Douglas Kinnis Macbeth

Supply
Ecosystems
Interconnected, Interdependent and Cooperative
Operations, Supply and Contract Management
10521_9789813223073_TP.indd 1 13/8/18 4:29 PM

b2530 International Strategic Relations and China’s National Security: World at the Crossroads
This page intentionally left blank
b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Supply
Ecosystems
Interconnected, Interdependent and Cooperative
Operations, Supply and Contract Management
Douglas Kinnis Macbeth

University of Southampton, UK
World Scientific
NEW JERSEY • LONDON • SINGAPORE • BEIJING • SHANGHAI • HONG KONG • TAIPEI • CHENNAI • TOKYO
10521_9789813223073_TP.indd 2 13/8/18 4:29 PM

Published by
World Scientific Publishing Co. Pte. Ltd.
5 Toh Tuck Link, Singapore 596224
USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601
UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE
Library of Congress Cataloging-in-Publication Data

Names: Macbeth, D. K. (Douglas K.), author.
Title: Supply ecosystems : interconnected, interdependent and cooperative operations, supply and
contract management / Douglas Kinnis Macbeth (University of Southampton, UK).
Description: New Jersey : World Scientific, [2018] | Includes bibliographical references and index.
Identifiers: LCCN 2018012720 | ISBN 9789813223073 (hc : alk. paper)
Subjects: LCSH: Business logistics. | Production management. |
Industrial procurement--Management. | Industrial management.
Classification: LCC HD38.5 .M33 2018 | DDC 658.5--dc23
LC record available at https://lccn.loc.gov/2018012720
British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.
Copyright © 2019 by World Scientific Publishing Co. Pte. Ltd.

All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means,
electronic or mechanical, including photocopying, recording or any information storage and retrieval
system now known or to be invented, without written permission from the publisher.
For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance
Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy
is not required from the publisher.
For any available supplementary material, please visit

http://www.worldscientific.com/worldscibooks/10.1142/10521#t=suppl
Desk Editors: Anthony Alexander/Karimah Samsudin
Typeset by Stallion Press

Email: enquiries@stallionpress.com
Printed in Singapore
Alex - 10521 - Supply Ecosystems.indd 1 19-07-18 10:33:57 AM

“9x6” b3235 Supply Ecosystems: Interconnected, Interdependent and Cooperative Operations, Supply and Contract Management
About the Author
Douglas Macbeth recently retired as Professor of

Purchasing and Supply at University of Southampton
Management School. He has worked in two other
UK universities and has taught in Europe and
America. He is the Founder of the consulting firm
SCMG Ltd., which commercialises early research
into buyer–supplier relationships. He was also
the deputy director of the Southampton Marine
and Maritime Institute collaborating across many
disciplines.
He takes an applied view of academic research and has always worked
actively across the academic/practitioner boundary.
He is a Lead Academic on FutureLearn Massively Open Online Course
(MOOC) on Contract Management: Building Business Relationships, com-
missioned by UK Cabinet Office and partnering with Civil Service
Learning and IACCM, which runs twice a year for 15,000 learners.
He is the author of six books, numerous articles and lead or co-lead in
many consultancy and research projects and is a supervisor for a number
of successful PhD candidates.
b3235_FM.indd 5 14-08-2018 06:30:02

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Acknowledgements
This book is dedicated to Ann, Graeme, Chris and Lisa. Ann has
supported me and my career in ways too numerous to list, but sincere
thanks are due.
World Scientific Publishing have been a joy to work with.
I have also worked with many interesting people both as colleagues in
academia and in business as clients and as co-investigators in research and
teaching projects as well as international students in a variety of settings.
I learned from them all and also owe them a great debt of gratitude for
allowing me to share my experiences. Some of that learning is captured in
this book, and I hope it properly reflects what I learned from these
interactions.
vii
b3235_FM.indd 7 14-08-2018 06:30:02

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Contents
About the Authorv

Acknowledgementsvii
List of Figuresxiii
List of Tablesxv
Introductionxvii
Chapter 1 Global Business Context 1

1.1 Financial and Strategic Objectives 1
1.2 Business Life Cycle 3
1.2.1 Start-up 4
1.2.2 Existing 5
1.2.3 Static 6
1.2.4 Under threat 7
1.2.5 Time horizon 9
1.2.6 Short-term survival 10
1.2.7 Medium-term growth 10
1.2.8 Trade sale or Initial Public Offering (IPO) 11
1.3 Ethical Stance 13
1.4 Citizenship 15
1.5 Political Sensitivities 16
1.6 How to Compete 17
ix
b3235_FM.indd 9 14-08-2018 06:30:02

b3235 Supply Ecosystems: Interconnected, Interdependent and Cooperative Operations, Supply and Contract Management
“9x6”
x Contents
1.7 Order Winners and Qualifiers 19

1.8 Core Competence 21
1.9 Price 22
1.10 Design 24
1.10.1 Design for function 25
1.10.2 Design for process and quality 27
1.10.3 Design for sustainability and recycling 29
1.10.4 Design for procurement and supply
chain30
1.11 Quality and Value 31
1.12 Delivery 33
1.13 Integration Across Boundaries 35
1.14 Data and Analytics 36
1.15 Corporate Social Responsibility (CSR) 37
1.16 Background Theory 39
1.17 Transaction Cost Analysis (TCA) 40
1.18 Resource-based Theory 42
1.19 Network 44
1.20 World Trade and Globalisation 45
1.21 Commodity Demand 48
1.22 Communication Links 49
1.23 Government Support to Inward Investment 50
1.24 Locational Advantages and Disadvantages 51
1.25 International Business 52
1.26 Evolution or Born Global? 53
1.27 Market Imperatives 54
1.28 Value Proposition 54
1.29 Value in Use or Transfer 55
1.30 Goods and/or Services 56
1.31 Make or Buy (Products) and Do
or Trade (Services) 58
1.32 Location 59
1.33 State-of-the-Art Innovation 60
1.34 Product Range 60
1.35 Order Mix 63
1.36 Competitive Threat 65
b3235_FM.indd 10 14-08-2018 06:30:02

Contents xi
Chapter 2 Operations 69
2.1 Design 69
2.2 Packaging 69
2.3 Quality and Cost Influence 71
2.4 Modularisation 71
2.5 Platforms 72
2.6 Cost and Reputation Risk 74
2.7 Tracking Customers 74
2.8 Quality 76
2.8.1 Quality and design 76
2.8.2 The voice of the customer 80
2.8.3 Standards 82
2.8.4 Service quality 83
2.9 Operations Management 85
2.9.1 Managing resources 87
2.9.2 Role of inventory 88
2.9.3 Role of information systems in operations 89
2.9.4 Performance metrics 90
2.9.5 Lean 91
Chapter 3 Supply 95
3.1 Buying and Trading 95
3.1.1 Offset 97
3.2 Customer Supply Chain Segments 100
3.3 Supplier Selection 105
3.4 Supply Side Infrastructure 108
3.5 EU Procurement Rules 112
3.6 Role of Procurement 115
3.7 Support Systems 126
3.8 Logistics 130
3.9 Organisational Buying Behaviour 135
Chapter 4 Contract 141

4.1 Context 141
4.2 The Contract Life Cycle 142
4.2.1 Initiation and implementation into operation 144
b3235_FM.indd 11 14-08-2018 06:30:02

“9x6”
xii Contents
4.2.2 Contract monitoring and improvement 146

4.2.3 Contract end game options 149
4.2.4 Contract de-brief and capture of lessons
learnt 150
4.3 Law, Intellectual Property and Negotiation 150
4.4 Ethics and Corruption 154
4.5 Risk 155
4.6 Measurement 158
4.7 Business to Business Relationships 160
4.8 SCMG Ltd Contract Management
Benchmarking Framework 161
4.9 People Skills 161
Chapter 5 Possible Futures 163

5.1 Global Warming 163
5.2 3D Printing 164
5.3 The Internet of Things 165
5.4 Robots 166
5.5 Blockchain 168
5.6 Artificial or Computational Intelligence 169
5.7 Job Displacement 171
5.8 Universal Basic Income 172
Chapter 6 Supply Ecosystems and Competitive Advantage 177
Appendix A The RED/BLUE Game 181

Objective 181
Playing the Game 181
Bibliography 185
Glossary187
Index219
b3235_FM.indd 12 14-08-2018 06:30:02

List of Figures
Figure 1.1 Costing Approaches 23

Figure 1.2 Costing Impacts of Decisions and Consequential
Spending26
Figure 2.1 The Relationship between Design Tolerance
and Rejects 77
Figure 2.2 Process Variations and Sigma 78
Figure 2.3 House of Quality Generic Model 81
Figure 2.4 The SERVQUAL Model (5 Gaps) 84
Figure 2.5 Basic Operations System Diagram 86
Figure 3.1 Gattorna’s Behavioural Logic of Supply Chains 101
Figure 3.2 Gattorna’s Market Logic of Supply Chains 102
Figure 3.3 Gattorna’s Strategic Logic of Supply Chains 103
Figure 3.4 Gattorna’s Cultural Logic of Supply Chains 104
Figure 3.5 Life Cycle Supply Requirements 107
Figure 3.6 Customer’s View of Suppliers 118
Figure 3.7 Supplier’s View of Attractiveness of the Customer 120
Figure 3.8 Relationship Portfolio Possibilities 121
Figure 3.9 Different Relationship Types 124
Figure 3.10 Logistics Hub and Spokes 133
Figure 3.11 Types of Products and Services 136
Figure 3.12 Product Definition 137
xiii
b3235_FM.indd 13 14-08-2018 06:30:02

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

List of Tables
Table 3.1 Organisational Location of Purchasing Activity 110

Table A.1 Red Blue Payoff Matrix 181
Table A.2 Red Blue Game Scores 182
xv
b3235_FM.indd 15 14-08-2018 06:30:02

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Introduction
Business is about customers who demand goods and services and the
associated supply systems, which can be coordinated to meet the demand
by supplying the requirements to specification, on time, to the agreed
quality and at an acceptable transfer price that provides relatively satis-
factory outcomes to both sides. It is about understanding all of the fea-
tures, activities, constraints and opportunities on both sides of the supply/
demand interaction.
However, while businesses recognise the need to manage the com-
plete, but complex, business process they often feel the need to disag-
gregate this into a series of narrower specialisms and to structure their
organisations around these sub-divisions. This however runs some perfor-
mance risks since, if not managed from the overall business effectiveness
viewpoint, there is a real danger of sub-optimisation. This is the situation
in which some action that can be seen as optimum as seen from the nar-
rowly specialist point of view is actually less so (that is, sub-optimum)
from the overall business viewpoint. This problem in business is com-
pounded in academic life where in organisation, teaching and publishing,
the experts become more and more narrow and less and less aware of, or
concerned with, the larger business effectiveness view.
There is an inherent logic to these long-standing processes of division
of labour (since Adam Smith in 1776 in terms of published work but long
beforehand in terms of medieval guilds for example), but they are predi-
cated on a scarcity of capability or resources to take a more integrated
xvii
b3235_FM.indd 17 14-08-2018 06:30:02

“9x6”
xviii Introduction
view and this is changing as intelligent software solutions spread further

into our normal operational areas of activity. This software-driven capabil-
ity is likely to mature in advance of organisational change, and that is
another challenge.
As a student, professor and consultant, I always found these sub-
divisions stressful as I tried to see beyond the narrow view to understand
the extensive range of input data to consider as well as the impact of deci-
sions made in one area with their consequential ripple effect across both
the focal organisation and out to their customer and supplier networks and
into the wider environment.
This book is an attempt to consider the extensive ecosystem which
forms the supply side of business markets as a step towards a more holis-
tic worldview. However, it makes no sense to ignore the demand side
since without customers there is no business, but the focus will be to
recognise the supply implications of customer demand and the ways in
which the supply side can support existing customer satisfaction and
provide opportunities to refine or re-define what supply solutions can be
possible for current demand (or a newly created future one).
Please note that the writing style avoids an excessive use of referenc-
ing. Key sources are identified and current URLs listed, but one of the
major developments in all areas of knowledge discussion and creation is
the use of the internet facilities of search engines and Wikipedia sources
to start off enquiries. While the academic will always suggest going back
to the original sources, it is now much easy to generate some search
paths where once we depended on long lists of references in each set of
resources we read.
Ideally of course, we want to integrate both supply and demand and
to some extent we will do elements of this in this book since the customer
is the start of everything we need to do; however, we will not address the
details of sales and marketing here. In similar fashion, we will discuss
finance and strategy but again from the viewpoint of the challenges that
emerge from them to which the supply side must react and hopefully
influence.
This sequencing is important. There are business drivers which form
a framework and often a set of constraints to the supply side choices
discussed here. No business succeeds if it fails to recognise the role of
b3235_FM.indd 18 14-08-2018 06:30:02

Introduction xix
customer demand and satisfaction and the effect that managerial choices
have on how successfully the organisation can meet its trading or service
objectives.
The book is structured into 6 chapters.

Chapter 1. This chapter looks at the general background of the Global
Business Context. It includes discussions about: Financial and Strategic
Objectives over a business life cycle since, clearly, these issues affect the
supply solutions possible and desirable; Order Winners and Qualifiers
allows a strong bridge to be built from the demand side to the supply sup-
port activities that are therefore necessary; Background Theory allows the
examinations of some of the academic theory most relevant to these con-
siderations; Globalisation is considered both for its long-terms benefits
and challenges as well as the recent political backlash from those com-
munities “left behind” in the process of technical change, outsourcing to
cheaper labour regions and the political challenges of growing supply and
market opportunities away from the original capability locations; finally,
we examine what the market imperatives are in terms of what the offer to
the market can be and how to make a decision about what supply options
make business sense.
Chapter 2. This chapter sets out the operation dimensions and critical
features, and while much of this is built from understandings first devel-
oped in manufacturing goods, we will argue that much of the thinking is
transferable (more or less readily) into the production and delivery of
services. Indeed, many offerings to customers are a mix of both goods and
associated services, so it is much better to think of this as a complex bas-
ket of offerings.
We start by looking at the fundamental and crucially important phase
of Design as it applies to all aspects of the offer creation process and
across all boundaries. Next, we look at the equally cross-boundary impor-
tance of Quality (but very widely defined and applied) before considering
how the Operations Management choices are recognised and justified in
light of the chosen supply strategy. This chapter concludes with a discus-
sion of the Toyota Production System or Lean Production as it can be
b3235_FM.indd 19 14-08-2018 06:30:02

“9x6”
xx Introduction
called as the complete challenge to the received Western perception of

what manufacturing was all about. We cannot in any way downplay the
importance of what Toyota taught the world about ways of thinking and
organising, and to this day we are still reflecting on what can be possible
by learning from this example.
Chapter 3. This chapter starts with general background topics beginning

with the boundary of the firm discussion of whether an activity should be
done through ownership of the resources or through purchasing the out-
come of another organisation’s resources — the Make or Buy decision.
From there, we discuss customer segmentation and supplier selection. We
will deal here with managing services as a special or potentially more fun-
damental consideration, as more business activity moves in this direction.
We then move into more operational areas as we look at the choices
around supply side infrastructure and support systems. This latter will
include discussion of the effects of new technology and the changing peo-
ple skills needed to make all of this integration more feasible.
We also need to understand something of the nature of organisational
buying to understand the challenges of being a supplier, and of course
goods need to be moved, so the activities of logistics need to be built into
our complex world.
Chapter 4. The nature of the contract life cycle begins this chapter as we
need to understand the scope of the considerations and stakeholders
involved.
Fundamental to all business activities will be contracts in law and in
more informal agreements; so we need to understand these issues with
their challenges, constraints and opportunities. Aspects of ethics, sustain-
ability, risk identification and mitigation will all affect the contracts we
negotiate and our freedom to act in normal and stressed situations.
However, contracts are in some senses just a formalised definition of
what the business-to-business relationship is intended to achieve, and
there are other ways we should consider and manage relationships.
We will also highlight a particular form of best practice guidance
developed in association with the Royal Bank of Scotland as a possible
checklist for business behaviour.
b3235_FM.indd 20 14-08-2018 06:30:02

Introduction xxi
Chapter 5. In this chapter, we will speculate on perceived current trends

in science and technology and where they might lead as an extension of
the earlier discussions of new technological processes. There is an
increasing perception that we are fast approaching a cusp where Artificial
Intelligence, Robots, Autonomous Vehicles and Additive Manufacturing
have the potential to dramatically affect much of what has been discussed
here, and as genome research matures, perhaps whole new industry sec-
tors will evolve in the pharmaceutical world to develop individually opti-
mised treatment regimes.
Political and trade-related issues and climate concerns are also likely to
need careful consideration, and alternative scenarios are worth exploring.
Chapter 6. This chapter draws the discussion threads together and high-
lights how dealing with the three aspects in a holistic way meets all of the
requirements of competitive advantage given the appropriate goods or
services.
Integration of practice or at least consideration and the business
understanding that it produces is inherently inimitable, while the skills
developed in working in these ways are readily applicable to other busi-
ness contexts. This has enormous strategic potential therefore.
Appendix A. The RED/BLUE Game.

This game has been used for many years to draw out the lessons of
competition and collaborative behaviour. It is structurally simple to
administer but can provide powerful learning.
This appendix will describe the game and set out the process of play-
ing it.
A more detailed guide to the key issues and points of management and
control, as well as pointers to the possible learning outcomes, can be pro-
vided on application to the author for tutors or facilitators planning to use
the game in helping their groups to gain most understanding and insight
from the game experience. People in these categories are encouraged to
email the author at dkmacbeth1@icloud.com, for these materials.
b3235_FM.indd 21 14-08-2018 06:30:02

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Chapter 1
Global Business Context
1.1 Financial and Strategic Objectives

All businesses or organisations have objectives: things that they were set
up to accomplish and on which they will be measured, primarily by the
members of the organisation themselves but often by third parties like
customers, competitors, lenders, investors, political masters or interested
social groups. Often, these measures will revolve around some economic
measures and monetary value, but this is a convenience in that society
often tries to compare activities by use of the common denominator of
money. We do need to remember that money is just a societal invention to
make the processes of trade and exchange simpler.
All societies start off with much simpler levels of exchange. One
farmer or hunter has a commodity in excess of their immediate require-
ment and offers it for trade with someone who has a different commodity
in excess. Then, the bartering and negotiation can begin as an attempt is
made to equate a deer perhaps to a quantity of corn.
From that simple scenario, most of what we understand as trade can
be seen to begin. There are issues here about comparative advantage (the
farmer is good at farming but not hunting), issues of trust about the
true ownership of the resources that are being traded, the equivalence of
the resources being exchanged, and so on. While this starts off being about
things or goods, the same ideas apply to the provision of a service. How
does the farmer value and agree a contract with a farm labourer for exam-
ple so that the labourer exchanges his physical efforts in return for food,
b3235_Ch-01.indd 1 14-08-2018 06:27:43

“9x6”
2 Supply Ecosystems
lodging and perhaps a wage? Does the contribution of the labourer

generate a surplus of a farm commodity in excess of the cost of the wage
package agreed and contracted for?
So all businesses and organisations need to understand what they are
trying to achieve and how they will know when this has happened. Other
stakeholders (parties having an interest in the outcomes) will want to be
able to monitor progress towards these objectives so that they can in some
way influence the directions and use of resources to make the achievement
more secure and maybe more rapid. Of course, competitors are also
stakeholders but with an interest in the opposite direction.
In the business world, economic benefit or profitable returns on the
capital invested will be critical. In local governments, alternatively, it may
be less about direct economic profit but could be a delivered social
objective efficiently met under constraints of an allocated budget, but the
general principles are similar.
In all of what follows, we have the similar potential splits of goods or
services and private or public sector ownership. Much of the history of
thought in the areas we will discuss was developed in the manufacture of
goods, but this sector is rapidly declining in western economies, espe-
cially in employment terms and in economic measures such as Gross
Domestic Product, while the growth of service-based businesses has
increased dramatically. However, people still need or want ‘things’ to use
and will buy them from wherever they can, so we find that the locations
of some aspects of productive industries move around the world in ways
we will discuss later. Some services would seem to be driven by relatively
finite demands. How often do normal families need to engage with the
legal profession for their support and ‘opinions’, for example? Other ser-
vices seem almost to have infinite aggregate demands in society, for health
and social welfare for example.
We also have to recognise a fundamental distinction however between
the entrepreneur and the person we can describe as a functionary of a
system. The latter can indeed be very principled and owe allegiance either
to the system that employs them or to their professional competence and
social standing, but they do not own the benefit of the achieved outcome
in the same sense as those who have risked their own money (even when
borrowed from others) to build the desired outcome. The entrepreneur is
b3235_Ch-01.indd 2 14-08-2018 06:27:44

Global Business Context 3
the essential risk taker in society who sees an opportunity to deliver a

benefit to a customer group who are prepared to reward him or her by
paying an excess over the entrepreneur’s cost of provision for the goods
or services. This provides the profit, which motivates more activity to
extend and develop the customer market demand which (s)he was creative
enough to recognise and supply. This is also true for the provision of
social services where such private ownership of the benefits of successful
delivery is accepted. For example, even in the National Health Service in
the UK the provision of care homes for the elderly can be done by profit-
seeking private businesses while other countries have much more active
private businesses and insurance companies involved in the provision of
services in support of individual’s health.
So we are going to concentrate on the business processes and
regard the public sector provision of services as the laggard in aspects
of these developments. However, being second is often a useful position
as it is possible to learn from the leader and improve the provision
without the wasteful learning processes that are often involved in being
a pioneer.
1.2 Business Life Cycle

The analogy with the human life cycle is a useful one in many areas of life
and business. There is a gestation period where the initial idea was con-
sidered and the reality conceived, birth, growth and development, maturity
with some development and then decline and finally wear out, infirmity
and ending.
As individuals, so products, processes, markets, organisations (includ-
ing businesses), nation states, civilisations and, if we are not more careful,
planets.
For the human, there is in many belief systems only one opportunity
in this. However, in many other situations we should perhaps only talk of
‘first’ life as at the end of the first cycle, modifications in a variety of ways
can allow for a form of continuity. So in the product world we can talk of
reuse, repurposing, recycling and resource recovery. In this way, the finite
resources of the planet can be used over and over again without needing
to extract so much more out of the earth.
b3235_Ch-01.indd 3 14-08-2018 06:27:44

“9x6”
4 Supply Ecosystems
Of course, the duration of a life cycle is very varied. The biblical

standard was of three score years and 10 (i.e. 3 × 20 + 10 = 70) which is
actually on the short side these days for the developed world at least. Life
cycles of some electronic products are measured in months, while civil
engineering structures can last hundreds of years. Religions and states can
last for thousands of years, while some lifeforms complete their cycles in
seconds, if that.
So we will use the concept without being definite about the timings.
We will simply argue that similar patterns are seen but often only recog-
nised as such in retrospect.
1.2.1 Start-up
An entrepreneur is often the first to realise that some people (the potential
clients) either have a need which is not being met (either at all or not very
well) and that the entrepreneur has an idea of how this nascent demand
can be satisfied by some supply process that the entrepreneur can imagine
or develop and for which satisfaction the clients will be happy to pay.
There are many uncertainties in the above statements, and it is being
comfortable operating with these uncertainties (in the belief that the ideas
and solutions are possible and sound in themselves) that demonstrates the
risk-taking approach of the entrepreneur.
It is also at this stage that fundamental operating and ethical principles
and philosophies are established, which we will discuss shortly. Sometimes
these are short lived as the battle for survival focuses more on cashflow
(remember that more businesses fail through not managing cashflow than
fail because there is no demand). However, sometimes the ethical stance
established at foundation endures for as long as does the business.
For the business start-up, all of the above factors need testing and
solutions measured against expectations and ability to reward the risk
taking processes. Entrepreneurs often demonstrate a drive for success
which seems to accept that there will be failures (from which learning
can be drawn) before a final success is achieved. While financial rewards
will follow, money does not in itself seem to be the driving force.
Rather, it seems that the process of succeeding is the source of the entre-
preneur’s self-evaluation and money is a welcome by-product and
b3235_Ch-01.indd 4 14-08-2018 06:27:44

perhaps a means of keeping score and demonstrating the success as well

as allowing r einvestment to aim for new goals.
Start-up is therefore inherently risky, and many enterprises will fail
long before all of the challenges can be overcome. In some cases, the
imagined solutions cannot be delivered with the current level of technol-
ogy or because of an incomplete understanding of the potential client
demand.
We can consider the start-up phase to be complete when enough of the
challenges have been more or less solved so that there is a level of demand
which is matched by a supply capability such that the clients are paying
for the goods or services and providing an excess over the supply costs.
At this stage, sufficient profit is being generated to maintain returns and
support future investments and business developments into the future.
In life cycle terms, passing the start-up phase can be likened to surviv-
ing the increased risk described as ‘infant mortality’. The business baby
can then really begin to grow and develop. In human terms, threats to
survival now come from more random events like accidents or severe
acquired illness. In business terms, these same random or at least unex-
pected and certainly unplanned-for events can stress the business causing
pain, change and hopefully learning and growth in capability and flexibil-
ity to respond and cope with new challenges.
1.2.2 Existing
As the existing business grows, it begins to reappraise the contracts it
established at its start up. Suppliers now have demonstrated their capabil-
ity or not, and as the core business grows it might be that the first suppliers
are not ready to grow in the same way or at the same rate. New customers
will also need to be found to grow the business further, and so some sup-
ply chains therefore need to be modified and new partners found, inducted
into the operating processes and new relationships established and built.
This change in connection to the external environment can be a difficult
and costly process.
Internally, other big changes are often needed. The personalities and
skills of the entrepreneur, so vital at start-up, are not the same skills
needed as businesses grow. With growth comes the need for more
b3235_Ch-01.indd 5 14-08-2018 06:27:44

“9x6”
6 Supply Ecosystems
controllable systems and procedures, more monitoring and control over a

level of complexity that the start-up expert managed through innate skill
and drive.
Thus, at some stage in the growth cycle, managers as well as owners
are needed. This raises the issue of the difference between the owner and
the manager who acts as the agent of the owner. The agent is ideally
almost a clone of the owner, acting and thinking in exactly the same way
as would the owner, (or Principal), if they were taking the actions or mak-
ing the decisions. However, in Principal and Agent Theory we recognise
that there will in fact often be different agendas and motivations between
the two parties and that sometimes the agent will make decisions which
benefit the agent more than the Principal. (Jensen and Meckling, 1976).
This issue is a factor in all such interactions and is especially the case
when dealing in supply chains where one hopes the chosen supplier has
the same motivations towards the final customer, as would the main pro-
vider or core company.
So one scenario for the business is more of the same. That is to say,
to roughly follow the same direction set at inception recognising that all
things change to some degree so products, services, personnel and s ystems
will evolve over time but essentially the same business model is still
apparent even if the financial scale and maybe geographical reach is
always growing.
Such a business can have a long life, extending a number of genera-
tions past the lifespan of its creators and their early managers.
This kind of business demonstrates the power of competitive advan-
tage (Porter, 1985) whereby it operates with some set of characteristics
with which a group of customers is happy to identify and with which they
will continue to trade while the business demonstrates a set of capabilities
which are in some ways better than their competitors and which are not
easily replicable by them.
1.2.3 Static
Not all businesses are driven by growth. For some entrepreneurs, the moti-
vation seems to have more to do with being in control and not reporting
to a superior, and often this attitude is extended to providing a safe and
b3235_Ch-01.indd 6 14-08-2018 06:27:44

prosperous source of income to an extended family. Such businesses often

treat employees as well as their own family and will support them in ways
similar to the consideration given to their direct relatives. In this kind of
business, the risk of growth can be seen as too large compared to the
attractions of survival and continuity. In return, they expect and are often
granted, a level of commitment and support such that the principal
employs agents who do think like principals for truly what is good for the
business is good for the individuals in the business.
The inherent stability of such businesses is an attractive feature in a
supplier, but by the same token we should not expect them to move far
from their comfort zone into ventures seen by them as being ‘riskier’.
Some business opportunities offered to them could thus be declined.
These considerations might suggest that in certain circumstances, these
suppliers are not the ones for new supply chain ventures into more uncer-
tain territory.
A newly selected supplier for the new venture might, if the venture is
successful, be an attractive replacement for the original supplier even
when in all other regards the original supplier has done nothing wrong.
We can see in this discussion the threat that if one is not advancing
then one is, in effect, retreating. The risk of growth is therefore somewhat
balanced by the risks of not growing!
This also indicates the truism that business strategy and partner selec-
tion are critical decisions much influenced by a changing environment.
Business managers therefore need to be constantly evaluating the fit
between current postures and future threats and opportunities.
1.2.4 Under threat

As we discovered in the previous chapter, even doing nothing wrong can
allow threats to future well-being to emerge. There are other things to be
concerned with of course and they come from many directions.
The first and constant threat is that customers change their demands
and expectations in ways which make it unattractive for the business to
continue to try to satisfy them. Even if the business can in theory change,
the timescales required can often create insurmountable problems. Even
without such major changes, customers can fail to live up to their
b3235_Ch-01.indd 7 14-08-2018 06:27:44

“9x6”
8 Supply Ecosystems
obligations to pay for an agreed good or service or find ways to delay

payment for spurious reasons. Formerly favoured customers then become
problems, and the business will incur more costs in trying to recover the
debts owed.
The mirror image of these issues can happen with suppliers to the
business. What once was a well-functioning supply chain becomes
weakened, perhaps because one of your suppliers’ other customers

becomes more attractive such that they get the support and response on
which you once depended. If this close support cannot be recovered, a
switch of suppliers might be necessary with all of the search and transfer
costs that implies.
These first two threats can arise from known connections with cus-
tomers or suppliers, but there are another two possibilities which might be
much more difficult to anticipate and perhaps react to.
The first of these relates to the threat of new entrants into the market
who can learn from the existing providers and offer a different combina-
tion of features to the existing customers and take their business away.
If these new entrants have fundamentally different costing structures
(for example, basing their business in low labour cost areas when the
product or service is labour intensive), it is very difficult for the incumbent
provider to fight back without replicating the move to the other region.
This argument partly explains some of the offshoring arguments or the
rise in global competitive capability from the more globally active
businesses from the newly emerging economies in Asia or the Indian sub-
continent or Latin America and soon perhaps Africa.
Other kinds of new entrant might choose to compete in different ways.
Perhaps the service element in the total package can be redefined such that
the value perceived by the customer is so sufficiently changed that the
choice is now biased in the new direction. We will examine some of these
choices below.
The second of the external threats can come from technological devel-
opment of which the incumbents have no knowledge and actually no
perception of its possibility and therefore are completely unprepared and
unable to react quickly enough. The best example of this kind of techno-
logical change is the invention of the quartz digital watch which nearly
wiped out the Swiss mechanical watch industry. The Swiss found it
b3235_Ch-01.indd 8 14-08-2018 06:27:44

difficult to recognise the threat to traditional watch making technology, so

while there were some early examples of Swiss watches pointing in the
direction of the new approach they did not fully appreciate that all elec-
tronic circuits have to have a means of causing the system to step into its
next state. In effect, electronics needs a clock to pulse to activate the
incremental processes the circuits depend on. Thus, the digital watch was
initially popularised by Texas Instruments, Fairchild and National
Semiconductor from the USA as an offshoot of their core electronics busi-
nesses. Later of course, the Japanese producers entered the market before
the Swiss fought back with their Swatch consortium.
There are other technological developments which suggest the same
potentially disruptive effects, which we will look at in Chapter 5 later.
Of course, many businesses operate in situations where their
customers have choices of which business they select to provide their
needed goods or services. The nature of competition is such that there is
always a threat that incremental improvements by a competitor affects the
share of the available market any single business can achieve over a given
time period. There is always the need to closely monitor what the com-
petitors are doing by way of differentiation and to react or not, as current
business strategy dictates.
1.2.5 Time horizon

All businesses need to be aware of what the future might hold for them in
terms of threats and hopefully opportunities and they need to be scanning
the horizon for these situations appearing from increasingly diverse direc-
tions. Businesses do have the potential to outlive their founders, in some
cases by many generations, but this must all be planned for ideally, or
reacted to if not anticipated.
Businesses move according to different statutory pulses. For example,
the requirements for annual taxation returns, shareholder meetings, trade
fairs or sales promotions, and so on. Shorter term there will be cashflow
metrics from daily monitors to longer term forecasts. In the medium term
will come loan repayments or expansion/restructuring plans, while in the
longer term there can be globalisation, relocation and new market entry or
exit from those markets no longer attractive.
b3235_Ch-01.indd 9 14-08-2018 06:27:44

“9x6”
10 Supply Ecosystems
There are recognised hierarchies of plans, and their normal time

h orizons and other hierarchies of managerial level decision-makers and
the associated data requirements and frequencies of collection and
analysis, support these.
1.2.6 Short-term survival

While there are many ideas about what causes a business to fail, one often
quoted is the need to keep sufficient funds in a liquid enough form such
that ability to pay staff and creditors is possible even when the demands
come quicker than anticipated. All businesses need to manage their cash-
flow carefully so that their survival is not threatened in the short term
before they can put other plans in place to cope with whatever has caused
the cashflow problem. As before, the challenge can happen from either the
market direction (loss of a key account for example) or from the supply
side (a sharp increase in taxation or adverse currency fluctuations perhaps).
The need to manage for survival can also put at risk longer term plans and
intentions. In the supply chain world, this can mean that the need to survive
supersedes other considerations such that there can be a changing of the
level of support given to a key supply chain partner. Conversely, it can also
be the case that a strong business-to-business (B2B) relationship can be
used to mitigate cashflow problems in that the partner can extend their
support in a variety of ways. Perhaps payment terms can be extended or
invoices delayed and it is not unknown for customers to ask their own
financial support provider(s) to provide loans or guarantees to their
suppliers at the same lending rate that is provided to the customer. There
are a variety of Supply Chain Finance providers offering such services.
1.2.7 Medium-term growth

For the business that can avoid the short-term survival issues then, for
reasons already discussed, the likelihood is that there is a level of growth
built into their future plans. Such ambitions can involve more of the same
sets of activities or transitions to new business models.
Businesses in this category are probably best placed to react to new
opportunities presented by their supply chain partners if they see them as
b3235_Ch-01.indd 10 14-08-2018 06:27:44

supporting their growth plans. Just having such ambitions and the
associated drive to make them happen can be an attractive personality trait
for their business partners to work with and help direct. However, as
always, there is another way of thinking and worrying about this. The
business which is intending to grow is ambitious enough and trying to
discriminate between opportunities it has created or identified and it may
be that another business who wants to works with them and the current
partner is simply not attractive enough in the longer term and so the
supply chain will be disrupted at some stage as apparently ‘better’ options
are recognised.
We will return to this discussion later when we examine the options
in the Portfolio Analysis discussions, in Chapter 3, for the key message is
that in any two-party relationship then both parties need to want similar
things and without such a meeting of minds there is nothing the
unfavoured party can do to recover from a rejection.
Such growth needs financing, and while some of it might be possible
from retained earnings, often new tranches of support or indeed new
sources of investment, can be sought. Commercial loans from existing
lenders or calls to existing shareholders might be possible, but there can
be limits to the risk appetite of such closely interested parties. It can there-
fore be the case that the business needs to look beyond its current funding
sources. At times like these, the business might need to clarify its longer-
term ambitions in order to make itself more attractive to new investors.
1.2.8 Trade sale or Initial Public Offering (IPO)

The end state of the ambitious growth-based business can be continuity
over some generations of owners and managers, or it might be that they
aim to get to a point in size or age (of the owner perhaps), when they want
to realise their investment and go on to new things.
To realise their investment requires that they find a way to sell the
business (in part or totally) while it is still trading so that the longer-term
business prospects are attractive to a new owner(s) or investor(s). Such a
trade sale allows for the complete or partial exit of the original owners and
investors, but often these people represent huge tacit knowledge about the
company and the market sector in which they operate and so it can make
b3235_Ch-01.indd 11 14-08-2018 06:27:44

“9x6”
sense to retain some role for them going into the future. If they have sold
all of their shares, then they can become employees or consultants,
perhaps on a time-limited contract, to allow some knowledge transfer to
take place. If they retain significant shareholding, it can be difficult to
manage since they have less power and influence and perhaps not the
same vision for the future. Emotionally, many entrepreneurs do not
always find it easy to accept direction and control from others, so it can
be a difficult process to manage.
Rather than performing a full-sale and subsequent departure, the other
option is to release funds by a massive increase in the value and number
of shareholdings by taking the business from a private company basis to a
public company whose shares are traded on one or more stock exchanges.
This initial public offering or IPO can release enormous amounts of new
money providing huge returns on the initial shareholdings. For some busi-
nesses in the social media space, the businesses do not even need to be
making any current profit as long as investors believe that a number of
subscriber transactions on their websites have the potential to be mone-
tised, either directly in a pay to use sense or indirectly by generating rev-
enue from advertisers to the user group.
While there are real and large risks in this approach, it nevertheless
has the potential to create billionaires more quickly than the incremental
growth model we were discussing earlier. Thus, it is to these kinds of
companies that two important investor groups are attracted. These are
Business Angels and Venture Capital Funds. The first of these are indi-
viduals who have capital to invest in growth businesses and who often
wish to assist the management of their chosen companies in a hands-on,
active way. They are almost professional entrepreneurs who certainly will
enjoy making more money but are sometimes driven by other agendas,
including promoting entrepreneurship and transferable skills, as a busi-
ness mentor.
Venture Capitalists or funds can behave in somewhat the same way
but are often accused of providing support in an overly IPO-focused way so
that they can exit from their commitment and sell out when the company
goes to the market. They also tend to have a relatively shorter time horizon
to make the IPO happen or they might move on to another target for their
treatment. They can be accused of making the company attractive enough to
b3235_Ch-01.indd 12 14-08-2018 06:27:44

do well at the IPO but not to care how well the company can support its
activities afterwards. They can provide a welcome source of risk capital
funds to support an expansion plan and might be more inclined to support a
riskier venture than perhaps are the company’s current investors or lenders.
Allowing such new investors into a tightly focused and controlled
family business can be problematical for the original stakeholders, and for
some these stresses are simply not worth the possible benefits and this can
also be a reason for the decision to become a static company as we dis-
cussed earlier. In effect, the owners can be ambitious to the point where
they believe their survival is probable and then move into stasis or they
can decide to freeze the expansion at the point before VCs get interested,
so as to remain independent. Here again, the attitudes demonstrated can
affect how such businesses are perceived as future partners by supply
chain buyers or suppliers.
1.3 Ethical Stance

When a new business is being started, there are obviously key decisions
to be made about product or service, capabilities of personnel, funding
and a host of others, but it is also at this point that the owners should be
taking a long look at themselves and their ambitions to decide on serious
ethical issues.
Of course, businesses have choices about whether they will obey laws
of their locality or not. Even organised crime follows some principles of
management so that they are choosing which norms of behaviour they are
choosing to accept and which they are happy to abuse. Even businesses
which are not explicitly illegal in their purpose still have choices to make
in terms of adherence to some set of rules of behaviour informed by their
culture and local laws, religion or family values.
Thus part of the definition of the start-up business is about what they
will do but also what they will not do. There will be decisions to be made
in all aspects of business life. Many long-lasting businesses are very
explicit about the norms they expect of all members of their communities.
For example Walmart’s Sam Walton established the three basic beliefs of
‘Respect for the Individual, Service to our Customers and Strive for
Excellence’. Rolls-Royce state that they are ‘Trusted to Deliver Excellence’.
b3235_Ch-01.indd 13 14-08-2018 06:27:44

“9x6”
Some of these credos or corporate visions can actually run to many

sub-categories as below for Johnson & Johnson.
We believe our first responsibility is to the doctors, nurses and patients,

to mothers and fathers and all others who use our products and services.
In meeting their needs everything we do must be of high quality. We must
constantly strive to reduce our costs in order to maintain reasonable
prices. Customers’ orders must be serviced promptly and accurately. Our
suppliers and distributors must have an opportunity to make a fair profit.
We are responsible to our employees, the men and women who
work with us throughout the world. Everyone must be considered as an
individual. We must respect their dignity and recognize their merit. They
must have a sense of security in their jobs. Compensation must be fair and
adequate, and working conditions clean, orderly and safe. We must be
mindful of ways to help our employees fulfil their family responsibilities.
Employees must feel free to make suggestions and complaints. There must
be equal opportunity for employment, development and advancement
for those qualified. We must provide competent management, and their
actions must be just and ethical.
We are responsible to the communities in which we live and work
and to the world community as well. We must be good citizens — support
good works and charities and bear our fair share of taxes. We must
encourage civic improvements and better health and education. We must
maintain in good order the property we are privileged to use, protecting
the environment and natural resources.
Our final responsibility is to our stockholders. Business must make
a sound profit. We must experiment with new ideas. Research must be
carried on, innovative programs developed and mistakes paid for. New
equipment must be purchased, new facilities provided and new products
launched. Reserves must be created to provide for adverse times. When
we operate according to these principles, the stockholders should realize
a fair return.
One of the most impressive examples is the Royal National Lifeboat

Institution (RNLI) which is ‘The Charity that Saves Lives at Sea’. They
operate around the coasts of the UK and Ireland and out to the Channel
Islands and increasingly operate in flood rescue inland as well as overseas.
95% of their staff are volunteers, and they receive no government funding
b3235_Ch-01.indd 14 14-08-2018 06:27:44

support. The vision is taken into every job description for all who are
involved with them which all start the same… ‘I save lives at sea by……..’
With this kind of focus, the concentration of minds is clear and visibly
effective.
In business, there will be occasions when corporate and personal eth-
ics will be severely tested, and it is a measure of the individual and per-
sonal integrity what reaction will follow. It can often seem to be attractive
to forget some of these beliefs to obtain some short-term benefit, but the
evidence would suggest that the longevity of an organisation is more
dependent on doing the ‘right things’ more often than not. Failure to meet
these challenges and subsequent public exposure can often result in cata-
strophic loss of reputation for the individuals involved and for their parent
organisation.
While some of these decisions will in effect be determined by the
legal framework in their marketplaces (and can therefore vary by large
amounts), there still is an obligation to define the organisation’s attitude
to compliance or not as a minimum or to work to their internal and pos-
sibly ‘higher’ values. Potential involvements in slavery, bribery and cor-
ruption considerations bring this very much to the fore.
1.4 Citizenship
One of the ethical dimensions to consider is how the organisation sees its
role in its local and possibly global communities in which it operates. One
of the considerations we will discuss later is in the definition of the system
in which our business operates. It is easy to consider our business entity
and its market objectives as something of a system complete in itself, but
then we have to extend the boundaries to include our customers and sup-
pliers. Then we have to think of the wider environment and legal frame-
works in which we have to operate. Very soon, the real interconnectedness
and interdependence becomes apparent. As a result, we need to think of
our effect on the people we employ and the surrounding society. Can we
afford to maximise our profits if it means our people are working in unsafe
conditions or our products and services are inherently unsafe for use?
Should we be allowed to pollute the water we use to clean our facilities
and discard poisonous by-products into the water table? Again political
b3235_Ch-01.indd 15 14-08-2018 06:27:44

“9x6”
and legal processes can be in place in some markets to control bad

behaviour but is that enough for our ethical consciousness? Some free
market economists would argue that the only obligation for shareholders
is to maximise the profits from the business activities and governments
have to look after the rest by legislative control, but surely this can only
be short-term thinking at best and abuse of market power at worst?
We will come back to these discussions when we talk about Corporate
Social Responsibility (CSR) later.
1.5 Political Sensitivities

Legislative frameworks are clearly one of the main constraints and some-
times opportunities faced by our businesses. However, we also need to
recognise that political agendas can affect the decisions we have to make.
Businesses have to consider medium- to long-term implications of their
choices, but political agendas often operate on much shorter time scales.
The length of the term of office of the local and central governments, the
degree of openness of the democratic (if relevant) debate, whether we are
located in a jurisdiction which is open to political parties and popular vote
or are subject to diktat by a ruling elite or demagogue or dictator. In cur-
rent times, the whole nature of what is truth and fact has become a
political issue.
Businesses have to deal with uncertainty and risk all the time, and
such uncertainty offers downsides and upsides. That is to say, bad things
can happen (the downside) but favourable outcomes, which were not
anticipated, can also happen (this we call an upside risk but it is really an
opportunity). In order to have some degree of confidence in their decision-
making, businesses try to forecast these different possibilities and put
some probabilities on their possible occurrence so that they can evaluate
their choices in a more structured way. If there are no consistent patterns
to feed into their probabilistic models, then they struggle to create mean-
ingful future scenarios to use to evaluate their decision choices.
The huge uncertainties brought about by the United (possibly for not
much longer) Kingdom Brexit vote to exit the European Union and the
unpredictability of policy by tweet demonstrated by President Trump in
the United States of America, are proving very difficult to evaluate. Added
b3235_Ch-01.indd 16 14-08-2018 06:27:44

to this, the effects of elections in parts of the EU bringing more narrow

nationalistic parties into the mainstream might affect the future of the EU
(in addition to the negotiations about how Britain exits from the EU).
Some major organisations are having to contemplate duplication of effort
(banks building up their presence and capabilities in other cities in the EU
rather than wait to see if London is allowed to retain its ability to operate
in the financial services market for EU customers), or relocate in advance
to guarantee access but perhaps lose the synergistic benefits of operating
out of London which is currently a major hub for such activities.
In other parts of the world, the political situations can be very difficult
to predict with local wars and rebellions based on politics and/or
religion.
In this chapter, we have begun to consider the challenges faced by
organisations. Some of these will only apply to businesses with an
international spread of some kind but most will require at least passing
consideration. Some of them will be fundamentally important such that a
decision made in good faith on the best of information and critical evalu-
ation at the time might still prove to be wrong with the benefit of hindsight
in the future.
Some of these decisions should be revisited on a regular (not neces-
sarily frequent) basis as part of the ongoing checking that they are still fit
for purpose as new information and measurements become available.
We now need to consider some more fundamental decisions about
how to set up the business to have a chance to succeed in whatever market
they are choosing to operate within. Such decisions are not linear. Often,
a decision made in relation to one aspect has to be considered for its
impact on earlier decisions as the new implications might affect the
benefit assumed to be obtainable in the earlier decision. Here again, we
see the effect of dynamic change in the business environment.
1.6 How to Compete

