure to success in the world of relationship marketing.
One of the drivers of improved customer retention is a delivery of superior customer service.
There is a very clear connection between logistics and customer retention managing customer
relationships has become a critical business process as organizations seek to improve the quality
of their earnings.

5. From “trucks and shed” to end –to –end” pipeline management.

Over the last two decades, there has been a dramatic broadening of the scope of logistic and
supply chain management in many organizations. Previously, logistics or distribution
management was seen primarily as a concern with transportation and warehousing. The focus of
managerial effort tended to be on cost minimization and the optimization of networks and
resources. Although efficient distribution is still strong now as the past, the real task of supply
chain management is to coordinate the wider end -to –end pipeline. The emphasis is time
compression from one end of supply of the chain to the other.

6. From functions to process.

Traditionally business has been organized around functions and those functions provided a
convenient mechanism for the allocation of resources and promotion of personnel .the classic
business organization could be described as “vertical “with multi layered hierarchal decision
making structure. Such organization cannot quickly respond to fast changing needs of the market

It is now suggested that the emphasis in organization should be upon key business processes that
create value for customers. They are thus team based and draw from various functions whose
roles are now transformed to “centre of excellence”.

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7. From stand alone competition to a network rivalry

The conventional business model has always been the companies succeed or fall on the basis of
their own resources and competencies. However as the trend to outsourcing has increased, there
has come a realization that the competitive vehicle is no longer the individual firm but rather the
supply chain of which firm is a member. Today a company fin itself a member of an “extended
enterprise” this extended enterprise is in reality a complex network of specialist providers of
resources and competition will be those that are best able to utilize the resources and
competencies of other partners across the network.

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PUBLIC PROCUREMENT

PUBLIC PROCUREMENT AND DISPOSAL CAT 2005 AND REGULATION 2006

1. Act provided information on the following areas of concern to public procurement. :

a) Regulatory bodies involved with public procurement and their functions.

b) Organization of procurement units
c) General procurement rules.
d) Tendering as the preferred method of procurement.
e) Alternative procurement methods.
f) Administrative review of procurement proceedings.
g) Compliance of public procurement entity (ppe)..
h) Debarment form participating in public procurement.
i) Disposal of stores and equipment.
j) Miscellaneous.
2. The purpose of law and regulations is to enhance efficiency, effectiveness, transparency and
accountability in public procurement.

3. Efficiency as a concept focuses on cost reduction in the short run and it is transactional in
orientation .These costs includes material costs, operating costs, and ordering costs.

4. The following aspects of law and regulations are concerned with improvement of efficiency in
the performance of a PPE.

a) Under preliminary –purpose of the act: promote competition; maximize economy and
efficiency.
 Under functions of PPOA
 Compliance of PPEs with procurement procedures
 Training and professional development.
 Issues of directives on conduct of procurement proceedings and dissemination of
information on procurements.
 Setting up of thresholds.
b) Under internal organization of PPEs ,efficiency issues include
 All procurement being within approved budgets
 Procurement to be within the specified thresholds
 Staffing PPEs with procurements professionals
 Use of innovative approaches e.g design and build
c) Under general procurement rules

 Use of open tendering method and alternative methods of procurement.

 Procurement may not be inflated or split to avoid a procurement procedure.
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  Use of standard tender documents.
 Specifications to be clear ,specific and allow fair competition ,
 Clarification of a tender; correction of arithmetic errors and responsiveness of a tender.
 Disposal of stores.
5. The effectiveness oriented system focuses on direct or indirect contributions to performance
improvement within or outside an organization. Instances of this in the law include;

a) General effectiveness

Structuring public procurement –PPOA and other regulating bodies and PPEs

Development of rules and procedures to be sued in public procurement

Maximizing the economy

Confidentiality of procurements proceedings

b) Specific aspects of effectiveness:

 PPOA-monitoring public procurement ;implementation and operation of PP system

Public procurement policy, register of contractors in works ,goods and services .;
administrative review of procurement proceedings.
Investigations of PPEs; debarment ;publications of procurement contracts .

 PPEs –staffed with procurement professionals ;compliance with act use of procuring
agents ; use of open tenders and alternative methods ;use of standard tender
documents ;not splitting procurements or inflate ;procuring at prevailing market
prices; specification ;no contracts with employees and their relatives ;specification of
requirements ,barred supplier not to be awarded tender ;inspections and audits
relating to contracts to ensure compliance; procurement and disposals by armed
forces.
6. Transparency and accountability

Preliminary –purpose of the act; increase transparency and accountability; increase public
confidence ;promote integrity and fairness in procurement procedures ;

Aspects include;

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 PPOA-directive ness on conduct of PP proceedings at every stage .providing correct
tender documents ; modifications to tender documents and communicating with
tendered ;advertisement ;providing adequate time for preparing tenders; providing
;submission and receipt of tenders; changes to tenders ;opening of tenders ;extension
of tender validity; using specified criteria ;evaluation ;creation of contract notification
of ward of contract; director to be outstanding honesty an integrity;

 PPES –processing tenders as provided for the law and regulations ; procurements to
be handled by different offices.; establishment committees –tender ;procurement
,disposal ,receipt and inspection ; sufficiency of funds ;staffing with procurement
professionals ;all those involved in the procurement –compliance with the act;
procurement not to be split ;use laid down procurement procedures ;discipline for mis
–procurement without discrimination ;corrupt ,fraudulent ,collusion ,procurement
conflict of interest lead to disciplinary action; procurement record to be kept ;
disposal of stores in accordance with the regulations –transfer ,sale by public
tender ,destruction ,dumping or buying ,trade in ;restriction disposal to employees;
Administrative review board –suspension of procurement proceedings when a
complaint id filed; all parties to review to attend; decision final unless appeal is made
to the court within 14 days.

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