All businesses require some spark of an innovative idea that propels the
entrepreneur to start up the venture. In innovation studies, there are usu-
ally two routes which are suggested as possibilities and the entrepreneur
can be informed by similar considerations.
b3235_Ch-01.indd 17 14-08-2018 06:27:44

“9x6”
Market Pull describes a process where there exists a demand in the

marketplace but there are perceived shortcomings in what is currently
on offer. The entrepreneur can use this information to fill the gap in
provision with her new market offering. The beauty of this route is that
to some extent the demand is guaranteed if the new offer properly
addresses the declared customer need at the right kind of price and so
the customers are inclined to buy and the start-up has a chance of suc-
ceeding. One of the best examples of this is the unspillable baby cup,
and the reference case study is well worth a look for an overview of
some of the considerations in the process of imagining, producing and
marketing the Anywayup Cup. (http://www.mandyhaberman.com/
case-study).
Technology Push is the second route. Here, the drive comes from an
inventor who knows something about a technology and its capability to
create a completely new market offer that no current customer could ever
imagine. The entrepreneur in this case is gambling on creating solutions
to the technological challenges to create the product or service but also on
her ability to persuade potential customers to realise the opportunity to
fulfil a need they did not realise they had. Such products or services, while
they have the potential to transform whole societies, are clearly of high
risk and many of them fail for one reason or another. Sometimes the tech-
nology vision is just too far ahead of what customers are currently aware
of possibly wanting or have to be priced at levels that customers are not
yet prepared to pay and what they might pay is not enough to offer a return
on the entrepreneur’s risk taking.
Although the technology solution is a few generations old, fax
machines failed to sell in the UK until there was a postal strike and sud-
denly the demand from customers went from zero to massive very quickly.
The introduction of the digital watch we discussed earlier shows some
aspects of this process.
Sometimes the issue is not with the technology itself but with some
other complementary technology where innovation is also needed in order
to allow the first one to perform. The Apple iPod and later the iPhone,
while technically capable of playing music, would not have been a market
success without the innovation of iTunes to provide the means to sample
and buy the music.
b3235_Ch-01.indd 18 14-08-2018 06:27:44

In essence then, businesses need to have a vision of a product and/or

service end point and recognise (or at least be prepared to deal with) the
barriers that will make the innovation journey more challenging.
The fundamental issue is that all businesses need customers who are
prepared to pay for the good or service at a level which meets the
requirements of the provider organisation. However, as the innovation
discussion indicates, sometimes customers are not able to look into a
possible future to imagine what is possible so someone else needs to do
it for them. These pioneers take all the risks and sometimes they can be
rewarded with huge initial market share and profits but having demon-
strated proof of concept then the duplicators can appear and come to
market quickly and gain market share without the same level of risk or
start-up cost.
James Dyson took 5 years and 5,127 prototypes to invent the cyclonic
vacuum cleaner, and he has built a successful global business on the
strength of that innovation. However, now he has to fight off competitors
who, legally or not, try and work round his patents or challenge the effi-
ciency of his solutions to try and pry some market share away from his
business.
1.7 Order Winners and Qualifiers

Most marketplaces with established providers have more than one possi-
ble source of the particular good or service to allow customers choice, so
it is important to recognise why customers buy what they buy. A useful
concept is that of Order Winner. This is the feature of the good or service
or their combination in some way, which is sufficient to make the
customer want to buy from one supplier rather than another. In effect, this
feature(s) is enough for it to be perceived as ‘better’ in some way com-
pared to a competitor offer such that the customer chooses to buy and the
supplier wins the order.
An innovative solution will be an order winner for a customer who
likes to be up to date and at the leading edge of new ideas (the early
adopter customer). Another customer might like the new technology but
be concerned about the purchase or operating cost or service aspects, so
these become the order winners for this type of customer.
b3235_Ch-01.indd 19 14-08-2018 06:27:44

“9x6”
The importance of this concept is that by identifying the order winners

properly, the whole business can be working to the same competitive plan.
Marketing can emphasise these features in their messaging to potential
customers and the supply side can design a system that will support and
deliver these promises to the customer.
However, to have a chance to be chosen you have to be considered by
possible customers, and this is where the other concept comes into play.
Order qualifiers are features where a minimum level of performance must
be guaranteed or the customer will not go any further and will not even
look at what you consider to be the order winners. Safety concerns are a
typical example of this kind. A low-cost airline only makes sense if you
believe that the low costs have not been created by reducing aircraft main-
tenance standards or of training of the pilots. Another example might be
the market for electric drive vehicles where the technology is good if the
distances are not great but if your journey is longer than the normal dis-
tance travelled before battery recharging is needed, then the availability of
charging stations and the time to recharge the batteries on route becomes
key considerations.
Thus, order winners and qualifiers are dynamic and need careful
review on a regular basis, but here one universal truth tends to emerge and
that is, at the current level of technology, customers can change their
minds and intentions more quickly than the supply side has the capability
to respond. This is further complicated by the fact that customers are not
uniform in their expectations, and so the marketing people consider mar-
kets as consisting of somewhat separate but internally consistent customer
groups or segments. This reinforces the need to manage both the customer
facing behaviour through sales and marketing with an aligned supply side
through purchasing, operations and contract management so that the dif-
ferent customer segments are fully supported by an appropriately respon-
sive supply side ecosystem.
Here, we see a demonstration of why no one organisational grouping
can be considered to be automatically more important than any other. For
the innovative product perhaps there might be a pre-eminence for the
technologists and marketing/sales have to promote what their technology
system can produce. In other situations, marketing might be more impor-
tant in demonstrating how the organisation delivers the order winners
b3235_Ch-01.indd 20 14-08-2018 06:27:44

better than the competitors and so the supply side is subservient to them.
Of course at all times, if the finances are not in control failure is likely.
One of the great mistakes of the academic process is to forget these
realities and teach inside functional silos. The business world meantime
tries to operate across or ideally without silos, and that is also the intention
of this book but not comprehensively since the focus is really on three
interacting and interdependent areas. The real-world needs wider integra-
tion of consideration, and this is where managers need to think in a much
more integrated way in which a much wider range of considerations come
into play. However, no one individual can cope with all of the complexity
and so there needs to be communication and coordination mechanisms to
ensure that all relevant information is properly assessed and incorporated
into the decision processes.
In business, the business need is paramount and the role and internal
structural or personal empire building should never overshadow the
importance of the customer who usually is uninterested in how the busi-
ness or indeed the supply chain is organised, that is until something goes
wrong.
1.8 Core Competence

This idea was first promoted by Prahalad and Hamel (1990) and is essen-
tially what a business has to offer to a wide variety of markets by making
a significant contribution to the benefits of the end product or service (as
seen by the customer) and at the same time is difficult for competitors to
imitate or replicate. This core competence is worth protecting and devel-
oping and is likely to also be at the core of the vision for the business.
In order to fulfil this definition, it is more than likely that it can only be
part of what is actually offered to the customer since most products and
services are actually complicated mixes of various capabilities. For any
such mix of capabilities, it is possible that the main focal business will not
be the leader in that singular factor; however, the customer needs it to
complete the whole mix. This, of itself, demonstrates the need for a supply
chain since only by going to the supply market and contracting with
another organisation to buy their goods or services can our focal organisa-
tion fill in the capability gaps for their customers. Like order winners, core
b3235_Ch-01.indd 21 14-08-2018 06:27:44

“9x6”
competences and their fit to customer requirements can vary over time and
circumstance, so another dynamically variable strategic question emerges,
to develop new competences for existing customers or use existing com-
petences but directed at new customer segments or locations.
Thus, there was a belief that companies needed to focus on their core
competences or to ‘Stick to the Knitting’ as Peters and Waterman (1982)
outlined as part of the McKinsey 7-S strategic approach. Anything else,
which was not regarded as core, would then be outsourced or bought from
the supply market.
Although much criticised by academics, the ideas still have traction
with managers but there is also the tendency to see such things as more
fixed than they need to be. In a changing world, the ability to recognise
(better still to forecast and better still, to create) changes in a market and
to take action to modify the business model to cope with the changes
faster than your competitors will allow the organisation to stay ahead of
the pursuing pack. Such ability might be the only real core competence in
the modern world.
1.9 Price
There is some confusion in business discussions about Price and Cost,
with many seeing them as essentially the same thing. Nothing could be
further from the truth. Price is what a customer is prepared to pay for
something of interest to them and any good or service only needs one
customer in order to make a sale. Price is determined in a marketplace
where if a customer has a choice then the order winner(s) and the price
will be considered together and a decision made. However, in a market
there are competitors who exert their own pressures on the customer
choice, and downward pressure by a competitor can affect the price that
the customer is prepared to pay for largely the same performance on the
order winners.
Cost however has a different source and dynamic. We use money as
a surrogate and common denominator shorthand for the totality of
resources that we have used internally to produce the good or service.
To a very large extent then, cost is an internal measure about the balance
of choices we make in using the resources, what we paid for them from
b3235_Ch-01.indd 22 14-08-2018 06:27:44

sourcing and how we have used them operationally. To a much greater

extent than price, we are in control over our resource use or cost.
Business is about realising a gap between the price that can be
obtained in the marketplace and the resources used, that is, the cost of
producing. If this gap, or margin, is positive then we are in profit and if
negative, we have made a loss.
Price is often the factor about which we negotiate in sales discussions
and it is a very useful shorthand but we should never forget the driving
factors and how much control, or not, we have over them.
However, all other things being equal, the price is usually the deciding
factor. Of course, the difficulty is in deciding if the other things truly are
equal and to some extent marketing and sales try to persuade the customer
that they are not equal and the advantage is in our favour.
This difference in understanding and emphasis is one of the many
lessons we have learned from Toyota. The traditional way of thinking in
the western world is that Price is a result of adding a desired profit margin
to our Cost or symbolically…
Price = Cost plus Profit Margin desired.
This is shown in Figure 1.1.
If the traditional approach is taken, the negotiation usually follows a
pattern where the customer will offer less than the cost value and the
seller will reduce their price and this backwards and forwards process
will continue until they meet somewhere in the middle of the pink zone
where the seller’s profit margin is reduced but both sides are somewhat
– Agreed Profit Margin
Figure 1.1 Costing Approaches.
b3235_Ch-01.indd 23 14-08-2018 06:27:45

“9x6”
happy but wondering if they could have done better, somehow. In this
process, nothing has been done about the costs at all, they have not been
looked at.
The target cost approach starts from the other direction. It accepts that
the price is set by the market and they will forecast this and then work
backwards to subtract the profit margin (which both sides find acceptable
and about which they may negotiate) and then what is left is the Target
Cost. The equation here is Market Price – Agreed Profit Margin = Target
Cost. The target cost is therefore the financial number which must be
achieved in order for the seller’ profit margin to be achieved while going
to the market at the planned price.
In this model, what is attacked is the cost structure, but the best cus-
tomers working in this way also recognise that they share the responsibil-
ity with their suppliers for the cost of creating the good or service and so
share the responsibility of finding ways to reduce the use of resources and
the cost build up between them.
In many marketplaces, the effective market price will reduce each
year (in the automotive sector around a 5% reduction per year is built in),
and so there is continuous pressure to reduce the real cost of doing busi-
ness and reduce the target costs to provide the margin which will allow for
the supplier to remain an effective partner for the customer. In such a
market, a traditional costing model simply reduces the margins for the
supplier, and so over time they must fail, as there is not enough income to
continue to invest and develop.
1.10 Design
Earlier we discussed how to compete through innovation but in that
process having the innovative idea is not enough, the idea must be trans-
lated into complete definitions or designed so that the idea can be made
real, created, marketed, sold and from which sufficient financial return
generated to meet the objectives of the organisation.
Design is of huge importance and while it might be best understood
in physical products the need is no less for service or more intangible
client interactions.
b3235_Ch-01.indd 24 14-08-2018 06:27:45

Again, as above, the driver for the innovation exerts an influence.

If the idea is incremental, then there will already be existing designs
which can be improved upon to provide the new requirements. The truly
new innovation has however to be completely thought through and pos-
sible solutions tested, evaluated and either incorporated into a new design
specification or rejected and different options considered.
1.10.1 Design for function

Design for Function is the first consideration. This really translates the
concept into something that will deliver the customer benefits first envis-
aged in the innovative idea. Then, we need to think about how the product
or service will be produced so now we need to design for Process and
Quality. In a world in which sustainability and the availability of scarce
resources is increasingly important, we also need to design for Sustainability
and Recycling. One newer consideration is to design for Procurement and
Supply Chain since many aspects of the product or service will require the
input of external organisations acting in a coordinated supply chain.
With the consideration of Design for ‘X’ (replace X with any of the
above highlighted words), it becomes clear that there will be a large num-
ber of circular considerations as a decision in one of the design domains
affects and might cause a complete redesign in another domain. For exam-
ple, a requirement for a more powerful display in a mobile phone might
require the redesign of a power supply and likely some wiring or connec-
tion changes. An example from the service sector might be that the
requirement for more space for business- or first-class passengers in an
airliner might cause the redesign of the economy seats to squeeze more
paying passengers into that part of the aircraft.
It also becomes crucially important to realise this ripple effect and
the importance of getting this right from the very start as indicated in
Figure 1.2.
In Figure 1.2, we see two main parts of the chart. Along the bottom,
we have the life cycle of the product or service but excluding for the time
being the recycling issues at the end of the first life of the product or
service. The research and development (R&D) stage is where the design
decisions are being made and evaluated. We then move into Design and
b3235_Ch-01.indd 25 14-08-2018 06:27:45

“9x6”
Committed Cost
£
Actual Spending
Profile
Operations &
Support
Design and
Manufacture
R&D
Time
Figure 1.2 Costing Impacts of Decisions and Consequential Spending.
Manufacture if a Product or Delivery if a service, and then we finally have

the extended lifetime (hopefully) of customer usage or operation and
support.
The two curves at the top of the figure represent the decision pro-
cesses and the spending impact of those decisions. The blue curve at the
top represents the designers sitting in front of their blank pieces of paper
or computer screens starting the process of converting ideas into defini-
tions. This is relatively a very cheap stage since lots of ideas can be tried
out and discarded with little consequential cost. However, the decisions
being made are committing someone else, later in the life cycle, to actu-
ally spend money as the product or service evolves towards being market
ready. Thus the lower red curve shows a slow build-up of actual spending,
which accelerates later. The blue curve indicates a concept from engineer-
ing which is Degrees of Freedom. The blank piece of paper or computer
screen has effectively an infinite number of degrees of freedom to make a
decision, but every time a decision is made it reduces the choices that can
be made at the next step, that is, we have removed one degree of freedom
with that first decision. The blue curve shows that we remove degrees of
freedom very quickly at the early stages but at no actual cost since the
b3235_Ch-01.indd 26 14-08-2018 06:27:45

decision relates to an actual spend which will come later. As we progres-

sively make decisions, the number of degrees of freedom diminishes so
that near the end of the process there are few options left to evaluate and
choices to make.
The actual spend curve follows an inverse path since little is really
spent at the beginning, but everything must be spent by the end of the
process, and so it builds up as we approach the end of the life cycle.
Another way to think about the effects of degrees of freedom is to
think of it like a decision tree. Making a decision determines which branch
of the decision tree we are on and we need to continue along it to design
and specify all of the choices. This indicates another potential problem in
that if, as the design and spending process continues to the right in the
figure, we then find out that there is a problem, we effectively have to
retrace all of the design steps back along the tree branches towards the
beginning before we can change the crucial decision which has only now
been proven to be wrong. This is clearly very expensive in terms of wasted
resources and time.
Thus, we can see that the role of design is indeed crucial. If the correct
thinking is not captured at this stage, then all that can happen later is that
more waste will be realised.
This is not to say it is easy. The designer sitting in front of their com-
puter screen will have information systems a click away, but often this is
only about historical solutions to technical issues at the functional and
maybe process levels. It is not common to have linked databases to the
information about the other factors, many of which need to be more real
time, for example, real-time purchase price information or existing con-
tract agreements for a sourcing decision. As we shall argue later, the role
of Artificial Intelligence and Data Mining in this field could be a game
changer.
1.10.2 Design for process and quality

While the Design for ‘X’ argument suggests a degree of linearity, the real
decisions are much more circular as we have to circle back round to recon-
sider some decisions as a result of a later and maybe more constrained
choice. However, next in the linear sequence is design for Process.
b3235_Ch-01.indd 27 14-08-2018 06:27:45

“9x6”
Knowing what we need to deliver to meet the design for function intention
requires us to decide how it can be done and who is best placed to be part
of the production or delivery process. For an incremental change then, we
might be happy to extend existing choices into the new requirement, but
for radical changes often we need radical new processes as well. In elec-
tronics, for example, the process innovations about how tightly electronic
circuits could be packed onto a silicon chip were the constraints on faster,
smaller and more reliable product designs. All processes have inherent
variability and those with human actors even more so because human
variability vastly exceeds those of well-engineered physical processes.
Variability is the enemy of consistency and often quality as well, but at the
very least we need to know the boundaries of the variability inside our
chosen processes so that we can then match the functional requirement
with that of the productive processes intended to deliver the functional
capability. Designers need to know the variability of their possible process
choices so that they can match that capability with the range of acceptable
functional requirements. Designers then match an acceptable range of
functional status with the most economically capable processes that are
able to control their variability inside the specified ranges. The designers
therefore specify the functional requirement with an acceptable range, in
the form of a target value plus and minus an acceptable value of tolerance
in the metric, around the target value. This matching approach is also key
to the creation of quality of output as we shall see later in the Operations
chapter.
Where people are part of the production process, we have greater
inherent variability and less inherent control from outside of the pro-
cesses. This is why the attitudes, training and motivation of the key per-
sonnel interacting with clients in a service encounter are so important,
since reliability and quality are dependent on how the individual performs
at each service interaction.
Of course, in an extended supply chain with multiple players involved
in the different value-adding stages, the design for process and quality
consideration needs to cross organisational boundaries and is consequen-
tially more complex. We should never forget the old computing phrase
‘garbage in garbage out’, so visibility of the variations across all of these
boundaries requires higher orders of design awareness and specification,
b3235_Ch-01.indd 28 14-08-2018 06:27:45

and even if the other parties are ultimately responsible for their own
detailed designs, they should be working to a coherent, integrative and
well thought through scenario.
Of course, one of the drivers for more automation in hardware or
software is to reduce the variation and increase the consistency of the
process, and this is why the drivers for more automation and artificial
intelligence applications are so keenly felt.
1.10.3 Design for sustainability and recycling

While some people are still climate change deniers, there can be little
argument that our planet has a finite store of resources. These resources
are not uniformly distributed nor equally easy and economical to harvest
or extract, and so increasingly the argument is that having once incurred
the cost of extraction say and further processing into some useful com-
modity the last thing we should do is simply throw the thing away at the
end of its first designed life and dig more of the basic resource out of the
ground.
Sustainability is a huge subject crossing all sorts of product and ser-
vice boundaries from consumer products, building structures and infra-
structures to service and leisure systems with all the associated energy and
distribution systems’ impacts associated with these. Some of the key
principles include: using low-impact materials which take little energy to
process or have already been recycled; materials which come from renew-
able resources which are efficient in their own energy use (for example,
bamboo for clothing fibres and flooring); designing to allow long-term
use and emotional attachment to avoid the worst aspects of a disposable
consumer culture; changing the nature of provision from ownership of a
good with infrequent use to one of using without owning, for example, car
sharing instead of ownership or replacement of individual transit with
equivalently convenient public transportation.
For the product and service designer involved to some extent with
tangible products, sustainability raises new issues in terms of initial
design. Instead of just considering how best to satisfy the initial functional
requirement (but now to include aspects of environmental impact), she
must now think about the end of first life considerations. If we truly have
b3235_Ch-01.indd 29 14-08-2018 06:27:45

“9x6”
moved from the old concept of planned obsolescence (aimed at selling

replacement products to improve earnings from customers over time) to
one of reuse, repurposing or recycling, then the process of creation (which
often involves the assembly of component parts into the finished product)
must now consider how to disassemble the product to enable the recycling
processes to have a chance of success.
This raises further complications. For example, many plastic products
can be designed to click together in assembly, but getting them ‘unclicked’
for disassembly is altogether more difficult so the efficient click process
might have to revert to some means of fastening together where the fasten-
ing is reversible. This sounds to be more expensive in the narrow focus of
the product designer even if better for society, but who is paying the
designer to produce a more expensive solution for her immediate product
design? Even identifying materials being used is a challenge since again,
using plastics or polymers as examples, it is almost impossible to know
what kind of polymer is being used by inspection, and so a system of
material identification needs to be designed, agreed and fully imple-
mented by all producers to allow the disassembly process a chance of
making the correct economic recycling decisions. Add the complexities of
global supply chains with different local efforts at standardisation and
control, and the problem is significant.
A further emerging issue relates to 3D printing technology. This
avoids assembly by printing physical parts, microscopic layer by layer,
using polymer or cellular materials such that the finished part is a com-
plete 3D artefact including moving parts but which avoids any means of
joining and therefore no possibility of separation of different parts…there
are no different parts! Such an artefact can only be recycled by returning
the artefact to its base materials, if possible, to be reprinted as something
else. However, we need to be very clear about the material composition
used so that the recovery process can be achieved.
1.10.4 Design for procurement and supply chain

If we work from the not unusual assumption that not all that one organisa-
tion offers its immediate customers is made or provided by their own
internal resources then we must be thinking in terms of a supply chain of
b3235_Ch-01.indd 30 14-08-2018 06:27:45

interlinked and somewhat interdependent operationally, but legally inde-

pendent, other organisations. However, add the global supply market into
the mix and we can now see major difficulties in providing our designers
with enough data about what is available, economically attractive and
functionally capable of satisfying at least some of the core customer
requirement. The major current difficulty is that the data about the supply
market will not be held, managed or understood by the design function.
At best, it will be through a procurement or buying activity inside the busi-
ness structure, but historically this data will contain more commercial
information than technical details and so is of limited use to the techni-
cally driven designers. The potential for miscommunication between what
the designer is looking for and what the Procurement function currently
know about or are capable of searching for, is very large and normally
suggests a sub-optimal process where the designer creates the specifica-
tion and the buyer goes out to match that requirement with little under-
standing of any information coming back from the supply market as to
alternatives that could have been fed back to the design process to improve
the overall solution. Even for standard requirements, the commercial mar-
ket effects might result in a request being impossible to satisfy because of
delivery problems in the supply chain. In essence, what we need is a com-
prehensive and interconnected database of all relevant information to be
in the design system so that the creative designer can really do a ‘what if’
analysis across all of the decision boundaries. That is still in today’s
future, but we will return here in Chapter 5.
1.11 Quality and Value

While we have discussed some aspects of quality in the previous chapter,
it is worth spending some time to really understand its importance and to
learn how the same set of data can be interpreted in different ways if one
is creative enough. The two concepts are linked here because of their com-
mon features, which are that they are both relative measures and that they
are only really evaluated and decided upon by a customer. That customer
is the only important one, that is, the one who buys from you. All the rest
are only potential customers and what they think in the aggregate means
much less than those who actually spend money.
b3235_Ch-01.indd 31 14-08-2018 06:27:45

“9x6”
They are relative measures in that they are evaluated by comparison

with other possible choices for spending the money either with a similar
product or service or in completely different ways. We discussed some
aspects of this when we talked of the Order Winning Criteria earlier.
The two concepts are very similar in that the quality evaluation
compares physical and service-related features to decide which is best
while the value calculation puts a monetary value on the satisfaction
to be obtained by a decision to purchase this offer rather than an
alternative.
Because they are comparative concepts, there are no limits to the
actual measures since as one supplier innovates they create new order
winning criteria, which have to be at least matched if not surpassed by
their competitors. Quality is then described as a journey or a process
rather than a destination, and the idea of continuous improvement in the
performance metrics is now inbuilt into customer expectations and should
also be embedded in everything the provider does.
It was not always thus. Before the western companies were reedu-
cated by the best Japanese practice, quality was seen as a process of
diminishing returns. In other words, to improve quality it was necessary
to spend more and more resource such that at some stage the incremental
quality-level improvement could not be justified by the expense of obtain-
ing it. What was wrong was that the quality improvement process in this
scenario was based on an inspection process in which good output was
progressively identified by more and more expensive inspection processes
which allowed good products to pass and filtered out failed products to be
discarded to waste or rework (which increased costs as well). Best
Japanese practice from Toyota and Honda and the like, demonstrated that
by gaining full control of the productive processes so that errors were not
made, then failures could be reduced or eliminated so that bad product
was not produced to be passed on to customers. This provided a two-fold
benefit. High quality became an order winner so revenues rose and market
share increased. As such, the competitors had to follow the new order win-
ner and compete on quality. The Japanese advantage however came that
while the Western companies were spending more resource to achieve the
higher quality, the Japanese were saving resources by not wasting them in
errors and failures.
b3235_Ch-01.indd 32 14-08-2018 06:27:46

The western approach depended on extensive controls to identify vari-

ations as they occurred provided by expensive, after the fact, inspections.
The Japanese only needed a sample size of two. That was one at the begin-
ning and one at the end to know that the process had not strayed from their
control parameters. (We will examine later how the design process and
knowledge of process capability metrics can avoid the possibility of ever
producing rejects.)
Another way in which redefining the order winner came from a dif-
ferent approach in automotive production, but this time it was around
value. Typical western practice (still in evidence in some product lines) is
to offer a basic-level model and then sell a vast range of additional fea-
tures as add-ons to the purchase. In some ways, this allows the customer
to ‘customise’ their purchase; however, it means the provider now has to
stock, manage and modify their product to the customised requirement of
the individual customer. This increases the complexity and therefore cost
of provision.
By ‘bundling’ more features into the car package at no extra cost, this
changed the perception of value in the new enhanced package. However,
again this has a two-fold benefit as the sales increase comes from the
perception of the enhanced value while by reducing the complexity of all
the option choices it actually reduces the cost of providing the more fea-
tured car.
These two examples around quality and value demonstrate the need to
think in more inclusive ways and also to pay close attention to what deci-
sions the competition are making and to learn from best practice wherever
it can be found.
1.12 Delivery
One of the major differences between products and services is the
opportunity to separate production from consumption of products. Pure
services are consumed as they are produced. Delivery therefore has
slightly different features in the two sectors.
A service encounter puts consumer and producer in contact over the
period of the service delivery. There may have been intermittent contact
prior to this to set up the understanding of what service is to be provided
b3235_Ch-01.indd 33 14-08-2018 06:27:46

“9x6”
perhaps, but the production and consumption processes are coincident in

time and place although it is increasingly possible to deliver the service
from another place, for example, surgeons in one country can deliver the
service of the surgical procedure by controlling a robot surgeon operating
on the patient. Delivery of the service is then more about scheduling when
both parties can be in the same (or coordinated and interconnected remote)
locations at the same time, ready for their interaction. Difficulties in
mutual timetabling might therefore impact the perception by the customer,
of service delivery performance.
The product world is different in that product can be produced in
advance of actual demand if required and stored somewhere until the
demand is realised. Even if not produced in advance of a customer order, the
separation of production and consumption means that there is some degree
of time delay between these two events. This separation creates important
considerations in the three dimensions of place, reliability and speed.
The customers can have discretion as to where they want their product
delivered (this might also be an order winner or qualifier). As a result,
means, timing and payment for distribution efforts come into play. In a
similar fashion, the product might need to be made ready for use at the
customer location, and who can do this, the customer or a specialist
installer? In this way, the product and the associated services in support of
it become part of a product/service package allowing more differentiation
in the supply market.
Whatever the complexity of these requirements, we then need to
recognise a wider consideration in that most business transactions are
with other businesses and these types of customers have customers of
their own to whom they must respond and whose demands they need to
satisfy. Every customer order in this scenario is therefore part of an inter-
dependent chain of events, and every promise made to deliver in one link
of the chain must be achieved to allow subsequent links to also deliver
their promises. In this sense, the reliability of the delivery promise
(assuming the product meets the quality requirements) is the most impor-
tant performance factor to avoid a compounding wave of failed deliveries
along the chain.
In some circumstances, speed of delivery also becomes important, but
even here the promises have to be met or chaos and cost results.
b3235_Ch-01.indd 34 14-08-2018 06:27:46

1.13 Integration Across Boundaries

In modern marketplaces, very few organisations have the current
capability or investment ability to remain at the forefront of all of the
technological features of leading-edge goods or services. Because of this,
the option to be vertically integrated and to own all of the factors of
production necessary to supply increasingly demanding customers is not
feasible. Organisations therefore have to decide what they will concen-
trate on and keep it in-house, and all other elements of the complete pack-
age then have to be purchased from a supply market that is increasingly
global in scope.
This is the basic premise of the supply chain concept we have already
been using. However, the separation between activities performed in-house
and those outsourced from the marketplace is not one that is either very
visible or of much importance to customers. Customers care about the
organisation they deal with in their marketplace and usually do not much
care where the component parts of the goods/service package they pur-
chase are actually created. This is not the case of course when provenance
is important. If you wish to buy authentic Swiss cheese, you do not want
to settle for a local version in another country. In another example,
Champagne can only come from that region in France, and so similarly
produced wines need to have different names and identifications. The need
for rules of origin arises from the control of copying and protection of
brands whose recognition has been built up over many years and whose
owners do not want the unfair competition which comes from an alterna-
tive provider ‘passing off’ their own version as the same as the original
brand. This is also important for taxation and import and export charges so
that there are no unfair advantages being taken in the market and govern-
ment can take what they regard as their due share of the business benefit.
This is different to counterfeiting where the counterfeiter is pretending that
they are providing the actual product when in fact they are producing a
copy, which may or may not function almost as well as the original one.
Customers however can change their attitudes very quickly. While
they might not care about where and how some product is produced, once
it is brought to their attention that, for example, child labour is being used
in the factories which are themselves dangerous and not up to the
b3235_Ch-01.indd 35 14-08-2018 06:27:46

“9x6”
equivalent standards in the customer’s home market, then suddenly they

can become concerned and put pressure on the brand company they deal
with (not the distant and abusive factory owner). Thus, the brand owner is
the interaction point with the customer and is ultimately responsible for
everything that goes on in their supply chain.
Reputational risk is an inherent threat in any deal to buy from another
party who you cannot control in the same way you think you can control
your own business.
The logic of the supply chain is therefore that customers do not need
to know what is internal to the first (or brand) company they deal with as
long as all of the promises and standards for which they are paying are met
when the product or service is delivered. The brand company has chosen
not to own all of the factors of production but needs to coordinate these
disparate organisations as if they were all part of the same enterprise with
the same objective of satisfying the brand company’s customers. Of
course, these are disparate organisations with their own shareholders and
stakeholders and are often operating in very different circumstances in
different parts of the world and in multiple markets with many other cus-
tomers who all expect to be dealt with as very important.
The challenge for all brand companies then is to appear to integrate
these different organisations (without ownership control) into one effec-
tive supply chain so that their customer is happy that all is well in their
interaction with the brand company.
Integration across all of the organisational boundaries is a virtual
process through information, systems interactions and management

processes. Virtual integration is difficult to manage in real time but makes
it easier to change counterparties if things go wrong and can avoid being
‘locked into’ owned assets and sunk investments. In theory, the brand
owner can walk away, find another company to work with and keep active
in their market. The reality is more complicated however, as we shall see
later, and walking away comes with its own costs and difficulties.
1.14 Data and Analytics

We have already discussed the need for more integration in the variety of
business data that is needed to inform a more integrated design decision,
b3235_Ch-01.indd 36 14-08-2018 06:27:46

but this situation is the norm in business at the present time. The funda-
mental nature of organisational structures with semi-independent manage-
ment driving their own agendas to look good corporately, who often are
using incompatible or legacy systems which do not share any real com-
munications with other systems, creates a level of complexity which is not
helpful to corporate control and direction setting.
As costs of computing decline relatively, while capability increases
massively, we are approaching a situation (especially with the help of
software agents, of which more later) where the constraint on analysis and
control will not be driven by our technical systems but our management
imaginations. The information requirements of a business embedded in
both a supply and possibly customer marketplace are very extensive when
seen in the light of optimising very fast-changing, real-time information.
Having a connection to all parts of a global supply and delivery system so
that planned progress can be monitored or real time switches of decisions
to cope with unforeseen events will increasing be seen as necessary for all
businesses who want to compete in this market.
At the moment, we still have a split around functional lines where the
marketers perform their web analytics of how customers are interacting
with them online while the operations and supply people use their enter-
prise resource planning (ERP) suites of programs to manage their current
horizon purchasing, operations and distribution processes. We have
already described how the designers talk to other designers about techni-
cal issues without full knowledge of more commercial and supply issues.
Meanwhile, corporate strategy people are trying to make sense of all of
the disparate information flows to see if high-level plans are still appropri-
ate and achievable.
Something has to change, and it will mean much more complex and
integrated systems and software support. The need is there, the capability
is emerging and the early adopters or creators will gain such an important
lead in their markets that it will be hard to catch up to them.
1.15 Corporate Social Responsibility (CSR)

We have already discussed how customers mostly do not care about the
brand company’s supply chain until something goes wrong. It is as if they
b3235_Ch-01.indd 37 14-08-2018 06:27:46

“9x6”
have tightly drawn picture in their heads in which only they and the brand
company are included. However, once there is the realisation that others
need to be included in the consideration set in their mind map, then their
behaviour can change quickly, and often this drives pressure to make leg-
islative change as well. For example, the Modern Slavery Act 2015 in the
UK can be considered an example of this more complete mindset being
realised in law.
This is one example in what is called CSR. This is a widening of the
concept of sustainability which was defined by the Brundtland Report
(1987) as follows: ‘Sustainable development is development that meets
the needs of the present without compromising the ability of future gen-
erations to meet their own needs’. This has the virtue of a nice form of
words which recognises the heritage issues that what we do now really
impacts the future more than the present and it does highlight our respon-
sibility as inhabitants of the same Earth to think of others in everything we
do in development terms. Some have criticised the definition for placing
too much emphasis on the development aspects rather than the environ-
mental since without environmental sustainability nothing else is
possible.
Thwink.org therefore argue for a more balanced approach defined as
follows: (see http://www.thwink.org/sustain/glossary/Sustainability.htm)
Environmental sustainability is the ability to maintain rates of renewable

resource harvest, pollution creation, and non-renewable resource
depletion that can be continued indefinitely.
Economic sustainability is the ability to support a defined level of
economic production indefinitely.
Social sustainability is the ability of a social system, such as a
country, to function at a defined level of social well-being indefinitely.
Of course, even these definitions raise questions about fairness across

the globe where developing countries want some of the development
achieved by the developed world in their non-sustainable past without
imposing new standards of behaviour which will make it more difficult to
achieve economic development for those countries trying to ‘catch up’
with the western polluters of old.
b3235_Ch-01.indd 38 14-08-2018 06:27:46

Adding Corporate to the front of the definition simply recognises that

economic actors have a newly defined responsibility to their stakeholders
and the wider world and its peoples to behave in ways consistent with this
realisation of responsibility both currently and far into the future.
Accepting this kind of thinking as a necessity forces corporate entities
to also recognise that what goes on inside their extended supply and value
chains through to initial customers (and subsequent customers in the recy-
cling process at end of first life), really creates a more holistic and inter-
dependent world view where all things are sub-systems within other larger
systems and that the thinking scales both up and down.
Systems thinking and the concept of Ecosystems, which are intercon-
nected, interdependent and cooperative, is inherent in everything we con-
sider in this book and should be a mandatory feature of all managers’
learning processes.
In this chapter, we have discussed the business variables which have
to be considered in practice and how the effects of dynamic changes
impact some of the needed decisions. The list is extensive and the mana-
gerial pressures can be great, and while experience is very useful, it is also
worth considering a more thoughtful and theory-based approach to some
of these issues.
1.16 Background Theory

Management has grown up from experiments by managers and then sci-
entists of the social and applied types only later, and as a result there is
still somewhat of a debate between the art and the science aspects of the
subject. Traditionally, science-based people feel that the art part of man-
agement is less important than their definition of evidence and data and so
tend to reduce the importance of the more intangible aspects of the sub-
ject. In refuting that, I would argue that actually what is needed is not to
pretend that any one field of human endeavour is more important than
others or a particular research method is always superior. The increasing
complexity of the world suggests to this author that what we need is a
much more integrated and holistic view where we can look for utility and
results from wherever there is some practice to observe, some test to
evaluate and data to be gathered and analysed by some agreed methods
b3235_Ch-01.indd 39 14-08-2018 06:27:46

“9x6”
based on achieved results. In addition, a questing and experimental

approach to look for the next improvement is always needed.
So, the theoretical background to these fields of study draws on a
variety of sources and cognate areas of study. What follows are some
selections of useful approaches. Some have come from academics asking
interesting questions and some from observation of practice and theory
developed out of the subsequent analysis.
1.17 Transaction Cost Analysis (TCA)

Many approaches in the areas of work covered in this book draw on
elements of TCA which has been developed over many years and has had
an impact on many areas of study (see Rindfleisch and Heide (1997) for
a wide review). In particular, the supply chain and contract law and
management areas look at many of these issues.
The work grew from the initial discussions of Coase (1937) who was
searching for the reasons why ‘firms’ existed. That is, what were the
reasons that firms or business entities grew to have a separate existence
from people trading with each other in marketplaces? His argument had
much to do with the governance structure of the firm as a means of control
and management of uncertainties which were in the marketplace (for exam-
ple prices, availability, trustworthiness of counterparties affected by fre-
quency of transactions) which, if large enough, created unacceptable
Transaction Costs such that the activity was better brought under internal
or hierarchical control through ownership of the resources. This result was
Vertical Integration, or what is called nowadays in-sourcing.
Williamson (1975) started a long series of developments to take these
ideas forward, and both received Nobel Prizes in Economics for their
work.
Although there still remain questions and some lack of hard evidence
for some of the features, a number are now in the lexicon of management
in a number of cognate fields and are discussed here.
Williamson contributed in particular two assumptions about human
behaviour which are bounded rationality and opportunism along with
three dimensions of the transactions which are asset specificity, uncer-
tainty and transaction frequency. Like many traditionally trained
b3235_Ch-01.indd 40 14-08-2018 06:27:46

economists, the behavioural assumptions focus more on individual pro-

pensities to maximise individual benefit rather than consider a wider set
of interacting economic actors. Thus, the economic person is assumed to
make decisions on the basis of maximising their personal economic
return, and this is assumed to be the rational and normal thing to do.
However, people have limited cognitive ability, and so in complex
situations they find it difficult to allow too many factors into their consid-
eration set and as a result the rationality they desire to exhibit is always
limited or bounded in some way in practice. Assumptions about maximis-
ing are therefore flawed to some extent.
The other behavioural assumption follows on from the maximising
personal benefit driver. This is that, when given an opportunity, individu-
als will take any personal benefit they can even to the distinct detriment
of the other party’s situation and outcome. They are ‘self seeking with
guile’ in Williamson’s words. That is, they will employ deceit and trickery
to gain an advantage over the other party.
If one party believes the other party is inclined to this behaviour, then
it makes sense for the first party to take precautions in advance or in moni-
toring behaviours to try and prevent the opportunistic activity taking
place. However, this increases the costs in the transaction, and so this
might be another reason to internalise the activity to avoid or reduce such
propensities. TCA also is based on single transactions, whereas most B2B
activity is repeated over a number of transactions. The thinking then can
be different since the opportunity issue is spread over the future transac-
tions rather than the singular one. It can be in a party’s interests therefore
to factor in the future value into the personal benefit calculation, and so
this shadow of the future comes to reduce the incentive for short-term
opportunism. This is inherently what drives a good supply chain B2B
relationship and much of relational contracting.
Of the transaction dimensions, one of great importance is Asset
Specificity. The argument here is that once an asset (like a machine, a per-
son, a process, a contract, a knowledge base or a relationship) is specific to
one other party, then it loses its utility for another party. So if I, as a cus-
tomer, approach a supplier and ask them to buy a new machine to be used
only for me on a particular supply contract, then that asset becomes spe-
cific to that particular contract. The supplier has no other customer looking
b3235_Ch-01.indd 41 14-08-2018 06:27:46

“9x6”
to use that machine so cannot recover their costs other than through the
first customer. However, the customer has no other supplier with the
machine capability to supply the contracted services or goods. Both parties
are in effect ‘locked-in’ to their mutual dependency relationship.
Lock-in can be good and can potentially be bad. Good, because both
parties have acceptable current relationships and avoid the need to find a
new business party to meet their needs. It can be bad as well if the initial
choice of party or asset is proved to be a wrong choice in some way or if
some better solution emerges and the costs of terminating the current
relationship are too high.
Uncertainty is inherent in business and the sources can be very diverse
and, in particular, difficult to forecast. The main costs to consider are
search costs to anticipate problems and possible solutions and communi-
cations problems associated with finding and changing the assets and the
partners. In contract terms, this raises issues of how much fixed detail you
need to incorporate into contracts and to what extent change processes can
be made flexible enough to continue the business relationship without
incurring the search and replace costs.
Frequency is one of the dimensions discussed but about which
evidence is more limited. Williamson argued that if a transaction in the
market took place very frequently, this might be an argument to avoid
the market transaction costs altogether and bring the activity in-house,
(in-sourcing again).
Overall then, TCA has contributed much and certain of its precepts
have come to be the base for many aspects of organisational design and
management practice.
1.18 Resource-based Theory

Resource-based Theory is much debated by management scholars, and
like many theories it has its critics and detractors. To the manager and
less-expert reader, there is much that is useful in the concepts presented.
Many authors have contributed to its development. The original works by
Penrose (1959) and Barney (1991) were concerned to look for ways in
which business entities could find a way to be competitive in their market-
places over an extended period of time.
b3235_Ch-01.indd 42 14-08-2018 06:27:46

The resources concept has been developed to include resources

which can be found, developed or purchased as well as capabilities
(to include individual and corporate abilities), to perform certain
activities.
These resources must provide value to the using businesses in satisfy-
ing their customers, but remember what we have already said about
value…it is in the eye of the customer. Resources must also be rare in the
sense that not all competitors would be able to access them. This is less
likely with purchased resources but could be very important for developed
organisational and interorganisational capabilities. These resources must
also be difficult to imitate (or any advantage would be short lived) and not
be able to be substituted by another form of resource providing the same
value creating potential. It is of course difficult to amass these resources
and retain then at an effective level over time and through dynamic
changes in the business environment. Here again, effort is needed on a
more or less continuous basis to scan the competitive horizon and make
sure that current practice and development paths are consistent with strate-
gies for success and customer satisfaction.
In the context of this book, it is worth noting that critical resources can
be owned and controlled by one of the other parties in the supply chain,
making access to them even more important and that the capabilities
included in that environment are likely to include how businesses build the
capability to work together in mutually supportive ways.
Another aspect of the resource-based view relates to the essential
question of how one finds new customers and products and/or services to
offer them. One approach, the marketing-based one perhaps, is to find an
unfulfilled need from a group and then build a capability to satisfy them.
This is attractive in some ways, but the risks of investing in the new capa-
bility building process, in the belief that the customer need has been prop-
erly identified, might be seen as too risky for some. The alternative is to
recognise the resource-based capability already generated for current
business customers and build on that existing capability and go and
actively look for new customers who want what we currently do but who
do not know about us yet. There can be risks here as well of course, but
we will not have complicated our capability portfolio by trying to go in
completely new directions.
b3235_Ch-01.indd 43 14-08-2018 06:27:46

“9x6”
This approach worked well with a supply chain partnership project in

the UK continental shelf oil business. Having developed a multi-company
solution to a local problem, the supply chain grouping then actively
searched together for customers in other oil production regions of the
world to offer them the same solution that had worked in their local
market.
1.19 Network
From the origins of capitalism through Adam Smith (1776) and others, the
emphasis has been on individual actions to maximise their immediate
benefit, sometimes, and maybe too often, at the expense of other people’s
interests. This individualistic focus seems to be very much the stereotype
of the American and Anglo-Saxon approach to business and commerce.
I was reminded of this by a French MBA student who pointed out that
France and much of Europe had never taken this extreme view, practising
instead a more considerate form of capitalism in which the interests of a
wider community needed to be considered. It is this more socially
informed form which this book advocates.
A network view is also one recognised by the International Marketing
and Purchasing (IMP) Group which was based on collaborative research
in the 1970s in a variety of countries but much influenced by the Nordic
countries where social conscience and societal impact is a recognised
feature of business life. The work focused on buyer–supplier relationships
and saw these as embedded in a social and commercially connected
network of businesses. Core references are Hakansson et al. (2009) and
Ford et al. (2011).
This is the early demonstration of a more all-inclusive view of busi-
nesses which argues that relatively few organisations sit at the top of a
pyramid of suppliers more or less dependent on them. In fact, most busi-
nesses are suppliers to other businesses in the B2B model of the market,
and the relative importance of their different customers and suppliers
changes over time and activity. So the focus on buyer–supplier relation-
ships (the so-called dyad) is important, but we need to recognise that these
companies have connections of their own out to other customers and other
suppliers. We cannot therefore conceive of the dyad and the relationships
b3235_Ch-01.indd 44 14-08-2018 06:27:46

between these two players as the only important factors. Rather, the dyad
is embedded in the extended network downstream towards multiple
customers and back upstream towards other suppliers.
The logic that we have already examined of complimentary resources
and interests is demonstrated in these extended networks which enable
players to access resources elsewhere in the network, through their dyadic
partner, to companies they might have been unaware of without the dyad
working properly. However, any choices made mean that other choices are
not possible and so along with the enabling access feature of the network
connections we also have constraints since we cannot easily find alterna-
tive partners outside of the existing networks (another example of lock-in
but on a larger scale). A further feature of a network approach is that no
one company is seen as more important than any other, continuously over
time. Any one company therefore has a limited opportunity to operate in
command and control mode demanding service and best pricing since
another player might come to be more important as the dynamics change.
Force cannot work in this environment, and so behaviour and becoming a
good partner is more important as companies try to influence, rather than
control, others.
This is seen in large measure when trying to promote innovation
where the innovators are more free to supply others in the network, and so
if this innovation is of value to one of their customers it is incumbent on
the customer to become the preferred customer of that supplier (at least in
the immediate future). A customer trying to demand innovation is more
likely to stifle the innovation, whereas if they allow the supplier some
freedom to do their own thing free from control pressures, they are likely
both to produce something of value and to offer it to the customer who
gave them that space to innovate.
1.20 World Trade and Globalisation

Trade across national boundaries has been taking place for hundreds of
years and often over considerable distances. The Silk route for example
had traders travel between European countries and China, exchanging a
range of goods along the way.
b3235_Ch-01.indd 45 14-08-2018 06:27:46

“9x6”
Trade is, as we have discussed before, a process of exchange where

some party has a good (more often than a service) which they want to
exchange for some other commodity (including money) held by the coun-
terparty and where a basis for the exchange can be agreed. In practice such
trade helps both ends of the supply chain achieve something of value to
them. Money is exchanged, lessons are learned and transferred (some-
times to the detriment of the original holder of the knowledge), people are
employed directly and indirectly in support of the trade, and associated
transport of goods and travellers and hospitality has to be provided and
paid for along the route. Often, the need to provide forms of security
required building supporting social institutions along the route, and this
created the need for political mechanisms and forms of law enforcement
as well. Thus, the British Merchant Marine transportation systems predate
the formation of the British Royal Navy, which was developed to protect
the merchant ships from piracy on the high seas. Of course, access to areas
with valuable goods to trade became attractive to governments, and so we
had the developments of various empires and wars to prevent competitors
into these lucrative supply or customer marketplaces. Britain, for exam-
ple, fought two wars in the 19th Century with the Chinese to control the
opium trade!
As more and more countries developed their capabilities and eco-
nomic ambitions, the urge to trade and take more control of the processes
they could access allowed the expansion of world trading activity.
Globalisation is the extension of these trade activities to a wider and ever
more inclusive set of trading parties for which global agreements about
the ways to undertake a fair set of business practices became increasing
important. Along with this came agreements to create special status agree-
ments between regions to simplify and control the exchange processes and
simplify the gathering of any due taxes.
To some extent, globalisation follows traditional economic logic
about comparative advantage which says economic activity is best located
where it is most efficient to be performed and access to the fruits of that
activity will be enabled by the globalisation of the international and,
sooner or later, world trade.
Most countries develop over time from a predominantly agrarian base
to an industrial one to a service economy, and for many years this was
b3235_Ch-01.indd 46 14-08-2018 06:27:46

seen as completely normal and to be expected. The effect of this was that
the more developed countries were further along this path and so tended
to de-industrialise in the belief that they would now be able to trade for
the goods they formerly produced themselves. Other, developing, counties
would take up the manufacturing burden and then trade these goods with
the service-based economies who still wanted the goods and had the
money to pay for them. This has undoubtedly worked for the developing
countries of China and Asia generally so that people now talk of China as
the workshop of the world (a title once held by the UK at the time of the
first industrial revolution based on coal and steel). However, the econo-
mists who argued for free trade deals in the belief that all would benefit
through overall world trade growth failed in the main to recognise the
effects on society and on workers displaced as manufacturing was
outsourced to other countries.
Globalisation as currently carried out has not delivered uniform ben-
efits across Western outsourcing communities. The so-called elites have
been amassing more economic benefits and wealth from the world trade
processes (this includes the financial services industries which have
enriched themselves by gambling with investors and latterly, taxpayers’
moneys at little personal risk). When the financial crash happened around
2007/2008, the same disadvantaged investors had to provide more money
though government support which allowed these same gamblers to con-
tinue (with some more controls), which affected the ability of businesses
to invest in their own recovery.
While it is true that many traditional manufacturing jobs have been
lost through automation and new technology rather than direct outsourc-
ing, nevertheless large numbers, often men, (who were either too lowly
skilled or too precisely trained for obsolete processes) simply lost their
jobs, their livelihoods, their place in their families and communities, and
many such people have seen their standards of living decline in real terms
over very many years. Neither the companies who once employed and
valued their contribution nor the governments they voted into power to
look after their interests took any concerted efforts to reskill them to make
them ready for new work opportunities. It was seen as a natural conse-
quence of the global trade forces, and they were expected to simply accept
the new reality. The UK vote to exit the EU and Trump’s election to
b3235_Ch-01.indd 47 14-08-2018 06:27:46

“9x6”
President in the US seems to have been, to some extent, the result of these
communities expressing a view that globalisation was not working for
them and almost anything else was better.
Some form of world trade is inevitable since the resources, capabili-
ties, support infrastructure and demand are not uniformly distributed.
Perhaps we are beginning to realise that we need a more integrative and
networked view of the processes of global trade but one that considers
more than just the immediate trading parties’ benefits and recognises that
there can be a more limited economic benefit of that trade for the com-
munities involved along the global supply chains. We need to find a way
to share the benefits more uniformly while recognising the returns needed
to support entrepreneurial behaviour.
We will return to this discussion later. For the time being, let us accept
that globalisation is a process which has brought new wealth to huge num-
bers of people in the newly developed world and has created a recognition
that trade is important for human development and indeed to the creation
of new markets as these people spend their new wealth. While there are
problems of a variety of kinds with globalisation, no other system has
allowed human and economic development on this scale to spread across
the globe.
1.21 Commodity Demand

As we have alluded to above, commodities are not universally distributed
across the globe and this fact has driven international trade for centuries.
From the raw materials extracted from the ground through to the kinds of
crops that can be grown in certain geographical conditions, we have limits
of capacity at the beginning of many supply chains. People and invest-
ment capabilities are different in that, given the will and time and com-
mitment, many features of the manufacture of goods are relatively mobile.
In electronics assembly operations, for example, the huge sub-contract
producers who make most of the actual products can move their factory
provision across national borders and be up and running again in a matter
of weeks.
The finite earth argument recognises that the planet itself is an inher-
ent limit to availability in that base resources have to find locations where
b3235_Ch-01.indd 48 14-08-2018 06:27:46

exploitation is technically and economically feasible and where

appropriate infrastructure and socio-political mechanisms can be counted
on to support the commercial activity. Many of these situations demon-
strate extreme conflicts of interest between developers and indigenous
peoples and their well-being and cultural survival. In the past, these eco-
nomic benefits to the developers were sought regardless of local impact,
and while this is certainly a continuing feature in many parts of the world,
here again the growing awareness of the social cost of development
means that some of the developments are moved forwards in less exploit-
ative, short-term ways.
There is also great scope for political action around the availability of
resources especially if the geographical locations are limited. All electron-
ics (including many defence applications) depend on the use of rare earth
materials, but at the moment the main sources are in China and since the
Chinese costs were much lower, most companies sourced from China.
However, during the ongoing dispute about rights over the South China
Sea and in a disputed incident in Japanese waters, China declared a stop
to the export of the materials in 2010 causing an urgent move to reopen
second sources around the globe. The Chinese declared that the limiting
of exports was so that they could build strategic reserves of the materials
for their own industries, but with then 95% of the global market it looked
to many observers as a political rather than business-driven decision.
1.22 Communication Links

Of great importance in opening up the global trade opportunities have
been the developments of high-capacity (or bandwidth) fibre optic com-
munications data links which now circle the world. This has allowed for
almost instantaneous communications links to enable the exchange of
trade information and logistical instructions to flow to almost all parts of
the world. However, the instantaneous flow can also spread bad news very
effectively as well. Part of the problem of the financial crash of 2007/2008
was how rapidly the financial markets moved from belief in a positive
future in which financial instruments were traded in milliseconds around
the world to a situation when one institution ran into problems with debts
they could not cover and this changed the perceptions of investments at
b3235_Ch-01.indd 49 14-08-2018 06:27:46

“9x6”
risk and caused the banks to stop lending money until they could figure
out how to value the so-called investments that they held in predominantly
American markets, now seen as unsecured.
The communication technologies have made good and bad things
happen and have made remote working and outsourcing of service opera-
tions a possibility in ways that open up new possibilities but also possibly
accelerates the concerns for the ‘left behind’ workers.
The fibre optic cables that circle the world are now seen as poten-
tial targets of aggressive foreign countries since breaking these links
would cause massive disruptions to economic activity and defence
coordination.
1.23 Government Support to Inward Investment

Businesses have a variety of reasons to locate some of their activity in
countries away from their start-up locations. Sometimes it is to chase the
low-cost labour, where this is an important factor in a process; sometimes
to locate close to the origin of some commodity; and very often, and
often the most important reason, is to be seen as a local provider for a
newly emerging marketplace. Whatever the reason, such businesses are
making an inward investment (foreign direct (inward) investment FDI)
into that country which brings jobs and opportunities for the local econ-
omy and will attract other support agencies to follow them. The local
governments can see the opportunities for their communities and for the
tax raising opportunities from the investor and their local employees.
There is of course a tendency for such investors to use the various pos-
sibilities of legal tax avoidance to limit the local benefit, but nevertheless
the balance is that they are still attractive to the local governments who
then compete with each other to make it attractive for the FDI to choose
their location. Incentives around tax breaks, support to investment deci-
sions and infrastructure development and training costs can all be pro-
vided and the need for innovation in the support packages drives this
competition onwards.
The advantages can be relatively short lived. For example choosing a
location on the basis of lower labour costs is time limited as the local
people become more skilled and expect better conditions as follow on
b3235_Ch-01.indd 50 14-08-2018 06:27:46

competitors try and attract away the staff from the first mover companies.
Such companies often move around the globe to make relatively small
margins of improvements in their operating costs. This is especially the
case as any time-limited benefits near their end of life.
Part of the attraction of the FDIs to local governments is the opportu-
nity for local employees to learn new skills which they can then transfer
to other employers in the local community building up capability and
hopefully new companies to compete in world markets. For the FDIs, this
is a threat as they are in effect training their future competitors and so they
might try and limit the opportunity to learn the complete range of skills
that would be needed to compete. There is always therefore a tension
between the reasons to be in the country and the risks inherent in transfers
of knowledge that will happen.
1.24 Locational Advantages and Disadvantages

Access to commodities and markets under favourable conditions are
clearly advantages supporting the decision to locate in a foreign country,
but there are clear disadvantages as well.
By definition, the local people will not be experienced in the work
being brought into the country, so there will be training costs. To support
the learning process, a number of experienced personnel at all levels will
need to move to the location sometimes over extended timescales to sup-
port the developing operational processes and operator development.
Quality is always a major concern as the new workers have no prior expe-
rience or understanding of modern quality approaches and procedures.
This means that quality monitoring, control and troubleshooting can
require more investment than might have been anticipated. All of the
expatriates that are brought to the country will expect their conditions not
to deteriorate and additional costs for accommodation, children’s school-
ing and flights home as well as financial incentives for the disruption to
their lives, will all increase the costs of doing business in the new location.
Some of these costs are difficult to fully anticipate, and so they might not
have been fully included in the cost–benefit calculations.
Other disadvantages follow from working in a different time zone,
culture and political and, possibly, religious environment. Even attitudes
b3235_Ch-01.indd 51 14-08-2018 06:27:46

“9x6”
to women workers, holidays and the need to provide transportation for

workers in remote areas can introduce new factors and costs to manage.
For goods-oriented FDI’s the infrastructure of highways, trains, ports
and airports become important along with any customs duties and controls
to be negotiated while the bureaucratic processes and attitudes about cor-
rupt practices can be challenging.
Perceived political stability and the local attitude to repatriation of
earnings or attitudes to taxation processes can also be of great importance
and increasing in focus as populations round the world realise how little
corporate tax big corporations actually pay to the countries who host them
and in whose markets they generate their sales figures.
1.25 International Business

We saw above that there are many reasons for businesses to become FDIs,
but what happens before then?
Most companies see a market and build a business around that market.
Often, it will start out as being very locally based but over time the busi-
ness grows and the local opportunities are largely satisfied. To continue to
grow, they need to expand further and this eventually means that they will
need to trade across national boundaries. Initially for goods producing
companies, this will be by exporting their product into new market areas.
As this succeeds, they are likely to need to have local marketing and sales
expertise based in the country and sometime later they might need to locate
production in the new country to support the growth of the new market.
All of this is incremental, trial and error and knowledge building espe-
cially in networks of customers, suppliers and local regulators and govern-
ment departments. The timescale is often measured in tens of years and is
very evolutionary.
Bartlett and Ghoshal (1989) described this process as a four-option
framework with the two pressures the business faces of control or integra-
tion across multiple locations with the need (or not) to respond to local
markets and to offer a tailored solution in response to local demands. The
other axis of consideration is whether to focus on the product or the geog-
raphy of the markets. This gives a four-stage choice. The first we have
discussed which is going international through exporting. This needs low
b3235_Ch-01.indd 52 14-08-2018 06:27:46

levels of integration and low or no responsiveness to the market — they

get what they are offered without changes. If we follow the product axis
but now with a need to greater integration, then we have a global strategy
demonstrated by the world car which is the same wherever it is built or
sold. If the need is perceived to respond and change the product according
to local demands, then we can move to a multi-domestic strategy. Here,
we effectively clone all of the systems of the home systems and simply
transplant them into the new geography and offer locally specialised prod-
ucts which we might export to other territories as specials. Organisations
trying to be all things to all people in an integrated and mutually support-
ive way are the transnationals, and it is this kind of organisation who truly
behaves as if the market is fully global but learns from and adapts to all
inputs from the different marketplaces. These organisations are often huge
corporations and can have financial turnovers greater than some nation
state’s Gross Domestic Products and perhaps more influence or power
than the local governments where they operate.
1.26 Evolution or Born Global?

While demonstrated over some years, the above incremental model does
not fit all cases. In particular, there are certain types of businesses who see
from their very beginnings that their opportunity and perhaps obligation
to succeed requires them to think of the whole world as the marketplace.
Rather than evolving as described, they are described as Born Global.
Perhaps the best example, although not yet realised, would be if some
company developed a cure for cancer or AIDS. If they were to take an
incremental view of their opportunity it would take so long, that apart
from denying product to many who desperately need it, their competitors
would see the opportunity and try to develop a patent busting way to intro-
duce their own products and compete. The innovator would fare far better
to aim for a global market reach and probably multiple supply chains to
target all marketplaces at the same time.
The best real examples come from the market for software apps where
the value is to get a huge user base even without or before there is any real
income generation and then sell to someone else who has the financial
capability to turn users into paying customers.
b3235_Ch-01.indd 53 14-08-2018 06:27:46

“9x6”
1.27 Market Imperatives

We have discussed some aspects of what makes customers buy, and here
we develop some more themes to demonstrate how choices have to be
made and changed over time in order to allow for customers to be satisfied
at a cost to provide the service (goods or purer service) which allows the
supplier to make a sufficient margin to reward their stakeholders and
continue the business into the future.
1.28 Value Proposition

Customers sometimes do not know or cannot articulate what they want or
will value, and so this highlights the fundamental difficulty facing a sup-
plier, which is, ‘What do I produce or what service should I offer to these
customers’. The key word is offer since there is no transaction until the
customer recognises the offer, evaluates it (often against competitors’
offers) and decides to buy. Thus, the supplier offers a Value Proposition to
the customers which indicates what value the good and/or service will
provide to the customer, and it is this value proposition which is then
evaluated and a decision made to buy or not to buy. Only if the buy
decision is made can we begin to think of customer satisfaction and an
acceptable trade.
Even if products are not on offer, the customer (or client) of a service-
based value proposition performs a similar evaluation of what value they
perceive to receive through the trading transaction. In public sector or
charity situations, even if money is not exchanged, there is nevertheless
an evaluation of the value proposition so that for example a patient can
evaluate the service provided by an emergency room in a hospital.
However, as we will see shortly in the quality discussions, how to per-
form these evaluations, and against what benchmarks or standards, is
often far from straightforward and, especially for services, much depend-
ent on the client/patient experience and expectations, and these can vary
widely across such populations.
Of course, difficult as it might be, the key to success for a supplier in
these situations is to fully understand what their customers or clients actu-
ally want even if they are not quite sure themselves. Once customer
b3235_Ch-01.indd 54 14-08-2018 06:27:46

expectations can in some sense be fixed, then we can build a supply sys-
tem which has a chance of providing the right value proposition. Without
such an understanding, we are risking more than is sensible.
1.29 Value in Use or Transfer

We also have to consider different kinds of value as demanded by the
customer groups since we have largely been talking of only one of the
options through trading or exchange. The basic exchange process is actu-
ally a transfer of ownership situation. The supplier has something of value
to the customer who is prepared to exchange some of their assets (money
probably but not exclusively) in order to take possession of the valued
item or service. This is Value in Transfer, and the customer now has con-
trol and responsibility for the asset to use as and when they like. So a
customer might buy a lawnmower to cut their garden grass.
If we think in value terms, however, the product, the lawnmower, is
really a means to an end. The end is better described as ‘grass cut’ and the
customer could have this value delivered to them without ever owning or
using a lawnmower. Instead, they contract with a garden service company
for them to use their own assets to produce the same value to the customer.
There are of course arguments for the benefits of both ways of working.
Ownership means the investment in the lawnmower is not available to be
spent in other ways but the work can be done at any time the customer
chooses and quality of the work is in their control while the asset may
have some resale or trade-in value if changes are wanted. Value in use
avoids the capital buying cost, but each mowing of the grass comes at a
new cost and is now subject to scheduling impacts as the garden service
company tries to manage multiple client demands. Quality performance is
now part of the contract negotiation and monitoring cost. Updating of
equipment is the supplier’s problem, but may be reflected in new service
charging structures.
However, the trend to value in use agreements is increasing. In the
airline sector, the pioneer was Rolls-Royce Aero Engines Division whose
trademarked ‘Power by the Hour’ approach guaranteed that whenever the
airline wanted to fly there would be Rolls-Royce engines maintained and
ready to operate. The airlines avoided the upfront purchase investment in
b3235_Ch-01.indd 55 14-08-2018 06:27:46

“9x6”
buying engines and all of the associated spare parts for their maintenance
at a fixed cost to operate the contract over an extended time. Incidentally,
since the costs of maintenance now fall on the service provider rather than
the airline in this scenario, there is also pressure on the design team to
reduce the costs of maintenance now since it is incurred by Rolls-Royce
rather than providing an opportunity to that company to sell the spares to
the airlines. The cost–benefits on both sides need careful calculation.
City Car variants follow the same logic allowing access to rental cars
in a convenient way as and when needed and it is argued also reducing
congestion and parking issues at the same time. The ultimate end point of
this argument is the provision of a local transportation solution offering
the perceived convenience of car ownership to manage flexibility of routes
and destinations. How this is paid for and who manages it is clearly a dif-
ficult additional decision.
1.30 Goods and/or Services

In their purest forms, the difference between Goods and Services is the
absence of or requirement for customer interaction at the point of product
creation or service delivery Vargo et al. (2008).
Goods can in theory be completely designed and manufactured with-
out any direct customer involvement. For flat pack furniture, the assembly
process and often the delivery to the home is at the customers’ costs and
not the producers, but the customer just chooses, they do not have any
input into aspects of design. The output can be stored until a customer
appears to request the goods from store and the transaction and delivery
can take place. Storing or holding goods in inventory is a way of separat-
ing production and consumption and is in effect storing capacity to satisfy
future customer demand. It also allows for different demand patterns on
the supply and demand side since the inventory acts as a buffer between
the two processes, allowing the goods side to operate with some efficiency
as the inventory absorbs some of the fluctuations in patterns of demand
and production.
Pure services require a direct interaction between the customer or cli-
ent and the provider of the service. There has to be some element of pre-
design in that the supplier decides what range of service they are prepared
b3235_Ch-01.indd 56 14-08-2018 06:27:46

to offer the customers, but the provider does not know what will be
required until the customer appears and a discussion starts as to what they
want. This is a process referred to as Co-creation in which the interactive,
request–suggestion–modification process is one where customer and sup-
plier/provider are both involved in the design and the delivery process and
are in interactive contact all through the service encounter. Services in
their pure form have to be delivered at a location where both provider and
client are present, even if this is a virtual location. For example, the
provision of health advice over radio links in remote regions still has the
coincident time for service delivery even if the parties are geographically
separated.
Since services cannot be stored, the benefits of inventory cannot be
achieved and there is a more difficult exercise of trying to anticipate or
control customer demand and match it to delivery capability.
Retail is the best sector to see how this works in practice. The retailer
has to guess or forecast possible demand patterns and has to decide when
to open the store and crucially when to have people in it to serve the cus-
tomers when they appear. In the UK, this has led to the operation of Zero
Hours Contracts where the retail sales person has no guaranteed hours per
week but is called into the store as and when the store manager believes
there to be a need. For the people on this kind of contract, there is no pat-
tern to build their lives around (since they are effectively always on call)
and no guarantee of enough paid work hours to make it easy to raise
mortgage finance for example. It also has the effect of disguising the true
unemployment statistics as while they are technically employed they are
not always earning and also they are not free to take other employment.
This limbo like situation solves the managers’ problems in scheduling
staff, but can hardly be seen as an attractive option to all employees.
It does seem to work for people who do not want full-time work (students
perhaps) or need the flexibility to react to family circumstance in child or
elder care for example.
Of course in many cases, products need to be supported by services
and services are often dependent on goods in some form to support ser-
vice delivery. The reality is that we need to think of a product/service
package which is the value proposition offered to the customer group. In
many cases, this also includes complementary products since products
b3235_Ch-01.indd 57 14-08-2018 06:27:46

“9x6”
often need operational materials (printers need paper and ink and actually
it is the ink cost which is the real driver of the cost of ownership), mobile
phones are often sold with headphones or covers. In these markets, it
might be worth the product provider also facilitating the supply chain of
the support products as well as finance or insurance products so that the
complete bundle of items and services can be presented as one, easy to
buy, offer.
1.31 Make or Buy (Products) and Do or Trade (Services)

Our early examination of TCA highlighted the question of the time which
was ‘why do firms (or businesses) exist’? Once we understand that issue,
the follow-on question is ‘Where should the boundaries of the firm be
located’?
This idea of the boundaries of the firm involves the basic decision
about what part of the total set of customer satisfaction activities do we
need to own, that is manage internal to the firm’s boundaries, and what is
it better to leave outside and transact with an external marketplace when
we need to? In the language we have already used, what needs to be
in-house and which outsourced?
In the product world, this is described as the Make or Buy decision or
the service equivalent is Do or Trade.
The transactional cost analysis discussion largely covered the fea-
tures of this decision choice, but it is of a high strategic importance for a
business to define its boundaries as what activity is kept in-house has to
be developed, supported and fully valued in the ambitions for particular
markets and customers. Make and Do decisions create internal assets,
and these will appear in the financial reports and controls of the business.
Investments made in these resources are not easily reversed if they turn
out to be less than optimal and may be difficult to liquidate in the final
stages of their lives. These assets will be required to create innovation to
increase and improve the value propositions and to reduce operational
costs, so the choice is really important. Buy or Trade decisions are to
leave these assets outside the boundary of the firm in the supplier mar-
ketplaces. This avoids the fixed and sunk costs of ownership and is inher-
ently more flexible, allowing a perceived easier process of contract
b3235_Ch-01.indd 58 14-08-2018 06:27:46

termination and subsequent re-sourcing for a different set of assets and

capabilities through market transactions. As we point out at various
points in this book, such re-sourcing or supplier switching is not without
difficulty and cost of its own, so neither of these options is either clear
cut or indeed static in attractiveness and of support to the value
proposition.
Another of the terminologies used in the choices involved here is the
term off-shoring where the other party is across some national boundary
even if it is land based rather than coastal. This can also apply when the
same company’s employees are used but in a different location because of
some local market attractiveness (often labour cost based). These people
are technically an off-shored resource but are not outsourced.
1.32 Location
The separation of production and consumption in the market for products
allows for different locations and different timings for each activity and
therefore the ability to engage in global trade where they may be many
weeks between the two ends of a supply chain. However, for pure service
delivery we need an interaction which is coordinated in time (if not always
in location) of the service delivery person and the client who consumes as
the service is delivered. The ability of a service to be delivered at a dis-
tance also allows for a separation of the service delivery function and the
consumption activity.
The differences between the physical product and the more ethereal
service have major consequential impacts on system construction and
operation. The physical product requires lots of hard infrastructure in
manufacturing operations, transportation and import/export considera-
tions, storage as well as recycling and waste management of packaging
and end of life products. A service process might require premises to
perform the interaction, a hotel for example or a lawyers’ office, but may
only require a good internet connection and reliable software at each end
of the connection between the interacting parties and any support teams
that might be needed.
With the rise of advanced robotics, even a surgery service can be done
at great distances with the right surgeon operating one robot and an
b3235_Ch-01.indd 59 14-08-2018 06:27:46

“9x6”
equivalent robot actually doing the operation on the patient with

presumably a team of support staff at the patients side at present but for
how long will they be needed?
1.33 State-of-the-Art Innovation

In all product and service markets someone had to be first. Sometimes the
market leader has had the original idea and invested a lot of time and effort
to realise the dream the entrepreneur had, and by being first gets so far
ahead of the chasing competitors that they retain their leadership in the
market for many years. Sometimes, in contrast, the person who provides
proof of concept in the product or service and identifies that there actually
is a market for the innovation is not the one who is successful in winning
the battle in the marketplace. It seems that in innovations being first and
demonstrating that something is possible seems to release creativity in
others who find a way around any patent protection set up by the first
innovator to develop their own offer to the market and then organise better
and faster to win the market dominance as the market follower. Often, the
follower will not have had to spend so much money and time on the dead
ends in the search for the solution because of the guidance they received
from the leader’s success and so has more money to develop the market
and win the customers’ support.
Another strategic decision therefore is how much investment do we
want to make in becoming a leader in our various marketplaces? Is it bet-
ter to keep watch on what the competitors are doing and be ready to move
into ‘copycat’ mode rapidly when proof of concept is demonstrated by
another business?
1.34 Product Range

Some products have to be produced in a range of sizes either to cope with
for example different physical dimensions in human populations (clothes
or shoes for example) or where essentially the same product needs to be in
different sizes because the forces under which they operate are different.
(Fastenings, nuts and bolts and screws for example.)
b3235_Ch-01.indd 60 14-08-2018 06:27:46

However, in many other markets, product range is another managerial

choice about what kind of offer they will take to the market. The choice is
three fold. The first is, do we offer a standardised product, even if it is part
of a range, to all customers wherever they are or do we allow the customer
to become involved in deciding what it is that they will buy from us.
Service similarly can be standardised, for example, a vehicle mainte-
nance service based on distance travelled or time since last service.
Services by their nature are often much more interactive and need cus-
tomer input to define what the service is to be. A hairdresser, for example,
needs information about what style and what length to cut the hair and
perhaps in what colour with what additional treatments and so on. The
hairdresser still had to make a strategic decision about how much cus-
tomer choice they were prepared and competent to offer.
So the first choice is in theory standardised or variable according to
customer choice and input that is customisable.
Standardisation is often seen as allowing for specialisation in equip-
ment and people training and repetition allows for a learning effect to take
place where repetition allows for a reduction in unit costs of production as
the skills are developed and little improvements are made in the processes.
The example of this, which may be apocryphal as well as the possible
reason, is Henry Ford’s mass produced Model ‘T’ car which customers
could have ‘in any color as long as it is black’ and the reason… because
black paint dried quicker and so the production line could run faster.
In the discussion earlier about world trade, we discussed the strategic
choices of Bartlett and Ghoshal (1989) where the product focus was about
standardisation while the geographical orientation was about allowing
customisation in the local markets.
The second choice is, if we are going to allow customisation how far
are we prepared to go, will we limit it in some way to try and retain some
of the economic benefits of bigger volumes? This creates a series of
options which define at what point the customer becomes involved in the
production process, which is sometimes referred to as the Order
Penetration Point.
This is really the third big choice which is, at what stage do we allow
the customers to express their views and exert their influence to effect a
change in our processes? Every time a process is interrupted by some
b3235_Ch-01.indd 61 14-08-2018 06:27:46

“9x6”
change being made, then that process is not running at its optimum speed
and someone has to pay the cost of that disruption!
With minimal customer involvement, except to buy the standard prod-
uct, we can talk of Building to stock and the customer simply transmits or
collects a standard order. Assemble to order is where the product is
designed as a number of interchangeable parts and the customer specifies
the collection of choices they want and the factory then assembles that
particular combination. The Just in Time system developed by Toyota is
essentially an assemble to order process. Make to Order avoids any risk to
the supplier since they do not begin to spend money in purchasing or
production until the customer has made their choices and probably paid
their money even if part of a stage payment process in for example house
building. Design to order reduces the producer risk even more since the
customer commitment is all at the beginning and the co-design process
ensures the customer is satisfied. Superyachts often fall into this category,
and the builders often have to make major changes in the middle of con-
struction when the customer (who by definition does not care about the
cost) asks for a modification with consequential redesigns needed to
accommodate the change. One can imagine the effort needed if the cus-
tomer decides to extend the size of the swimming pool or wants to land a
larger helicopter on board!
In a different sector, a bespoke wedding dress would show the same
production management features.
In some sectors, it is really difficult for customers’ demand to be
known at the point when production decisions are being made. For exam-
ple, the oil industry has to make processing decisions about what product
stream to move the raw materials through in order to make different kinds
of oil-related products as liquids or polymers. This means that they have
to forecast all of the possible customers’ demands across very many prod-
uct categories, many months in advance of the actual demand being real-
ised. The processes are so long that they cannot respond to demand
changes mid-stream.
A similar problem occurred in knitted garments where the technology
would only allow for colouring of the yarn to take place more than a year
before actual demand. For fashion goods, it is extremely difficult to fore-
cast what colours will be seen as desirable that far ahead. Benetton got
b3235_Ch-01.indd 62 14-08-2018 06:27:46

round this problem for some of their goods by inventing a way to colour
dye a complete knitted garment. This allowed them to respond to actual
customer demand by rushing orders through to the garment dying opera-
tion and then rushing them into their stores to catch the current customer
preferences.
In all of these situations, the other major dimension is time, especially
how long a customer is prepared to wait for their goods. Zero customer
wait time has, in the physical product world, to be provided for by holding
stock in anticipation of the demand actually appearing. If customers are
prepared to wait and pay for any changes, then the production system can
be operated more efficiently. In the virtual world, wait time can be reduced
to the download speed of the internet connection device the customer is
using.
Changing output for many physical production systems creates prob-
lems and relative inefficiencies since so many of the assets employed,
including people, are indivisible and so output changes move in discrete
steps (one more worker or machine in operation), but to match output
levels with changing demand patterns really needs the resources to vary in
a continuous manner not the discrete, step change way which is the cur-
rent normal pattern.
1.35 Order Mix

Once we, as a supplier, have determined what range of interactions on
product design specifications we wish to offer our customer groupings, we
also need to recognise that we also have to deal with ranges of volumes
from the unique superyacht at one extreme to the mass production of sin-
gle product types at the other. In between, we might have a mix of product
variety and volumes from any one customer. This massively increases the
complexity of the management challenge inside the operational unit and
its, perhaps many, supply chains feeding materials into the system.
We have another concept to work through as well, this time looking
into the future. This is described as the Order Visibility Point. This reflects
how much notice the supplier gets of an actual order from a customer.
If there is no notice and the customer just appears and places the order,
then the supplier has no response time and must rely on forecast demand
b3235_Ch-01.indd 63 14-08-2018 06:27:46

“9x6”
planning and stockholding to satisfy the demand. As suppliers and cus-

tomers get closer together, there can be more sharing of future plans by
the customer, thereby allowing the supplier to make appropriate plans.
With closer relations still, customer and supplier order planning and pro-
duction planning systems can be linked and coordinated and the supplier
can make even better informed decisions. Ideally, the demand signals the
customer is receiving from their own customers can be relayed back in the
supply chain so that all have good visibility into the future and might actu-
ally be in a position to suggest some changes to improve the flow of goods
to final consumers.
Sometimes the challenge is not just having the materials available but
being able to distribute them, in different part orders, to a variety of
required locations. Large customers might, for example, have a number of
intermediate processing sites to be supplied in different locations based on
the geographical spread of their own customers.
The final variable is that different customers at different times might
need to have separate agreements on the service level they need from their
supplier. Service-level Agreements are sub-contracts that specify all of the
details of the order in all of its complexity but adding in response times
for supply of products or service. For example, a similar product, a com-
puter say, might be in a very critical situation to support a customer’s
business offer and so if anything happened they might need a service
response measured in minutes for online support or hours for a physical
response to fix a problem. The same computer product might be used for
another customer or another part of the same customer’s operation where
a failure is not so time critical and a response measured in days might be
adequate. Clearly in these different scenarios, the cost to serve the cus-
tomer, the skill sets of the supplier’s people and the business consequences
of a failure to respond are quite different and therefore drive the setting
(and pricing) of different service-level agreements.
Overall then, there is the potential for a very complex and changing
mix of requirements which a supplier and of course their supply chains
need to recognise, decide on their offer and then manage successfully. It is
no surprise therefore that suppliers try and divide up their customers into
groups with similar supply expectations and try and design a supply chain
system(s) to match the needs of these groups. This is usually a more
b3235_Ch-01.indd 64 14-08-2018 06:27:46

complex picture than might be expected if we think of marketing dividing

up the customer base on principles of spend, attractiveness or similar cri-
teria. Marketing and operations need to coordinate very well in this area
to avoid promises being made to customers which the extended supply
chain just cannot support.
1.36 Competitive Threat

Most of the above describes a situation where relatively everything is
known but it is still very difficult to manage in any way optimally.
However, in all open markets where there are alternative providers then
the logic of the marketplace is that whichever supplier can persuade the
customers that their offer is in some way better than their competitors
then they will win the business. For this reason, all businesses need to
try and stay up to date with everything that their competitors are doing
and even better if they can also find out what their competitors are plan-
ning for the future. Without resorting to illegal means of industrial
espionage, there is still much that can be learned from public or slightly
devious means. Most companies provide a lot of this kind of informa-
tion in their marketing presentations, or in presentations to stock market
investors.
If products are involved, then these can be bought in the marketplace
and then the engineers dissect the product to find out how it works, what
it is made of and ideally what it would cost to create. Even with services,
it is possible to act as a true customer to experience the performance of
the service and to do the same kind of reengineering but this time on the
people processes being used and possibly the training that they have been
receiving. Less ethical is the process of pretending to offer an employment
opportunity in the hope that someone from the competitor organisation
applies. The interview then becomes less about the skills of the person and
more about what they will be persuaded to reveal in the interview about
the company processes while believing they are impressing the recruiter
with their own abilities.
Sometimes, consumer organisations or industry bodies perform
benchmarking exercises from which all participants can learn something
of value in terms of their ranking in their market and perhaps what they
b3235_Ch-01.indd 65 14-08-2018 06:27:46

“9x6”
can do differently, having studied their competitor’s results. Bench

marking is a planned exercise where interested parties agree to share
information to see if another sector has process lessons which can be
transferred into another sector. These exercises often will not provide
direct comparisons to immediate competitors so while they are good in
themselves they do not usually fulfil the objective of gathering competi-
tive information.
In all of these exercises, it is often much more difficult to measure the
more intangible aspects of a competitor’s abilities and competitive threat
so the secret shopper type of approach may be the only way of getting
meaningful information. However, in services we are so dependent on the
capability and motivation of the service delivery person that it can be
difficult to get meaningful data unless the sampled numbers of service
episodes is statistically large enough.
A big risk in all marketplaces is the complete removal of demand for
a good or service because a new offer appears in the market which cus-
tomers fall in love with and immediately switch to. This can come about
in two main ways. The first is where a competitor finds a substitute which
offers essentially the same kind of functional capability but with much
higher perceived value-added or possibly less serious environmental or
social damage concerns. An example of the first might be a newer entrant
to the automobile market who offers much the same functionality as the
major brand but without the brand pricing. An example of the second
might be a realisation that the environmental impact of using animal furs
for clothes or furniture is socially unacceptable and so customers switch
to alternative materials (even though the real cost of alternatives might
actually have a different and more serious environmental impact if they
are derivatives of the oil industry and thus contributing to the depletion of
fossil fuels and increases in carbon-related emissions and thus to climate
changes).
All of this is compounded by the impact of new technology, but here
whole industries might be replaced, not just some businesses. We already
discussed the example of the Swiss mechanical watch industry which was
nearly replaced with digital watches. Currently, we are in the midst of
moves away from carbon-based fuels for automotive power systems to be
replaced by electrical battery systems. The old brand companies who
b3235_Ch-01.indd 66 14-08-2018 06:27:46

built the industry based on fossil fuel power systems are now in a
race with new entrants who have been battery based from their inception,
for example, Tesla.
All of this requires businesses to be alert and scan their horizons for
possible threats but as we already discussed in the innovation chapter
above it is really very difficult to know where to look.
This brings focus on what Donald Rumsfeld described as the
‘unknown, unknowns’ These are things of which we are completely
unaware that they exist far less their potential impact, but these are the
situations which can change whole life circumstances. By definition, these
cannot be forecast since we cannot know about them.
These ideas are also related to what Taleb (2007) described as Black
Swan events (The logic for the Black Swan label is that until Black Swans
were discovered in Australia in 1697 the rest of the world had only seen
white ones so did not believe they could come in a different colour). Taleb
describes them as events which were completely unforeseeable, have huge
impact and somehow can be partly explained by people in retrospect as if
there were available logical projections…but no one predicted them!
Taleb also argues against an overdependence on the Normal distribution
in which the Black Swans inhabit the extremes of the tails of the distribu-
tion and are largely ignored by many using statistics to inform their deci-
sions or insights.
Given such uncertainty, in what is a very critical area of future proof-
ing a business model, perhaps the only sensible response is not to try and
forecast the actual event but to build an inherently robust supply chain
system and strong intercompany relationships such that when the unex-
pected happens, all in the chain can pull together to find a solution to cope
with the new situation.
This chapter has set the business task in a wide context in which the
complexity of the choices to be made and the systems to be designed and
managed is very real and dynamically changing through local and interna-
tional changes and in the rapid deployment of new competitors and new
technology in increasingly global marketplaces. Some of the managerial
approaches we will discuss are very old, some less so but overall we will
look at the choices and decisions as ways of providing an extensive set of
tools with which managers can craft sets of relationships, contracts and
b3235_Ch-01.indd 67 14-08-2018 06:27:47

“9x6”
business processes to meet their business objectives in a robust, flexible

and responsive way to satisfy their customers and their evolving needs
and wants.
We will now begin the process of establishing how to build robust
supply chains through looking at aspects of Operations, Supply and
Contract Management and the impact of Technology in each of these
areas.
b3235_Ch-01.indd 68 14-08-2018 06:27:47

Chapter 2
Operations
2.1 Design
As we discussed earlier, design is at the beginning of everything. It sets
the standard against which the output is measured and success depends on
the two aspects of how well the customers’ actual requirements were
understood and translated into specifications for operations resources to
be trained and for them to be used to effect delivery.
2.2 Packaging
One design issue not discussed so far relates to discrete goods and how
they are packaged. This is also very important when we discuss logistics
later as the volume of the product is much increased when we also allow
for the packaging of that product and logistics costs depend on volume
and weight among other factors.
Packaging design has to consider a number of related issues. The first
is perhaps the need to protect the product from damage in transit from the
end of the production process until delivered to and unpacked by the cus-
tomer. Potential damages can be from dropping, impact with or by other
items, degradation through environmental effects of rain, sea water, heat
or cold as well as vibration in the transportation method. Thus design has
to accommodate international standards for materials, construction tech-
niques, sealing and the associated processes to produce these results.
Often, the packaging has to carry crucial information for safety reasons or
69
b3235_Ch-02.indd 69 28-08-2018 10:16:47 AM

“9x6”
for import and export documentation as well as advice about how to lift
and stack the goods in bulk.
Other aspects of packaging relate more to market image if for exam-
ple the good is to be displayed in stores to allow customers to view and
select them. The transparent bubble packs we often see provide this level
of visibility while providing protection against damage, and the robust-
ness of the packaging makes it much more difficult for anyone to tamper
with the product. Tamper-proof seals also work against potential theft of
contained liquids or indeed the introduction of poisons into the liquid
product by criminals for extortion purposes or as terrorist attacks.
While all of these packing solutions serve a purpose in getting the
product to the customer, we then have another issue of what to do with
the packaging once the product is removed from it and put into use by
the customer. The recycling of packaging material is a large issue for the
planet as too much plastic waste ends up in rivers and oceans and into
the food chain through fish and mammals ingesting the smaller waste
while larger waste can cause death through animals becoming entangled
in the plastic mess.
All of this reinforces the earlier points about getting as much repre-
sentation of key issues involved in the interconnected design issues from
all stages of the product’s life cycle.
For the operations area, packaging is another issue of mix and variety
that has to be managed.
Let us consider the example of Scotch Whisky. The product is a
liquid, which for each brand type does not vary. However, it can be pack-
aged into different bottle sizes, with different brand labels, different tax
labels depending on country of delivery and might need different types of
bottle cap depending on country requirements. They then might have to be
packed in different box sizes, and these boxes might also have different
marketing features on them. So what starts as a standard product, the
liquid, ends up having a multitude of versions all of which have to be
procured or produced according to a sales and bottling schedule in time
for transportation to a distant customer.
This is the essential nature of the operations management problem.
Simple, standard products can be produced efficiently in volume but the
b3235_Ch-02.indd 70 14-08-2018 06:28:02

Operations 71
more variety that is introduced, the more time it can take to change from
one requirement to another, losing time, output and efficiency, thus affect-
ing delivery promises. In addition, if any of these extra materials have to
be sourced outside the company, then we have to add the supply chain
complexities into the calculation as well.
2.3 Quality and Cost Influence

All of the potential steps in the overall process are hopefully adding value
as seen by the customer. Each one is a potential threat if the quality per-
formance is not as planned and if the costs of the operation increase
above plan. All design decisions involve trade-offs between the different
possible solutions, and such a multi-dimensional calculation is very chal-
lenging. A trade-off recognises that often getting a good result against
one factor means that another factor has to use a less satisfactory choice.
The design and operations areas are clear examples of this in action.
Trade-offs are sometimes more in our minds than forced by unchange-
able circumstances. Sometimes technology allows for new solutions or a
challenging brain reformulates the questions in new ways and applies new
thinking to change these choices and design has had this effect in a num-
ber of areas.
2.4 Modularisation
It is too easy for designers to keep introducing new versions, often
because their systems are not intelligent enough to inform them of some-
thing that would perform the task just as well but is not identified in a way
that allows the designer to find and evaluate it. The problem is what the
mathematicians call the combinatorial explosion. If we consider a typical
automobile, there will be choices of engines, transmissions, body shape,
paint colours, interior trim and wheels even before we add electronic
choices. To simplify, suppose we say we have 4 engines, 2 transmissions,
3 body shapes, 8 colours, 4 trim levels and 4 wheel sets. The combina-
tion of all possible choices is found by 4 × 2 × 3 × 8 × 4 × 4 = 3072. The
real-world choices are much more of course, so the problem is obvious.
b3235_Ch-02.indd 71 14-08-2018 06:28:02

“9x6”
The Mercedes Maybach, even at its launch in 2002, offered more than
2 million combinations, and this number has increased since then.
This variety costs money to create and can perhaps only be justified
to create a truly unique car at the highest end of the price market. For more
‘normal’ customers, it is both difficult to choose when there is too much
choice and if they cannot justify the expense of paying for all of the vari-
ety. For the producers, this complexity creates its own costs in the man-
agement of operations.
One approach, which is successful in many industries, is to rethink the
product design so that relatively few standard modules can be combined
together in a variety of ways so as to produce what appear to be different
end products. This is the Lego brick concept.
When this process of modularisation is well thought through, we can
construct an operational system which allows the manufacturing process
to be relatively efficient in producing the standardised modules which are
then combined together in a responsive process driven by actual customer
demand so as to offer apparent variety to the marketplace. It is only appar-
ent variety however since the particular version of a Toyota Prius for exam-
ple is still recognisable as a Prius although the customer gets everything
they asked for their, somewhat, unique version.
2.5 Platforms
Another version of this kind of thinking is to look at how similar but dis-
tinct product families can share common components or even processes so
as to produce the same balancing act of efficient operations and customer
variety. Automotive again shows lots of examples where corporate group-
ings offer a number of distinct brands to their customers. For example, in
2017 Volkswagen’s PQ35 platforms is used in 6 VWs and is shared in
models by SEAT (3), Audi (2) and one Skoda. Other major groups follow
the same path. In addition to the economic benefits from both cost and sales
aspects, another feature is that innovation efforts can be focused on the
platform so that resultant benefits are shared over more end products.
Many products go on the market with inherent safety issues which
were not realised at the design stage and when discovered by the producers
or after complaints from consumers or trading standards personnel in the
marketplace, then they have to be recalled. An example would be the line
b3235_Ch-02.indd 72 14-08-2018 06:28:02

Operations 73
of children’s toys which had inbuilt small magnets. What was not foreseen
at the design stage was that if these magnets became detached from the
toy, children could swallow them with dire consequences. Once more than
one magnet had been ingested they have a tendency to join together even
through soft tissues causing internal organ damage, ruptures and conse-
quential medical problems. Many batteries are inherently poisonous as
well, so the threat to a child’s health is major.
A product recall is easier if there is a connection between the sup-
plier and the user through for example completing a registration or
warranty card. Such customers can be contacted and informed of the
dangers and the proposed remedies (replace or reimburse the buying
costs perhaps). However, tracing the children who end up using the toys
is much more difficult since so many will have been purchased by oth-
ers so there has to be a general recall that has to be advertised and
managed.
Products like automobiles are much easier since the connection
between supplier and customer is likely to be direct and often minor recall
issues can be dealt with at annual services for example and the customer
might not even know it has happened. Safety critical issues need much
more urgent action however.
Other causes of recalls relate more to the operations processes
employed in the manufacturing process, especially where food is con-
cerned. The infamous Chinese milk scandal in 2008, where adulterated
milk products killed some children and affected tens of thousands of
others had a global impact and some guilty participants were executed
for their part in what was both a corruption and well as a safety scandal.
Although the problem originated in China, its impact was felt around the
world through the global coverage of food supply chains.
A report by Stericycle Expert Solutions in 2017 listed some issues
from the automotive sector according to their country of origin. (http://
www.stericycleexpertsolutions.co.uk/wpcontent/uploads/2017/08/
Index-).
In that year, the number of automotive sector recalls were: from
Germany 42, France 24, China 11, Italy 9 and the USA 7. The biggest
problems were related to injuries and airbags.
In Consumer Goods, toys were the biggest category with 170, with
Clothing and Textiles at 51 and Electrical Appliances and Equipment at
b3235_Ch-02.indd 73 14-08-2018 06:28:02

“9x6”
33 recalls. The country with the largest number of reported incidents was
China where injuries and burns were caused by choking hazards and elec-
tric shocks as well as chemical related problems, in a variety of goods.
In Foods and Beverages, the focus switches a bit with Poultry Meat
causing 223 recalls, Fish causing 132 and Nuts 112. The countries
involved were Brazil with 184 recalls, Spain 70, India 68, Turkey 60 and
China 51.
Globalisation makes all of this more likely and a bigger problem
because of the need to track and trace and investigate across country and
market jurisdiction areas where the possibilities for corrupt activities com-
pounds the problem. We will discuss corruption in Chapter 3, Supply,
later.
2.6 Cost and Reputation Risk

Major incidents like a product recall of course takes much effort from very
many people and organisations to find the extent and source of the problems
and then to introduce robust solutions which will cost money to rectify the
problems and will also cost money as actions are taken, in some way, to try
to retain the customers who have been affected. However, the real cost is
less direct and that is to the reputation of the brand which is identified with
the problem. Reputation Risk is very hard to quantify as some of the effects
of a loss of reputation will be immediate (some customers do not buy any-
more), or it can be more indirect in that future possible customers do not
even consider you. In terms we used earlier, the brand company is no longer
‘qualified’ to be in the market and consumers will never buy from them.
We can see therefore why the design effort on product and process is
so important from the safety and reputational risk point of view. Getting
it wrong at the design stage will always produce a bigger problem which
will cost more to solve when the worst happens.
2.7 Tracking Customers
As indicated above, knowing who is buying from you is a great advan-
tage if you need to contact them for recall reasons, but ideally customers
b3235_Ch-02.indd 74 14-08-2018 06:28:03

Operations 75
will return to buy from you again and so it makes sense to build some
form of linkage so that you can keep in contact and let them know when
new offers are going to be brought to the market. The Japanese car mak-
ers learned this early on. Partly, it was driven by their sales approach
which did not build big sales premises or car lots for customers to visit
to select and purchase their car. Rather, they employed sales people to
visit customers in their home and really get to know them, what their
needs were and when they might change, for example as the family size
increased. In effect, they had learned from western academics that it
costs a lot more to find a customer than to retain an existing one and
they were simply putting this into practice and developing it further.
In more recent years, the growth of customer reward cards performs the
same kind of function. The sales company gets lots of information
about spending patterns and product preferences and can tailor market-
ing and product development to meet this opportunity if there are suf-
ficient other customers of the same inclinations to form a customer
segment.
Such customers can also be used in marketing to test out new product
or service ideas before the supplier commits to great expense in product
development. The best customers can also be used, by the designers, to
help evaluate the choices the designers are making. In traditional western
companies, this is often frowned upon as the marketers see the customer
as their property and do not want designers to get too close to them in case
they (being often less commercially aware) give away business secrets.
In contrast, the lead designers in Japanese car companies often follow a
new product into the market to see what the customers really think of
what is right or less satisfactory on this design iteration. As the next ver-
sion is being developed later, the designer has their own insights into
customer requirements without it being interpreted by less technically
capable marketers who also have to try and translate their understanding
of the requirement to the designers. As we discuss later, the voice of the
customer is listened to by the design decision-makers themselves, with
fewer intermediaries from other functions and without the need for com-
plicated information translation systems. They still have to make the
trade-off decisions however.
b3235_Ch-02.indd 75 14-08-2018 06:28:03

“9x6”
2.8 Quality
According to the American Society for Quality, there is no one universally
accepted definition for quality. Their website says that it is ‘A subjective
term for which each person or sector has its own definition. In technical
usage, quality can have two meanings: 1. the characteristics of a product
or service that bear on its ability to satisfy stated or implied needs; 2. a
product or service free of deficiencies. According to Joseph Juran (2010),
quality means “fitness for use;” according to Philip Crosby (1979), it means
“conformance to requirements.”’ Both Juran and Crosby are significant
thinkers in the field, so if they cannot agree we can see what the problems
can be. Others have described it as: innate excellence, making or providing
error-free products or services or in terms we have referred to in relation
to value as seen by the customer.
While the history of quality in the west has been about inspecting
the output of processes to determine if they are good enough to pass to
customers either as an attribute (i.e. good/bad) or a point on a continu-
ous scale (e.g. length of a piece of cloth), the Japanese took a different
approach when they were taught about quality after the second world war
by W. Edwards Deming. He was a statistician who had worked on quality
as part of the war effort and helped make the American industrial complex
so overwhelming. The Japanese managers listened, thought, applied and
improved on the American thinking so that in a relatively short period of
time they were teaching everyone else how to do quality in a much more
inclusive and effective way.
2.8.1 Quality and design

Fundamental to all of this is a recognition that when we talk of quality we
are actually working with two quite separate and independent processes
both of which recognise that just about everything in life can be described
as being part of a distribution of continuous variables rather than a single
point. One of the most frequently used is the Normal Distribution, of
which we will talk more.
The first process is design, which again demonstrates its importance.
Designers know that when they design things they must accept that the
processes which will be used to realise their design are inherently variable
b3235_Ch-02.indd 76 14-08-2018 06:28:03

Operations 77
and this must be recognised in the design specifications which then have
to be defined to accept some variability. Thus, even if the designers speci-
fied a single point as the desired result they know that no manufacturing
process or even less likely a human service process could guarantee
achieving that single value. Worse still, no measurement process could
guarantee identifying it correctly. And so the designers work on the basis
of a desired or nominal value with an allowance or tolerance of different
values on either side of the nominal. In doing this, they are saying that any
result which falls within this zone of tolerance, will work as an acceptable
result. That is to say, inside the tolerance is good quality and outside of
this zone is bad quality or reject performance.
The designers are effectively determining what quality is and is not,
based on their choice of nominal and tolerance values.
The other process, as hinted at above, is the manufacturing process
which produces outputs according to a normal distribution. This is use-
ful since the normal distribution is completed defined by two measures,
the mean value and the standard deviation around the mean. This also
allows us to create control charts to monitor our production processes as
the distributions change and approach a situation where we are not rec-
ognising random variations inside the starting distribution but actually
looking at a distribution which has changed location or shape or indeed
done both. We can then stop the production process and reset it to get
back into control.
Figure 2.1 demonstrates the relation between tolerance and process
variation as a normal distribution.
(a) (b)
Figure 2.1 The Relationship between Design Tolerance and Rejects.
b3235_Ch-02.indd 77 14-08-2018 06:28:03

“9x6”
The figures show the design tolerance set as a Lower Specification Limit
and an Upper Specification Limit as seen in Figure 2.1. In Figure 2.1(a), the
design tolerance creates the situation that rejects will always be produced
as shown by area under the curve in the red boxes. In Figure 2.1(b), this
is worse since the tolerance band is tighter and proportionally more of the
distribution results fall into the failure or reject zones.
We can now understand why the designers are effectively determin-
ing what is good and bad quality. We can see other aspects of this in
Figure 2.2.
In Figure 2.2(a), we have the tolerance band (between the Upper and
Lower Specification Limits) being set at the practical limits of the distri-
bution at plus and minus 3 sigma. In this scenario, there will be effectively
no rejects, although technically the curve is asymptotic to the x-axis which
means it approaches but never touches the line. In theory, therefore, we
can get a valid result from the distribution which is outside the 3 sigma
distance but the probability is very small. This interplay between tolerance
and process variation is not a great result for the producers since any small
change in the distribution location or shape will cause the numbers of
rejects to increase.
In Figure 2.2(b), we have a much better situation. Here, the distribu-
tion is relatively tightly focused compared to the tolerance band. In this
situation, the shape would have to spread by a lot and the distribution
location to move by at least 3 sigma before there would be any likelihood
(a) (b)
Figure 2.2 Process Variations and Sigma.
b3235_Ch-02.indd 78 14-08-2018 06:28:04

Operations 79
of rejects or defects being produced. The numbers indicate that the expec-
tation of rejects is only 3.4 for every million times the process is used,
pretty close to perfection for most purposes!
We can use the measurement of Process Capability to measure the
relationship of the two processes and this also makes it feasible to talk of
zero defects in high Process Capability or more accurately high Cpk
situations.
Please visit http://elsmar.com/Cp_vs_Cpk.html for a great animation
of how these processes interact.
Of course, one issue that emerges from a very high Cpk is whether the
tolerance band is wider than the product actually needs since in every vari-
ation there is a cost and often one variation makes some other feature
more difficult to achieve.
This is the argument put forward by Genichi Taguchi (1993) who
argued that any variation away from the nominal carried a cost to society
in some form and so it is better to aim for the nominal value in many
cases. He built this idea into a Quality Loss Function to highlight how
designers could target the nominal more closely and also to make sure that
the processes were controlled inside the 3 sigma limits. He also argued
that a form of statistical design of experiments can be used to find out the
key variables that must be controlled to provide quality output and to
reduce the effect of other ‘noise’ variables so that they would not impact
the results. This is called Robust Design.
Costs of quality is a key concept in all of this. These are usually
described as: (1) Appraisal (internal measurement of whether the pro-
cesses have produced any defects; (2) Prevention (perhaps through
design changes); (3) Internal Failure (where defects are caught after they
are produced or forced to fail by stress testing before sale); and finally
(4) External Failure which is the worst-case scenario when the failure
occurs in the customers’ hands and is then subject to complaints, warranty
claims or re-calls with all the attendant costs and bad publicity leading to
damage to corporate reputation. By putting more effort into prevention,
the failure costs are reduced and the total cost will be reduced over time.
This is the logic of the continuous improvement thinking where every
repetition of a process offers the opportunity to make it better than the
last time. Sometimes this is through a learning effect when humans are
b3235_Ch-02.indd 79 14-08-2018 06:28:04

“9x6”
involved, but can be an actively promoted process where the people

involved in the process are empowered and trained through the use of
extensive creativity and quality improvement ‘tools’ (see the ASQ web-
site for details) to challenge ways of thinking and doing the process and
to measure, experiment and trial new ways of working so that by a
sequence of small changes a large gap in capability is opened up com-
pared with competitors who are content to stay with the initially specified
instructions.
2.8.2 The voice of the customer

We have said that the level of quality is determined by the consumer, who
purchases and uses the good or service when delivered to them, and that
sometimes customers do not know what they want in detail, or even in
concept and can only recognise it when it is presented to them as a fin-
ished item. However, in all situations a designer must make detailed speci-
fication decisions which s(he) hopes will meet this future expectation of
the customer.
One structured way of doing this gathering of information and exam-
ining the choices and trade-offs that the designers must make is the House
of Quality (Hauser and Clausing, 1988) or Quality Function Deployment
as shown in Figure 2.3.
The essential logic is to gather the customer requirements, weighted
ideally in importance terms in as detailed and measurable way as possible.
This can be by a variety of means including focus groups, market surveys
or competitor analysis. (Or indeed as discussed earlier, by allowing the
designers to follow their products into the market and ask users directly
what they value and how they set their priorities.) These customer require-
ments are then related to the design and technical options to satisfy these
requirements. However, some of the features might work in opposition to
each other. The classic example is the weight of an automobile door which
needs to be heavy enough to close with a reassuring ‘clunk’ while at the
same time is not so heavy that it cannot be pushed open when the door is
facing up a hill. The ‘roof’ of the house is where these design correlations
(both positive and negative) can be examined and decisions made to
resolve them for best technical and value outcomes. The same diagram
b3235_Ch-02.indd 80 14-08-2018 06:28:04

Operations 81
Figure 2.3 House of Quality Generic Model.
can be used to examine the relative competitive advantage between the

focal design and competitor offerings to see what added features or per-
formance levels could be usefully added which were of value to the
customers.
The voice of the customer use of these diagrams is in a cascade from
base customer needs through other diagrams looking in turn at the
designed features in specific detail which is then translated into the
detailed planning for the processes to be used to make the parts and then
into the details of the production planning process. In this way, the voice
of the customer is carried deep into the organisation in a controlled, con-
sidered and comprehensive way, and all key decisions are made before
any resources are committed to actually spend or act. (Remember the
discussion earlier?)
These techniques are the essence of the quality statement ‘Right First
Time’ and reinforce the process of thinking about quality from the very
beginning and avoiding the late panics and surprises of more typical
product planning processes where often the product is launched onto the
b3235_Ch-02.indd 81 14-08-2018 06:28:05

“9x6”
market even though it is known that work is still needed to sort out the
final design choices and solve the expected problems.
2.8.3 Standards
Business needs to have as much clarity as possible in its dealings with
customers and each other, and to this end a variety of international bodies
have collaborated over many years to create specifications for both items
and business systems. These standards simplify the buying process in that
if a supplier agrees to supply according to a specified and internationally
approved standard, then it becomes much easier for the buyer to have trust
that this is what will actually happen. It means that the communications
and the contracts become simpler since both sides are referring to agreed
sets of details which both understand and are committed to providing.
In other ways, standards can be used as pre-qualifying criteria for suppli-
ers who can be inspected and certified as operating according to the
detailed procedures set out in the standards.
In the quality world, the most important sets of standards are the
International Organization for Standardization, ISO 9000 suite of related
standards. These are informed by the eight quality principles of Customer
Focus, Leadership, Involvement of People, Process Approach, System
Approach to Management, Continuous Improvement, Factual Approach
to Decision-making and Mutually Beneficial Supplier Relationships.
This comprehensive approach considers much of the supply chain
and the intention is that the agreed procedures cross each of the organisa-
tion boundaries up and down the chain so that all are operating to the
agreed best practices. In this way, we can think of the standards embed-
ding the ideas of Total Quality Management (TQM) as an agreed way of
thinking and acting across all of these boundaries and indeed, if operated
on internationally, we can conceive of efficient supply chains crossing
the globe.
Total Quality Management needs to build on the continuous improve-
ment logic in all aspects of the business and especially in the supply chain
where the old computer adage applies very strongly. Garbage In Garbage
Out (GIGO) states that no matter how hard you try and control quality
internally, if you buy in poor-quality product or service, then it is likely
b3235_Ch-02.indd 82 14-08-2018 06:28:05

Operations 83
that your own quality performance will be reduced and your own
customer’s satisfaction might be at risk.
Another feature is that as we try and improve other less obviously
quality related aspects of our performance, we often find that we need
to go back to the underlying processes and improve the quality level in
them before we can achieve the new levels of performance. In this way,
the quality thinking permeates through all aspects of the business and
becomes the fundamental underpinning of all that we are trying to do.
All businesses need this basic understanding of their customers, what
quality means for them and how we can control and improve their quality
experience reliably.
The internationally approved standards are also added to by sector or
company specific sets of standards, but the problem with non-ISO stand-
ards is that for a supplier there can now be multiple sets of standards and
probably inspection and approval regimes which they must satisfy in order
to be an approved supplier. This must mean a degree of overlap, potential
confusion and certainly added costs which have to be covered somewhere
in the chain. This is essentially a waste of resources, and major buying
organisations should be thinking carefully why they are forcing their sup-
pliers to add these costs into the business processes.
2.8.4 Service quality
Much of what has been discussed so far related to physical products, so
where does this leave service businesses which have the same expecta-
tions from their customers but often more difficult measurement issues
and inherently more variation in their operations since they are dependent
on the variations which humans bring into play.
The most important approach produced so far comes from Parasuraman
et al. (1988) in their SERVQUAL Model. This builds on the dimensions
of customer satisfaction captured in the acronym RATER which stands for
Reliability (that the service will be delivered dependably and accurately),
Assurance (knowledge and courtesy of employees and the ability to con-
vey trust and confidence), Tangibles (the appearance of people and hard-
ware surrounding the service encounter), Empathy (the attitude of service
delivery people in providing caring and individualised attention to the
b3235_Ch-02.indd 83 14-08-2018 06:28:05

“9x6”
customers) and Responsiveness (in allowing for customer requirements in

a prompt and accommodating fashion where possible).
However, it recognises that quality is a perception of the customer so
Service Quality is the gap between the perceptions of quality the customer
expected and the perceptions of quality that they actually experienced.
Perceptions therefore are the problem since they cannot be measured in
the same way that physical product dimensions can be.
To help explain this better, the SERVQUAL Model was constructed to
demonstrate how this final performance gap is influence by four other
possible gaps. Figure 2.4 is taken from the Wikipedia article where Gap 5
is the gap between perceived expectation and perceived delivery of the
service.
In Figure 2.4, the focus is on the marketer but we can change this into
supplier as we have been discussing.
The customer/consumer expectations are constructed from their
recognition of their own needs, any past experience they have had of the
service delivery organisation, and word of mouth communications from
family, friends and colleagues (including increasingly the effect of social
Figure 2.4 The SERVQUAL Model (5 Gaps).
b3235_Ch-02.indd 84 14-08-2018 06:28:06

Operations 85
media communications). This is also affected by the way the delivery

organisation presents itself in its advertising and social presence through
marketing-related activities.
Gap 1 is potentially the design gap where the supplier tries to under-
stand what the customer actually expects before moving into the specifi-
cation stage that was discussed above. Any misunderstood or misperceived
customer requirement can create Gap 2 when the detailed service specifi-
cations are created. Gap 3 arises when, as a result of a number of factors,
what is actually delivered by the person interacting with the customer is
not according to the designed specifications. This can arise from poor
internal training, bad communication or low motivation or a lack of ability
in the delivery person to understand and act according to the defined
specifications. (In product related, areas this would be described as the
quality of conformance to the design). Gap 4 can arise if the internally
defined service experience details are not communicated effectively
enough to properly inform the customer expectations.
Like all such models, there is debate in the academic world about
many aspects of the model but it is widely discussed and actually used in
practice and has much to recommend it. It was designed to study and
explain service quality, but when we look carefully there is much here that
also apply for product delivery as well. So perhaps the need is to look
across the product/service differentiation to look for lessons to apply in
each area as part of our own continuous improvement ambitions. If we do
this well, then perhaps we can talk of total quality in practice.
2.9 Operations Management
Operations management grew out of the need to manage factories produc-
ing goods and many of the concepts have most resonance in those kinds
of settings. However, when one looks past the uniquenesses and particu-
larities of the language used to describe their activities and uses more
generic descriptions, then we can realise that service businesses also
demonstrate many of the same issues. Of course, there are some key dif-
ferentiations. Services cannot store their output; the consumer has to be
present in some form when the service takes place, whereas products can
be produced in advance of demand and stored until needed; services are
b3235_Ch-02.indd 85 14-08-2018 06:28:06

“9x6”
very dependent on the service provider to deliver quality, whereas prod-

ucts can have more impersonal ways of controlling quality. We have
already realised in our quality discussions that sometimes we can make
too much of the perceived differences. In fact, most businesses demon-
strate features of both sets of activities so we need to look at a more over-
all picture across these possible boundaries.
The basic Operations System diagram shown below in Figure 2.5
demonstrates this generic thinking. All operations activities are essentially
transformations of some input resources by an activity in the operations
area which produces a modified output according to the principles being
applied in the transformation. So in product manufacture, raw materials
are converted and transformed in some way by abstraction (for example,
from raw petroleum to plastic derivatives) or addition (for example, in
automobile assembly from parts and sub-systems into finished product),
but there are similar services examples ( for example, marketing data min-
ing takes large data sets of customer buying behaviour and abstracts sub-
sets of similar customers for a target advertising campaign) or the assembly
of the details and contents of a will by a legal service provider.
This systems diagram also demonstrates the fundamental process of
control. The organisation has to determine what kind of output it wants
(driven by customer demand and the opportunity to provide satisfaction at
an acceptable level of reward to the provider), and so they have to select
both the input resources and the transformation resources to create the
output they have designed. However, control comes from a measurement
of what actual output is produced against the planned levels and feedback
to either or both of the transformation process managers and input selec-
tors, modifications to either close the gap between output and desired target
INPUT
NPUT OUTPUT
Transformaon
FEEDBACK
Figure 2.5 Basic Operations System Diagram.
b3235_Ch-02.indd 86 14-08-2018 06:28:07

Operations 87
(negative feedback) or indeed to increase the gap (positive feedback).

Negative feedback is classic control and is demonstrated by the action of
steering a vehicle along a highway where the movements of the steering
wheel are the control actions to keep the vehicle moving along the desired
path on the road. Positive feedback would answer the old joke about mar-
keting that only 50% of marketing works but the problem is to know which
50%. If we could identify what was working, we would then positively
feedback that information and change the input or transformation resources
to create outcomes which would be reflected in increased sales.
2.9.1 Managing resources
Discussions about the boundaries of the firm highlight that there can be
choices between owning resources and accessing resources owned by
other organisations. In similar fashion should one manage the purchase of
input resources or engage others to do it on one’s behalf.
Whatever route an organisation takes, the systems diagram requires
that these things take place, and this has to be at an appropriate time and
place to meet the obligations made to customers.
Generally speaking, changes in customer demand can happen more
quickly and with greater variety than an operations system can react to
comfortably. This raises issues of capacity and capability to respond to
such changes. Many operational systems require large, fixed investments
in capital equipment that takes time to replace when necessary. Such
investments need to generate cashflows over extended periods of time in
order to pay back and then to create financial returns to justify the invest-
ment. The matching of available capacity to real or expected demand
becomes one of the big interactions between the marketing and sales func-
tions and the operations functions with finance looking on with interest.
Even if the capacity is related to people, then some issues are similar.
In retail, for example, the business does not know when customers will
come through the door and therefore how many staff they need to have
available to serve them. This has led to a solution for management, which
in the UK is called ‘Zero Hours Employment Contracts’ and has been
mentioned earlier. This is structured so that the employee has a contract
which requires them to be on call to work when required but does not pay
b3235_Ch-02.indd 87 14-08-2018 06:28:07

“9x6”
them when they are not called in. Essentially, this means that the employee
has to always be available to work but is not being paid during their stand-
by periods. However, they cannot do anything much during this time
because if they did and the call comes, they might not be able to respond
in time. So the management have a solution, but one which causes hard-
ship and uncertainty for their employees. It is difficult to see a happy
workforce in such situations, and so other problems might be created in
solving the capacity matching one.
Resources are often interchangeable, especially as new technology
and software make it possible to replace some of the activities that
people have traditionally done. This is certainly true with transforma-
tion resources, but alternative materials, sources of energy or informa-
tion at the input stage also have impacts. Managers have an ongoing
need to evaluate the relative costs and benefits of these resource choices
all the time to meet the changes in their supply and competitor market-
places. Part of the loss of jobs in manufacturing, for example, is due to
machines replacing people. At the start of the industrial revolution, this
was a process where manual labour was replaced by machines (think
about farming for example), but increasingly it will be the mental
processes of analysis and decision-making that will be replaced by

Artificial Intelligence and agent-based software solutions.
Some of these investment decisions are major, and many organisa-
tions, especially in manufacturing, will have a high proportion of their
total assets invested in the operational areas.
In all of this, the fundamental question (the answers to which can vary
over time) is ‘are these investments providing a financial and customer
satisfaction return’? If the answer is no they are not, then they are actually
creating wastes in the business and they should be reappraised and prob-
ably liquidated.
2.9.2 Role of inventory
This is more important in the product world where inventory can be of
Finished Goods or Products; products in the Distribution chain to cus-
tomers, products which have not yet completed all of their manufacturing
process stages, that is Work in Progress; or Raw Material Inventories.
b3235_Ch-02.indd 88 14-08-2018 06:28:07

Operations 89
Many such inventories represent an investment or are counted as assets in

the financial accounting system that may or may not result in a final sale
to a customer. However, in a Make to Order situation the customer will
likely have already paid, so the risk is removed.
To a large extent, however, inventory is an indicator of a system
failure to react quickly enough to satisfy an immediate customer demand.
If a customer is not prepared to wait for their goods or essentially
demands instant gratification (retail stores suffer this… if the goods are
not on the shelf they cannot be sold), then the only way to cope with the
demand is to have products ready for the customer (in inventory) when
they appear. (We will discuss the options around this in the Supply chapter
later.) However, the investments made in inventory mean that the money
invested is not available to be spent in other ways and so create opportu-
nity costs if these other ways could have provided better returns.
The ideal is to have an operations process which can react instantane-
ously to actual customer demand and produce the perfect result with no
delays and no extended management processes to plan and manage all of
the inventory complexities. 3D printing or additive manufacturing holds
out some promise for what is at the moment a rather science fiction vision
of a possible future.
For services, the concept of inventory needs some more interpretation.
The service encounter cannot be stored, but many of the features around
the service have to be stored so that the service can be provided when
required. Hotels therefore need to have an inventory of rooms available
even if they do not know if any customers will arrive that they do not
already expect. This is why pricing models reflect this difficult of trying
to create a new demand to fill their available capacity. So we have web-
sites offering last minute deals for hotels, theatre or flight tickets to help
fill the providers’ supply and demand gaps.
2.9.3 Role of information systems in operations

Operational management is a hugely complex task, but since the advent of
computer systems it has become possible to plan and control and to simu-
late the decisions that are needed to match supply capability to consumer
demand. This started off internal to the factory as manufacturing resource
b3235_Ch-02.indd 89 14-08-2018 06:28:07

“9x6”
planning (MRP) but has evolved to enterprise resource planning (ERP)

which operates from the design specification of a part, matched to the
process specification of the transforming resource to be used while
allowing for demand, inventory and capacity considerations so as to pro-
vide a best fit to the customer requirement. The enterprise aspect spreads
out coverage to the incoming supply chain so that in effect we have a
complete computer model of the whole business supply chain from cus-
tomer back through to supplied raw material resources. The simulation
aspect means that rather than simply making a delivery statement to a
customer and hoping it can happen, it is possible to simulate all of the
related decision choices and provide both a more realistic and reliable
delivery promise. This is in fact much better for the customer who often
has to make their own calculations of ongoing activities, based on the
delivery promises from their supplier.
The link back to the designed part and process specification again
demonstrates the critical importance of the design activity.
2.9.4 Performance metrics
Our systems diagram indicated the basic ideas of control, but in such a
complex world what should we be measuring?
Each of the categories that follow can have many sub-categories and
special features depending on context, but we will stay with generic dis-
cussions here.
Owing to the importance given to quality and design, we have been
arguing here then all aspects of perceived as well as quantitative and rig-
orous scales are needed in all aspects of the business. Time, including
delivery to promise and time to change as well as overall response time,
is key. Incoming and operational resource usage costs need to be captured
and controlled as well as tracking sales and marketing and other overhead
expenses to generate the information for profit calculations. Even if the
business is not competing on its rate of innovation at the product or service
level, there is always scope for innovation in processes, so overall rates
and attitudes to innovation and the quality concept of continuous improve-
ment need to be measured and the people thinking like this need to be
supported. While underused or inappropriate resources are inherently
b3235_Ch-02.indd 90 14-08-2018 06:28:07

Operations 91
wasteful, some processes also produce wastes as by-products of their

primary purpose. This needs to be controlled and reduced as does actual
pollution into the external environment and generally the need to control
and reduce the environmental impact of all operations is both sensible
from a business standpoint, but even more, from a social responsibility
viewpoint.
All of these issues are underpinned by the measures and controls put
in place for the recruitment, care and development, as well as rewards, for
the people employed in the organisation and for those dependent on them
in the wider community.
2.9.5 Lean
Japanese management techniques had, until the publication of the book by
Roos et al. (1991) called ‘The Machine That Changed the World’, been
studied by relatively few, but Japanese Automobile assembly operations
was seen as so different from all that had gone before that MIT engaged
with a number of global automotive manufacturers to conduct what was
effectively a global benchmarking study to compare the best of the
Japanese companies (Toyota) with those in the rest of the world who
would cooperate.
Prior to this book, there were various suggestions about what made
the Japanese car assemblers so competitive including: extensive support
from government or high levels of automation as well as less polite sug-
gestions about the work intensity and unreasonable commitment from the
work people. The study blew those excuses away because the very best
company in the world was Toyota in Japan but the second best factory
(but employing Toyota techniques) was Ford in Mexico. So here was the
modern inventor of mass production in automobiles (Ford) working in
what was then a developing country (Mexico), and so it proved that what
was being demonstrated was not dependent on an unique set of country-
based characteristics but was in fact about a management system that was
both understandable and transferable to other companies and parts of the
world.
The approach came to be called Lean Production. This title referred
to its ability to use much fewer resources than their counterparts while
b3235_Ch-02.indd 91 14-08-2018 06:28:07

“9x6”
producing higher quality and more reliable cars with more variations
introduced into the market more quickly and effectively. To do this,
Toyota had studied what Ford in particular did to make cars just after the
Second World War and rejected or reexamined many of the taken-for-
granted assumptions as not appropriate or useful in a Japanese context.
Toyota were of course pioneers in the quality movement where the same
kinds of thinking had also paid dividends. They also did not have the money
or the space in their island home to build huge factories with enormous
stores of materials that they regarded as wasteful anyway. Instead, they
made a virtue of producing in small batches or production lot sizes so that
the materials would not stop or remain in storage or inventory but would
instead flow continuously with value being added at all times until the final
product could be dispatched complete and ready for the customer.
Lean thinking emphasises 5 key concepts.
(1) Define value as seen by the end customer and remove all waste (activ-
ity not adding this value).
(2) Identify the entire value stream, across all boundaries for each ser-
vice, product or product family.  The value stream gathers all of the
required activities through three key processes of  Product/Service
definition;  Information management — from order taking through
detailed scheduling to delivery  and Physical Transformation in the
terms we have discussed above.
(3) Make the value-creating steps flow.  The ideal is to efficiently pro-
duce in batch sizes of one by removing any impediments and wastes.
(4) Produce only what the customer wants, only when they want it.  The
customer pulls the product/service from the value stream Just-in-Time
to satisfy their demands and this avoids any need for stock holding
and the wastes of inventory.
(5) Perfection is a valid goal on a continuous improvement journey.
In order to realise this vision, Toyota worked over many decades to

educate and train their people, managers, suppliers and to an extent their
customers to allow these principles to come together.
There are some other underpinning thoughts and principles and these
include trying to standardise the design where possible even if it means
b3235_Ch-02.indd 92 14-08-2018 06:28:07

Operations 93
bundling options in as standard rather than as add-on special features. This

enhances the sales offer while reducing the inventory and complexity
costs in the factory; challenging their work people to look for innovations
in processes and empowering them to make the changes (in a controlled
process of experimentation as a continuous improvement process) as well
as stopping production if there are any possible problems in quality or
flow; selecting and training suppliers who can work in this way in collabo-
ration with Toyota and who are ready to commit to a long-term relation-
ship in which both sides recognise the value of working closely together
for mutual benefit and end customer satisfaction.
This awareness of the external connections required them to take
what we now call a supply chain view of the world and they then organ-
ised the participating organisations into a tiered or pyramidal structure
where Toyota only deals with the first tier of immediate suppliers (around
300–400 companies) who then take responsibility for managing the lower
tier suppliers in order to support themselves and Toyota. They become the
system integrators on behalf of Toyota, so that perfectly designed and
produced sub-assemblies can be sent onto the Toyota production line Just-
in-Time for the production schedule. Given there are approximately
30,000 parts in a typical passenger automobile, this means that Toyota has
a much less complex set of relationships to manage. A first-tier supplier
to Toyota is almost part of the family with a real co-destiny involvement
so that what is good for their customer is also good for themselves in the
medium and long term. Both sides of the relationship are looking to a
long-term involvement and two-way sharing of information and expertise
and in this way it is sensible to say that the competition in the final con-
sumer marketplace is between rival supply chains, not just individual
brand companies. The first-tier suppliers are regarded as the experts in
what they do, which is complementary to the skills that Toyota keep to
themselves, and Toyota will often allow them a lot of freedom to design
the details of their part or sub-assembly but within the constraints of how
that part has to interface with or join to other parts. In this way, Toyota
gets the benefit of the suppliers’ innovations very quickly, but it does
demand such innovation and the expectation is that there should be an
annual reduction in costs of around 3–5% without doing anything really
innovative. This is based on the principle of the Learning or Experience
b3235_Ch-02.indd 93 14-08-2018 06:28:07

“9x6”
Curve which posits that high levels of repetition in the productions of

identical units allows for the reduction in the unit operational costs by a
significant factor.
The principles of lean thinking have been demonstrated to have appli-
cation in many other sectors including services, and the literature and
consulting activities in these areas are very many. Truly, the automobile
on its own, but especially when produced by using the Toyota methods of
Lean Production, has changed the world in many ways and in many loca-
tions. However, there remain challenges for high variety products which
are highly engineered to particular customer requirements. These sectors
do not allow for the relative stability of the automobile product (platforms
can be stable over a number of years typically) and they may not have the
volumes being demanded which can justify some features. As is the case
everywhere, the manager has to examine her own context and see if the
learning from the automobile experiences can be fitted or adapted to
solve the unique problems in the particular situation.
For this writer, the book still captures the most comprehensive defini-
tion of what an effective supply chain vision of management can be and
provides a possible ideal case towards which it is worth striving.
For those marketplaces where customers require more customisation
than for automobiles, the Toyota methods are seen as too rigid, and for
these the alternative approach has been to build a more Agile approach.
This will retain many of the Toyota ideas but recognises that, in order to
manage a much more diverse set of customer demands, inventory will still
be needed to allow for response to unforeseen demands. In Agile, however,
the inventory is not everywhere. Instead, it is located at strategic points in
the supply chain just before one of the decision tree branching points in
much the same way as we discussed earlier. Agile in this sense is trying to
match the purity of Lean thinking but apply it in a more demanding and
variable environment.
Now we need to consider in more detail how the supply side activities
can support the flow of resources into the operational system.
b3235_Ch-02.indd 94 14-08-2018 06:28:07

Chapter 3
Supply
3.1 Buying and Trading

We have been arguing that in many business situations there are basic
choices of whether the business needs or chooses to own the productive/
operational resources as part of the asset portfolio of the business or
whether it is content to let others own these resources and contract with
them when the need arises to utilise the outputs from these resources.
These choices define the nature of the business tasks accepted as
appropriate for the achievement of their objectives and are among the
most important that a business will make. However, the answers might
change as the dynamics of customer and/or supply markets change, so
they need to be in a more or less constant state of evaluation.
As a general statement, for many technology-influenced or -dependent
sectors, it is no longer possible for any one organisation to be at the
leading edge of all of the complicated and interacting technologies on
which their product and/or service depends and on which, in turn, their
customer satisfaction performance also depends. In such circumstances,
bringing the assets or resources and capabilities in-house is simply not
feasible technically or economically. In these circumstances, the only
option is to trade in the supply market.
It is worth firstly reflecting on the opportunities and benefits of this
approach as well as potential risks.
Buying from the market (outsourcing or sourcing from outside the
organisation) allows the buyer to procure the most up-to-date solutions
95
b3235_Ch-03.indd 95 14-08-2018 06:28:23

“9x6”
without having had to make any investments in ownership, which also

means that if there were wrong choices made then the buyer is not locked-
in to the use of these wrong resources. If they had been in-house, they
would be already paid for and there would be pressure to generate some
kind of financial return achieved by using them. In theory, by buying from
the market they can then simply cancel one contract and start searching
again to find a ‘better’ choice. The downside risk is that the supplier does
not agree to supply this buyer for some reason (perhaps they are already
supplying a competitor and do not want to harm that competitor’s business
opportunities), then the buyer might have to look for a less attractive
supplier with whom to contract.
The biggest issue is however the lack of control over the supplier’s
actions. Ownership allows a degree of priority setting simply because of
the common ownership and the internally agreed strategic direction.
Without this potential control through organisational structure and man-
agement, the buyer has to work on ways to influence the supplier to work
as if they were part of the same organisation with mutual interests.
The Toyota example demonstrated that as a feature of their approach
for their first-tier suppliers, but even here it is also quite normal for Toyota
to take an equity stake in these suppliers and to have staff who retire from
Toyota to take up positions in the supplier companies. It is no surprise
therefore that it is possible to talk of co-destiny relations and extended
business families, in that environment.
Western companies do not seem ready to go as far as Toyota very
often, but that remains the ideal and many try to emulate a number of the
Toyota practices, at least to some degree.
Another of the downside risks is that in communicating information
about what the buyer organisation is doing to be competitive in the market
place (which the supply contract is likely to make apparent), then the sup-
plier gains information about this buyer’s competitive strategy and this
information has a value to other of the supplier’s customers or even the
supplier itself who might then become a competitor in the same market.
We are always dependent on ethical behaviour in the supplier organisation
so that such information is not abused or leaked to others.
Possibly losing influence and control over supplier priorities is even
more the case when the initial meaning of the outsourcing concept takes
b3235_Ch-03.indd 96 14-08-2018 06:28:23

Supply 97
place. This is when an activity, which was originally taking place inside
one organisation, is transferred outside of that business. This can happen
either through a trade sale to another business entity ready to continue to
develop and extend their capability in this area or indeed the activities and
people employed are transferred into a new organisation established to
trade in that activity. The business doing the outsourcing often still requires
a service to be provided internally from the newly outsourced entity, but
rather than being the only (internal) customer they are now one of a num-
ber of customers potentially looking for service and support. As such, they
are no longer able to demand the service previously offered and have to try
and influence and contract for it with the legally separate external entity.
Even if activity is outside, responsibility never leaves the brand owner.
For example a health authority which contracts with a supplier to design,
build and operate a new hospital (in the UK this could be for the next
30 years) might think they are outsourcing the business risk by so doing,
but the reality is that if something goes wrong in the supplier’s business
and they cannot complete the hospital building project then there might be
breach of contract court cases to be argued but the health authority still has
a group of patients to care for in some hospital provision somewhere.
No risk has in reality been transferred at all. At best this is an exercise in
getting capital investment off the balance sheet of the commissioning
organisation or its government funder (in the UK at least), but the com-
mercial and reputational risk is never transferred. Managers considering
outsourcing would do well to think about these scenarios very carefully
before proceeding. Of course, no one can foretell the future, so any
attempt to make assumptions 30 years ahead is challenging in the extreme.
This kind of approach might be better considered in terms of the legacy it
creates for future generations of patients and taxpayers. Perhaps there is a
lack of Corporate Social Responsibility in evidence here? The recent
failure of a major contractor (Carillion) to various branches of the UK
Government is a recent case in point.
3.1.1 Offset
When major government funding projects are opened up across interna-
tional borders, especially in aerospace and defence businesses or major
b3235_Ch-03.indd 97 14-08-2018 06:28:23

“9x6”
utilities and infrastructure contracts, there can often be a requirement for

the winning supplier or lead contractor to use some of the income gener-
ated to buy from other suppliers local to the purchasing authority.
In effect, the flow of money out of the buying country is offset by a
fraction of the money flowing back in the opposite direction. This is a
deliberate attempt by the purchasing government to obtain the benefits
from the initial purchase but to also gain cash flow for their own citizens
and companies to share in the economic benefits of the spending. They did
not have the skill or scale to supply the requirements of the initial contract
but can share some of the money spent.
However, even more important and a major reason for offset require-
ments is to force the supplier who wins to transfer some of their expertise,
knowledge and intellectual property (IP) to the local companies. It is not
industrial espionage since it is open and understood, but the effects are the
same. IP is transferred from the winning supplier to the local companies
and over time (with the right kind of planned process and awareness of the
opportunities), a local competitor to the external supplier will grow and
act against them in the local and other international markets.
For the external suppliers, this is a real problem. They want the market
access and business turnover but recognise the risks they face, so what can
they do? One approach is to outsource to the offset supplier old technol-
ogy so as to try and remain in the technological lead. In China, for exam-
ple, the airliner business is a huge and growing market and the government
has made no secret of their desire to build a local capability to challenge
Boeing, Airbus and their engine suppliers. There is then a fundamental
concern for the western producers. Can they stay ahead against the coor-
dinated approach to gather their IP in design and manufacture? Is it worth
having this continual fight to stay as number 1 or 2 in the world? What
happens if they fail, will they still have enough of a market in the rest of
the world or will the new leaders attack that market as well?
An alternative approach, but with a different set of risks perhaps, is to
believe that the sheer size of the Chinese market and the influence of gov-
ernment direction and policy means that it is inevitable that they will
eventually catch up and surpass the current market leaders from the west.
If this belief makes sense, then perhaps it might be worth considering an
alliance or joint venture (JV) with a rising star Chinese company?
b3235_Ch-03.indd 98 14-08-2018 06:28:23

Supply 99
This approach might mean that instead of being in control and number one
globally they become, over time, the junior partner in the larger
organisation. They would at least in this scenario still have a presence in
the market and continued income and employment for some of their
people. Business leaders are however often known for the size of their
egos, and so this is a difficult strategy to enact even if their other board
members and shareholders could also be persuaded.
The potential loss of IP is a real issue in any trading relationship and
is another of the potential principal and agent problems where the agent is
essentially learning from the principal’s experience (or stealing from them,
depending on what use the agent or supplier makes of the new knowl-
edge). If the agent is motivated to behave in the way of opportunism and
taking advantage of the trading relationship in an exploitative way, there is
little that the principal can do except build more transaction costs into their
monitoring and control efforts or find another agent who might be influ-
enced to act more in accord with the best interests of the principal.
In the extreme, of course, counterfeiting and passing-off takes this to
illegal outcomes. Counterfeiting is a global problem where someone’s IP
embodied in a product is copied to some extent so that the counterfeit
looks and to some extent performs like the original but at much reduced
cost, and therefore sales price, to compete unfairly in the market place.
While this is very common in the luxury goods markets, for ladies hand-
bags for example, it might be argued that the brands which suffer are
inclined to exaggerate the selling prices far in excess of production costs
and ‘reasonable’ profit margins. To some people the fake product situation
is a victimless crime, but industrial counterfeiting is also an issue in main-
tenance goods for automobile parts including brakes and for aero engines
where a substandard turbine blade or disc can explode and put the whole
aircraft and its passengers at serious risk. There are also counterfeit drugs
and medicines where again the consequences are very serious. This is part
of the argument which has resulted in Viagra tablets now being (in the
UK) available over the counter rather than on prescription since data sug-
gests many men were looking for the pills online with no guaranteed
safety of the supplied products.
Passing-off is when an organisation pretends to be another one
through a similar name or web presence perhaps so that business which
b3235_Ch-03.indd 99 14-08-2018 06:28:23

“9x6”
should have flowed to the rightful company is diverted to the one who is
pretending to have all of the capabilities and reputation of the original.
This is partly why the ownership of domain names is so important and
why patents and copyrite agreements are also so important in order that
investments made by the original provider are protected and can generate
due rewards. Passing off is in this sense a form of counterfeiting but not
just of a products but of the whole business.
3.2 Customer Supply Chain Segments

Marketing managers have long understood the need to identify groups of
customers which had similar needs and could be considered somewhat
similar. Often these categories would relate to their spending patterns,
demography or geography, but more recently people have begun to ask if
this kind of segmentation might not also be true in terms of the kinds of
supply systems that are best placed to satisfy the other aspects of the total
product service package.
Gattorna (2006) is the leading proponent of this kind of approach. He
builds his concept around the basic human traits, which operate along two
axes 90° apart but rotated through 45° as shown in Figure 3.1.
These axes represent extreme points along a continuum from operat-
ing with pure Intuition to the opposite where all the senses are utilised
and action is based on hard data where possible (called Sensing by
Gattorna). On the other axis, the extremes are from Feeling, which
emphasises the human tendency for empathy, to, at the other extreme, a
more logical, analytical approach based on Thinking. Of course, we all
display a mixture of all of these traits in our everyday life, sometimes
moving along or between these axes as we interact with others and deal
with ongoing situations. Gattorna labels each of the quadrants, and these
labels are carried through each of the next few diagrams and indicate a
broad category of supplier which shows a tendency to occupy one or
other of the quadrants. However, it is also true that organisations can
demonstrate a variety of these categorisations at different times and in
different circumstances.
Like all such concepts, their value is not necessarily in their precision
of definition but the fact that the models allow for a more informed
b3235_Ch-03.indd 100 14-08-2018 06:28:23

Supply 101
I Integrator Developer D
Feeling Intuition
Cohesion, Cooperation Creativity, Change

and Relationships and Flexibility
Behavioural
Forces
Analysis, Systems Energy, Action

and Controls and Results
Sensing (Data
Driven) Thinking
A Administrator Producer P
Figure 3.1 Gattorna’s Behavioural Logic of Supply Chains.

Source: Adapted with permission from Gattorna, 2006.
consideration and discussion framed around them. I consider that this is

very valuable even though, as you will find out later, I do not find his
choice of words completely useful in places.
The argument then develops that if individuals and organisations can
demonstrate elements of these dimensions, then we can consider the mar-
ket place or the customer groupings in the same way and so we have
Figure 3.2 which looks at the Market logic as a means to identify similar
customer segments around which supply solutions can be constructed.
In Figure 3.2 there are two more axes included. On the vertical we can
consider how certain (or not) the market place demand is likely to be,
while the horizontal axis addresses the degree of competition present in
the market place.
Thus, we can see that the Developer quadrant is coping with a very
competitive market place with a high degree of uncertainty, and this is
described as Turbulent. In the Producer quadrant, they have to cope with
a market with many competitors but where the demands are more certain.
It is however very Competitive. The Administrator quadrant is dealing
with high levels of certainty in a low-intensity competitive environment
b3235_Ch-03.indd 101 14-08-2018 06:28:24

“9x6”
Uncertainty
Forgiving Turbulent
High Competitive Intensity

Low Competitive Intensity
Behavioural
Forces
Stable Competitive
Certainty
Figure 3.2 Gattorna’s Market Logic of Supply Chains.

while the Integrator is dealing with high levels of uncertainty but perhaps
with customers who are understanding and loyal to them.
(In the book there is much more discussion and attempts to describe
in words how each of these categorisations work out, and this is the inher-
ent difficulty for all who try and find such an all-embracing means of
defining complex situations. You will have to decide for yourself how
successful Gattorna is in doing this.)
The next diagram in the sequence, Figure 3.3 now tries to match the
supply side to the segments of the customer-based market demand diagram.
In this diagram, we are now looking from the supplier’s viewpoint as
they try to match what capability they want to offer into each of the market
segments. The vertical and horizontal axes now have to change to reflect
this. The horizontal axis is based on the risk as seen by the supplier in the
market place, while the vertical axis represents how they plan to respond
to it by reacting when required or trying to be more proactive and trying
to influence their customers rather more. These are basic strategic choices
of the kind of supply business they want to be.
b3235_Ch-03.indd 102 14-08-2018 06:28:25

Supply 103
Proactive
Protective Pathfinder
High Risk
Low Risk
Behavioural
Forces
Evolutionary Operational
Reactive
Figure 3.3 Gattorna’s Strategic Logic of Supply Chains.

Now the Developer quadrant is operating as a Pathfinder, pushing to

generate new solutions for their customers. The Producer is more
Operational, making sure that what is expected is reliably delivered. The
Administrator moves along a more considered Evolutionary path, changing
as required, probably in small increments. The Integrator is trying to ensure
that their loyal customers are sufficiently satisfied that they will stay with
their supplier who, thereby, Protects their business relationship.
The final diagram in this group (Figure 3.4) reflects on the need to
support the chosen supply strategy with an internally consistent set of
cultural standards and behaviours.
Now the vertical axis represents the choice of command and control
approach taken from a very direct and obvious one to a more subtle and less
direct approach. The horizontal axis shows a focus of attention from a largely
internally biased one to the other extreme where it is more externally focused.
Suppliers in the Developer quadrant want their people to be
Entrepreneurial and ready to take chances and be creative, while the
Producer quadrant wants their people to focus on getting the job done in
b3235_Ch-03.indd 103 14-08-2018 06:28:25

“9x6”
Indirect Control
Group Entrepreneurial
Creative and innovative

People and teamwork important
Broad concepts and
Consensual decisions
hypotheses
Loyalty and commitment to
Proactive to environment
group highly valued
Inspiration and
entrepreneurialism
External Focus
Internal Focus
encouraged
Behavioural
Forces
Traditional Action emphasis
administration Goal directed
Process more than High environmental
content awareness
Strong internal focus Productivity valued
Stability and order valued
Hierarchical Rational
Direct Control
Figure 3.4 Gattorna’s Cultural Logic of Supply Chains.

a controlled and Rational way. The Administrator quadrant expects their

people to obey the internal rules in a very Hierarchical, process-driven
way. The Integrator quadrant wants a culture that is very group driven, and
the group probably includes their customers.
Gattorna further argues that each of the cultures also requires a
different kind of Leadership approach to continue the inherently consistent
set of approaches, but this is enough for our purposes here.
This kind of model can be considered a different example of the
House of Quality logic we discussed earlier in that the voice of the
customer (the Market Logic) is progressively brought inside the supply
chain in greater and greater detail.
Gattorna also tries to summarise this thinking into four generic supply
chain types, and it is here that I have the most difficult with his choice of
words.
His four types are: Fully Flexible, Agile, Continuous Replenishment
and Lean. Now the problem appears because, from our discussion of
Toyota earlier, we have a set of concepts defining Lean Production and
indeed Agile, but the way that Gattorna uses these labels and supports
b3235_Ch-03.indd 104 14-08-2018 06:28:26

Supply 105
them with example word pictures does not feel comfortable to this
writer, but by all means read the original works and make up your own
minds.
The essence of these discussions is that customers are the most impor-
tant people in the business situation. We need to understand them and their
needs and desires in great detail, and we are then in a position to consider
if we wish to offer them a supply solution and if so we can structure and
manage our supply system to provide a good probability that our design,
operation and delivery efforts will be rewarded through their ultimate
satisfaction (and payment of their invoices).
3.3 Supplier Selection

Business-to-business relationships require both a buyer and a seller who
agree to act in a coordinated way such that the buyer’s needs are satisfied
so that their customer needs can in turn be satisfied. This in turn requires
that the supplier’s needs are also satisfied. Whether the levels of satisfac-
tion are equal is not the important consideration since there may be very
good reasons why the returns on the trading investment decision have to
be different. We might, for example, be valuing an innovation, or market
access or any other competitive factor which one side has but which the
other side wishes to make use of for an agreed period of time. Relative
power differences can also come into play here but, as we will discuss
later, power is a dangerous concept if mishandled. What is important is
that both parties see the outcomes for themselves as equitable in the
circumstances.
Remember that the reason a buyer looks to source goods and/or ser-
vices from a supplier is that the buyer organisation has chosen not to be
an expert in or even invest in the capability that the supplier considers core
to their business. So the first issue for the buyer is the supplier’s capability
to fulfil the task. Then comes a list of things whose priority in the sequence
might vary but will include: availability of equipment and people to per-
form, quality assurance, pricing and cost control, delivery capability,
innovative potential, planning and support systems, managerial processes
and attitudes. It is said that Japanese companies will only decide not to
invest in a potential supplier if they consider that their managers do not
think and act with the right attitudes since these are the most important
b3235_Ch-03.indd 105 14-08-2018 06:28:26

“9x6”
and most difficult things to change. Almost everything else will yield to
enough time, money and training.
Of course, the supplier is also trying to establish a similar set of crite-
ria for their evaluation of the potential customer. Trading is a two-way
process and our decision processes should recognise this. Even if a sup-
plier might be forced to accept a particular deal at one point in time, if
they consider that the deal is not equitable then they are likely to exact a
consequence from the buyer at some future transaction.
This is why power is such a difficult thing. One definition is the ability
of one actor to impose their will on another actor so that the other actor does
something they would not otherwise have chosen to do. We can see in this
definition the problem and the opportunity for an exchange of somewhat
unpleasant actions as the circumstances creating the power opportunity vary
with market conditions. Whole industries can swing from the power being
in the buyers’ hands to being one where suppliers are, for some time, in a
position to demand what they want of the buyers. Over the long term, these
swings do nothing to build a sustainable future. They promote distrust and
opportunistic behaviour, and while there will always be some markets
where this is in some ways acceptable, and smart managers learn to play the
game according to these rules, the argument in this book is that for those
customers and suppliers who really need each other in a cooperative, coor-
dinated, mutually supportive relationship then power has no positive role
and should be challenged whenever any party tries to play that game.
To some extent buyers have power, since they are choosing who to
spend their money with, but as soon as the buyer decides on one supplier all
of that power is transferred to the supplier who now has to decide if they are
going to behave in the ways the supplier promised in their sales pitch and
the buyer believed they would when they made their sourcing decision.
The supplier selection decision can therefore be of high strategic
significance allowing the best possible collaborative offer to be made
and delivered to the buyer’s customers. Get it wrong, and the costs of
relative failure can be extensive, and the rectification costs, which might
include replacement of one supplier with another, can make the contract
loss-making rather than the beginning of a long-term business relation-
ship. There are clear reasons why this overall process needs careful
planning and operation.
b3235_Ch-03.indd 106 14-08-2018 06:28:26

Supply 107
Introduction Start Up & Maturing market — Plateau End of Life

Ramp
A/I
Volume Demand
I/D
D
D/P
Very Flexible Rapid Volume Stable, Reliable Small Lots

Innovaon Increase Reducing Costs Very Flexible
High Quality Wide Distribuon Innovave
Figure 3.5 Life Cycle Supply Requirements.
Another issue we also need to consider is the choice of supplier at

different stages of the product life cycle.
Figure 3.5 illustrates a typical product life cycle curve. The challenge
is that at each of the life cycle stages the situation in the marketplace sug-
gests that what the supplier has to be good at changes and the question
then is can any one supplier be sufficiently adaptable to be able to cope
with each of the stages.
During the Introduction phase, many of the product details will be
being tested and modified depending on customer reactions in the market
place, so the design will not be stable and the supplier therefore needs to
be able to handle fast moving changes and be innovative in product and
process design. In Gattorna’s terms, this is the area for the Developer
D type.
At the Start Up and Ramp the final design is clear and the market
preferences are being fully understood. Now the challenge is to get the
new product introduced effectively to the market before the me-too
products are developed and marketed. Here, speed and consistency of
quality and delivery are key criteria to get the product into the market in
volume and to build a lead that competitors will find hard to catch up.
In Gattorna terms, this sounds more like the Producer P type with a bit
of D included at times.
b3235_Ch-03.indd 107 14-08-2018 06:28:26

“9x6”
At the Maturing market and Plateau, we are approaching market

s aturation. Competitor products are also established so it is more about com-
petition in marketing and maybe delivery and service. The Gattorna types are
Producer to keep the volume flowing and perhaps the Administrator A to
keep the flow under control, but there could also be a role for the Integrator
I who is trying to keep long-standing customers satisfied and involved.
End of Life is a particular challenge. At this stage, it is likely that
newer technologies have been introduced from competitors and these are
taking market share away. There is still however a market for the existing
products, just not in the same volumes and so the ideal supplier type also
changes and we need a more flexible response to cope with smaller order
quantities and production batch sizes, so the Developer’s D skills are more
likely to be needed. In addition, it is here that cost reduction efforts are
also needed in an attempt to persuade the customers that there is still some
benefit to them of staying with the old product. Again the Integrator
I might help keep the customer involved in the process and extend the cash
flow a little bit more into the future.
If one supplier can manage this changing requirement effectively, then
all to the good but if no single supplier can change to follow this life cycle
challenge we might be forced to think of selecting different suppliers for
different parts of the life cycle. Re-sourcing then becomes a planned pro-
cess, but it would be wise to make this clear to the suppliers as they are
selected since their orders might be stopped for no fault of theirs but
forced by the changing requirements.
This discussion indicates that selection is not a simple exercise and not
one that can be effectively done without a lot of internal communication
and joint decision-making and a high level of external communication,
especially with those suppliers whose capability is built into your product
and service offering and on whom your future success depends. These key
strategic suppliers justify commitment and involvement of a Toyota type.
3.4 Supply Side Infrastructure

Large businesses will often be split into smaller organisational units or
divisions, and if so there are now choices on how the buying operation is
to take place. To some extent this is no different to other organisational
b3235_Ch-03.indd 108 14-08-2018 06:28:26

Supply 109
structure decisions, but the tendency to switch structures with each change
of leadership is a particular issue if, as we argue here, the supplier selec-
tion decision has at some point been seen as highly strategic and an
attempt to ‘lock-in’ a key supplier has been committed to in all good faith
only to find a change of leadership takes the business in a different direc-
tion. Such behaviour can put at risk months or years of relationship build-
ing activities and joint, interactive system developments. In such
circumstances, it is often a requirement for the relationship managers to
argue on behalf of their key supplier that the organisational change must
not be allowed to put at risk the investment in mutual understanding and
support.
Table 3.1 captures the arguments for and against each of the strategic
options. The key supplier consideration suggests that this is too important
to devolve to a division or single budget holder and should be seen for
what it is, a highly strategic decision in which the centre and indeed top
management needs to both understand, agree and commit to the interac-
tion rules, in a very public way. If this is done, the supplier will have a
degree of comfort that their medium- to long-term involvement is not
something that will be easily cancelled out by a change in managerial
fashion for a different structure.
Whatever structure is put in place, it is incumbent on the managers to
understand and capture the advantages and recognise and mitigate the
disadvantages. This is also a process that needs to be reviewed periodi-
cally to ensure that the correct choices have been made to support the
business objectives.
So far, we have made little distinction between whether our focus is
on businesses in the private sector or for business type activities in the
public sector. However in the purchasing procurement activities, there are
some fundamental differences which need to be recognised and managed.
In some senses, the public sector is more advanced than the private sector
in this, but the operational constraints are different.
Operating in the private sector is seen to be controlled and evaluated
according to market performance considerations, and the ultimate respon-
sibility of the business managers and owners is to their shareholders who
regularly review their performance against plans and competitor’s actions
to evaluate the degree with which they are comfortable to allow them to
b3235_Ch-03.indd 109 14-08-2018 06:28:26

b3235_Ch-03.indd 110
“9x6”
Table 3.1 Organisational Location of Purchasing Activity.
Description Advantages Disadvantages

Centralised A powerful central office Economies of Scale. Lack of empowerment in divisions causes
specifies and buys on Standardisation. resentment.
behalf of all divisions. Policy deployment to divisions. Temptation to do local deals against the
Financial oversight and control. central policy.
Simpler auditing. Missed opportunities for local specials.
Common IT systems. Divisional overheads not fully recovered.
Allows staff exchange from divisions Possible slow response from centre.
to centre and vice versa.
De-centralised Central office makes policy More autonomy locally. Possible for suppliers to offer different deals
and does corporate deals. Increased variety and diversity of to different divisions causing cost
Divisions purchase on their purchases. confusion.
own behalf. Local responsibility for actions. Potential for duplication of effort.
Staff rotation for varied experience is Danger of skill shortages across the network.
possible. Financial control more difficult across many
Possibility of using one deal in other systems.
divisions (lead buyer approach). Potential for local ‘Maverick’ deals — good
Possible inter-division competition (is locally but not for whole group and against
this good or bad?). central agreements and policies.
14-08-2018 06:28:26
b3235_Ch-03.indd 111
“9x6”
Atomised Small central office makes Local autonomy and responsibility. Maverick buying of personal favourites or corrupt
policy. Simple controls. buying.
All other decisions Quick response. Suppliers divide and confuse with multiple
devolved to individual offers.
budget holders. Price control lacking.
Commercial risk not visible centrally.
Multiple IT systems makes audit and updating
difficult.
Federal Divisions award power to Agreed rules. Complex arrangements and negotiations.
central office for policy Dual citizenship. Unclear hierarchies and corporate
and buy services from Minimal central control empowers responsibilities.
them when required and local entrepreneurial behaviour. Central bureaucrats.
controlled by divisions. Cross fertilisation across divisions Risk of instability.
provides learning and response
capability.
Supply 111
14-08-2018 06:28:27
“9x6”
continue to trade, (assuming that they are not already breaching

corporation law and should be wound-up and the business liquidated).
The Public sector is fundamentally different in that they are in effect
acting as the agents of the wider society and in particular the tax payers
and voters in their regions. The market therefore does not exert the same
direct pressure on this sector although it is often seen as the exemplar for
business behaviour, but in terms of procurement for public sector organi-
sations I would argue the learning should be the other way round.
Public sector organisations have the additional stress of operating in
political environments where directions can be changed dramatically as
voters change the politicians and in some situations the administrative
officials whose task it is to translate political directions into practical
actions. This political direction also raises the potential for public sector
purchasing decisions to be biased in favour of the voters or political sup-
porters on whom the politician depends for re-election. In the USA, this
is described as pork–barrel politics where funds from the many are used
to benefit the few, in the legislator’s home state. This situation is not
unique to the USA of course and many regimes stay in power by such acts
of cronyism, nepotism or other forms of corruption. Inside the European
Union, the recognition of this problem was behind the introduction of a
different set of procurement rules.
3.5 EU Procurement Rules

Part of the concept of what was once called the common market in
Europe was the recognition that politically or geographically biased pub-
lic procurement negated a lot of what the ideology of a common market
should be. In effect, the European Union, as it came to be called, wished
to see fundamental principles enacted in all of its member states in which
the right and freedom to bid for and a have a fair chance of winning gov-
ernment contracts was there for all potential bidders from any of the
member states. These principles are: open and transparent competition in
which tenders are evaluated on objective and published criteria and that
all are treated equally using sound procedural management which is open
to audit and challenge. Losing bidders have the right to know why their
bid was not selected. The procedures are designed to achieve a
b3235_Ch-03.indd 112 14-08-2018 06:28:27

Supply 113
procurement market that is competitive, open and well regulated. The

central EU procedures have to be transposed into local laws for each
member country (see https://ec.europa.eu/growth/single-market/public-
procurement_en).
The system operates according to spending thresholds which are
updated every 2 years, and in 2017 these were set at €5,225,00 for works
contracts (that is major construction types of projects) and for the majority
of goods and service type contracts the threshold is either €209,000 or
€135,000. There are some variations around these for different circum-
stances, but the important point to note is that these are relatively not large
numbers given the size of governmental spending, and so it is more than
likely that public authorities will find that they have to operate their pro-
curement activities according to the EU procurement rules.
The procedures are too detailed to reproduce here, rather it is worth
highlighting some key features.
There is a requirement to publish actual and sometimes planned
expenditures in sufficient time for potential bidders to be able to react and
develop their responses. Potential bidders are selected in a variety of
ways, to be described shortly, but once selected into a bidding situation all
must be treated equally. Questions to clarify details of the buyer’s require-
ments are allowed and should be answered if sensible, but the questions
and all answers must be communicated to all bidders to ensure the trans-
parency and fairness aspects.
Decisions can be based on a collection of criteria, all of which must
be communicated to all bidders as must the weightings that will be
applied in the evaluation process. Evaluation processes need to be data
driven and objective in nature and all involved should aim to operate
impartially. This can be aided if the evaluation process itself uses elec-
tronic voting systems which hide who of the evaluators is giving any of
the scores.
Another attraction of an electronic voting system is that it provides an
audit trail about the veracity of the anonymous voting processes and the
overall evaluation. This can be of great support if the final decision is chal-
lenged on the grounds of a supposed process flaw (the only acceptable
grounds) where all decisions can be made transparent. The data can also
inform any feedback demanded by losing bidders and the comprehensive
b3235_Ch-03.indd 113 14-08-2018 06:28:27

“9x6”
ability to analyse one questionnaire response or provided response value

in a bid document can be compared with all others and the winning bid,
to demonstrate the correctness of the decision against the given criteria.
There are three main types of process that can be used depending on
the type of purchase requirement and uniqueness. The Open procedure is
for lower value and risk procurement where the focus is on price and is
for a very well-specified and usually standardised commodity. As the title
suggests, bidding is open to anyone, but then the complication is that there
can be high numbers of bids to be evaluated. The most often used proce-
dure is the restricted one. This is a two-stage process where a contract
notice (CN) is published (often preceded by prior information notice
(PIN) to warn potential bidders that bids are to be sought in the future)
which invites possible bidders to complete a comprehensive questionnaire
(a pre-qualification questionnaire, PQQ) which has to be submitted to
allow for the pre-selection of candidate bidders who are believed to have
the capability and current capacity to successfully fulfil the contract, if
selected. For those passing the PQQ stage, they are then invited to submit
a final bid in the stage called invitation to tender (ITT). This smaller num-
ber of bids or tenders is then subject to the full process of information
exchange and will often include formal presentations from the buying
agent to allow for answers in the public forum about issues in the ITT
document. This raises important considerations for potential bidders who
might have an innovative idea which might win them the contract award,
but might not be allowed by the tenderers. If the question is asked, the
others hear it (either in the open forum of the presentation meeting or as
part of a question and response communication process) and so can rec-
ognise the innovation and either copy it or work against it in their own bid.
Potential bidders thus have to play a careful and clever game to get the
information they need without giving away any of their potential competi-
tive advantage. This is even more the case in the final procedure. This one
has a variety of names including: Negotiated, Competitive Dialogue or
Innovation Partnerships and are for situations where the buying agent
knows what result they want to pay for but do not how to achieve it and
therefore cannot specify their requirements in advance as they can in the
other procedures. In this one, a small group of expert suppliers is pre-
selected and are part of a discussion process with the buying agent to
b3235_Ch-03.indd 114 14-08-2018 06:28:27

Supply 115
explore what is possible and desirable in the final tender document. This
kind of procedures makes sense for software, architectural structures or
creative art works, for example where relatively few people or groups
have the ability to work in this way. Once a specification can be devel-
oped, then the tendering process continues as before.
All of these procedures have stipulated time scales for each of the
stages to which adherence is mandatory.
In all cases, the award decision is announced in a contract award
notice (CAN), but there is a standstill period of a minimum of 10 days in
which a losing bidder can challenge the decision, but this will only suc-
ceed if they can prove some procedural flaw in the process.
One of the issues in these procedures has been to accommodate the
natural instinct to look for additional local benefits during the implemen-
tation stages of the contract. This can be included if they are included in
the decision criteria, which must be satisfied by any successful bidder.
Thus, if a new hospital were to be built somewhere as part of a contract it
is not acceptable to award the contract to a local supplier based only on
their localness, but it is acceptable and smart to specify additional local
benefits (maybe sourcing materials, employing a percentage of local
labour, building social amenities in addition to the hospital, retraining
local unemployed people, for some examples). All bidders have to prom-
ise to do these aspects as part of their tender proposal. Thus local benefit
is multiplied but the overall process is non-discriminatory.
While some of these procedures seem as first glance to be onerous
and possibly overly bureaucratic, there is much to recommend their gen-
eral principles. A degree of openness and an ability to audit the overall
process to demonstrate fairness must surely be best practice for all
procurements?
3.6 Role of Procurement

As we shall see in the next chapter on contract management, the role of
procurement changes when we consider it as part of the overall business
processes involved in managing outside resources. However, the historical
role of procurement was to enact the decisions of others and usually to do
so at a minimum cost to purchase, with little thought given to the real or
b3235_Ch-03.indd 115 14-08-2018 06:28:27

“9x6”
total cost of procurement. The impact of this view is best reflected in the
quote attributed to John Glenn (one of the American astronauts) when
asked in 1962 what he thought of sitting on the top of an atlas rocket about
to be launched into Earth orbit.
I felt exactly how you would feel if you were getting ready to launch and
knew you were sitting on top of 2 million parts — all built by the lowest
bidder on a government contract.
Perhaps mission critical or safety-related procurement needs to con-

sider more than just cost to purchase? Traditionally procurement was a
clerical function which came at the end of a lot of other function’s deci-
sion processes. However, as we will see the role of procurement changes
as soon as we realise that the majority of the money spent in many busi-
nesses is with outside suppliers (the Buy option) and that quality, innova-
tion, cost and customer satisfaction will all ultimately be dependent on the
choice of supplier and how the customer–supplier relationship is
managed.
However, the procurement requirement is not uniform, and realising
this is part of the solution to making better decisions.
Firstly we need to recognise the differences between two fundamental
categories. Direct Procurement and Indirect Procurement. Direct procure-
ment involves the sourcing of materials which will eventually form part of
the final product or service the business produces and which will be sold
to customers (hopefully at a value greater than the purchase cost). Direct
procurement therefore directly contributes to the value adding transforma-
tions in the business and to the generation of revenue and profits from the
market. It therefore has always attracted most attention and attempts at
control. Indirect procurement involves everything else by way of goods
and especially services which are needed to allow the business to function
and to deliver the value adding offer to the customers. These are essen-
tially in support of the directly market-related activities. Many of these
will involve spending in areas away from the product or service main-
stream like advertising, auditing, legal, catering and facilities management
for example and often be managed by function heads who saw no need to
involve the purchasing function as they considered themselves to be better
b3235_Ch-03.indd 116 14-08-2018 06:28:27

Supply 117
able to choose suppliers because of their own expertise and local

knowledge. For this reason, much of the spending on indirect purchasing
can be regarded as maverick in potential. Historically, indirect procure-
ment has not had the same focus or control applied to it. However, as the
Lean messages were applied very successfully to the direct activities to
reduce cost while improving quality and reliability, the same focus on
indirect procurement lagged behind in many businesses. The success of
lean in manufacturing has encouraged the application to the indirect
area where new opportunities for waste reduction and performance
enhancement can also be realised.
Regardless of what kind of procurement we are involved with, there
is still the issue of how to apply managing resources to the selection and
interaction with the chosen supplier, and it is here that considerations of
portfolios of relationships comes to the fore. This concept builds on the
reality that in many aspects of life there is demonstrated an 80:20 rule
which is often quoted as Pareto’s Rule or Law after the Italian economist
who identified in 1896 that 80% of the land in Italy was owned by only
20% of the population. Since then, many aspects of business have demon-
strated the same kinds of ratios, for example 20% of customers account
for 80% of the turnover or that 20% of the suppliers account for 80% of
the costs. These are the Important Few, and the logic of identifying them
is that scarce managerial resources should be applied to both groups to
maximise profits on one side and minimise costs, while supporting the
competitive offer on the other side.
In order to use this rule in procurement, it is necessary to conduct a
Spend Analysis. Here, all of the company’s spending is analysed and
allocated to one or other of the quadrants on a 2 × 2 matrix as shown in
Figure 3.6. This and the following two figures are adapted from the
original ideas presented by Kraljic (1983).
In Figure 3.6 we are looking at how a customer can evaluate its spend
with its suppliers. The x-axis on the graph is Value of the spend in actual
or relative terms running from low to high. The y-axis is the criticality of
the supplied items for the customer’s business success or the risk of non-
supply, that is the impact on the customer’s business if the supplier failed
to deliver for any reason. This gives us the classic 2 × 2 matrix and four
quadrants. In quadrant 1 we have supplies both of high value to the
b3235_Ch-03.indd 117 14-08-2018 06:28:27

“9x6”
High
2 1
Criticality/Risk 80% of spend

20% of effort
4 3
20% of spend
80% of effort
Low High
Value
Figure 3.6 Customer’s View of Suppliers.
customer and representing the 80% of the total spend value. These are also
highly critical and risky. These are therefore the items and their suppliers
on which most effort should be expended since improvements here will
make a big difference to overall performance. However, typically these
items only attract 20% of the procurement effort! At the other extreme we
have quadrant 4 where only 20% of total value lies but this accounts for
80% of the management effort. These are usually low-cost or -value items
where risk in the market is low, (that is, there are lots of suppliers so we
will never have a shortage and therefore risk is low). Contrary to quadrant 1,
these are the Trivial Many. However, these often require lots of manage-
rial attention so typically account for 80% of the effort. Quadrant 2 repre-
sents items that are highly critical or where sources are few and therefore
risk is high. These are called Bottleneck items and are best designed out
of the product because of the problems they can cause if they are not
delivered or if suppliers cannot easily be found for them. The final quad-
rant 3 is the Leverage one. Here the risk is not high but the value is, and
so the customer will try to use the volumes or total values to ‘leverage’
some best prices from the supplier. The supplier’s reaction, if they find
themselves in this quadrant as seen by the customer, is to make themselves
more important to the customer perhaps by bundling more items or
b3235_Ch-03.indd 118 14-08-2018 06:28:27

Supply 119
services into a bigger package which will justify the customer giving them
more consideration and therefore moving them into quadrant 1 as shown
by the arrow.
Quadrant one represents the quadrant that the customer needs to man-
age very carefully, and it is here that the most mutually considerate and
involved relationships are to be found, hence the smiley face.
The logic of supplier relationships is that all customers will have a
variety of suppliers in each of these quadrants although we want to mini-
mise the numbers we have in quadrant 4 to reduce the effort involved and
also redesign the items in quadrant 2 to remove them if possible. The
portfolio argument then is that a customer will have a variety of supplier
relationships in place from close and cooperative in quadrant 1 to market-
driven, brutal, select and replace policies in quadrant 4 to coercive, power
driven in quadrant 3. Businesses need to understand their spend patterns
to properly allocate their managerial resources and activities in proportion
to their relative importance for their successful market strategies.
However, suppliers also have views about which customers they want
to pay close attention to and which they want to replace as simply not
worth the effort.
Figure 3.7 shows the view from the supplier’s side.
From the suppliers view, the 80:20 rule still applies in that 20% of the
customers account for 80% of the economic benefit to their business and
these customers are worth investing time and possibly real money to keep
them satisfied and coming back for more business in the future. Instead of
risk on the y-axis, we now have customer attractiveness. This idea covers the
situation of perhaps being a global brand but certainly showing potential
future growth and a belief that they will behave as intelligent customers in
their relationship with the supplier. Quadrant 4 in this diagram represents
the truism that a supplier can go bust satisfying customers if those c ustomers
are not reasonable in their demands for service while minimising the
amounts they will pay in prices. Such customers are best avoided or
replaced. Of course, it is in the nature of customers to assume that their busi-
ness is very important to any supplier, but the reality is that suppliers make
choices in the priority they apply to all of their customers. The challenge for
a customer is to become the preferred customer of their important suppliers
so that their needs are dealt with before the supplier’s other customers.
b3235_Ch-03.indd 119 14-08-2018 06:28:27

“9x6”
High
2 1
Attractiveness
Preferred
Customers
80%
4 3
20%
Nuisance
Customers
Low High
Figure 3.7 Supplier’s View of Attractiveness of the Customer.
Money is not always the most important driver in this decision process
and suppliers have a measure which is important to them. This is Cost to
Serve, and if it is too high then that is when the supplier will either reduce
the cost number by affecting their level of responsiveness, their pricing or
charges for distribution or changes or by simply cancelling the contract in
favour of a better customer. Often these actions will not be visible until
too late to the customer, but the choice for the supplier is there, and the
intelligent customer makes sure that for their important suppliers that this
does not become the correct choice for that supplier. They do that by mak-
ing sure that the interaction is both fair and open and that there are no
unpleasant surprises in the business relationship.
The challenge for a nuisance customer is to change their interactions
and probably the money they spend to move them from quadrant 4 to
quadrant 1 as shown by the arrow.
Having looked from both sides of the relationship, we now need to put
them together. The customer has done its spend analysis and chosen a
supplier that they wish to get close to and build a mutually valuable rela-
tionships with and will send out a request to begin the discussion about
this and hopefully have their chosen preferred supplier choose them as
their chosen preferred customer, but there can be three reactions to this
from the suppliers point of view, as shown in Figure 3.8.
b3235_Ch-03.indd 120 14-08-2018 06:28:28

Supply 121
Supplier Perspective Customer
High
High
2 1
80% of
Possible
spend
Attractiveness
Preferred
Criticality / Risk
4 20% of 3
spend
anks
No th
Low Value High Low Value High
Figure 3.8 Relationship Portfolio Possibilities.
The lower line shows the reaction when the supplier looks at the
customer and says they are not spending enough to be interesting imme-
diately and do not look to be very attractive in terms of future potential
either. The supplier is likely to decide that they do not want to invest the
time or other resources to build a collaborative relationship with such a
customer and so the invitation will be declined. The customer in this
sense is in a difficult position since they have evaluated the supplier as
important to their future performance but they have been refused a special
relationship. Perhaps the supplier already has a more important customer
they have invested in and if this customer is a competitor of the focal
company there can be real problems. If this is not the case, the customer
might still continue to have business transactions with the supplier and
perhaps try to become more attractive over time, but it might be more
sensible to start the search process again to find a more accepting alterna-
tive supplier.
The second line at the top of the diagram shows a different response.
Here, the customer is not yet spending enough money with the supplier to
make them immediately convinced, but the customer attractiveness is very
high so the potential future benefit is there. The supplier response is there-
fore that a special relationship is possible and is worth exploring through
some investment in relationships building and see if the future orders and
cash flows follow the hoped for growth pattern. The response therefore is
positive and discussions can begin.
b3235_Ch-03.indd 121 14-08-2018 06:28:28

“9x6”
The best result from the customer’s point of view is when they invite
the supplier to be a preferred supplier and the supplier is happy to commit
to this customer as one of their preferred customers. This is the meeting
of minds on which true collaborative and mutually supportive business
relationships can be built. The customer locks-in a critical supplier and the
supplier locks-in a critical customer and the whole process of cost reduc-
tion and value enhancement can begin, making this part of the supply
chain behave almost as one unit, at least for this range of products or
services.
One important point to recognise however is that the unit of analysis
of a company is too big. Large organisations have so many sourcing
requirements and sales opportunities that they will often have supply con-
tracts with different parts of the same supplier company and similarly a
supplier will often have contracts with different parts of the same cus-
tomer company. Each one of these contracts will have had to form in dif-
ferent circumstances and not all of them will demonstrate preferred
characteristics. The portfolio of relationships must be built in recognition
of these differences as well as recognising that market circumstances can
also change such that a preferred relationship might become less impor-
tant and have to be dissolved in a managed and safe way. Managing the
relationship portfolio and associated relationship investments must there-
fore be subject to the same dynamic oversight as all other areas of busi-
ness. However, the relationship investment can often mean that rather than
simply walking away from one partner to look for another it might be
possible for the partner to change some business activity dramatically to
meet the changing market situation, thus avoiding the search and change
costs of a major re-sourcing exercise or major sales drive for new
customers.
A consideration for sourcing strategy is how many suppliers per item
or service. The options include Sole Sourcing which is where there is no
choice, there is only one possible supplier operating as a monopoly and
all customers need to deal with them. Such suppliers have all the power
and can choose who they will supply, at what price and how they want to
deal with their customers. Individual customers have little influence and
will wait their turn to be supplied. For customers, this is not a comfortable
place to be and so they will look for or even invest in alternative suppliers
b3235_Ch-03.indd 122 14-08-2018 06:28:28

Supply 123
who might develop or be supported to develop a parallel capability to

break the monopoly. Single Sourcing is when there is a choice of suppliers
but the customer only contracts with one of them. This allows the cus-
tomer to develop a special relationship with the chosen supplier but
exposes them to the risk of supplier failure with no back-up plan in place.
Dual Sourcing is where two from a number of possible suppliers are cho-
sen to avoid the shortage issue if one supplier fails to deliver in some way.
Toyota uses this approach but in addition manages the suppliers together
so that they have to collaborate on best practice and innovation while
guaranteeing that supply failure is not catastrophic since the second sup-
plier can rapidly increase their own production to cover the other’s failure.
Multiple Sourcing is where there are lots of alternative suppliers and tra-
ditionally this is where the suppliers would be forced to compete on price
in particular. For non-critical standard products this can work well and can
be used in quadrant 4, for example, to force best, market-driven, prices.
Suppliers do not want to operate in quadrant 4 for this reason as price wars
are dangerous for them.
What we have been discussing here as cooperative and collaborative
and mutually supportive relationships is often referred to a Partnering
Relationship and is usually between a buyer company and a supplier com-
pany. (Note that it is not a Partnership which is an organisation with a
distinct legal status. This where two or more parties agree that each is
liable for the other’s decisions and all liabilities are shared. Joint and
Several Liability is how it is described in legal terms. The liability is
unlimited so that in a partnership one party’s bad decision can cause their
partner(s) to lose all of their assets, houses included. For this reason most
professional businesses, like lawyers or accountants, now trade as Limited
Liability Partnerships to limit their exposure to the other parties’ risks.)
However, some of the same interaction characteristics are represented
in other type of business-to-business relationship. Figure 3.9 shows these.
The Joint Venture (JV) is between two or more organisations who
decide to create a third organisation where some if not all of the activities
of each of the parent organisations is vested into a new legal entity (the
JV). The legal entity aspect has an important difference from the other
relationship types in that legally the people in the JV must now behave
with the interests of the JV as their priority, in effect leaving their parent
b3235_Ch-03.indd 123 14-08-2018 06:28:28

“9x6”
Brand Owners/
Original equipment Joint Venture Alliance
suppliers
Main Contractors
Partnering
Partnering
i
First er suppliers
Suppliers Alliance
Figure 3.9 Different Relationship Types.
organisations behind. The other relationship types are meant to behave like
this in practice while retaining their separate legal entity status. They are
obliged to retain the interests of their parent organisations as they operate
closely with their partner organisations. These kinds of relationships are
more voluntary and more easily terminated if the worst comes to the worst.
Partnering types of relationships can be very long lasting and in Toyota’s
case the suppliers become hard to separate from their buyer and have
worked productively with this brand owner for decades. In effect, the bound-
ary of the firm becomes permeable and indistinct as the formally separate
entities act as if they are one, since their co-alignment is almost perfect.
Alliances are very similar to partnering types of relationships (and the
terms are sometimes used interchangeably depending on the industry
sector). Alliances can be between suppliers or even between parties at
different levels in supply chains.
The overall logic of all of these relationships is to harness the benefits
of the other party’s complementary skills to enhance the ability to take a
successful offer to the market so that each party benefits from the
increased trade. If this does not happen, then there is no reason to continue
the relationship and a more market-driven trading process might then be
sufficient.
It is really only in the Partnering type of relationship that it makes
sense to talk about supplier involvement in the buyer’s business activities
b3235_Ch-03.indd 124 14-08-2018 06:28:31

Supply 125
but maybe we should simply expand the concept and talk of partner
involvement. If we have chosen wisely to identify the partner we wish to
work closely with, then it should be obvious that they have skills we do
not have. If this is the case, then we need to respect their expertise and
allow them the freedom to make the choices that are best for the relation-
ship with a trust that this freedom will not be abused or treated lightly.
This is most obvious when the issue of design arises. We have previously
argued for the recognition of the fundamental importance of good design
and if the partner has the skills, they are also best placed to produce the
best design solutions. However, the other party will have to work with
these designs so the communication needs to be open and specific where
possible. When we talked before of the voice of the customer being drawn
into the design process, now we are likely to have another party acting for
the final customer. As before however, this intermediate customer is not
an expert who knows how to do current things and has no ability to inno-
vate in the design space. They are however probably going to need to
manage the interface between the other party’s designs and the work they
have to do on their own. To give an example we will go back to an auto-
motive design. The car assemblers Toyota, Ford and Geely, for example,
choose areas of their own expertise and if that does not include seat
design, for example, what they will do is what is called Functional Design.
Here, they specify certain parameters that the actual seat design must be
able to deliver including, for example, weights of passenger, presence of
adjustments in certain ranges, incorporation of heating elements, posi-
tional memories and may well indicate materials or colours for the seat
coverings which have to coordinate with vehicle colour choices and inte-
rior finishes as well as many other aspects. They must also specify how
and where the seats must connect to the vehicle and the internal wiring
looms to carry power and control information. The functional specifica-
tions provide an envelope within which the seat supplier can utilise their
ingenuity to design a range of seats to fit the vehicle and probably be
delivered directly to the assembly line, quality assured, to be fixed into
place as efficiently and quickly as possible.
The corollary of the different types of relationship is that choosing
possible partners becomes a real challenge. Clearly, partners need to have
complementary skills and the capability and commitment to enter into a
b3235_Ch-03.indd 125 14-08-2018 06:28:31

“9x6”
collaborative and very open working relationship. Selecting such a partner

is about measuring the requirements and the demonstrated capability in
the people, their management systems, the financial health of their busi-
ness and which other businesses they work with to avoid possible clashes
of interest. Above all else, however, it is the attitudes and mindsets of the
management team which are most appropriate but also difficult to estab-
lish. Prior experience of working in such close relationships helps to
convince the other party that the challenges are understood and indeed
welcomed.
Of course such partners have to be found, and if they are not obvious
in current business interactions or industry experience then the procure-
ment function is often tasked with finding possible suppliers from other
fields where even if the products are different the skills being utilised
might transfer relatively easily. Some of the EU procurement processes
might be useful here at the early stages, but soon the need for face-to-face
interaction and two-way evaluations will be needed.
3.7 Support Systems

In the discussion about relationship portfolios we talked about spend
analysis as a key process. It is simple to envisage it, but it depends on hav-
ing good data to do it usefully and that can be the problem for many
organisations. Procurement activities are often spread over different sub-
groups in large organisations and many companies will have grown by
acquisition or merger with the result that their IT systems will have grown
up in different circumstances and may not be wholly integrated or their
information completely compatible. Identifying exactly where the procure-
ment money is spent is not always easy therefore. As a simple example
from my own University, the finance system regards me as a supplier
because I have sometimes raised a claim for travel expenses. Their system
regards any payment as a transfer to an entity which is called supplier so I
will appear on the spend analysis information as a perhaps very small data
point. Spend analysis therefore often requires some prior work to clean out
spurious data like my status before meaningful analysis is sensible.
Increasingly, intercompany communications and trading documents
are based on electronic transfer, and this is important to speed up certain
b3235_Ch-03.indd 126 14-08-2018 06:28:31

Supply 127
of the sub-categories of the whole process and at the same time reduces
possible human error in data entry. The sourcing process greatly benefits
from gaining access to a sometimes global supplier market, but this raises
other problems since we now have to find ways of assuring ourselves that
the supplier is real and is as capable as they claim. Global sourcing has
other constraints since there remain many locally based approval and
licensing procedures and qualifications which incoming suppliers may be
unaware of or not qualified under. These local standards have been used
in the past as a barrier to trade for the incomer. (The EU procedures were
intended to reduce these aspects.) On balance, e-business processes speed
up communications aspects while probably increasing the effort needed to
fully specify requirements so that they are understandable to all possible
bidders and they also increase the effort to evaluate bids because of the
increased numbers and geographical spread of the newly discovered
potential suppliers.
Of particular interest in the electronic business space is the use of
Reverse Auctions. Whereas traditional auctions for art, property or classic
cars perhaps, will have the bidders increasing their bids until no one else
bids higher, the reverse auction, as one might expect, works in the oppo-
site direction. Here, the process is that bidders are progressively bidding
lower values until no one else is prepared to bid and the last bidder wins
the auction and gains the contract to supply. The process usually takes
place over the internet where potential bidders are invited to be part of the
process and will be instructed if necessary in how the system will operate.
The buyer will suggest a starting price point based on their view of an
appropriate price point or on their current contract price and the auction
then tries to find bidders who will undercut the starting price. The auction
is usually operated by an independent third party, to avoid a situation
where a buyer, acting as one of the real bidders, places a bid themselves
to force the price down. When bidding, all participants can observe how
the anonymous bids appear on the computer screen and watch as the bids
decline over time. The bidding takes place over a predetermined time limit
on a given day with the right to extend the bidding process by increments
of time if there are a rush of late bids in the final scheduled minutes of the
allocated time. This prevents a bidder trying to submit their final low bid
before a competitor can react.
b3235_Ch-03.indd 127 14-08-2018 06:28:31

“9x6”
The issue with this process is that it is easiest for standard products
or services where the order winner is the price, but this is not seen as
beneficial to a supplier whose offer is more around service, flexibility or
innovation since it is hard to define these sufficiently clearly to allow for
a variety of bidders to calculate their best prices to take part in the bid-
ding. Reverse auctions have been very successful in reducing the pur-
chase costs for such things as stationary and other standard products and
even hotel bed bookings for airline flight crews overnight accommodation
where the standard of accommodation is recognised in international hotel
groups. The proponents of the systems argue that it establishes the real
market price but often rerunning the auction after a year produces little
improvement. It seems as if all the possible cost reductions are given
away the first time.
In all procurement activities, clearly defining what the product or
service is unambiguously remains a challenge. It is aided, for hazardous
materials, by a set of UN standard codes. The same problem is present,
however, for all other articles and for them a set of European Article
Number (EAN) and now Global Trade Item Numbers (GTINs) have been
established. These can uniquely identify the item, the packaging used and
the manufacturer. The GS1 organisations are continually expanding and
developing these numbering systems which can then be represented as
barcodes or for Wi-Fi-based Radio Frequency Identification (RFID) iden-
tification and tracking systems.
While global standardisation of these types can significantly facilitate
and assure trading processes, they still have to be adopted and used by
sufficient number of parties in the global supply chains to make them
really effective. This may be used by a buyer organisation to act as a quali-
fier for potential suppliers and to simplify the buyers’ search and evalua-
tion efforts. It is quite normal for these codes to be part of CNs under the
EU Procurement Directives, for example.
If we move back up the life cycle of a product to the design stage, we
recognise another way in which design is a business critical activity,
particularly for products. Most products will be designed using computer-
aided design tools. Thus, the design process digitally codes all of the
product features of material, measurement, manufacturing process, qual-
ity and safety features, possibly packaging and of course recycling
b3235_Ch-03.indd 128 14-08-2018 06:28:31

Supply 129
requirements and associated identification features. This same digital

information is used to instruct and control the operators and their
equipment performing the physical transformation along with the quality
measurement processes. This data is therefore created once in design and
transferred along the line to manufacturing, into procurement and sourc-
ing to be used by the suppliers and will be used when the items are deliv-
ered for further processing at the next supply chain stage. This information
can be used to inform marketing and distribution and in the end to make
possible recycling or recovery of value from products at the end of their
first life. It is really a form of digital DNA. As we shall see later,
Blockchain processes could make a huge impact here.
When we talk of standardisation we also need to consider two other
aspects. These are compliance and enforcement. All businesses operate
under legal obligations for personnel training, performance measurement
and in many cases reporting for: financial; labour entitlements and dis-
putes procedures; safety/quality systems, and environmental impacts and
business outcomes and results as well as any required rectification
through recalls for example. As supply chains become ever more global,
these compliance and enforcement issues are both more necessary and
harder to implement consistently. As the world moves more online and
social media and trade information is more and more available or acces-
sible to determined searchers, then the data protection issues become ever
more pressing. In March 2018, the EU Global Data Protection Regulations
will be imposed on all businesses which interact with the public and/or
private data of EU citizens regardless of where in the world the activity is
located. Its intention is to return a degree of control to EU citizens over
what personal data is held by organisations and provides these organisa-
tions with an obligation to effectively police their own supply chains to
ensure that no breaches of the rules occur in the external parties which
form their supply chains.
Organisations cannot remove themselves from the obligation to know
what the companies in their supply chains are actually doing and while
this is focused on data in this EU requirement it suggests a newly active
awareness that, in the past, major organisations seemed to be happy not to
know what was happening in terms of bad or even criminal practice in
their supply chains. They seemed only to take action when these practices
b3235_Ch-03.indd 129 14-08-2018 06:28:31

“9x6”
entered the public domain, usually as the result of some major crisis of a
factory fire in a manufacturing unit, falsified quality records in a supplier
factory or abuse of labour forces and the use of child or slave labour.
Of course, consumers have been somewhat supportive, through their igno-
rance of the real conditions in the supply chains, and have been happy to
accept the low-cost products supplied without too many questions.
Countries have also been complicit in prioritising the winning of business
and the earning of foreign currency above the well-being of their working
populaces and permitting, or simply being blind to, business practices
which keep costs low and therefore export earnings high while their work-
ers are effectively abused or employed in situations the developed world
has largely consigned to industrial history. This includes child labour and
slavery, but these exist in many societies and the UK has recently intro-
duced a Modern Slavery Act 2015 and recent prosecutions have involved
farm workers, domestic servants and general labourers. Of course, people
trafficking can be related to slavery, especially for the sex trade (see http://
www.legislation.gov.uk/ukpga/2015/30/contents/enacted).
The trend in legislative enforcement and a wider awareness in busi-
ness of their responsibilities to wider society suggest that the developing
world will follow the same path of consigning such practices to history as
they become more prosperous. The recent decision in China to stop recy-
cling the world’s waste to deal with local pollution issues might be an
example of this new reality.
Of course, where money is being spent then corruption is also a pos-
sibility and while some parts of the world would seem to have a bigger
problem than others and at many levels in society some of the largest cor-
ruption issues have been demonstrated or believed to occur in large
organisations, not least where government procurement is concerned. The
EU procurement rules are intended to reduce these possibilities, but in
global businesses the picture can be very difficult to see clearly.
3.8 Logistics
The procurement issues are still focused on inbound movements of goods
and materials to another transformation stage and for products this refers
to the physical movement of the items needed to make the goods for
b3235_Ch-03.indd 130 14-08-2018 06:28:31

Supply 131
onward sale. However, there is physical movement needed inside the

transformation processes and outbound to distribute the goods to the next
customer along the supply chain. This is the area of logistics which can be
called the management of inventory in motion and at rest. The word inven-
tory is important here since for service-based activities where inventory of
the service is not a meaningful concept the logistics concerns are more
about planning and sequencing of actions rather than with the focus on the
goods.
While manufacturing provides Form Utility to a customer through the
physical transformations of the input materials to the output goods, and
marketing and sales provide Possession Utility as ownership is transferred
from supplier to buyer, then logistics provides two related forms of utility,
Place and Time Utility in which the purchased product is distributed from
the factory to the chosen customer location at a time of mutual
agreement.
While logistical considerations might not impact the core product
design much if at all the need to protect the finished good at its final qual-
ity level in a manner where the distribution process will not cause damage
to it while in transit and where, if necessary, the goods can be displayed
in retail outlets for example, requires that packaging design becomes very
important. Packaging design can also be influenced by the decisions made
by marketing to aid visibility of the product in a competitive retail envi-
ronment or to suit different market segments perhaps. Packaging is also
emerging as a major environmental hazard as plastics in particular do not
degrade effectively and so remain a problem for many years and ocean
pollution threatens the food chain for all species living in the oceans and
rivers and downstream consumers of those food products.
Physical logistics is also responsible for much global pollution
through emissions from transportation vehicles, and of course global sup-
ply chains can exacerbate this as components and sub-assemblies for
products can travel thousands of kilometres between supply chain stages
and crisscross the globe many times even before the first-life consumer
has the product in their hands. The modern demand for natural water
products in single life bottles means that countries with perfectly safe
water sources are importing waters in branded products from all over the
world and then not effectively dealing with the empty bottles.
b3235_Ch-03.indd 131 14-08-2018 06:28:31

“9x6”
The world needs to rethink many of their current logistical concepts

if we are serious about the human impact on our environment. Until then,
let us consider what we need to do to make the current systems work
better.
Moving materials involves a number of interlinked and interdepend-
ent factors. The materials can be in liquid or in discrete forms. They can
be moved in bulk or in discrete and packaged quantities and cost depends
on both weight and volume of the space they use in the designated trans-
portation mode. In addition, for any vehicle transportation the costs
depend on the demand location and overall volume to be moved. This is
often directional. One of the key business factors for logistics managers is
to try and fill up their vehicle in both directions, out and return. Often, the
return journey is more difficult to optimise.
The modes for continuous materials are by pipeline (oil, gas, water)
and while we do not often talk about them in this way, conductive cable
or fibre optic versions are also distributing product or indeed services in
the fibre optic example. Discrete modes include a variety of sizes of ships
for canals, rivers or seas, road vehicles, rail and air systems. There is a
trade-off in transportation costs between the size of the load being trans-
ported and the number of locations from which items are collected or to
where they are to be delivered. This is shown in Figure 3.10.
One of the reasons for inventory we discussed earlier was to separate
out different parts of the supply chain in terms of demand variations and
supply capability. In the logistical aspects of supply chains, inventory
separates out the variety of customers and suppliers from the efficient
transportation between major centres. In Figure 3.10, this is represented
as an analogy with bicycle wheels where the hubs are major geographi-
cal locations where warehouses are located as temporary storage facili-
ties. On the inward process the input hub gathers materials from widely
distributed suppliers along the variety of routes called spokes and pre-
pares them for distribution along an efficient bulk carrying mode to
another similar hub at the destination. Here, the storage warehouse acts
to break the bulk down into their individual packages for onward distri-
bution, often in smaller road vehicles which can get close to the final
destination location of the customer, along a further set of route spokes.
The process works in reverse to get other materials to fill the return
b3235_Ch-03.indd 132 14-08-2018 06:28:31

Supply 133
Spokes — Small unit movements

- complex, variable path
Bulk movements
— efficient, fixed path
Build or Break Bulk in Hub warehouses
Figure 3.10 Logistics Hub and Spokes.
journey. Hub-to-Hub transportation tends to fixed routings, by agree-

ment for aircraft or by infrastructure investment in roads, rail, canals and
pipelines.
As over 90% of global trade is carried by sea transport, the invention
of the container by Malcolm McLean in 1937 has totally transformed the
nature of the tasks. Containers can be loaded and unloaded (building and
breaking bulk) away from the ports. Port operations can now be much
more automated and fast while the security of the boxes has largely elimi-
nated the crime that used to be prevalent on the quaysides of the ports. The
container ships continue to expand their capacity so that ports and their
land-based transportation systems have grown to match and canals have
had to be expanded to cope with the size of the ships (largest in 2017 is
the OOCL Hong Kong capable of carrying over 21,000 standard
containers) while the scheduling of their routes and arrival processing at
the ports becomes a major challenge.
While containers are more secure by their construction than many
other forms of distribution package, nevertheless there are concerns. Each
container carries cargo of, sometimes huge, value, so stealing it or break-
ing into it to steal its contents is a real concern. Security systems therefore
b3235_Ch-03.indd 133 14-08-2018 06:28:32

“9x6”
mean that the container filling and emptying facilities need their own
security systems, more like military establishments. We also want to
know that the containers on ships are also secure and that the ships
themselves do not divert to unauthorised ports of call to unload or load
containers of contents. There is also the possibility that criminals or
terrorists might load drugs, people or bombs on board one of these
containers. There are so many containers in the world (estimates vary
between 5 and 170 million) including many lost at sea, that no importing
country can inspect all those passing through their ports, so security at the
exporting port is required in order to provide some assurance to the
importer that all is well.
Each ship can be tracked using versions of GPS systems across the
globe to check for any unauthorised diversions and RFID tags can be used
to identify individual containers. Containers can be scanned using non-
intrusive X-ray types of systems, but again like any inspection process this
is usually done on a sampling basis or following up on prior intelligence
about possible wrongdoing. Ship location systems can currently be
switched off, and sometimes this is done to avoid pirate attacks but some-
times for commercial reasons to influence or affect market prices or to
hide materials being diverted to countries where political trading restric-
tions are in place.
Global communities work to make the systems more secure and trans-
parent to ensure that markets stay open for international trade flows to
take place effectively.
On the commercial side of global trade, where goods transit national
borders, we have had since 1936 an agreed set of terms of trade created
by the International Chamber of Commerce called the INCO terms
(see https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-
rules-2010/).
In distribution systems of this type, there is a need to fully understand
the terms of trade and the point at which ownership is actually trans-
ferred. At this point the responsibility for choosing transportation modes
and suppliers as well as for cargo insurance takes place. These terms of
trade were established when ships were the only real means to cross
water-based national boundaries and so the language reflects this, refer-
ring to whether transfer takes place on the quayside, on the ship, at the
b3235_Ch-03.indd 134 14-08-2018 06:28:32

Supply 135
point of supply or on delivery to a final destination, with many variations

included. The point is really to understand the legal situation at all times
and therefore the required actions to take for all parties. It also allows the
procurement decision to be better made in comparing like with like. For
example, a price which is quoted as Ex Works requires the buyer to carry
all costs associated with transportation, insurance, customs charges for
export and import and distribution in the destination country. The Ex
Works price, if compared with the cost to Deliver Duty Paid to the final
destination for example, will be very different. Buyers therefore need to
consider careful what terms of trade make sense, in what circumstances.
Taking responsibility for choosing modes of transport and carriers might
ensure more visibility of likely arrival dates, making ongoing planning
more controllable so the decision, as always, should never just be about
the unit price.
3.9 Organisational Buying Behaviour

Having spent some time looking back up the supply chain from a procure-
ment view, we need to take a little time to see the opposite side and look
into how buyers make their decisions. Often this view would be taken by
the sales people, but of course every purchase has both suppliers and buy-
ers and we have been arguing that this needs to be a more two-way and
mutually considerate process, for best results all round.
We need to recognise that there are different types of products in terms
of their uniqueness, and shortly we will also explore how buyers gain infor-
mation about products or services to buy. Straight Re-buy covers items which
are well known and just need replenishing. Most information about the items
will already be in the buyer’s systems but there may be price variations since
the last purchase order. A Modified Re-buy is a purchase decision where the
buyer needs to do some research to see if there are better product character-
istics currently or potentially available from a number of suppliers and if
prices or terms of supply have varied. A New Task has never been done
before and all information required has to be found and evaluated.
Given these buy types, how do we then find out about them?
Figure 3.11 shows the overlapping characteristics of goods and services
and how we can find out information about them.
b3235_Ch-03.indd 135 14-08-2018 06:28:32

“9x6”
Clothing
Jewellery
Furniture
Search House
Car
Most Goods
Restaurant meals
Holiday
Haircut
Experience Child Care
Most Services
TV Repair
Legal Services
Dentist
Credence
Car Repairs
Medical Diagnosis
Figure 3.11 Types of Products and Services.
Most goods can be found by a search process often now using social
media or internet search engines. Commercial or industrial search can also
be done through trade directories and publications, exhibitions or by invi-
tation to potential suppliers as an information gathering process in the first
instance, rather than as a formal procurement one. In personal buying,
people now seem to use a mix of clicks and mortar in that they research
what is possible using online shopping and search and if possible visit the
retail outlets to try and feel the product and then often go back online to
find the best price for the product they have decided on.
The next category requires more actual experience to really evaluate
them. We might still go through the search process before choosing the
restaurant for example and we need to make a buying decision and visit
for a meal, but the experience at the first meal determines if we will return
for another visit, and tell our friends about the good or the bad experience
we have had. Websites like TripAdvisor try to aid this process by drawing
on others’ experiences, but we need to be careful about the sample of
people who complete evaluations and to what degree we are going to put
b3235_Ch-03.indd 136 14-08-2018 06:28:32

Supply 137
our faith into what can often be a small sample of the user population
thinks and reports.
The final category is where we can search but our decision is more
influenced by what is called credence, that is, the reputation and/or brand-
ing of the goods and services. These services are very dependent on who
is providing the service and this is very difficult to evaluate without expe-
rience. Such service providers tend to tailor their advertising to present a
form of credence to potential customers. Look at lawyer and financial
service organisations for examples.
We have discussed earlier how suppliers are really only making an
offer to a customer which is intended to satisfy the needs and wants of the
customer. This is demonstrated in Figure 3.12 looking at how a product is
defined.
The core of the product is best thought about as providing some kind
of benefit (satisfaction of a need or want) to the customer. Thinking in
terms of benefits to customers keeps the focus right and avoids the trap of
trying to sell whatever we already have. The Actual Product can be a
physical thing or a defined service, but it is to some extent tangible,
Augmented Product
Delivery Warranties
Actual Product
Core
Product
Finances Benefit Services
Tangible
Installation/
Customer
Support
Care
Re-cycle
Figure 3.12 Product Definition.
b3235_Ch-03.indd 137 14-08-2018 06:28:33

“9x6”
literally for the product, and less tangible, but still definable, for the
service offer. Around the actual product we have the augmented product
where features in support of the core benefit are added to the overall
package of the offer.
From a procurement point of view, all of these different features need
to be considered, evaluated and clear specifications provided for the pro-
curement activity with potential suppliers. From a supplier point of view,
there might be less freedom to offer variations around the core product but
the augmented product offers scope for negotiations and differentiation
from competitors. It will often be in these areas that negotiations will focus.
A term that sales people use is the Buying Centre. This refers to the
wider group of people inside a business who are actually involved in a
procurement decision. It recognises that such decisions are actually group
based rather than the right of only one functional group like procurement.
The sales people try and find out all of the people involved and try and
find ways to influence the others in the process so that in turn they will
exert internal pressure on the negotiators or bid evaluators in favour of the
selling organisation.
The users/specifiers are in effect the internal customers whose needs
and wants have to be satisfied so that the procurement can be seen as suc-
cessful. Of course like other customers, users might not know precisely
what they want or how to get it and so specifiers might be needed to trans-
late the expectations into a clearer definition. Sometimes this group might
have preferred suppliers and are biased in their favour. A highly ranked
surgeon for example might argue to keep purchasing from the same sup-
plier because the results in the past have been good and (s)he is scared to
risk changing.
Influencers can help clarify definitions and might be technically com-
petent to recognise what is possible. Technical personnel can often fall
into this group. They contribute their expertise but are probably not that
concerned with the decision choice after their involvement.
The buyers are empowered by the organisation to manage the pro-
curement process, select and evaluate bids and negotiate the final deal to
agree the terms of business and service-level agreements. They will not
always be technical experts in what they are purchasing, and that is why
the involvement of the others in the buying centre is so important.
b3235_Ch-03.indd 138 14-08-2018 06:28:33

Supply 139
Deciders have formal or informal power to select or approve the final

choice of supplier. They may be senior managers or simply people of
influence who everyone accepts has to be involved in the final decision.
In the entrepreneur-owned business, they will often require involvement
for as one such owner expressed to a consultant ‘it is my money after all’.
Gatekeepers are people who in some ways control access to other
people or can influence the flow of information. Personal assistants often
act in this way to manage their boss’s time. Sales people will always try
and find out who these people are, what their agendas are and how to
influence them. They are not formally or informally involved in the
purchase decision but are nevertheless very important people.
In this book, we have been arguing for a more integrative and holistic
approach to managing these interrelated and interdependent activities and
the buying centre concept reinforces this view. It also demonstrates why
the contracts that will underpin all of these interactions have also to be
considered in the same way but with extensions to cope with other aspects
of the total contract life cycle.
b3235_Ch-03.indd 139 14-08-2018 06:28:33

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Chapter 4
Contract
4.1 Context
A legal contract is created with two purposes in mind. The first is to define
the agreement between the two parties in terms of what is to be paid for
what goods or services under what operating and monitoring conditions
as well as defining conflict resolution and restitution processes. The
second one is to allocate cost penalties in the event of some form of con-
tract breach. The legal agreement has to be agreed to operate under a
particular legal system, often determined by the customer. The second
purpose is the one that traditionally has been the focus for parties who
believe that trading is inherently an adversarial process where if one party
wins something then the other party has an equally equivalent loss. Thus,
the legal focus has been to anticipate and mitigate against failure of the
other party and to allow for some financial recovery to compensate for any
failure. This raises the very real problem of how anyone can anticipate the
range of possible failures in order to include their effects into the contract
and, if they could, would the counterparty accept them. It is also even
more difficult when the contract is about services rather than products
(which is increasingly the case at typically over 58% in 2017), given the
intangibility of some service provisions. It is also very difficult if the
contract is for services which have to be provided in a flexible way and at
improving levels of performance over time. Best practice companies are
now trying to put more focus on the first purpose, to define and agree on
how business between the two (or more) parties is intended to operate for
141
b3235_Ch-04.indd 141 14-08-2018 06:28:56

“9x6”
mutual benefit. In effect, this is emphasising the positive aspects of the

relationship rather than try and anticipate the negatives.
The privileged role of the legal function in contracting in the past is
reducing as it is recognised that a more integrative team approach pays
better dividends. The ideal situation is where a contract is approved and
forms the basis for a profitable and mutually satisfactory set of behav-
iours. It therefore acts as a guide to working practice rather than being
filed away in both organisations and only referred to again because the
behaviour of any the parties causes a concern to the other parties such that
they would need to try and invoke any of the liability clauses included in
the contract. If any business relationship needs to invoke any of the legal
mitigation clauses, then it is probably already too late to save the relation-
ship and all that can happen now is more costs are incurred with more
lawyers and in the replacement costs incurred to find new suppliers or
customers. The legal function does have responsibilities to ensure consist-
ency of treatment and risk management across a number of contracting
units, and this is likely to increase with more contracts and more complex-
ity but new technologies will impact this as we shall discuss later.
4.2 The Contract Life Cycle

As in the discussions about the buying centre, there needs to be a wide
ranging involvement from across the business functions to ensure that a
contract is well thought out, a provider or customer identified, and every-
thing agreed and implemented to the best of everyone’s abilities.
Research carried out by International Association of Contract and
Commercial Management (IACCM) has shown the cost of contracting at
$6,900 for low-risk contracts, $21,300 for medium-risk ones, while high-
risk contracts can cost hundreds of thousands of dollars. They also found
that an average of 9.2% of annual revenue is lost as part of the 40% of
contracts which fail to deliver all of the benefits which were negotiated
and agreed during the early stages of the contract life cycle. They have
identified 10 reasons for this, which they call Pitfalls, which are discussed
here in order of importance.
(a) Lack of clarity on scope and goals. This harks back to earlier discus-
sions about customer voice and design and in supply procurement.
b3235_Ch-04.indd 142 14-08-2018 06:28:56

Contract 143
If this is not done well, then arguments are bound to occur and be the
source of claims and disputes.
(b) Often, the legal or contract experts are not involved early enough to
shape negotiations and possible agreements, so are left to try to make
a bad job better but really when it is too late.
(c) Lack of involvement with all of the stakeholders. This might actually
be a subset of pitfall (a) since, if they are not involved, their expecta-
tions cannot be properly incorporated into any agreement and they are
likely to be dissatisfied with the final outcome.
(d) Adversarial negotiations, often around price and risk allocation, set
the wrong tone and avoids discussing how the relationship is intended
to work.
(e) Negotiations therefore are focusing on things which can go wrong and
allocate blame rather than how to make them go correctly to reduce or
manage risks and gain new opportunities.
(f) Lack of flexibility is a major issue, especially if the process takes too
long to conclude while the world has changed. The wrong kinds of
contracts then lock-in a no longer appropriate deal.
(g) Difficult to understand language and formats. If written by lawyers for
lawyers and to anticipate court arguments, then normal managers can-
not understand what they mean and 90% say they cannot understand
the contracts they are supposed to operate. If the contract is intended
to define how the business relationship is intended to work, it needs
to be written and illustrated in a much more user-friendly style.
(h) A poor handover from the procurement stages to the operational stages
are next in impact, no doubt also affected by any lack of involvement
on contract agreement issues.
(i) Poor IT support can affect both good record keeping but more impor-
tantly tracking and reporting on contract performance. Contracts need
to be written as documents to be used to direct practice and to facili-
tate reporting and improvement agendas.
(j) Poor post-contract award process and management. This is the area
where the contract management activities are needed to make sure
that all the promises and procedures are fully implemented and tar-
gets achieved. Without fixing the earlier pitfalls, this will be really
difficult but, even if they were very good, the ongoing challenges of
making good on all of the two-way commitments will require good
b3235_Ch-04.indd 143 14-08-2018 06:28:56

“9x6”
people to be actively involved and properly supported in the two

organisations.
From this and other information, we can identify seven stages of the
complete life cycle, which we will look at in turn.
There is a clear overlap in the contract life cycle with the other func-
tions we have focused on this book. Stages 1–3 have been covered in our
design, operations and especially the supply chapters, so as long as these
have been carried out with the extended contract team, then we should
have selected and agreed a contract with the other party, which for our
discussion we will assume is a supplier, although many of the same con-
siderations apply to contracting with a customer.
1. Need identification and requirement specification

2. Make or Buy and if Buy then Sourcing strategy 
3. Sourcing process and contract award 
The above issues were covered in earlier chapters, so this chapter will
concentrate on the next four steps.
• Initiation and Implementation into operation

• Contract monitoring and improvement
• Contract end game options 
• Contract de-brief and capture of lessons learnt
4.2.1 Initiation and implementation into operation

Once the selection and award process has been completed and everyone is
ready to move into implementation of the contract, there arise a number
of issues to manage. There is a structural decision as to who will be
involved in day-to-day interactions with the other party. The choices are
perhaps three. Of course, the people and function for whom the agreement
was drawn up, the users or internal customers, are most dependent on the
contract performance in order to meet their commitments to their down-
stream customers (internal or external), and so they will be intimately
involved in coping with any crises that might arise, but formally the
b3235_Ch-04.indd 144 14-08-2018 06:28:56

Contract 145
escalation of problem solving in the business-to-business interactions

might involve an organisation choice between using the team that did the
purchasing/procurement activities and a perhaps separate function set up
to manage the contracts. There are arguments in favour of both (and the
demonstrated practice in the benchmarking exercises discussed later sug-
gest an even split in the choices made by different organisations), but
some argue that the skill sets are different between the different stages. The
procurement function is often commercially driven and operating as agents
of the users or operations function. The skills of sourcing, bid evaluation
and playing an important part in creating the contract can be different from
managing ongoing and perhaps evolving business-to-business relation-
ships, and so a separate function to manage the agreed contracts can make
sense. However the organisational design issue is resolved, there is always
a handover requirement from one stage of the life cycle to the next with at
least a change in focus if not team members.
Some organisations describe this process as mobilisation. Systems
need to be updated with new contact information, schedules of operational
and review meetings need to be planned, interaction teams identified
and contacts exchanged, initiation meetings and activities planned and
delivered, and finance updated on how to pay or submit invoices. These
processes are described as Purchase to Pay in many organisations and
computer software suites so that all steps are transparent and auditable to
see if the internal compliance to the contract agreements is working well.
It will often also make sense to consider how the agreed conflict resolu-
tion processes will work with the right personnel identified and briefed.
If the contract is important enough, there might need to be a launch event
at which senior managers are very visible in confirming their support of
the agreed operational principles. This is good publicity, but more impor-
tantly it helps convince the other party that the organisation is seriously
committed to the promises they made in the contract. Senior people need
not be involved in day-to-day details, but should be part of the review
process somewhere to demonstrate their continuing commitment. We
also need to remember that the other party to the contract, while accept-
ing the words agreed on the contract, will be watching carefully to see if
their opposite numbers are behaving in the spirit of the agreement. If this
is the case, trust will begin to build, and with trust comes new
b3235_Ch-04.indd 145 14-08-2018 06:28:56

“9x6”
opportunities to solve problems and look for improvements. Trust how-

ever is very fragile. It takes time to build, but can be destroyed very
quickly by an inappropriate action or comment. The face-to-face people
need also to manage their own support and senior management teams to
try and keep everyone compliant with the contract agreements.
4.2.2 Contract monitoring and improvement

The users and operational people are stereotypically fixers who will try
and make things happen even if their plans have to change for some rea-
son, so if the contract is not working well they will do their best to cope
and adapt and will interact with their opposite numbers in the other
organisation to see how they can change plans and allocate resources to
troubleshooting and problem solving and that should be part of the normal
activities within the contract delivery process. However, there are two
situations where this might not be enough.
The first is when failure is not random but frequent (by decision or
negligence) and then the conflict resolution processes needs to move
into action with the goal of using the ongoing business relationship to
surface issues and to deal with them fairly. This might happen because
the world has changed in some way since the contract was signed and
the current agreement is no longer so attractive to one or other of the
parties. If there are no sensible modifications possible to these process
difficulties under the existing contract, then we might be faced with a
renegotiation of aspects of the contract or declaring a contract failure
that requires a new partner search project, and maybe a breach of con-
tract court case.
The second situation (and one which should have been recognised
as a possibility, if not a requirement, in the initial contract) is when an
innovation in the product/service or delivery process has been identified
which needs reconsideration of some feature of the initial contract. If the
business to business relationship is a collaborative one and the actual
behaviours of the parties have followed the promised mutually benefi-
cial path, then this innovation will be regarded as worthy of support.
However, it may be that some reward for the innovation is also fair. As
b3235_Ch-04.indd 146 14-08-2018 06:28:56

Contract 147
in any joint situation, if equal benefit can be justified then it makes sense
to agree that, but often one party will have had to spend money to create
the innovation and that investment should be recognised in the modified
contract terms. Suppliers in particular need to believe that it is in their
interest to support their preferred customer by providing the innovations
that benefit their joint part of the supply chain. If suppliers feel aggrieved
by their treatment by the customer, they will look for more considerate
customers to support and the relationship will no longer be such high
priority.
When changes do happen, then many of the IT systems will have to
be updated to use the new standards and here change control is very
important. In the same way that digital information can move from design
CAD systems through to operational equipment before going to suppliers
and into their systems, then a change control process needs to flow
through the same information paths to ensure everyone in the chain is
operating to the latest versions of the data. The well-publicised problems
of trying to operate with different versions of computer-aided design
software in the assembly of the Airbus A380 were some of the most
expensive examples of what can go wrong. In this case, the software in
Hamburg produced results that left the different parts of the aircraft
unable to join together because the electronic cables were too short
when supplied to Toulouse and this was in one company, albeit a diffi-
cult transnational alliance. How much greater is the potential trouble in
international supply situations between legally separate organisations?
(see http://www.nytimes.com/2006/12/11/business/worldbusiness/11iht-
airbus.3860198.html).
What is true for changes to product or process specifications is also
true for issues around governance of operational activities, compliance
with the raft of legal requirements in all of the different territories and
legislative jurisdictions in which supply chains operate.
This can be considered under the heading of Risk Management
which can be grouped under sub-headings of Economic, Environmental,
Geopolitical, Societal and Technological. Some of these are influenced
by people’s actions and some by the joint effects on the planet of climate
change.
b3235_Ch-04.indd 147 14-08-2018 06:28:56

“9x6”
These global threats can of course impact our contracts, and so some
degree of risk sharing and joint action to mitigate or recover is worth
building into the contract agreements where possible and economically
sensible, but sometimes we simply have to react and that can also make
an amazing difference.
The article listed below discusses the difference that Nokia managers
made compared to their competitors in Ericsson when their common sup-
plier’s factory suffered from a small fire after a lightning strike.
Nokia initiated a series of changes before Ericsson realised there was
a serious supply disruption and as a result Ericsson had to abandon their
phone production while Nokia’s results showed little impact (see http://
www.economist.com/node/7032258).
A regular process of contract review should take place, but this should
be a two-way process where both parties can challenge the other about
their performance against their commitments and to actively pursue per-
formance improvements.
While the process of contract review is important for all contracts, it is
even more important for the preferred customer and supplier relationships.
After all, these relationships are important because of the mutually sup-
portive skill sets that they provide and for parties in such a co-dependent
relationship it is even more important that all is well when examined from
both viewpoints. When these are working well, it will be difficult to know
where one organisation starts and stops. We worked with one electronics
company whose preferred suppliers sat in a room inside their manufactur-
ing factory with full computerised access to all the customer’s forward
plans and current planning systems. It was they who decided when to
replenish stocks in the customer’s inward goods systems by interrogat-
ing the customer’s production planning systems and they had full visi-
bility and involvement with all the future product development
processes. They were indeed partners in the best sense of the word. It is
worth noting however that when the customer decided to relocate some
of their business to a different market location and asked the suppliers
to come with them, the biggest supplier decided against it as not com-
patible with their own development plans and so a very productive and
collaborative relationship was wound down. Even the best relationships
are subject to reevaluation and possible dissolution when the world
b3235_Ch-04.indd 148 14-08-2018 06:28:56

Contract 149
changes. It is therefore worth considering the commercial equivalent of

a prenuptial agreement to manage such transitions.
4.2.3 Contract end game options

As the contract is nearing its end date, the customer and the supplier will
begin to think of what happens now. Of course, the requirement for the
contract may now have ended and no new agreement is needed, but it will
still be useful to keep in contact with each other as the investments made
in building the relationship might make for easier involvement for some-
thing new in the future.
For some form of continuing need the buying centre options apply
here but we have to recognise which sector we are in.
In the public sector, all contracts have to finish and, even if everything
worked as planned, we are obliged to treat the next contract consideration
as a new task and run another procurement competition. In the new com-
petition, we are not allowed to favour the incumbent suppliers’ perfor-
mance, they have to compete as if they had no prior involvement with the
purchaser.
In the private sector, we can be facing a straight re-buy and if agreed
by both sides can renew the contract very easily, maybe with some pricing
variations if market conditions have changed enough to justify it.
A modified re-buy will require new negotiations but not necessarily
a new sourcing project. The value of the prior relationship experience can
justify a new award to the current supplier even if there have to be some
negotiations to reflect the modified specifications and requirements.
It might be that the purchaser feels the need to evaluate alternative bid-
ders, but it will be better to explain that to the current supplier as part of
a market reality check rather than as a direct threat to the current supplier.
It is also possible to go to the market to consciously look for new ideas
and information with no intention of switching suppliers but rather to use
the information to drive the improvement agenda with the current partner
organisation. This should be done with the full knowledge of the current
supplier but sounds a little unfair for the possible alternative bidders who
might, if they realise what is going on, be more reticent to share their
secrets.
b3235_Ch-04.indd 149 14-08-2018 06:28:56

“9x6”
4.2.4 Contract de-brief and capture of lessons learnt

All organisations should be learning all the time how to perform better at
everything they do. The competitive race does not let up, and learning
effort is usually rewarded. This is very much the case for contract manage-
ment, but is rarely done well if at all. The pressures of business often mean
that the procurement team just want to move on to the new challenges and
get the new deal in place while a supplier needs to find new customers, so
will stress the search and sales process rather than the reflective benefits
of a contract de-brief. Examining what went right and wrong, what could
have been done to avoid these bad issues or at least mitigate against their
possibility, as well as understand the people skills and attitudes which
worked or did not, in which circumstances, is information that can be used
in the next contracting process to avoid repeating the same mistakes.
The process will be aided if the information systems around contract
review were used to record major events, discussions and agreements on
actions needed. Overall performance reviews (especially to provide proof
if the 9.2% wastage did not happen) will be important and all of the les-
sons learned should be built into procedures to be used in the next con-
tracting process. Documenting how the contracting process has contributed
to the user performance results and to the business success criteria will
also go a long way to ensure that senior managers recognise the value and
contribution of a properly staffed, trained and supported set of groups
involved in the overall process. After all, 9.2% of annual revenue might
well be greater than their profit margin, and reducing this waste might be
easier than generating new sales to increase profits.
4.3 Law, Intellectual Property and Negotiation

While not everyone in the contracting process need to be qualified law-
yers, it is well worth everyone understanding enough about the law to
avoid obvious errors and to also recognise when the full capabilities of an
expert are necessary.
Not all business arrangements will need full contracts, but when they
do it is important to recognise that they will be subject to some particular
features depending on where the contracts will be legally located in terms
b3235_Ch-04.indd 150 14-08-2018 06:28:56

Contract 151
of different jurisdictions. The world is largely split into two different kinds
of systems. Any contract has to indicate under which jurisdiction the con-
tract will be set up and where any breach of contract actions will take
place. Often, this will be chosen by the customer but should certainly be
made clear to all concerned.
The two basic systems have their differences through their historical
development. Much of the world is subject to a process called Civil Law
where decisions made by the state set out a framework of legal principles.
The origins go back to late Roman times. The alternative system, and the
one most common in the extended Anglo-Saxon parts of the world, is the
Common Law. Here, although the legislatures will pass laws, the courts
operate by judges’ interpretation of these laws and their subsequent rul-
ings in actual court cases, thus creating a precedent that informs future
decisions. For this reason, this system is also referred to as case law.
For the purposes of this chapter, we will discuss English law.
A contract is above all an agreement between at least two parties who
intend the contract to be enforceable in the jurisdiction agreed. This
means that an aggrieved party has a belief that any grievances will be dealt
with fairly by the legal system. This of course also requires that there is
an effective and impartial legal process working in that jurisdiction. The
contract requires that one party offers some terms of trade, which are
accepted by the other party, so offer and acceptance is important. This
means that both parties have to be able to understand and agree the details
of the contract, so infirm or young people are not deemed able to agree to
any contract. Some consideration (not always money) is needed in English
Law to mark the contract. Contracts are also deemed to be void, that is
unenforceable, if one of the parties was under some kind of duress to
agree or there was any deliberate or even unintended misrepresentation of
any information presented in the contracting process.
While the contract will address many of the issues we have already
discussed about rights, obligations, performance measures, measuring and
reporting and conflict resolution, one very important issue is that of intel-
lectual property (IP).
Organisations build up experience and knowledge in many aspects
relating to their chosen business experience. This belongs to them and is
largely why another party wishes to work with them in the contract. It is
b3235_Ch-04.indd 151 14-08-2018 06:28:56

“9x6”
recognised as Background IP and is not expected to be transferred during

the contract. However, new knowledge will be created during the time of
the contract, referred to as Foreground IP and ownership of this needs to
be agreed and incorporated into the contract at the very beginning to avoid
later disputes.
Customers will often claim foreground IP since they are the ones who
recognised the need for a new solution to offer to their own customers and
they therefore contracted with the supplying party to use their background
IP, along with the information provided by the customer, to create the new
solution and new IP. While this is an example of co-creation as we dis-
cussed earlier, there is still the issue of what happens to the innovation
after it is successfully developed. The customer might have no interest in
the new IP once the immediate need has been satisfied, so for them to own
it but not use it can be seen as a wasted opportunity. The customer might
however wish to use it again with new customers so would be interested
in owning the new IP.
In a similar fashion, the supplier might see opportunities to supply the
new IP to another of their customers, but the current paying customer
might not want their competitive advantage given away too quickly and so
might stop this through the ownership of the IP or by having some kind of
delay clause inserted into the contract.
For customers who do not see commercial advantage in any future
use of the new IP, it might be sufficient for them to have the right to use
the new IP for no further cost for as long as they need it, but not to claim
ownership.
These are difficult circumstances to anticipate and evaluate, but all
parties need to be aware of the options and their relative constraints and
opportunities.
The new foreground IP might be codified in some way and incorpo-
rated in products or processes, and this valuable property can be protected
in a variety of ways.
Copyright © refers to anything that is written, and there is an auto-
matic assumption that the originator of a published piece of work owns
the copyright for between 50 and 70 years after their death. During that
time, the obligation for anyone who wants to use these words is to
b3235_Ch-04.indd 152 14-08-2018 06:28:56

Contract 153
acknowledge and fully reference the source author’s works. Databases

follow much the same rules.
Trademarks ® have to be registered and in the EU last for 10 years but
can be renewed indefinitely. They show who created the goods and ser-
vices and protect businesses, to some extent, from competitors passing
their offers off as yours.
Designs ® are about the look and feel of items, and almost anything
can be a registered design. They can be products or craft items, logos,
typefaces, packaging, colours, drawings and artwork, parts of products,
ornamentations, web designs, maps or even actions in advertising, but not
computer programs.
Patents are for major innovations and last for 20 years but the details
have to be filed in every jurisdiction where the innovation might be traded,
so it can get very expensive. You have to prove that the designs and pro-
cesses are new and so have to search for earlier ones that might do the
same thing, which would prevent you being granted the new patent. Then
you have to go through a process, taking up to 5 years for the first one, at
a cost in the UK of £4,500. Replicating this in each jurisdiction is clearly
a concern. The fact that you have to disclose so much information to prove
uniqueness is also is a problem since a competitor might be able to effec-
tively reverse engineer your ideas, modify them a bit and produce a com-
peting product on the market. For this reason, if you have something
unique, it might be best not to patent it but to keep it a complete secret and
let the competition try and understand your solution by buying your fin-
ished product and trying to break it down to find out how it does what it
does so well, a process described as Reverse Engineering.
In any supply chain transaction, there is an inherent dilemma. We often
need the other party for complementary skills, but we need to share our
ideas and background IP to make the contract work. In this way, the other
party learns a lot from us, and it is not unusual that the cooperative party
in the contract becomes a full competitor afterwards. This can even be a
tactic for a developing country to look for sub-contract work from global
brand owners for their local supply companies who are even not expected
to make money in the conventional sense but to learn from or even steal
ideas and skills from their customers to build up the local knowledge base
b3235_Ch-04.indd 153 14-08-2018 06:28:56

“9x6”
with the aim to compete in the global markets. Such countries are often
accused of showing little respect for IP, but over time as they develop their
own IP they will wish to protect it and the courts may become more active
in protecting everyone’s IP so that their own companies are also protected.
With very important mission- and survival-dependent information, it
could be better to avoid supply chain solutions altogether and build or use
internal capability to produce the desired outcomes.
4.4 Ethics and Corruption

In the supply chapter, we discussed how the threat of corrupt activities in
government procurement practices has influenced the direction of the EU
Procurement Rules, but there are other aspects of corrupt practices about
which those involved in contracting need to be aware.
The Foreign Corrupt Practices Act 1977, while an American act, is
written in such a way that anyone or any organisation who has some form
of connection to life in the USA is subject to its provisions, especially
since an amendment in 1998 (see https://www.justice.gov/criminal-fraud/
foreign-corrupt-practices-act).
It essentially makes it illegal for any form of bribery to be offered to
a widely defined range of foreign government officials in order to secure
decisions in favour of the briber, which might not otherwise have been
made. Very many major organisations have been subject to large fines
when wrongdoing has been proved or admitted. There is also provision
that full accounting records should be able to prove that transactions have
been legal and in support of this organisations should have in place proce-
dures and training to indicate their belief in not operating corruptly.
In some cases, businesses have accepted a lesser charge of inadequate
accounting or disclosure rather than admit to the corruption charges. They
have then modified their visible information on brochures, websites, train-
ing and policy documents to indicate that the organisation recognises their
commitment to ethical trading. There is a problem however in countries
where some form of bribery is accepted. Grease Payments are a form of
bribery which does not change a decision which would have been made
anyway but simply speeds things up. An example might be delays at a
customs post where an inbound shipment would get through in turn but
b3235_Ch-04.indd 154 14-08-2018 06:28:56

Contract 155
bribery facilitates a jump to the front of the queue. To many, this is no less
an unfair advantage and often the monetary amounts are not large; how-
ever, the distinction is a rather fine one. The UK Bribery Act includes
these as prohibited, but the reality is that few cases at this level are brought
to trial (see https://www.legislation.gov.uk/ukpga/2010/23/contents).
It is interesting to note however that the Swiss courts only as recently
as July 2016 brought their own laws into more alignment with other major
trading nations.
This emphasises the issue of international trade where not everyone is
operating according to the same rules and might be considered to be tak-
ing advantage of their situation in some unfair way.
4.5 Risk
All business activity runs under conditions of risk and uncertainty from
which they hope to generate financial returns. Generally, the riskier the
business activity the higher the rewards have to be to justify running the
risk, the so-called Risk Premium.
However, the words are used imprecisely since in an uncertain world
an outcome can be less than desired or greater than expected due to the
uncertainty. A bad outcome is called by many, a risk, but this ignores the
other possibility where the outcome is better. We can also talk of an
Upside Risk to reflect a better outcome or a Downside Risk where the
result is not welcomed.
Unwelcome occurrences can take many forms in life and business.
Some of these possibilities can be recognised and their financial implica-
tions estimated, their likelihoods estimated with a probability value and
the Risk Exposure calculated by multiplying value by likelihood. This will
help decide how much money it is worth investing to avoid the risk or
reduce their impact. However, it is often more about Risk Attitude which
reflects on a manager’s propensity to accept or take risks. This can be
translated into a prevailing culture of a business.
Possible impacts of course vary enormously in terms of size and
extent of their effects, and our extended supply chains exacerbate these.
Some risks are manifested as small perturbations in a flow, for example
when a planned delivery is late arriving at a manufacturing unit. The unit
b3235_Ch-04.indd 155 14-08-2018 06:28:56

“9x6”
operational managers are skilled at rescheduling and rebalancing their

resources to cope with this kind of effect and no one else might recognise
that the event happened. If it happens frequently however, that is the prob-
ability increases markedly, then larger remedial action might be needed
and this can take place across a contract boundary and be the subject of a
performance review.
Larger impact events can create larger disruptions in the flow, causing
larger efforts to try to cope and adjust, or in the limit, stop the flow alto-
gether causing a business interruption. The Nokia and Ericsson example
we used before demonstrated that the Nokia managers minimised the
impact of the same flow disruption that caused a calamitous production
failure for their Ericsson competitors.
So, disruptions can be anticipated or not (as in the unknown, unknowns
we talked of earlier); they can be evaluated by what are sometimes very
personalised estimations of probabilities affected by particular personality
features; they can be built into evaluation processes to estimate how much
it is worth to try and avoid or mitigate the impact if the risk happens.
However, rather like the lawyers who try and anticipate what might go
wrong in a contract and write mitigation and damage recovery clauses into
the contract, we cannot foresee all eventualities. We have also seen that for
small disruptions, local fast-thinking managers can adapt to reduce the
impact. However, how do we deal with sudden, large impacts? The supply
chain can be part of the answer if the relationships are good since imme-
diately there are more resources and distributed knowledge to bring to
bear on finding workarounds, if not permanent solutions. Part of the
Nokia story demonstrates this feature as well.
One key factor is available time to respond. When the crisis hits with
no warning, then the task is much bigger, so getting warning of possible
problems allows for a more considered response with perhaps some alter-
native options. How do we get such warnings? Cooperative relationships
in the supply chain, backed up by the right communications channels and
the right attitudes, can help greatly. The problem sometimes is that rather
than admit to an issue arising which might create a supply problem later,
there is a tendency for suppliers in particular to try and fix the issue before
telling their customer of the circumstances. This is partly to ensure their
customer does not have any information which might cause them to doubt
b3235_Ch-04.indd 156 14-08-2018 06:28:56

Contract 157
the supplier’s capability and partly to demonstrate their coping ability to

themselves and if necessary their customer as well. However, it is actually
best practice to inform the customer of all such possibilities as soon as
they become apparent since this allows the customer to also begin to think
of plans to cope if the problem materialises. The supplier should still
inform their customer of what they are doing to avoid the issue impacting
their service delivery to the customer even if no action is requested from
the customer in the meantime. Both parties can then be part of solutions
if that becomes necessary, but at least the customer has had time to think
and consider their options as well.
In the same way as product design can incorporate robust features to
ensure quality, the business relationship needs to build robust interaction
and communication processes to ensure the supply chain has a chance to
overcome disruption challenges.
In many global supply chains, the source of a problem can be very
difficult to find. Food adulteration issues in the milk supply chain in
China spread around the world, while the horsemeat scandal in Europe
had a supply chain which crossed many national borders. Problems
included lack of visibility into the extended supply chains, insufficient
quality checks or in fact criminal misreporting or ignoring of concerns.
Driven by small actions by uninformed and uneducated small farmers in
China and criminal gangs in Europe, regional governments and clients of
the supply chains had to greatly increase their inspection regimes, but in
China this was after very many children in particular died or became seri-
ously ill after consuming adulterated milk products.
The major lessons learned were to do with the major brand companies
seeing past the first tier of suppliers and in effect cascading the best prac-
tices back up the supply chain to earlier players. The major brand compa-
nies had to deal with major reputational risk effects, product re-calls,
customers switching brands or stopping buying any similar products and
renewed and increased focus on how they ensured compliance to their
own and international quality and food safety standards in all areas of
their supply chains.
Here again is evidence that business risk can never be outsourced or
removed through market trading. The responsibility (especially for safety
but actually for all the product/service features) is still the final supplier’s
b3235_Ch-04.indd 157 14-08-2018 06:28:56

“9x6”
or brand owner’s to ensure that what they process and pass on to their
customer is everything the customer believes it to be and the supplier can
also prove it to be so approved. This is a legal requirement in developed
marketplaces and more importantly a moral obligation, in order to be
worthy of a customer’s trust.
Customer trust is what provides the supplier with a licence to trade but
once lost is very difficult to recover, if indeed recovery is possible. Even
the mighty Toyota got much of this wrong when they suffered problems
with faulty braking systems around the world (see http://www.motortrend.
com/news/toyota-recall-crisis/).
4.6 Measurement
All businesses need to measure their activities at all stages of the transfor-
mational processes we discussed earlier in the Operations chapter. Neely
(1998) suggested that there were four purposes and three uses of measure-
ment, which is a helpful way to consider the issue. Under the purpose head-
ing, we have Check Position which relates to classic control as one might
drive a vehicle for example or operate a room thermostat. Once identi-
fied, the measurement can be used to Communicate Position to all of the
relevant stakeholders, for example reporting on financial results to share-
holders and financial analysts. Measurements also allow us to Confirm
Priorities as it might be that we have stayed in control but the world has
changed and we need to refocus our strategic direction. For example, we
may have increased market share in our current market but we now realise
other markets are more attractive. Measurement can also be used as a
carrot or a stick to Compel Progress, in other words to reinforce directives
given to personnel either to improve up to the given standard or to accept
new directions as a result of a refocusing decision. Thus, the uses of the
measurement are to control against Key Performance Indicators (KPIs) and
in our supply chains these should have been mutually agreed as part of the
deliverables of the contract and should then be subject to reciprocal meas-
urement processes. We talked above about licence to trade, this is a form
of Health Check. Is the business doing what it promised in a consistently
efficient, effective, safe and socially constructive way? If not, then cus-
tomers can very quickly remove the licence to operate by simply not
b3235_Ch-04.indd 158 14-08-2018 06:28:56

Contract 159
buying from them anymore. Of course, some businesses operate in highly

regulated markets in finance and aerospace sectors as well as legal and
medical professions for example and the licence to operate is real and
tangible and might be displayed on the walls of the business and in their
advertising. The final use is to Challenge Assumptions. The market exam-
ple above illustrates the point. We had assumed that one market was the
place to be, but new information causes us to reexamine that choice to see
if there is a better one. In the supply chain, this might be when having
committed to one supplier we find a new supplier with a much superior
product or demonstrated performance success and we have to ask is it
worth the changeover or switching costs of cancelling one arrangement to
build another or can we realistically refocus the existing business and its
measurements but stay with the current supplier.
First of all, we need to understand the difference between efficiency
and effectiveness. Efficiency is about use of resources and can be consider
the ratio of useful output to input, but effectiveness is about the overall
benefit of having done the action. Sometimes it is described as ‘Efficiency
is about doing things right while Effectiveness is about doing the right
things’. However, doing the right things can be achieved inefficiently so
we need to do both. There is another issue however in that efficiency is
more often measured at a local level where quantification is possible and
this is where the problem of Sub-optimisation can happen. This is the situ-
ation where a local, efficient result is achieved, but at the total business
system level the result is less effective. For example, a production opera-
tions manager can be very efficient producing more output than scheduled
of one kind of product using the same input resources, but if all it does is
to create a delay in working on other desired products then the system
effectiveness is reduced. Why would this happen? It can be because
reward systems can produce unexpected consequences if not thought
through properly. If the local manager is incentivised on the basis of effi-
ciency and not effectiveness, then it is in her best interests to optimise
efficiency and the business overall will suffer.
In extended supply chains, where there are a series of one-to-one
relationships and contract links with effects rippling up and down the
chain, it may be that one part of the chain should be inefficient in order to
make the chain effective overall. However, without the total view of the
b3235_Ch-04.indd 159 14-08-2018 06:28:57

“9x6”
chain and an appropriate rewards structure at chain level, where is the

incentive for a supplier, far removed from the area of concern, to perform
inefficiently? In these circumstances, relying on a serial set of communi-
cations and requests for change to ripple back to that supplier is unrealis-
tic. It might be necessary to bypass many links and go direct to the
supplier to find a way to compensate them for the local inefficiency.
Of course, getting agreement on the appropriate chain levels of per-
formance measurement is a difficult task, but performance against agreed
metrics at all points along the chain is a good place to start and to focus
on the customer satisfaction of the final consumer on whose payment all
in the chain ultimately depend.
If all contracts could avoid the 9.2% loss of value identified by
IACCM, then all in the chain would benefit alongside all of the customers
along the way to the final consumer.
4.7 Business to Business Relationships

This book has argued that for those critical few customers and suppliers,
there is no logical alternative to cooperative and mutually supportive rela-
tionships of the partnering kind. We have seen how the processes to iden-
tify and form agreements with preferred partners is challenging, but we
must also recognise that life after selection should not be easy. The effort
to provide a win on both sides of the relationship is significant and that is
why it is not sensible to try and work this way for all relationships. This
indeed is the logic behind the relationship portfolio approach, but the
mutual measurement and challenge to continuously improve captures the
quality journey ideal as well.
Part of the contract discussions should be to capture these features
and make them part of the normal way of working, and we have also
argued that the benefits split needs to be agreed upfront. This is not
based on any historical perceptions of the power of the customer but
rather a considered and considerate mutual evaluation of what is appro-
priate and fair to each party. One group in the USA calls this approach
‘Whats in it for WE’ rather than the historical and adversarial approach
where the WE is replaced by ME. This is a movement based on research
done at the University of Tennessee which aims to promote this kind of
b3235_Ch-04.indd 160 14-08-2018 06:28:57

Contract 161
thinking under the Vested banner (see http://www.vestedway.com/laying-

the-foundation-whats-in-it-for-we/).
In the UK, the Institute for Collaborative Working has been instru-
mental in creating an International Standard in ISO 44001 2017 for
Collaborative Business Relationship Management Systems (see http://
www.instituteforcollaborativeworking.com).
4.8 SCMG Ltd Contract Management Benchmarking

Framework
In 2010, The Royal Bank of Scotland commissioned the author, through
the University of Southampton, and the consultancy company SCMG Ltd,
to investigate how to benchmark their contract management practice. This
led to the creation of an online survey tool and the growing of a group of
interested practitioners who respond to an annual survey, which RBS still
supports through participation and hosting events. The online site demon-
strates the logic behind the contract management model with examples
and discussions, so will not be repeated here. The model is simple, but to
our minds, captures the important features also discussed in this book.
Participation is free and geographical location is not an issue (see
http://www.scmg.co.uk/cmb/manage.htm).
4.9 People Skills
The essence of this book is that the business need is paramount, and how
we choose the internal organisation of our business can create divisions
and difficulties to coordination and effective performance. The biggest
challenge is the understanding and vision (or the lack of these things) of
the management group, since with the right amount of time and resource
allocation most things in business can change. So we need to have edu-
cated and motivated leaders. However, the overall model is not just
dependent on them. The concept of a supply chain helps reduce the sig-
nificance of boundaries between business entities, but the same driver
should also be apparent inside organisations since if there is no atmos-
phere of collaboration inside the organisation, it is likely to be less than
optimum between organisations.
b3235_Ch-04.indd 161 14-08-2018 06:28:57

“9x6”
Relationships with key customers and suppliers is fundamental to this

networked world, but we still have to manage the currently non-critical
relationships and contracts for even very low value items or services can
become critical very quickly. We need to be training people at all levels
in our organisations to welcome the challenges of thinking about larger
supply chain issues and looking to grow effective responses to ensure
customer satisfaction and sustainable business activities.
Not all relationships need to be fully collaborative, but some of the
general principles should be uniform across most areas. Considerate and
data-driven planning, effective and open communication channels using
IT systems to best advantage, face-to-face discussions and attentive listen-
ing, striving to be and do the best with an attitude of continuous improve-
ment can all be applied. One set of skills that is often neglected is that of
selling ideas based on thorough business case generation. With the reduc-
tion in the importance and use of power, the business activities are much
more about persuasion and in that sense an idea has to be sold to the other
stakeholders.
Perhaps the most obvious place to start on this improvement journey
is to accept the challenge of the 9.2% of revenue wasted through poor
contract management and do something to reduce and finally eliminate
this waste of scarce resources.
b3235_Ch-04.indd 162 14-08-2018 06:28:57

Chapter 5
Possible Futures
The great science fiction writer Arthur C Clarke first said in 1962 that
‘If an elderly but distinguished professor says that something is possible,
he is almost certainly right; but if he says that it is impossible, he is very
probably wrong’ Clarke (2013). This author certainly fits the first part of
the description if not the second, but here goes anyway.
5.1 Global Warming
What we have been discussing so far is the current state of the world, as
seen by this author at least. However there are many suggestions that in
many fields driven by technology we are standing or getting close to a
cusp where things might change very quickly. The biggest possibility to
many people’s eyes is climate change, and for all those who deny the
weight of scientific evidence and informed opinion there are increasing
legions who believe action is needed now to give our children a chance to
have a future on this planet. One of the scariest thoughts might be the
changing rate of change. So far, we are concerned about the rise in CO2
emissions and more recently the particulate emissions from diesel vehi-
cles but these trends have been somewhat slow suggesting that we might
have time to respond, change behaviours or invent a new technological
solution. However, the cusp aspect comes from possibilities of global
warming from permafrost under the tundras at the poles, releasing meth-
ane (the chief CO2 gas) in great quantities very quickly. This could
163
b3235_Ch-05.indd 163 14-08-2018 06:29:36

“9x6”
accelerate the warming effect and thus bring catastrophic change more
quickly and severely. The melting of the polar icecaps where, as the ice
melts global seal levels rise, exacerbates this.
Shipping transportation is a large contributor to global warming,
using as it has the dirtiest type of fuel oil for its engines. Legislation is
forcing this to change but will it come quickly enough? Our current global
supply chains have been chasing low-cost labour sources around the globe
but in many products labour cost is not the most significant one. For too
long, the same narrow and sub-optimal view has been taken but once we
begin to seriously calculate the real, total cost of our global supply chains
will we be happy to continue? Part of the logic for these approaches has
been the different evolutionary state of the business activities around the
globe, but as emerging nations approach or exceed parity in gross domes-
tic product (GDP) with the old developed world perhaps these pressures
will be replaced by trends to reduce the length of the global supply chains.
In this process, more local groupings might be anticipated where even
more trade is within the local group than between them. Of course, the UK
leaving the EU and USA leaving the Trans Pacific Partnership (as it was
called at the time) goes against these trends. Indeed, the Chinese Belt and
Road initiative, although driven by and supportive of the ambitions of
China to become or maybe consolidate their role as the leading trading
nation, still envisages a degree of global trade between trade groupings, so
who knows how it will turn out? At the very least, one would expect
global businesses to take a more holistic view of the economic and social
impacts of their decisions about where to locate their business activities.
5.2 3D Printing
Another feature to challenge the need for logistical distribution at all is the
rise in what has come to be called 3D Printing. While actually a very wide
range of different techniques, the essence is that materials are produced in
layers similar to an ink on paper printing process except that structures are
created in the third, vertical direction to produce composite parts which
often do not need to be assembled in the way that traditionally produced
items would be joined together. Nevertheless a layer-by-layer structure
takes time to complete. The range of currently practical materials, while
b3235_Ch-05.indd 164 14-08-2018 06:29:36

Possible Futures 165
wide, is not as wide as in traditional manufacture and there are still

practical reasons to favour traditional methods, especially for high-

volume, simple parts. Biological materials can also be used to create
structures to mimic human ones so that alternatives to transplant surgery
and electrometallic systems are becoming possible. This demonstrates
perhaps the focus of likely applications of 3D printing which are for low-
volume, relatively unique parts. Its main role in manufacturing may be in
prototype generation and testing, especially for the tooling to produce in
volume later through plastic injection moulding perhaps.
Maintenance and repair is one area where 3D printing makes most
sense. By its nature, a complex piece of equipment which needs a
replacement component part poses huge logistical problems. Do we store
(where?) inventories of parts in case of an unpredictable failure or do we
hope to react to the failure by producing the part, as if for the first time,
which then gets delivered along some logistical pathway. Both of these are
more or less impractical. Space travel demonstrates this, where space is
limited for inventory and a replacement part cannot sensibly be sent to fix
the problem. Storing the right kinds of materials on board a space ship, for
3D printing on board as required, is a theoretically better solution to the
problem.
5.3 The Internet of Things

One of the greatest inventions of the 20th Century has been the internet and
its essential openness and lack of central ownership has allowed for rapid
expansions in scale and reach so that it is hard to envision an world where
the first response to any question is not to Google it and search Wikipedia.
Of course, the lack of central control has also produced concerns of a
variety of types and some of the companies actively involved have huge
financial and, maybe indirectly, political power. Until recently, the inter-
net required computers in some form (from smartphones, tablets, laptops,
desktops to data centres) to connect to other computers over global net-
works, but this still involved humans directing some enquiry or communi-
cation. The next big thing is to embed in a variety of artefacts (from
clothing to refrigerators to vehicles to light bulbs and so on) sensors which
can connect to the networks and create the Internet of Things. This greatly
b3235_Ch-05.indd 165 14-08-2018 06:29:36

“9x6”
expands the possibilities for working and living in new ways as well as
some scarier scenarios. It is possible to have your refrigerator monitor
your food consumption and refresh your food stocks automatically by
sending a purchase order to the supermarket and have the delivery made,
probably to some safe place on your property or for pick up on the way
home from work. The refrigerator can also warn when your food is
approaching its best before date so can reduce the likelihood of food
poisoning. Home security and access control can be done in this way and
remote monitoring and permissions can be granted. You can see what
your pets or aged relatives are doing and take some actions from a dis-
tance. More eco-friendly domestic heating and lighting controls will
reduce overall consumption.
Already, aircraft engines have machine logging sensors and condition
monitoring built in, and as the aircraft lands the flight operational data is
downloaded and analysed so that maintenance planning can be better
informed. This is very significant as without this data the maintenance
people often will not know what they need to do until they open up the
engine and see for themselves. This makes the extent and duration of the
repair uncertain in an industry where fast turnaround is key to profitabil-
ity. After all, the aircraft only earns money when it flies. As the engine
manufacturers move more to ‘Power by the Hour’, it is in their interests to
reduce this downtime to a minimum.
The possibilities are very extensive and limited only by human imagi-
nation, and entrepreneurial drive along with much greater network visibil-
ity and social acceptance.
5.4 Robots
At the moment, Robots are limited examples of this. While relatively sim-
ple robots are already very important in manufacturing factories, nuclear
and disaster search and rescue and clean-up operations, their application
to more general applications are still patchy. In Japan, there is a high level
of acceptance for companion and health care type robots around the home,
but much work is ongoing to develop them to allow for higher acceptance
levels more widely. There is a fundamental question about how human-
like we want them to be for domestic acceptance and even simple delivery
b3235_Ch-05.indd 166 14-08-2018 06:29:36

robots being tested in Los Angeles are being constrained by the local
politicians in terms of their speed and place of operation. Society, however
represented, has some difficult questions to answer.
In the factory, however, the trend is clear. People are just too expen-
sive and variable in their behaviour (while also needing to eat and sleep),
so the robots are progressively replacing the human workers. Foxconn, the
main sub-contractor making products for Apple and Samsung, is replacing
work people with robots on a massive scale (see http://www.bbc.co.uk/
news/technology-36376966).
At the moment, most of these robots are not designed to be able to
safely work alongside humans and tend to work behind safety fences, but
over time it is possible to see robots working as part of a mixed team with
humans, where this makes sense. This is already possible in remote sur-
gery where a skilled surgeon in one location operates a surgical robot in a
different location and performs a surgical procedure that was not available
locally. Distributed medical treatment of this kind has a huge potential
given the areas of the world which do not have the same levels of health
care, or the practitioners of this kind of skill level.
All robots are not of course applied in universally beneficial ways for
all of the populations involved. The use of drones in conflict zones
removes the direct risk for their pilots who would otherwise fly these mis-
sions but might mean that the collateral damage issues are more extensive.
There is also the possibility that effectively killing people from the com-
puter screen in one country produces a certain detachment from the
human horror at the receiving end so that the drone operators find it psy-
chologically easier to fire the missiles and then go home for dinner with a
more limited awareness of the actions they have taken. Does it make it
easier for politicians to take such decisions about conflicts when they have
no ‘Boots on the Ground’? On the other hand, remote monitoring might
make the prosecution of war crimes easier and therefore act as more of a
deterrent. In these issues, there are clearly no easy answers, but if the
technologies are there then they are likely to be used. War is played by
adversarial games in which win wins are not likely. Only diplomatic
games can hold out the possibility of that kind of result.
Of course, drone technology can have beneficial uses in civilian
society. Already a drone has dropped safety flotation equipment to save
b3235_Ch-05.indd 167 14-08-2018 06:29:36

“9x6”
swimmers in trouble off Australian beaches. Their use in search and rescue
operations can increase the areas to be searched dramatically and reduce
reaction time to rescue. Medicines can be delivered quickly enough to
be effective without worrying about the need for refrigerated transporta-
tion systems. In Tanzania, the Zipline company has a distribution system
based on drones flying at 110 km/h and a communications process built
around text messaging. In more commercial settings, drone technology is
being developed for use in the final delivery process to customers who
order with Amazon.
5.5 Blockchain
While cryptocurrencies like Bitcoin are gaining a lot of attention and con-
cerns exist about a black tulip, or South Sea Bubble effect, what lies
behind this is the use of Blockchains. A blockchain is in effect a comput-
erised record or transaction ledger where a particular event is recorded,
encrypted in a highly secure manner and then validated by a globally
distributed network of computers. In this way, no record can be changed
by any individual since all in the network would have to accept the change.
This makes it very secure against hacking or fraudulent behaviour. The
involvement of so many other parties also makes the system very secure
and fault tolerant as in effect there is a high degree of redundancy in
the network that no organisation or company could afford on their own.
The further application to Blockchain 2.0 allows the creation of Smart
Contracts which have the capability to facilitate exchange between two
parties so that a supplier for example gets paid automatically when the
delivery is registered at the buyer’s end of the chain. This action disin-
termediates so that banks, for example, are no longer required to act as
storage of value and distributer of value on each side of a transaction.
Blockchain technologies are being evaluated in voter registration, rec-
ognition and vote counting. They can provide unique identities and
provenance information for all items and could avoid incorrect medicine
delivery in hospitals and the inaccurate inventory information in storage
facilities (which might be backed up by drone data collections perhaps).
Some argue that Blockchain provides a foundational technology that
b3235_Ch-05.indd 168 14-08-2018 06:29:36

will allow new forms of commerce to emerge, but in the meantime can
cause those businesses and activities that are disintermediated to disap-
pear from the scene with consequential impacts for turnover, taxes and
employment.
The impact of Blockchain approaches to business-to-business con-
tracting could be profound as would be the impact on house buying where
the unique identification will simplify the process of proving who has title
to the ownership of property thereby facilitating the process of offer and
acceptance.
For international trade, blockchain methods could greatly speed up
information processing, insurance and customs clearance, for many of the
same reasons as above.
Whether the cryptocurrency versions will replace money and credit is
still unresolved.
Given so many of the current systems need to have proofs of various
types to operate efficiently, the extent of these developments could be
profound.
5.6 Artificial or Computational Intelligence

Another foundational technology is Artificial or Computational Intelli
gence, however the definitions vary over a wide range. It is essentially
trying to replicate (and some argue surpass) the human abilities to reason,
analyse, decide and act and maybe also to create. Within bounded domains
there has been great success, for example the factory robots, but these are
essentially doing what the humans have instructed but without error.
Systems having more autonomous capabilities have also been demon-
strated in a variety of areas especially in gaming with Chess and GO
human masters being outplayed and even in the American TV game show
Jeopardy (which has no formal rules as in Chess and GO) and now we
have computer chess programs competing against each other. Partly this
has been a function of huge calculating power to work through all possible
combinations of possibilities (in Chess and GO), but in Jeopardy and the
newer game systems this has involved accelerated processes of learning
by experience and analysis of huge volumes of data to find out which
b3235_Ch-05.indd 169 14-08-2018 06:29:36

“9x6”
decision path is better to choose. The newer chess programs have also won
by not doing anything that human masters would have regarded as best
practice thinking, but it worked. The machines might soon be teaching
their teachers something new.
In our earlier discussions about the critical importance of the design
activity, we were worried about the fact that design decisions have cur-
rently to be made with an incomplete view of the world that the design
will inhabit and thus decisions made in good faith in these circumstance
will be flawed in some sense as new information from elsewhere in the
extended networks becomes available. To make sense of the different
knowledge domains and real-time data (and future projections from
markets perhaps) and build this into a design system that can allow the
designer of the future to make a fully informed set of trade-off decisions
to specify the most stable and ecosystem friendly design, such that right
first time becomes a realistic possibility, will require a very creative and
well-resourced effort. The organisation that can make that happen will
have no difficulty selling the product if it is at all reasonably priced, for
the need is real and urgent.
The current race to develop autonomous vehicles (including the
drones) is an example of how many different knowledge, technical, regu-
latory and social domains need to be incorporated into the intelligence
built into a variety of computer systems. For vehicles, the internet of
things might aid this as every vehicle, traffic light, road architecture and
pedestrian(?) might be connected into the available knowledge space.
It is also worth noting that as of 2016, 30% of all civilian jobs required
some form of involvement in driving a vehicle, so what happens to these
jobs when autonomous vehicles are fully developed? (see https://www.
bls.gov/opub/ted/2017/30-percent-of-civilian-jobs-require-some-driving-
in-2016.htm).
There are currently serious attempts to address the ethical dimensions
of driving in that given a choice in an evolving, dangerous emergency situ-
ation should the car save the occupants of the car and kill a pedestrian or
vice versa?
In the movie ‘I, Robot’, Will Smith’s character is saved from his sub-
merged car while the 12 year old child in the other car is left to drown
because the robot calculated that Smith had a better probability of survival
b3235_Ch-05.indd 170 14-08-2018 06:29:36

and only one person could be saved in the time available. Smith’s view is
that a human would have chosen the other way round. We could argue of
course that the programming could have had a rule to favour the young
over the older person but then the film would not have worked the same.
The film also features Asimov’s Three Laws of Robotics even if they
attribute them to one of the characters in the film. The logic of the three
laws has been seen to be dangerous to humanity and is the point of the
film. Asimov later added a fourth or zeroth law to deal with this concern.
Significant thinkers see in these developments a threat to human society
or maybe a merger of the computational with the biological as we evolve
to a society of cyborgs. The science fiction writers may have valid points
for us to consider?
The essence of all of these developments is the increasing power of
computers, their miniaturisations, the internet and network of things and
the ability to very rapidly process vast quantities of data to look for pat-
terns which are difficult if even possible for human intelligence to per-
form. The computational intelligence label is to indicate this difference in
capabilities, origins and structure of data processing.
5.7 Job Displacement
It is the ability overall to process large data sets which might be the most
disruptive of our current world model. Martin Ford (Ford, 2015) used the
word ‘predictable’ to define the jobs that are most at risk in the new indus-
trial revolution that is dawning. Any job which can be described as repeat-
able patterns of behaviour can be taught to a computational intelligence or
even better, learned by that intelligence by simply high-speed analysis of
huge data sets. This definition captures many middle management jobs.
In health care, radiologists scanning mammograms have human error to
contend with as they become tired or distracted and they have a limit on
how many they can process in a given time. Smart learning algorithms do
not have these constraints, and this capability will also impact legal activi-
ties (especially reviewing case law), contract managers comparing different
contractual clauses and outcomes and logistics planners trying to optimise
vehicle routing plans. Other professions affected will include scientists,
journalists, pharmacists, insurance and banking sector employees, trading
b3235_Ch-05.indd 171 14-08-2018 06:29:36

“9x6”
companies and freight forwarders in international trade, maintenance

planners, and so on.
What will happen to the people currently employed in these activi-
ties who are currently well educated and experienced and core to their
societies?
5.8 Universal Basic Income

Anglo-Saxon style capitalism is no longer delivering sufficiently well-
distributed benefits to society.
In the west, we have experienced the progress of society as Creative
Destruction (Schumpeter, 2008) where the entrepreneur sees new ways of
competing through new technology or organisational thinking which cre-
ates a new normal, new jobs as well as old discarded jobs and the people
who used to perform them. This has worked dramatically well to create
growth in economies around the world and, as the thinking spreads
through globalisation, millions of people have been lifted out of poverty
in newly developing societies. The theory concerning the displaced work-
ers was that some of them would be retrained to be fit for the new jobs that
the innovation needed, but of course not everyone could be retrained or
could afford to move to new locations for the new jobs. They became the
‘left behind’ so that in rust belt towns, little is left but often part-time work
on zero-hour contracts or indeed no work at all. Many of these people
were males who had been employed for their motor skills in factories or
mines. Some growth in employment numbers but not always full-time or
well-paid were women now trying to juggle even more demands on their
time and attention. The left behind people become a burden on the state.
The state responds by voting through complicated forms of welfare pay-
ments but these then have to be administered by other state employees.
But none of this contributes much by way of added value to society. All
the time the left behind feel degraded and undervalued in the society
where once they were major contributors. In the meantime, large areas of
activity are not even counted by the KPI of societal development, GDP
including the black economy of cash transactions, homemakers and later
carers, volunteers for charities and soup kitchens. In all societies, there
is no shortage of useful work that could be done, but currently our
b3235_Ch-05.indd 172 14-08-2018 06:29:36

governments can find no mechanism to pay people to do the work. Our

populations also vote with their actions or inactions that some jobs are not
suitable for them in some way and often immigrant labour (who entered
into the country legally or not) provide basic efforts to keep agricultural
harvesting viable for example.
Wealth is still being created, but the existing processes favour the
owners of capital above the value creators and also the manipulators of
capital benefit as they find new ways to monetise different activities so
that they can be traded for local profit but no real added value. After the
financial crash of 2007/2008, who was prosecuted for almost destroying
international businesses on a global scale? Instead, the financial institu-
tions were considered too big to fail and politicians worried about a com-
plete global collapse propped up the banks, helped recapitalise them so
they could go largely on the same path gambling with other people’s
money. As part of their reward structures, they take a disproportionate
share of the artificial profit through inflated salaries and bonuses with
which they buy more high-end goods and services while inflating house
prices to the extent that many millennials will be poorer over their life-
times than the older generations, especially the baby boomers who had all
of the benefits when the economic benefit distribution was more
equitable.
When Vilfredo Pareto was looking at the distribution of the ownership
of the land in Italy in 1896, the distribution of the benefits were 80% of
the land being owned by 20% of the people. In the USA in recent years,
and especially since the financial crash of 2007/2008, the income inequal-
ity figures have become much more dramatic (see https://inequality.org/
facts/global-inequality).
The top 10 billionaires in the USA owned more wealth in 2016 than
the total GDP of each of the following countries: Nigeria, Belgium, Iran,
Norway, Thailand, Austria, United Arab Emirates, South Africa and
Colombia. In the meantime, the top tiny percentage has gained the most
value out of the recovery and the middle is essentially also being left
behind. While using the statistics available at the time of writing, Robert
Reich (Reich, 2010) argued that there are no signs that the inequality gap
is reducing, in fact the contrary position holds and, he warns, threatens the
future of the USA.
b3235_Ch-05.indd 173 14-08-2018 06:29:36

“9x6”
Part of the problem is that this form of capitalism argues that only
those directly involved in wealth creation have the right to participate in
any benefits generated. This of course leaves government and society to
sort out what is to support the left behind parts of the population. It also
encourages the use of tax avoidance and clever use of different corporate
taxation rules around the globe for corporations and individuals to hide
their wealth, while building it even higher.
Of course, many religions around the world recognise the need for
wealth generation and recognise the need for, and even obligation to
make, contributions to society through charitable acts to aid those less
fortunate than themselves.
There is no denying however that such gross inequality is not sup-
ported as valid or healthy by large parts of the population in many coun-
tries in the world. It has even been suggested that people who regard
themselves as the left behind have voted for decisions seen as extreme by
many other voters actively participating in the successful parts of the
economy. Trump in the USA targeted rust belt voters among others, while
in the vote to exit the EU parts of the UK where industrial jobs had largely
disappeared supported the leave option against all of the ‘expert’ advice
that the economic damage would be significant. It is as if anything would
be better than what they currently experienced.
Whose fault is it that the displaced workers do not get proper retrain-
ing or support? With the Anglo-Saxon capitalistic model focused on the
participating employees and owners, it as if we have reverted to a narrow
sub-system view that anything outside these self-drawn boundaries were
irrelevant. That thinking has been shown to be flawed in terms of eco-
logical, safety and Corporate Social Responsibility concerns, and so the
system boundary of the business concern has become more porous or has
been extended to include these concerns. What will it take for large, suc-
cessful businesses to include the left behind inside their system bounda-
ries? Rather than objectives that focus only on limited scope benefits
through customer satisfaction, why can we not design systems where
part of the economic benefits of market success are routed more directly
to parts of the population who did not actively participate but are still
part of the society which gives us a licence to trade? When possible, the
left behind still spend what money they have to keep the wheels of
b3235_Ch-05.indd 174 14-08-2018 06:29:36

commerce turning. As consumers, they still contribute to the economic

activities counted in the GDP figures. Should society not value this role
more rather than see them as useless or lazy? Rather than taxing the
income of those fewer people employed, can we not concentrate on the
wealth generation processes at the corporate level and introduce a taxation
regime where the first call on profits goes to government for distribution
across society. This would need to be done in a way that removes the cur-
rent stigma of dependence on charity and welfare benefits when out of
work, and replaces this with a system of Universal Basic Income which
gives to all a living income so that they can be full members of the society,
spend their money as they wish and so keep money circulating in the
economy. If this could be done well enough, it would also be possible for
individuals to do the things that interest them rather than the things they
must do in order to get a wage and live. It would also be possible for the
few that have the skills and interests to become part of the economic
wealth generation process for added income or indeed continue to be
carers, craftspeople, artists and musicians or just better neighbours and
community activists.
This idea sounds like a modern Utopia, but it is now being seriously
examined in a number of economies. Rutger Bregman’s best seller dis-
cusses this as an idea both whose time has come but also as one that will
be enabled and made necessary by the technological advances we have
been describing (Bregman, 2017).
Of course, if your world view is that people are inherently lazy and
will waste such automatically provided income, then you will not believe
this is possible. The rise of the robots and artificial intelligence-driven
technologies, with their potential to displace jobs on a massive scale never
seen before in previous industrial revolutions, means that we need to
rethink our priorities, our deeply held assumptions about economies and
human nature, otherwise we are building up an unsustainable situation
where the very wealthy will retreat even more behind their high walls,
private islands and mega yachts until another kind of revolution redresses
the inequality.
b3235_Ch-05.indd 175 14-08-2018 06:29:36

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Chapter 6
Supply Ecosystems
and Competitive Advantage
For the near future, we are still going to be faced with the need to
operate our current business systems but ever more productively, for
one of the globalisation lessons is that if you are not successfully part
of it someone from somewhere else will soon come over your horizon
and take your lunch.
The key lesson of this book is that in business almost everything is
connected to something(s) else and more or less interdependent with
them, and if we do not start with that holistic vision then we will be creat-
ing friction between the bits of our system rather than building an inte-
grated, interdependent and co-destiny business ecosystem.
In this book, we have concentrated on the Supply side and, to some
extent, taken the Demand side as given. That is to say, we have not tried
to incorporate the Marketing activities into the discussions. We have how-
ever recognised everywhere the importance of knowing and understand-
ing the customer and, where possible and sensible, satisfying them. From
this, everything else flows, but the flows can also be reversed since the
supply side can create ideas for product and service offers which no cus-
tomer can envisage.
Applying all of the concepts we have discussed is not easy of course.
Ideas take time to be realised into practice, look for example how long
177
b3235_Ch-06.indd 177 14-08-2018 06:29:47

“9x6”
we have taken to begin to understand and apply the Toyota lean thinking
ideas effectively into many areas of business where they could contribute
massively.
While this is a challenge, it is also an opportunity. If it is difficult,
not everyone will try and fewer still will succeed, so if your organisation
can move faster down this path than your competitors, then by definition
you will be more competitive than them in the market place. The beauty
of the approaches discussed here is their contribution works on both the
demand and supply side. Many of the techniques are about reducing the
wastes that occur at the boundaries between sets of activities so impact
on cost reductions. However, the added value product and services offer-
ings impact on the sales side of market growth, customer satisfaction
and competitive advantage through the correct delivery of order win-
ners. Successful operation of these activities as component parts of one
solution is an organisation skill that will be difficult to replicate, so suc-
cess provides a lead that will be difficult for competitors to copy quickly.
They might buy the same technology as you but without the same inte-
grated view of the supply ecosystem processes, then their progress will
be limited.
Some principles to embed in your solution.
(1) Choose your customers carefully and get close to them, understand
them and manage them carefully.
(2) Satisfy your customers, but not at any price.
(3) Look for complementary skills in your suppliers and build co-destiny
relationships with the ones who are key to your future.
(4) Look for win–win approaches where possible and sensible in sup-
port of the business objectives.
(5) Recognise your role in the building of a better society and the sur-
vival of the planet.
(6) Give Design and Contract Management increased importance in
your organisation, but work in teams to make the decisions the best
they can be.
(7) Break down corporate boundaries where they are impediments to
cooperation.
b3235_Ch-06.indd 178 14-08-2018 06:29:47

Supply Ecosystems and Competitive Advantage 179
(8) Value integrity, intelligence and contribution at all levels, in all

locations.
(9) Invest in your people, your systems and your community.
(10) Deliver on your promises.
(11) Innovate and improve continuously.
b3235_Ch-06.indd 179 14-08-2018 06:29:47

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Appendix A
The RED/BLUE Game
The game is a simple one between two teams of around 8–10 people at a
maximum. They should be in different locations where they cannot see or
hear the other team’s discussions.
Objective
The objective of the game is for both teams to end up with positive scores.
The team with the higher positive score at the end of the game wins.
Playing the Game

The game is played over 10 rounds. In each round, the teams decide to
play a Red or a Blue which they tell the game facilitator. After each deci-
sion has been collected, the facilitator will tell each team what the other
team chose and the scores can be recognised and recorded before making
the next decision to play Red or Blue in the next round.
The scores are shown in Table A.1.
Table A.1 Red Blue Payoff Matrix.
Group 1 (3) Group 2 (4)

Plays Score Plays Score
Red + 3 Red + 3
Red − 6 Blue + 6
Blue + 6 Red − 6
Blue − 3 Blue − 3
181
b3235_Appendix A.indd 181 14-08-2018 06:26:45

“9x6”
The payoff for each set of decisions is shown in the table.

If both teams choose Red, then both teams score + 3.
If both teams choose Blue, then both teams score − 3.
If one team plays Blue and the other plays Red, the team voting Blue
scores +6 and the team voting Red scores − 6.
Note: Each team knows what colour the other team chose before they
make their next decision (except for the first decision).
The scores are cumulative over the 10 rounds and can be recorded in
a form as shown in Table A.2.
Table A.2 Red Blue Game Scores.
Round Group 1 (3) Group 2 (4)
Colour Score Colour Score

1
2
3
4
Conference Y/N Y/N
5
6
7
8
Conference Y/N Y/N
9
10
Teams are not allowed to talk to each other during the game, but after
rounds 4 and 8 a conference is allowed.
The facilitator will, after feeding back the votes at the end of rounds
4 and 8, ask each team if they want a conference. Only if both teams want
a conference will there be one.
If there is to be a conference, one or two people from each team will
be taken to a neutral meeting place (away from the team locations where
b3235_Appendix A.indd 182 14-08-2018 06:26:45

The RED/BLUE Game 183
they can talk). The facilitator listens but does not take part in the
discussions. The conference concludes when the teams decide.
During rounds 9 and 10, the scores are doubled. That is +3 becomes
+6 and −6 becomes −12 and so on.
At the end of round 10, the teams are brought together to discuss the
game and the lessons learnt.
Note: Detailed facilitator notes are available for bona fide instructors
on application to the author at dkmacbeth1@icloud.com.
b3235_Appendix A.indd 183 14-08-2018 06:26:45

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Bibliography
Barney, J.B. (1991) Firm Resources and Sustained Competitive Advantage.

Journal of Management, 17(1), 99–120.
Bartlett, C.A. and Ghoshal, S. (1989) Managing Across Borders: The Trans
national Solution. Harvard Business School Press.
Bregman, R. (2017) Utopia for Realists: And How We Can Get There. Bloomsbury.
Brundtland Report (1987) Our Common Future, by the World Commission on
Environment and Development, p. 43.
Clarke, A.C. (2013) Profiles of the Future: An Inquiry into the Limits of the
Possible. London: Hachette.
Coase, R.H. (1937) The Nature of the Firm. Economica, 4(16), 386–405.
Crosby, P. (1979) Quality is Free. New York: McGraw-Hill.
Ford, D., Gadde, L.-E., Hakansson, H. and Snehota, I. (2011) Managing Business
Relationships, 3rd edn. Chichester, England: John Wiley & Sons.
Ford, M. (2015) The Rise of the Robots. London: Oneworld Publications.
Gattorna, J. (2006) Living Supply Chains. Harlow, England: FT Prentice Hall.
Hakansson, H., Ford, D., Gadde, L.-E., Snehota, I. and Waluszewski, A. (2009)
Business in Networks. Chichester, England: John Wiley & Sons.
Hauser, J.R. and Clausing, D. (1988) The House of Quality. Harvard Business
Review, 63–73.
Jensen, M.C. and Meckling, W.H. (1976) Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure. Journal of Financial
Economics, 3(4), 305–360.
Juran, J.M. (2010) Quality Control Handbook, 6th edn. New York: McGraw-Hill.
Kraljic, P. (1983) Purchasing Must Become Supply Management, Harvard
Business Review, 109–117.
185
b3235_Bibliography.indd 185 14-08-2018 06:26:59

“9x6”
186 Bibliography
Neely, A. (1998) Three Modes of Measurement: Theory and Practice.

International Journal of Business Performance Management, 1(1), 47–64.
Peters, T. and Waterman, R.H. Jr. (1982) In Search of Excellence: Lessons from
America’s Best-Run Companies. HarperCollins.
Parasuraman, A., Ziethaml, V.A. and Berry, L.L. (1988) SERVQUAL: A Multiple-
item Scale for Measuring Consumer Perceptions of Service Quality. Journal
of Retailing, 62(1), 12–40.
Penrose, E.T. (1959) The Theory of the Growth of the Firm. New York: John
Wiley & Sons.
Porter, M.E. (1985) Competitive Advantage. New York: The Free Press.
Prahalad, C.K. and Hamel, G. (1990) The Core Competence of the Corporation.
Harvard Business Review, 68(3), 79–91.
Rindfleisch, A. and Heide, J.B. (1997) Transaction Cost Analysis: Past, Present,
and Future Applications. Journal of Marketing, 61(4), 30–54.
Roos, D., Womack, J.P. and Jones, D.T. (1991) The Machine That Changed the
World: The Story of Lean Production. New York: Harper Perennial.
Reich, R.B. (2010) Aftershock: The Next Economy and America’s Future.
Penguin Random House.
Schumpeter, J.A. (2008) Capitalism, Socialism and Democracy. Harper Perennial
Modern Thought.
Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations.
London: W. Strahan.
Taleb, N.N. (2007) The Black Swan: The Impact of the Highly Improbable.
London: Penguin.
Taguchi, G. (1993) Taguchi on Robust Technology Development: Bringing
Quality Engineering Upstream. New York: ASME Press.
Vargo, S.L., Maglio, P.P. and Akaka, M.A. (2008) On Value and Value
Co-creation: A Service Systems and Service Systems Perspective. European
Management Journal, 26, 145–152.
Williamson, O.E. (1975) Markets and Hierarchies: Analysis and Antitrust
Implications. New York: The Free Press.
b3235_Bibliography.indd 186 14-08-2018 06:26:59

Glossary
Agile Manufacturing
Lean manufacturing was developed and is at its most effective in repetitive
production processes of somewhat standardised or modularised product
designs. For businesses which allow for more customisation, pure lean is
more difficult to implement. Agile tries to gain much of the benefits of
Lean, but also allows for changing customer requirements often by build-
ing buffer stocks of inventory at crucial decision points in the flow which
allow different options to be chosen.
Alliance
This form of agreement and agreed behaviours is set up by organisations
(not just companies) to fulfil some objective but is not a legal structure of
itself. It can be set up to market a new service offering or to promote some
cause. It is often used in construction businesses where, for the duration of
a particular project, the alliance is formed to try and coordinate resources
and provide mutual support to achieve the project objective often for a
reward-sharing benefit for a successful completion of the project on time
and on, or below, budgeted costs. At the end of the project, the parties
separate until they next see the benefits of forming a new alliance for
another project. They might form the alliance in advance to enable a joint
bid against a tender call.
187
b3235_Glossary.indd 187 14-08-2018 06:30:16

“9x6”
188 Glossary
Artificial or Computational Intelligence

This is the application of data mining of huge databases and deep learning
to allow machines to approach and often surpass human equivalent perfor-
mance levels. It has the potential to do very positive things in medicine
and business but raises the issue of more structural job displacement than
did any technology before.
Assemble to Order
This allows some degree of customer customisation through the design
of the product in modules which can be assembled in different configura-
tions to create somewhat different final products. The modules may be
stocked, waiting for the final assembly stage. It allows better customer
response while allowing some efficiency in producing the standardised
modules. Note, services generally cannot be stocked.
Asset Specificity
When a customer asks the supplier to purchase a piece of equipment, say
to supply a part or a service, but the supplier has no other customers look-
ing to use the equipment, then the supplier holds an asset that is specific to
that customer and is dependent on the customer to keep buying the service.
Equally, the customer has no other supplier who can provide the part or
service. The asset is specific to that relationship. They become locked-in
to each other.
Blockchain
This is a computerised record or transaction ledger where a particular
event is recorded, encrypted in a highly secure manner and then validated
by a globally distributed network of computers. In this way, no record can
be changed by any individual since all in the network would have to
accept the change. This makes it very secure against hacking or fraudulent
behaviour. The involvement of so many other parties also makes the
system very secure and fault tolerant as in effect there is a high degree of
redundancy in the network that no organisation or company could afford
on their own. Blockchains can provide unique identities and provenance
information for all items and could avoid incorrect medicine delivery in
b3235_Glossary.indd 188 14-08-2018 06:30:16

Glossary 189
hospitals and inaccurate inventory information in storage facilities (which

might be backed up by drone data collections perhaps).
Born Global
Such a company is not prepared to take a step-by-step approach over
many years to create market growth across country borders and aims from
its inception to see the world as the target market and will build supply
chains to service all the countries in its sights, at the same time.
Background Intellectual Property

This represents the IP created in prior circumstances and is completely
owned by the creators.
Benchmarking
This is a process where a group of organisations share their operational
data with each other in the hope that, by studying similar activities tak-
ing place in different settings or industries, new learning will be realised
allowing improvements to be made to the learners’ practices. Since com-
petitors will not wish to share these details, the benchmarking process
often excludes more than one party from each industry sector. It is not
about the actual performance number achieved but what processes were
used to create the number. Often, the parties will meet after the exercise
to debate and discuss the results and again avoiding direct competitors
allows for more open discussions. For example, organisations might
compare their production change over processes with the pit crew in a
Formula 1 racing team.
Black Swan
This is an example of an unknown, unknown. If all we have experienced
are swans which are white, we cannot conceive of the possibility of a swan
being black…until we find one! These rare events are usually located
(if recognised at all) at the extremes of the normal distribution (which is a
property of many populations of data) and are often ignored because of
their very small probability of occurring. When they do occur, then they
can change the world.
b3235_Glossary.indd 189 14-08-2018 06:30:16

“9x6”
190 Glossary
Building to Stock
This is necessary when demand for the product is expected but cannot be
forecast accurately enough to respond to actual orders. Stock items have
to be standardised. The stock is held in inventory in the hope that a real
customer will come along in time to demand it. If the item is perishable,
this complicates the planning process since after the shelf life time is
expired, the stock has a much reduced value. Note, services generally
cannot be stocked.
Bounded Rationality
Traditional economic theory assumes that decision-makers are rational
and look after their own self-interest above all else. The further
assumption is that with perfect information all such people would make
the same kind of decision. However, often information is not perfect
and, even more, people have difficulty dealing with complicated deci-
sion processes. Their cognitive abilities are limited by the limited num-
ber of factors they can deal with. The effect of this is that even if the
decision-maker was trying to decide sensibly, they are incapable
of reaching the perfect solution the theory would expect to be taken.
In this sense, the rationality is bounded or limited by these natural
constraints.
Business Angels
These are usually people with money available to invest in a growing busi-
ness, often in the expectation that their prior business experience and
network of contacts will be useful to the ongoing management of the
companies in which they invest. They will not usually be involved long
term as they often like to sell their shares at a profit and move to other
challenges.
Buying Centre
This refers to the wider group of people inside a business who are actually
involved in a procurement decision. It recognises that such decisions are
actually group based rather than the right of only one functional group like
procurement.
b3235_Glossary.indd 190 14-08-2018 06:30:16

Glossary 191
Civil Law
In this system, decisions made by the state are set out a framework of legal
principles. The origins go back to late Roman times.
Co-creation
For some products, there can be little or no direct interaction between
customers and suppliers in the detailed specification of the product.
However, most services and some products require a close interaction
with customers to really understand what they want and in some ways the
customers are part of the transformation processes as well as the supplier
organisation. Close involvement of this kind is described as co-creation by
the customers and their suppliers.
Common Law
Sometimes referred to as case law-based system, this applies in the
extended Anglo-Saxon parts of the world. Here, although the legislatures
will pass laws, the courts operate by judges’ interpretation of these laws
and their subsequent rulings in actual court cases, thus creating a prece-
dent that informs future decisions.
Core Competence
All businesses have some set of activities, supported by peoples’ knowledge
and skills, that they consider they are so good at that they can beat their
competitors in any fair evaluation of relative performance. This set of activi-
ties provides their competitive advantage and should be protected from being
stolen or otherwise acquired by their competitors. These activities should be
supported and developed through internal investment and should never be
outsourced to another party, as the intellectual property they represent could
then leak out and the advantage be lost. The other activities needed to pro-
duce a completely rounded good or service can be bought in from the mar-
ketplace to create a combined product or service to meet the customer needs.
Corporate Social Responsibility (CSR )

This represents the awareness that a business or other corporate entity rec-
ognises their wider role in society to better the situation of all stakeholders
b3235_Glossary.indd 191 14-08-2018 06:30:16

“9x6”
192 Glossary
who are in some ways affected by the activities of the business. Decisions
therefore cannot be based only on single criteria like financial benefit to
the business but on much more widely diversified issues. It is part of the
spread of sustainability concerns and recognises the positive and negative
impacts which businesses can create.
Cost
A supplier uses a variety of resources as input to their productive processes
as well as resources used to effect the transformation of the input resources
to output goods or services. Cost is the representation, in financial terms,
of the totality of the resources used to get to the end output stage. Cost is
therefore an internal measure and has much to do with the effectiveness of
the procurement of resources and the management of them through the
supply chain. It is independent of the selling marketplace. Price and cost
are not the same thing. They are driven by different forces, but cost is
subject to higher level of management control than is price where market
competitiveness affects the decision for a customer to buy. We can fail in
business if we cannot create more value from sales than we spend on the
cost of the resources we used.
Cost to Serve
All customers require some consideration to understand their needs and to
try to satisfy their expectations. However, some customers expect more
support and hence more cost from their suppliers, and the actual cost to
serve these demanding customers might produce a situation where the
economic benefit of keeping them satisfied is less than the cost to serve
them to this level.
Customisable
An organisation can make a strategic decision that they will offer variants
of their goods dependent on input from their customers (services are
inherently more customisable). They must then also determine the extent
of customisation they can afford to offer since all variants will cost more
than the equivalent standardised item since the production runs will be
b3235_Glossary.indd 192 14-08-2018 06:30:16

Glossary 193
shorter and planning more difficult. Unique is the enemy of low cost
(and often speed or response), in most businesses.
Counterfeiting
This occurs when an organisation copies, without permission, another
organisation’s product or service concepts, often at reduced cost and too
often at much reduced quality and safety levels. They then sell that item
as if it were genuinely produced by the original organisation, thereby
stealing sales revenue possibilities from them.
Degrees of Freedom
This concept recognises that designers starting with a blank screen or
sheet of paper can have an infinite set of choices (degrees of freedom) to
make but that as soon as one decision is made the number of choices
reduces by one each time. It captures the nature of a decision tree where
one choice starts a process of branching but also makes it difficult to move
from branch to branch without retracing all of the decision steps.
Design for (x) where x = Function

Design is responsible for translating the expressed customer expectations
or internally generated innovative ideas into an achievable specification
of the details of what the item is required to do to satisfy the customer
requirements.
Design for (x) where x = Process

Design must consider the functional requirement details and set them
against the existing or obtainable processes to ensure that the functional
requirements are capable of delivering the required functional specifica-
tions. If not then, there has to be a redesign of the functional specifications
to allow this to happen effectively.
Design for (x) where x = Quality

Design must ensure that the selected processes are capable of meeting the
required quality standards or must redesign some specification details to
make this possible.
b3235_Glossary.indd 193 14-08-2018 06:30:16

“9x6”
194 Glossary
Design for (x) where x = Sustainability

Design must consider all aspects of specifications and process details to
ensure that due consideration is given to the sustainability impacts of raw
material sourcing, energy use in manufacture and delivery as well as
safety and social well-being considerations in their own business and with
the customers who use the items.
Design for (x) where x = Recycling

Design must consider what happens at the end of the first life of the prod-
uct (less so for services) so that possible recycling, repurposing and value
recovery is economically feasible and can be achieved as efficiently as
possible. This will include identifying parts to allow for effective repro-
cessing and making possible disassembly, where relevant.
Design for (x) where x = Procurement

Design has to recognise the possible impact of issues of sourcing of both
goods and services so as to avoid supply interruptions during production
and delivery as well as potential price increases, as far as it is possible to
know in advance. Some consideration as to acceptable alternative solu-
tions would help future proof the design.
Design for (x) where x = Supply Chain

Design has to recognise the impact that extended supply chains can have
on the difficulty of coordinating and managing flows of goods and ser-
vices and consider (with others) whether the supply chain risks can be
managed or mitigated or if the design needs to be modified to allow for a
lower risk solution.
Note that at the time of writing, there are no known technical solu-
tions to bring this set of diverse requirements together at the designer’s
computer screen to aid the coordination of all of the Design for (x) deci-
sion processes.
Direct Procurement
This relates to all purchases which will directly affect and may be con-
tained in the final product. They are crucial to the final product value offer
b3235_Glossary.indd 194 14-08-2018 06:30:16

Glossary 195
and are part of the process of generating revenue. They are usually better
controlled than indirect items.
Downside Risk
This describes what most people think of when using the term risk. That is,
it is the possibility that the result of an action is against the best wishes of
the person taking the risk. The term risk also covers the opposite outcome.
Drones and Self-driving vehicles

These technologies use many of the same kinds of technologies as those in
Artificial or Computational Intelligence but also need levels of coordinated
databases that remain a challenge at this time. They also need social and
legal changes to match the technological ones for there to be acceptable
performance and safety in domestic and business situations. These tech-
nologies have the potential to displace massive numbers of people from
their driver roles with impact on employment and tax raising possibilities.
Dual Sourcing
Dual sourcing is used to reduce the risk of an individual failure of some
kind since all of the buying orders can be switched to the second, surviv-
ing supplier. However, there are now two relationships to manage. It is
also important to keep the output from both suppliers completely consist-
ent over time so that switching can be efficient.
Early Adopter
This is a customer who is motivated by newness and being first to buy.
They will buy from a respected brand almost without knowing the details
of the new product and will buy regardless (and often queue up to be early
into the store, think new Apple products). The order winner for them is
newness and having ownership of the item or experience of the service,
before their friends can buy.
Enterprise Resource Planning (ERP)

This is a suite of computer programs which work from individual
item descriptions as designed to coordinate planning of all of the
b3235_Glossary.indd 195 14-08-2018 06:30:16

“9x6”
196 Glossary
businesses resources. They work with customer demand data and design
specification and process information, to allocate people and equip-
ment to plan and deliver (from inventory or new production as required)
to meet the agreed customer delivery date. The systems connect to
customers and back through the supply chain and inform logistics coor-
dination to ensure effective flows into and through the extended enter-
prise (or supply chain). They are capable of simulating the effect of
changes to a plan so can be used for ‘what if’ type of planning. They
are a basic building block towards the fully integrated and coordinating
vision this book is describing but do not yet have all of the needed
information sources and controls in place as a fully interacting informa-
tion system.
Foreground Intellectual Property

This represents the IP created in new circumstances, and if this is done
purely internally it becomes part of the owner background IP. If this is
done as part of a collaborative process between a customer and a supplier,
then there needs to be agreement about who has ownership and exploita-
tion rights in the new foreground IP.
Foreign Direct (inward) Investment (FDI)

When a company chooses to invest in some capability in an overseas mar-
ket so as to aid their business growth, either in the new marketplace or in
sourcing to support their existing one, then the new host country will
regard them as Foreign companies making a direct investment into their
territory. FD Investors are welcomed because of the financial turnover, tax
revenues and employment opportunities they bring while the opportunity
for local people and businesses to learn new skills is an attractive addi-
tional, and maybe more important, opportunity to aid in the local develop-
ment processes.
Form Utility
Manufacturing creates form utility for a customer by transforming, in
some physical way, input resources to output products.
b3235_Glossary.indd 196 14-08-2018 06:30:16

Glossary 197
Functional Design
A buyer company will work with their preferred supplier because the
supplier has capabilities they do not have, to design certain aspects of the
product. The buyer has to specify general aspects of what the supplied
design has to do and how it has to function, but will not specify the details
how this will be achieved. Such functional design allows the supplier to
use their background knowledge to design something which will meet
requirements and successfully interface with other parts produced by
other suppliers.
Garbage In Garbage Out (GIGO)

This recognises that regardless of what you do internally, the outcome
cannot be better than the resources fed into the system from the supply
side. If bad quality comes from suppliers, then it cannot ever get better
without major effort and expense to correct it. Much better to ensure that
what arrives from the suppliers is guaranteed good quality, ideally so no
checking actions are needed, since this only adds more cost.
Global Trade Item Numbers (GTINs)

This is a global set of agreed standards to provide unique identification of
a variety of product features, producer, packaging, location and much else.
The numbers produced can be translated into linear or 2D bar codes and
thus allow for scanning in stores and tills as well as incorporation into
Wi-Fi-enabled tracking systems in Radio Frequency ID (RFID) formats.
Buyers can specify these numbers in their tender documents and thus
make it very clear what it is they wish to purchase.
Global Warming
For all those who deny the weight of scientific evidence and informed
opinion, there are increasing legions who believe action is needed to miti-
gate the human impacts on climate change now, to give our descendants a
chance to have a future on this planet. One of the scariest thoughts might
be the changing rate of change, which seems to be accelerating and pro-
ducing ever more severe weather situations.
b3235_Glossary.indd 197 14-08-2018 06:30:16

“9x6”
198 Glossary
Grease Payments
Some legal jurisdictions regard this as a form of bribery while others see
it as less extreme. Where bribery is used to change a decision in the favour
of the person bribing, grease payments are used to facilitate a decision
(speed up often) which will be taken anyway. Attitudes to bribery vary
around the world, but there are a number of international agreements to
try and stop it occurring or punish those involved.
House of Quality
This is a visual guide for designers to consider how customer require-
ments (the voice of the customer) can technically be achieved and to
identify trade-offs in the decision choices that have to be made. It can
also be used to compare a possible solution to those of a competitor’s
product to ensure some positive differentiation in performance can be
achieved.
Important Few
This relates to the most important 20% of the population in the 80:20 rule
applications. Making a small difference to these individuals leverages
much more impact on the whole population.
Indirect Procurement
This relates to all purchases that are not directly incorporated or support
the main product or service. They are however crucial to the functioning
of the business but are more like overheads in that they need to be spent
but do not often attract the same levels of control and focus as direct
procurement.
Initial Public Offering (IPO)

This occurs when a business is planning to grow and sells some or all of
its shares on a stock exchange, thereby generating large amounts (hope-
fully) of new investment from a large number of shareholders. Often, it is
the way in which Business Angels realise their investments and exit from
the company.
b3235_Glossary.indd 198 14-08-2018 06:30:16

Glossary 199
Inventory as Finished Goods

A build to stock approach creates final items ready for purchase. Once the
customer order is received, all that is needed is to pack the item and dis-
tribute it to the customer.
Inventory in Distribution
Goods as input to a factory and on route to the customer through the distri-
bution logistics system are all part of the value of inventory in distribution.
Inventory as Work in Progress

Any product which has completed some but not all of its internal process-
ing stages can be counted as inventory in the category work in progress
(that is not yet finished goods). Although they will be counted in the com-
pany’s financial accounts as assets, they really have little value until they
are finished and sold.
Inventory as Raw Material

Raw material inventory is a store of the input materials on which the fac-
tory can draw quickly when they need to make the next items. Sometime
it is worth speculating by buying more raw material then is operationally
required if the expectation is that supply prices will be rising in the future.
If this is the case, any stocks surplus to requirements can be sold to gener-
ate a profit.
In-sourcing
This is when a business, which needs to have access to goods or services,
chooses to have them operate as part of their own organisation. They take
ownership of these resources as a form of vertical integration.
Intellectual Property (IP)

This term captures the experience and knowledge embedded in systems
and people’s memories and is essentially the basis for the business to
compete in the market place. Particular versions cover Copyright ©,
Trademarks ®, Designs ® and Patents.
b3235_Glossary.indd 199 14-08-2018 06:30:16

“9x6”
200 Glossary
Internet of Things
As more items are produced with embedded intelligence and communica-
tions capabilities, it is becoming possible to think of a future in which
everything can be connected, and in some senses, coordinated. Self-
driving cars will need this capability as a minimum. Security and possibly
surveillance issues will also have to be addressed.
International
When a business wishes to expand out of its home marketplace and sell
in other geographies, their first move is normally to start by exporting
the same goods or services (if possible), which are available in their
home market. This first-stage expansion allows the company to become
International.
Joint Venture
This is a legal form of new company which is formed by the joining
together of previously separate legal entities. The JV must look after its
own interests rather than those of its parent organisation, so while the
parents might have had complementary skills and other features they now
have to transact with the JV as if they had no prior history. JVs are often
between companies which are close to being peers, but this is not a legal
requirement. Suppliers and buyer companies could form a JV to move into
a new country market for example, to offer a one stop shop service in that
market.
Just in Time
This is effectively a make to order format extended into the factory so
that if there is no demand from intermediate customers in the factory,
then no output is created. This avoids large stock holdings while allowing
high levels of variety to customers. It requires frequent deliveries from
excellent suppliers, very high quality levels and people involvement in
continuous improvement programmes. This is the method most manufac-
turers aspire to replicate. Toyota was the first company to make this work
effectively.
b3235_Glossary.indd 200 14-08-2018 06:30:16

Glossary 201
Lean Production
This is another name for a Just in Time system or Toyota Production
System. It aims to operate with high quality and low inventories.
Learning or Experience Curve

Repetition of any task over many repeat actions makes the action more
efficient and less costly in resource terms. This is a learning process,
and the plotting of the progressive improvement tends to follow a similar
mathematical path or experience curve. It can be used to predict the
effects of efficiency given a certain number of repetitions. Given the
volume in mass production, this can be very important.
Lock-in
In a situation of asset specificity, one or both parties can be in a situation
of lock-in where they have no other choice but to continue to trade and
cannot easily find alternative business partners in the short term. It can
reduce the search costs of finding new customers or suppliers, but if the
initial choice turns out not to be the best, for whatever reason, it can be
costly to break the lock-in and trade with other parties.
Make or Buy (Products) and Do or Trade (Services)

All organisations have to make decisions about how much they want to do
by themselves and how much they are happy to pay for others to do things
for them. Thus, the amount of their products they decide to make or ser-
vices they will do themselves determines the set of the total customer
support activities which take place inside their organisational boundaries.
For the rest, they will buy products from suppliers or trade for services
with service providers who are legally separate entities. This defines the
boundaries of the firm.
Make to Order
In this approach, production of an existing product design does not start
until a customer places an order. The supplier avoids spending money in
anticipation and is guaranteed the sale from the beginning. If the product
b3235_Glossary.indd 201 14-08-2018 06:30:16

“9x6”
202 Glossary
does not exist in concept, the approach can be modified to designing to

order with the same benefit to the supplier and increased uniqueness for
the customer.
Market Follower
The follower deliberately avoids the risks and costs of innovation and
waits until a competitor introduces a new product or service and proves
that customers are willing to buy it. The follower then tries to ‘copy’
(without infringing on copyright or patents) and become competitors in
the expanding market by finding some aspect of the value proposition that
will differentiate themselves from the initial leader.
Market Leader
This is the organisation, which is first into the marketplace with a new
innovation, and if they can protect their initial market share they will be
the leader in revenue as well.
Market Pull
This is a driver of innovation when the idea or demand comes from cus-
tomers who ask for something new in the product or service. The attrac-
tion for the supplying business is that if they translate these wishes
effectively, the likelihood is that these customers will buy the new offer-
ings. It is relatively a low-risk approach to innovative change because of
this prior customer acceptance.
Modified Re-buy
This occurs when a customer wishes to buy a similar item or service to
ones previously purchased but with some specified changes. The possibil-
ity is to start a new procurement process to find suppliers better able to
meet the new specifications.
Multi-domestic
When a company recognises the need to have more capability closer to
customers in a foreign market, they can choose to create replicas of their
business models in the new location. Each new market entity then operates
b3235_Glossary.indd 202 14-08-2018 06:30:16

Glossary 203
as if it were an individual business in their own domestic market. Such a

business can respond quickly to changes in customer requirements locally
without needing to have anything change from their corporate headquar-
ters. The corporate however might consider that they have lost some con-
trol over the local organisation.
Multiple Sourcing
Buyers using multiple suppliers need to be sure that they are all capable
of producing the same level of quality and then use the market as a com-
petition between these multiple suppliers to exert downward prices on the
prices to supply. If the price competition drives some suppliers out of the
market, the buyer does not care since there are many others to choose
from. This makes sense for non-strategic supplies of very standardised
products where price is the only differentiating factor, but even here it is
not clear if the other features are indeed completely the same. Lots of sup-
pliers means that no meaningful relationship can be justified, so it is not
looked for on either side.
Network View
The essence of this view is that organisations are essentially open systems
and that all such are members of a number of overlapping networks of
other organisations, some of which are customers and suppliers, while
there are other influencers or constraints on actions. In business relation-
ship terms, this means that no one organisation is always the most impor-
tant, instead influence ebbs and flows with market changes. Customers
and suppliers cannot control in such circumstances, they can only influ-
ence others through their own actions and behaviours.
New Task
This is the need to buy something completely new with no prior knowl-
edge of what the available market opportunities and threats might be.
Offset
When a government buys expensive goods or services from a foreign
supplier, they will often demand that the supplier spends some of the
b3235_Glossary.indd 203 14-08-2018 06:30:16

“9x6”
204 Glossary
purchase value in the buyer’s local community. In this way, the buyer
government gets the items it needs but also provides some additional local
benefit by way of employment of local people or sub-contracted work to
their own companies. It can be used by those governments to force the
supply company to reveal some of their technological secrets to the local
companies, which over time, can become competitors to the foreign sup-
ply company.
Opportunism
The rational economic person is assumed to favour their own benefit
above all others and to tend to look for opportunities to take advantage of
the opposite party so that the results are better for themselves. They are
acting with opportunism. In the jargon, they are out to Win, but to do so
the other party must Lose. In game theory this is describe as a Zero Sum
game, that is the amount of the positive gain when added to the negative
loss equates to zero. Parties operating without opportunism look for ways
in which both parties can gain something and so that is described as Win–
Win or a Non-zero Sum game.
Order Qualifiers
An order qualifier is a product or service feature that must be present in
the offering for the customers to even consider buying in the first place.
It is like qualifying to race in the Olympics, you are in the race but you
might still not win. A qualifier can also make it more likely for you to fail
if you cannot meet the minimum standards in the market place. Safety
would be one of these features. Qualifiers vary over time as competition
creates new features of interest to customers.
Order Visibility Point

This is the point on a timeline when the customer order becomes visible
to the supplier. If the customer only appears without warning and places
the order, the supplier has no time to plan, they can only react, and if they
have stocks they can then supply. The earlier a supplier knows about a
coming order, the better they can plan and avoid building stock in anticipa-
tion, thus saving their costs. With close relationships, the supplier can in
b3235_Glossary.indd 204 14-08-2018 06:30:16

Glossary 205
effect look through their immediate customer’s eyes to the next customer
along the chain and make more considered plans to supply efficiently.
Order Winner
In a competitive market, where customers have choices of what to buy to
satisfy their needs, the order winner is that feature which is most impor-
tant to the customer and will persuade them to actually buy the item. It is
the feature which, all other things being equal, determines which supplier
succeeds in the competition for the customers’ money. Different order
winners emerge over time as competitors gain parity in the initial order
winning feature and move to another differentiating factor.
Partnering
Preferred customers and suppliers are effectively in a partnering type of
relationship where they operate as if they are the same organisation but
without legally changing their separate legal status as independent of each
other. This is not a partnership which is a legally defined status similar to
a JV but with unlimited liability. Few companies in partnering relation-
ships would consider becoming formal partnerships.
Passing-off
This is the process where one organisation behaves and illustrates itself as
if they were another, more highly regarded, one to take customers away
from their business. Essentially, they will be selling counterfeit items or
services to customers who believe that are buying genuine ones.
Place and Time Utility

Delivery of a good or service needs to be at a time and place of some
agreement, and to do this to a supplier provides them with the item in a
useful state.
Possession Utility
Trade exchanges are a way to transfer possession of some assets to
another party for some agreed value transfer to the transferor. Perhaps, we
b3235_Glossary.indd 205 14-08-2018 06:30:16

“9x6”
206 Glossary
also need a Use Utility for those situations of value in use where owner-
ship does not change.
Preferred Suppliers and Customers

These are the important few in business relationships on both the sales and
the supply sides of the exchange. These parties are the ones on which your
future as a business will depend and you need to keep them close and
involved to build a mutually supportive future together. These are the ones
where cooperative Win–Win relationships make most sense.
Price
In any market exchange, there has to be a supplier of some good or service
and a customer who provides something of value to the supplier such that
the two parties can agree to the exchange, as somewhat equitable, and the
transfer of ownership of the goods or services goes to the customer in
exchange for the valued item (money usually). The agreed exchange value
is the price to be paid by the customer and agreed by the supplier.
A supplier only needs one customer, who decides to buy, for each item.
Price is a market mechanism to effect the process of exchange.
Principal and Agent Theory

This recognises that when a principal recruits or contracts with another to
do activities rather than do themselves, they hope that the agent will
behave as would the principal in that situation. The reality is that the agent
often has other priorities, so what results is not as good as if the principal
had indeed done the activity themselves.
Process Capability
All production and to some extent human processes are subject to inherent
variation, even if they are trying to reproduce an exact replica of what
went on before. This process capability can be defined by the dimensions
of the likely distribution of values around a mean value. This is independ-
ent of the specification limits created by the item’s designers but it is in
the relationship between process capability and specification limits that
the likely quality performance is created. A narrowly distributed process
b3235_Glossary.indd 206 14-08-2018 06:30:16

Glossary 207
working within a widely defined specification can avoid all quality prob-
lems in normal operation.
Product Recall
If, despite best efforts at producing quality products, problems occur in
the market, especially if they are potentially hazardous to the health and
well-being of the customers, then the suppliers are required to issue a
product re-call. This involves contacting all of the customers (not always
possible since actual buyers may not be known or contactable) to encour-
age them to stop using the item and claim compensation or arrange for it
to be exchanged for a newer, safer version. This will be backed up by
national advertising campaigns to find previously unknown customers.
Overall, this is a public relations disaster for the supplier, causing huge
loss of reputation and perhaps permanent loss of customers in the future.
Sometimes, this is due to a design flaw or a failure in the manufacturing
processes but the customers will not care why this happened in detail they
will just blame the supplier for the failure. Even if the problem originated
in the supplier’s own supply chain, the customers will not differentiate and
still blame the key supply contact they bought from. This is one reason
why risk is never actually outsourced.
Purchase to Pay
This describes the various activities needed to implement a purchase con-
tract and make all of the interconnecting people and processes work to a
consistent set of expectations and performance standards. It can often be
supported by a suite of computer programs to manage the information
flows and event planning arrangements.
Quality Function Deployment

The first house of quality connects to customers and specifies high-level
requirements in the design. Quality function deployment acts as a cascade
of this information into the organisation so that each level is expanded into
more and more detail of how the whole organisation and its suppliers must
perform so as to ensure internal consistency and compliance and that the
voice of the customer is heard in all parts of the organisation.
b3235_Glossary.indd 207 14-08-2018 06:30:16

“9x6”
208 Glossary
Resource-based Theory
In the discussion of where market growth can come from, there are two
main choices. One is to follow the customers wherever they can be found
and build a capability to satisfy them, if this is different from current capa-
bilities. The alternative is to base the decision on the existing resources.
This latter argument is that we already know how to do certain things well,
so let us use these resources to find new customers who need the services
these resources provide. As always, this is a decision between the risks of
doing new things or sticking to old things but running the risk that no new
customers for these resources can be found.
Reverse Auctions
This is a competitive auction with multiple bidders making successively
lower bids until no other bid is received. It is best suited for supplies of
completely standardised and quality assured items and proponents argue
it will establish the best current market price for the item in question.
Suppliers often do not like it because of the focus on price, especially if
they consider that their offer is based on other important aspects like inno-
vation or responsiveness. Large initial saving have been reported for many
diverse items, but future savings seem to be more difficult to achieve.
Reverse Engineering
This describes the situation where as an example a company will buy a
competitor’s product and take it apart to try and understand the design
decisions made and the production methods used to produce it. They will
also try to identify possible costs of production and procurement. With
this information, they might try to create a competing version of it to try
and win some market share away from the original producer. If there is
patent protection in place, they will try and use the information to find a
variation in methods or detail such that they cannot be charged with patent
infringement.
Reputational Risk
Organisations build up reputations with their customer and suppliers for
being true to their values and beliefs. This form of trust in the brand takes
b3235_Glossary.indd 208 14-08-2018 06:30:16

Glossary 209
time to build but can be lost very quickly if the organisation behaves in
a way which then does not live up to this standard of performance.
The risk is that formerly loyal customers and suppliers will refuse to do
business with the organisation which has failed to live up to its prom-
ises. Losing your reputation for being a trustworthy party can destroy
businesses very quickly and recovery (if possible) will be expensive
and time consuming.
Risk Attitude
It represents attempts to measure the extent to which individuals (and their
organisations) are comfortable at certain levels of risk. An entrepreneur is
expected to operate with a more positive attitude to risk than someone
who is just looking for a good job with defined prospects.
Risk Exposure
This is a calculation of the potential risks multiplied by the estimated
probability of their occurrence.
Risk Premium
All business operates under conditions of risk, but the more the level of
risk the more the person taking the risk expects to be rewarded for taking
the risk. This is called the risk premium.
Robust Design
This is based on the statistical design of experiments approach but applied
to product design. The various factors which impact the achieved quality
levels are evaluated to find those that must be controlled very closely and
to make the overall design less subject to other noise factors which might
complicate control of the process.
Rules of Origin
Provides a customer with information on where an item has been pro-
duced. They also provide details to make customs charges appropriate.
These rules also protect brands against unfair competition if the item loca-
tion details are protected. For example, Champagne can only come from
b3235_Glossary.indd 209 14-08-2018 06:30:16

“9x6”
210 Glossary
that region of France. Similar products using similar or the same grapes
and produced in the same ways might be described as ‘Champagne like’
but not as Champagne from another region.
Self-seeking with Guile

This is one of the behaviours of a person being opportunistic. They are
looking to better their possible results by hiding information, lying or not
telling the whole truth or other devious ways of operating with guile to tilt
the odds of winning more in their favour.
SERVQUAL Model
This model initially defined the processes of ensuring that service quality
levels were as expected by customers. Services are much more about
perceptions and are therefore much more difficult to control compared to
physical measurements in the product world. The model describes five
gaps between different stages of the overall process at which misunder-
standings or poor performance against plans can cause problems. Since
many organisations produce both products and services, it is good to
think of this model alongside the physical aspects of other total quality
approaches.
Single Sourcing
When there are choices of supplier for a given need but the buyer chooses
to only use one of them, this is single sourcing. It is dangerous since there
is no backup if something goes wrong with this supplier, but it can aid the
consistency of quality supplied and allow for the building of preferred
relationships. It does demonstrates the effects of lock-in however.
Specification Limit
As designers specify the dimensions of some item they recognise that they
need to allow for practicalities of production and therefore they specify a
range of acceptable values around the nominal one. These form limits in
the specification within which a result will be deemed to be of acceptable
quality. The upper and lower limits around the mean value form the basis
for statistical process control as part of a quality assurance approach.
b3235_Glossary.indd 210 14-08-2018 06:30:16

Glossary 211
Spend Analysis
Spend analysis creates the information to understand the 80:20 rule in
particular circumstances to show how value is distributed and to aid the
allocation of scarce resources to where they can have the biggest impact.
Sole Sourcing
This is a supply situation where a supplier has a monopoly of some com-
modity or service such that a buyer has no choice but to accept the terms
offered to them by the supplier. Most buyers will try and find, or help
create, alternative suppliers just to break the power hold a monopoly sup-
plier can exert on a market.
Standardised
An organisation can make a strategic decision that they will only offer a
controlled number of variants of their goods (more difficult for services).
These form the standardised list from which customers buy and will not
be changed to satisfy a customer request. This is efficient for the supplier
but might limit the choice for the customer.
Straight Re-buy
This occurs when a customer wishes to buy the exact same item or
service. The price might change but the specification has not.
Sub-optimisation
This is a feature of systems thinking where the efficiency of a sub-unit can
be made very high but at the higher systems level the result is less good.
The optimisation locally has resulted in sub-optimisation at the total sys-
tem level.
Systems Thinking
All life forms and businesses are complex systems which contain essential
sub-systems which perform needed sets of activities and have to co-exist
and mutually support each other so that the overall system can survive and
prosper. In addition, all systems are themselves sub-systems of larger enti-
ties and it is these interconnections and interdependencies which define
b3235_Glossary.indd 211 14-08-2018 06:30:16

“9x6”
212 Glossary
how our planet will survive (or not). Systems thinking recognises the
scaling effect to larger or smaller systems and allows us, through the use
of generic descriptions, to describe these in terms that capture their
essential features. So, all systems use input resources and transform them
into desirable and waste outputs and by comparing the outputs with the
resources used as input and to the management of the transformation
processes, we have the basis of measurement and control opportunities
and the needed control actions to obtain the goals of the systems. Open
systems accept input from their environments, while closed ones do not.
Too many businesses behave as if they are somewhat closed in that they
do not fully reflect on the effects they have on the larger systems or
indeed recognise the effects that other systems can have on their own
system effectiveness.
Target Cost
In traditional thinking, we add a profit margin to our costs to set a price
which we offer to the market for our goods or services. However in the
negotiation to reach an agreed price, the only factor that is being consid-
ered is the profit margin where the customer is trying to reduce the sup-
plier’s margin as far as possible and the supplier is trying to get the highest
price in order to maximise their profit margin. Target costing works in
reverse. It accepts that price is set in the market and so abstracts from the
anticipated price an acceptable profit margin to obtain the target cost. This
is the cost which must be achieved to be competitive in that market. In this
situation, the customer and the supplier can now work together to reduce
the target cost so that the customer can compete in the final marketplace
and the supplier gains a sufficient profit margin so that they can continue
to invest in their businesses to be an effective partner to their customer
over the longer term.
Technology Push
For radically different technologies or service concepts, current customers
have no frame of reference or experience to help them understand what
impacts a new innovation might have or if they would use the new market
offering if it were to be produced. However, the technical experts in the
b3235_Glossary.indd 212 14-08-2018 06:30:16

Glossary 213
supplying company can understand their own concept and how it might
be wanted by customers, and so a decision to innovate in this way is
essentially a gamble on whether the technologists were right and also if
the customers might be persuaded to also welcome the item onto the
market and to pay for it. The technology is pushed onto the market in the
hope that customers will buy it. It is inherently high risk, but can be mas-
sively disruptive of current market situations if the innovation is a market
success.
Total Quality Management (TQM)

Total quality recognises that quality depends on getting everything right
ideally the first time. It is a whole-organisation issue and crosses into
customers and suppliers as well. It is best thought of as a journey and
attitude to always strive to be better and to involve all of the people in
making this a reality and a core value of the organisation.
Trade-offs
A trade-off describes the situation where there are choices, but if we move
in one direction to make something better then we usually make the other
choice worse. For example, in designing a vehicle door we want the door
to be heavy enough to carry all of the internal equipment and provide
impact protection to the occupants but we do not want it to be so heavy
that it is difficult to open the door when the vehicle is parked on an
adverse hill. Some trade-offs are fixed at the current level of technology
but some are in our minds and can be challenged by new thinking. Toyota
could not afford the high stocks and storage space needed by their car
competitors at the time, which they needed because their system built cars
in large production runs of the same type. Instead, Toyota designed a sys-
tem to reduce stock holding and space (through Just in Time) which
allowed them to efficiently produce in very small production runs, that is
one at a time.
Transaction Cost Analysis (TCA)

TCA recognises that market exchanges incur costs on both sides of
the transaction to ensure factors such as ownership, truthfulness of
b3235_Glossary.indd 213 14-08-2018 06:30:16

“9x6”
214 Glossary
statements, reliability of promises, capability and control are as the other

party describes them. In addition, costs are incurred to monitor these
issues in the other party’s behaviours, especially if one believes the other
party is likely to try and take advantage (behave opportunistically) in
some way which favours their outcomes over one’s own. If the costs of
these market transactions are perceived to be too high, then there is a
tendency to avoid them by, in some way, internalising the features we
might otherwise have traded for in the market. It is part of the Make or
Buy decision.
Transnational
The transnational organisation tries to get the benefits of local responsive-
ness to market changes while also gaining the benefits of global scale and
support without expensive duplication of resources. For such organisa-
tions, the market is truly global and decisions will be made with this
awareness. Such companies can have more financial size than some of the
countries which host their subsidiaries.
Universal Basic Income

This is funding provided by government to give to all citizens a set living
income so that they can be full members of the society, spend their money
as they wish and so keep money circulating in the economy. Its propo-
nents argue that it will be cheaper than social benefits to administer while
avoiding the stigma of the benefit process. In a time of high numbers of
left-behind populations due to market and technological changes, this
would make society fairer and allow people to develop their own interests
and to help others in making a contribution to society while the economic
processes of money circulation could still to take place.
Unknown, Unknowns
Some factors which might influence the challenges facing an organisation
will be known, but their expected value might not be. For example, it may
be known that customers always arrive at the store but we just do not know
when or what they will buy. These are known, unknowns. However, much
more difficult to deal with are things of which we are completely unaware
b3235_Glossary.indd 214 14-08-2018 06:30:16

Glossary 215
and whose impact, when they happen, is also unknown. These unknown,
unknowns can often deliver potentially catastrophic impacts but were not
foreseen by anyone; worse still, no one was even looking for them.
Upside Risk
Like a downside risk, the outcome is unexpected, but on the upside this
covers a result which is better than expected and can be taken advantage
of, once its causes are understood.
Value in Transfer
A trade is an exchange of different things of value to the parties in which
the ownership of the item transfers from the seller/supplier to the buyer.
This is value in transfer.
Value in Use
This is when ownership is not transferred from the supplier to the cus-
tomer, but the agreement paid for by the customer is to have access to and
use of the item or the service. In services, it is always value in use since
the resources used by the supplier are never transferred to the customer
but what is paid for is the benefit to the customer of using the supplier’s
resources for the time agreed.
Value Proposition
A supplier to a potential customer tries to understand what the customer
does, or might be persuaded to, want to buy and then creates an offer which
captures this value to the customer in a proposition. That is a statement that
says ‘if you buy this item, you will benefit in the following ways…’. This
value proposition is then evaluated by the customer (often by comparison
with other supplier propositions) before making the decision to buy or not.
Only if the buy decision is made will there be an exchange and a trade, and
only then does the supplier have a return on their investment.
Venture Capital Funds

These are financial fund businesses which act in a similar fashion to busi-
ness angels but on a larger and more distributed set of growing companies.
b3235_Glossary.indd 215 14-08-2018 06:30:16

“9x6”
216 Glossary
They are more financially driven and do not usually expect to be involved
in the operational management of the growing business. They do expect
to make a profit from their investments and will choose companies care-
fully rather than simply spreading investments over a very diverse portfo-
lio, which a normal investment fund might do.
Vertical Integration
A fully internally organised set of activities in which all of the factors of
production needed by the organisation are owned and operated by the
organisation. In other words, such a system does not depend on buying
anything from outside suppliers. For example, Henry Ford’s model T was
produced using supplied raw materials, through manufacture, to distribu-
tion to dealers, who were all part of the Ford organisation. Modern prod-
ucts and services are widely believed to be too complicated for any one
organisation to be able to be the best solution provider in all of its aspects
so some buying from outside is more likely.
Zero-hour Contracts
In, for example, retail businesses it is impossible to forecast in detail when
customers will come through the door. Over time, certain patterns can be
discerned but it is often not good enough for the store manager to match
customer demand with numbers of sales people to optimise sales support.
To solve this personnel planning problem, employment contracts can offer
conditions of employment which do not guarantee any actual work times.
In this way, the manager does not have to pay people to stand idle when
no customers are in the store. However, the managers require the people
to be on call to come into work when the manager decides s(he) needs
them. These are Zero-hour contracts, which solve a staffing problem for
the managers but create very uncertain payment and time management
problems for the employees on such contracts.
3D Printing
This production technology uses the design-generated digital functional
specifications to drive a machine that builds up the design realisation
through deposition of layers of a variety of materials (akin to an ink on
b3235_Glossary.indd 216 14-08-2018 06:30:16

Glossary 217
paper, printing process) like plastics, concrete, metal-like materials as well

as biological materials. Complex, near to final form, items can be pro-
duced relatively slowly and in small production quantities. It can reduce
or remove the need to assemble parts and sub-assemblies in manufacture,
but this might make some forms of recycling more difficult. For some solu-
tions, this might remove much of the supply chain complexity involved in
traditional processes.
80:20 Rule
It is widely observed in many populations that only 20% of the total num-
ber in the populations account for 80% of the total value of the whole
population. While this is even more extreme in many personal wealth
distributions, it is used to identify important customers and suppliers in
business and to concentrate efforts around these important clients.
b3235_Glossary.indd 217 14-08-2018 06:30:16

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Index
A Business Start-up, 4
Additive Manufacturing, xxi, 89 Business-to-Business (see also B2B)
AIDS, 53 Relationship, 10, 41, 44, 105, 123,
Anglo-Saxon Approach, 44 145, 169
Anglo-Saxon Capitalistic Model, 174 Buyer–Supplier Relationships, 44
Artificial Intelligence, xxi, 27, 29, 88, Buying Centre, 138–139, 142, 149,
175 190
Asimov’s Three Laws of Robotics,
171 C
Autonomous Vehicles, xxi, 170 Check Position, 158
City Car Variants, 56
B Civil Law, 151, 191
Background Theory, xix, 39 Clarke, C. Arthur, 163
Basic Operations System Diagram, Co-Creation, 57, 152, 191
86 Commercial Loans, 11
Black Swans, 67 Common Law, 151, 191
Blockchain 2.0, 168 Communicate Position, 158
Born Global, 53, 189 Compel Progress, 158
Brexit, 16 Contract Award Notice (see also
British Merchant Marine CAN), 115
Transportation Systems, 46 Contract Notice (see also CN), 114,
British Royal Navy, 46 128
Brundtland Report, 38 Corporate Social Responsibility
Business Angels, 12, 190, 198, 215 (see also CSR), 16, 37, 97, 174,
Business Managers, 7, 109 191
219
b3235_Index.indd 219 14-08-2018 06:30:33

“9x6”
220 Index
Cost–Benefit Calculations, 51 Financial Support Provider(s), 10

Costing Approaches, 23 Ford, Martin, 171
Costing Impacts of Decisions and Foreign Direct (Inward) Investment
Consequential Spending, 26 (see also FDI), 50, 196
Creative Destruction, 172
Crosby, Philip, 76 G
Customer Trust, 158 Garbage In Garbage Out (see also
Customer’s View of Suppliers, 118 GIGO), 28, 82, 197
Customer–Supplier Relationship, 116 Gatekeepers, 139
Gattorna’s Behavioural Logic of
D Supply Chains, 101
Data Mining, 27, 86, 188 Gattorna’s Cultural Logic of Supply
Degrees of Freedom, 26–27, 193 Chains, 104
Deming, W. Edwards, 76 Gattorna’s Market Logic of Supply
Design and Contract Management, Chains, 102
178 Gattorna’s Strategic Logic of Supply
Different Relationship Types, 124 Chains, 103
Direct Procurement, 116–117, 194, Genichi Taguchi, 79
198 Glenn, John, 116
Do or Trade, 58, 201 Global Business Context, xix, 1
Downside Risk, 96, 155, 195, 215 Global Trade Item Numbers (see also
Dyson, James, 19 GTINs), 128, 197
Globalisation, xix, 9, 45–48, 74, 172,
E 177
Enterprise Resource Planning Goods and Services, 56, 135, 137,
(see also ERP), 37, 90, 195 153, 173, 194
EU Global Data Protection Grease Payments, 154, 198
Regulations, 129 Gross Domestic Product (see also
EU Procurement Rules, 112–113, GDP), 2, 164, 172–173, 175
130, 154
European Article Number (see also H
EAN), 128 Health Check, 158
Ex Works Price, 135 House of Quality Generic Model, 81
House of Quality Logic, 104
F House of Quality, 80, 198, 207
1977 Foreign Corrupt Practices Act,
154 I
Financial and Strategic Objectives, I, Robot, 170
xix, 1 Indirect Procurement, 116–117, 198
b3235_Index.indd 220 14-08-2018 06:30:33

Index 221
Industrial Revolutions, 175 McKinsey 7-S Strategic Approach,

Infant Mortality, 5 22
Initial Public Offering (see also IPO), McLean, Malcolm, 133
11–12 Modern Slavery Act 2015, 38
Institute for Collaborative Working, Modularisation, 71–72
161
Intellectual Property (see also IP), N
98, 150–151, 189, 191, 196, 199 National Health Service, UK, 3
International Association of Contract Normal Distribution, 67, 76–77, 189
and Commercial Management
(see also IACCM), 142, 160 O
International Marketing and Operations Management, xix, 70, 85
Purchasing (see also IMP) Group, Order Penetration Point, 61
44 Order Visibility Point, 63, 204
Invitation to Tender (see also ITT), Order Winners and Qualifiers, xix,
114 19–20
Order Winning Criteria, 32
J Organisational Location of
Joint Venture (see also JV), 98, Purchasing Activity, 110
123–124, 200 Ownership, 1–3, 29, 36, 40, 55, 58,
Juran, Joseph, 76 96, 100, 134, 152, 165, 169, 173,
Just in Time System, 62, 201 196, 206, 215
K P
Key Performance Indicators (see also 3D Printing, 30, 89, 164–165, 216
KPIs), 158 Pareto, Vilfredo, 173
Pareto’s Rule or Law, 117
L Pork–Barrel Politics, 112
Lean Production, 91, 94, 104, 201 Portfolio Analysis, 11
Lean Thinking, 92, 94, 178 Power by the Hour Approach, 55,
Lego Brick Concept, 72 166
Life Cycle Supply Requirements, 107 Pre-Qualification Questionnaire
Logistics Hub and Spokes, 133 (see also PQQ), 114
Lower Specification Limit, 78 Principal and Agent Theory, 6, 206
Prior Information Notice (see also
M PIN), 114
Make or Buy Decision, xx, 58, 214 Process Capability, 33, 79, 206
Market Logic, 101–102, 104 Process Variations and Sigma, 78
Market Pull, 18, 202 Procurement and Supply Chain, 25, 30
b3235_Index.indd 221 14-08-2018 06:30:33

“9x6”
222 Index
Product Definition, 137 S

Public Sector Organisations, 112 2017 Stericycle Expert Solutions,
Purchase to Pay, 145, 207 73
Service-level Agreements, 64, 138
Q SERVQUAL Model, 210, 83–84
Quality Function Deployment, 80 Short-Term Opportunism, 41
Quality Loss Function, 79 Smith, Adam, xvii, 44, 170–171
Quality Performance, 55, 71, 83, 206 Smith, Will, 170
Quartz Digital Watch, 8 South Sea Bubble Effect, 168
Spend Analysis, 117, 120, 126, 211
R Sub-Optimisation, xvii, 159, 211
Radio Frequency Identification Supplier’s View of Attractiveness,
(see also RFID), 128, 134, 197 120
RATER, 83 Supply Chain Finance Providers, 10
Red Blue Payoff Matrix, 181–182 Supply Chain Partners, 10, 44
RED/BLUE Game, xxi, 181 Sustainability and Recycling, 25, 29
Reich, Robert, 173 Sustainable Development, 38
Relationship between Design Swatch Consortium, 9
Tolerance and Rejects, 77
Relationship Portfolio Possibilities, T
121 Target Cost Approach, 24
Reputation Risk, 36, 74 Technology Push, 18, 212
Request–Suggestion–Modification Total Quality Management (see also
Process, 57 TQM), 82, 213
Research and Development (see also Toyota Production System, xix,
R&D), 25 201
Resource-based Theory, 42 Trade-offs, 71, 80, 198, 213
Reverse Engineering, 153, 208 Trans Pacific Partnership, 164
Risk Attitude, 155, 209 Transaction Cost Analysis (see also
Risk Exposure, 155, 209 TCA), 40, 213
Risk Management, 142, 147 Trump, Donald, 16, 47, 174
Risk Premium, 155, 209 Types of Products and Services, 136
Robots, xxi, 166–167, 169, 175
Robust Design, 79, 209 U
Royal Bank of Scotland, xx, 161 Universal Basic Income, 172, 175,
Royal National Lifeboat Institution 214
(see also RNLI), 14 Upper Specification Limit, 78
Rumsfeld, Donald, 67 Upside Risk, 16, 155, 215
b3235_Index.indd 222 14-08-2018 06:30:33

Index 223
V Z
Value in Transfer, 55, 215 Zero Hours Contracts, 57
Venture Capital Funds, 12, 215 Zero Hours Employment Contracts,
Virtual Integration, 36 87
W
Walton, Sam, 13
Whats in it for WE, 160–161
Williamson, 40–42
b3235_Index.indd 223 14-08-2018 06:30:33

Douglas Kinnis Macbeth - Supply Ecosystems - Interconnected, Interdependent and Cooperative Operations, Supply and Contract Management-World Scientific Publishing Company (2019)

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Douglas Kinnis Macbeth - Supply Ecosystems - Interconnected, Interdependent and Cooperative Operations, Supply and Contract Management-World Scientific Publishing Company (2019)

Uploaded by

Copyright:

Available Formats

Supply

10521_9789813223073_TP.indd 1 13/8/18 4:29 PM

This page intentionally left blank

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

10521_9789813223073_TP.indd 2 13/8/18 4:29 PM

Library of Congress Cataloging-in-Publication Data

British Library Cataloguing-in-Publication Data

Copyright © 2019 by World Scientific Publishing Co. Pte. Ltd.

For any available supplementary material, please visit

Desk Editors: Anthony Alexander/Karimah Samsudin

Typeset by Stallion Press

Alex - 10521 - Supply Ecosystems.indd 1 19-07-18 10:33:57 AM

About the Author

Douglas Macbeth recently retired as Professor of

b3235_FM.indd 5 14-08-2018 06:30:02

This page intentionally left blank

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

b3235_FM.indd 7 14-08-2018 06:30:02

This page intentionally left blank

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

About the Authorv

Chapter 1 Global Business Context 1

b3235_FM.indd 9 14-08-2018 06:30:02

1.7 Order Winners and Qualifiers 19

b3235_FM.indd 10 14-08-2018 06:30:02

Chapter 4 Contract 141

b3235_FM.indd 11 14-08-2018 06:30:02

4.2.2 Contract monitoring and improvement 146

Chapter 5 Possible Futures 163

Chapter 6 Supply Ecosystems and Competitive Advantage 177

Appendix A The RED/BLUE Game 181

b3235_FM.indd 12 14-08-2018 06:30:02

Figure 1.1 Costing Approaches 23

b3235_FM.indd 13 14-08-2018 06:30:02

This page intentionally left blank

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

Table 3.1 Organisational Location of Purchasing Activity 110

b3235_FM.indd 15 14-08-2018 06:30:02

This page intentionally left blank

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

b3235_FM.indd 17 14-08-2018 06:30:02

view and this is changing as intelligent software solutions spread further

b3235_FM.indd 18 14-08-2018 06:30:02

The book is structured into 6 chapters.

b3235_FM.indd 19 14-08-2018 06:30:02

called as the complete challenge to the received Western perception of

Chapter 3. This chapter starts with general background topics beginning

b3235_FM.indd 20 14-08-2018 06:30:02

Chapter 5. In this chapter, we will speculate on perceived current trends

Appendix A. The RED/BLUE Game.

b3235_FM.indd 21 14-08-2018 06:30:02

This page intentionally left blank

b2530_FM.indd 6 01-Sep-16 11:03:06 AM

1.1 Financial and Strategic Objectives

b3235_Ch-01.indd 1 14-08-2018 06:27:43

lodging and perhaps a wage? Does the contribution of the labourer

b3235_Ch-01.indd 2 14-08-2018 06:27:44

Global Business Context 3

the essential risk taker in society who sees an opportunity to deliver a

1.2 Business Life Cycle

b3235_Ch-01.indd 3 14-08-2018 06:27:44

Of course, the duration of a life cycle is very varied. The biblical

About the Authorv

Chapter 1 Global Business Context 1

1.7 Order Winners and Qualifiers 19

Chapter 4 Contract 141

4.2.2 Contract monitoring and improvement 146

Chapter 5 Possible Futures 163

Chapter 6 Supply Ecosystems and Competitive Advantage 177

Appendix A The RED/BLUE Game 181

Figure 1.1 Costing Approaches 23

Table 3.1 Organisational Location of Purchasing Activity 110

The importance of this concept is that by identifying the order winners