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Chapter 22

Implementing Value Network


Management

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Key Concepts

World Class Supply Management


Background
Leadership
Transformational Training
Strategic Planning
The Vision Statement
The Mission Statement
Cost
Quality
22-2

Key Concepts
Technology
The New Product Development Cycle
Supplier Feedback
Social Responsibilities
Standardization
Value Engineering and Value Analysis
Organization and Staffing
22-3

Background
Vice-president of Supply Management of Megatronics
Base salary $450,000 per year
Potential $450,000 per year bonus
You may hire a maximum of 16 new supply
management professionals
You obtained authorization for a training budget of
$3.25 million per year
You will become a member of the executive committee

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Value proposition
Reduce Megatronics new product development
time by 50%
Cut time to market by 30%
Reduce post-introduction revisions by 70%
Increase customer satisfaction from 85% to 98 %
Increase the impact of the firms test and
measurement equipment on customer
profitability by 15%

Background
Obligations:
Reduce the cost of purchased goods and
services by an average of 5% per year
Reduce incoming material defects from a
current average of 1,000 ppm to 10 ppm over
the next 5 years
Improve cutting-edge technology inflow by
10% per year
Reduce the average product development
cycle by 20% per year

How are you going to do it?


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Characteristics of Successful Leaders


Helps to establish a vision
Helps to prepare for change
Helps employees cope with change
Motivates and facilitates adaptive work
Energizes people
Maintains focus in facing adversity
Listens actively
Communicates clearly and convincingly
Knows how and when to disarm conflicts
Functions as an empathetic mentor
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Three Critical Skills of Supply Management

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Implementing Strategic SCM


Currently where are you in this map?

22-9

Destroying the Old Box


World Class Supply ManagementSM
requires more than just thinking outside of
the supply management box
The old supply management box was a set
of artificially imposed constraints that
limited proactive, strategic, and synergistic
efforts
WCSM calls for destroying the old box
WCSM calls for creating a new vision
where leadership capabilities and
capacities are enabled and unleashed
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Transformational Training

During boom times, firms dont have time for


training
During bad times when they should be
getting ready for the next upside of the cycle
they claim that they cant afford it
Training should be a vehicle of transformation

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Burts 12 Golden Rules of World Class Supply


ManagementSM
1.

Operate Supply Management as an integrated system including


customers, operations, quality, demand management, supply
management, logistics, and suppliers.

2.

Implement continuous improvement in all activities internally and


externally.

3.

Apply strategic sourcing in the selection, maintenance and


development of the supply base.

4.

Focus on the total cost of ownership, not purchase price.

5.

Train and educate supply personnel in world-class processes,


leadership, and change management.

6.

Work in a cross-functional mode with internal functions and with


key suppliers.

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Burts 12 Golden Rules of World Class Supply


ManagementSM

7.

Recognize and reward excellence, both internally and externally.

8.

Study and understand supply managements business


environment.

9.

Involve supply management and external suppliers in the earliest


stages of new product development.

10.

Develop and manage appropriate supply alliances.

11.

Identify, verify, track, and control savings.

12.

Foster an environment of collaboration.

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Organization Chart
Top Half

Chief
Executive Officer

Corporate Level
VP of
Finance

President

VP of
Engineering

Division Level
General Manager
Surgical Division

General Manager
Optical Division

VP of
Operations

Director of
Purchasing

General Manager
Test Division

VP of
Marketing

To Divisional
Purchasing
Managers

General Manager
Medical Division
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Organization Chart Showing Purchasing


Below Division Manager
Bottom Half
Director of
Operations

To Director
of Purchasing

Purchasing
Manager

Executive Assistant

Buying Teams
(70)
Buyer

Expediter

Support
Person
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Transformational Planning
Supply management must develop and manage
the firms supply strategy as an integrated whole
instead of a series of unrelated strategies
The corporations strategy is the key driver of the
supply strategy
The technology, marketing, finance, and
production strategies are all inputs to the supply
strategy
Conversely, the supply strategy is an input to the
corporations strategies for technology,
marketing, finance and production
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Megatronics Vision Statement

Supply management at Megatronics will


perfect its worldwide process resulting in
totally delighted customers and
shareholders.

22-17

The Mission Statement


We will design and implement necessary
process and cultural changes to create a
fully integrated customer driven supply
management system.
We will integrate suppliers into our
business plans and processes in an
environment of respect and trust,
establish full cooperation throughout the
enterprise, and establish supply
management as a core competency.
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The Mission Statement Continued


We will improve the bottom line by
facilitating increased profitable sales while
minimizing the total cost of ownership of
all materials, equipment, supplies, and
services.
We will ensure that diversity suppliers
have opportunities to play vital roles in
our supply base.

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Cost
You proposed an overall savings goal for
the first year of 10% on the costs of
purchased materials, equipment, supplies,
and services
The team agrees that the focus must be
TCO
The problem is that price often rises when the
focus is on TCO
If we pay a price premium that is offset with a
reduction in the total cost of ownership, we
will document our analysis
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Strategic Sourcing
Criteria for Rating Suppliers
Cost minimization by suppliers
Willingness to share cost data
Incoming quality levels (ppm, if feasible)
Current technology status: leader/follower
Ability to meet Megatronics technology needs
in 3 years
Potential to become an alliance supplier

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Four Categories of Supplier


World Class
Suppliers who are acceptable and have
the potential to be developed to world
class status
Suppliers who are acceptable and provide
products and services where a supply
alliance is not needed
Suppliers to drop
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Supplier Development Teams


After assessing the suppliers the decision
of whether to develop selected suppliers
must be made
Your management team decides to field
four dedicated supplier development
teams to start at each operating division
Expertise: supplier development, cost,
quality & supply management

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Quality
Development of clear and concise specifications
by our internal customers,
Quality considerations during sourcing,
Development of a clear understanding with
suppliers on all aspects of quality both prior to,
and subsequent to, award of a contract
Identification of opportunities for supplier
development,
A comprehensive monitoring system, supplier
certification,
A motivational program addressing quality, cost,
and service
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Technology
Technology changes very fast and could be expensive

Inflow of technology is a function of two


variables:
The suppliers investment in advancing its
technological capabilities
The suppliers willingness to share its
innovations with us

Hire 12 individuals capable of developing


and managing strategic supply alliances
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The New Product Development Cycle


Utilize early supplier involvement (ESI) and
early supply management involvement to
improve new product development
Reduce design cycle time
Reduce costs of materials
Improve quality

Prequalify suppliers
Create supply managers with engineering
knowledge
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More Proactive Supply Management Initiatives


Six Sigma program.
Improve source selection process
Ensure understanding of requirements
before and after award of a contract
Transfer responsibility for ensuring quality
to the supplier
Investigate certifying our major suppliers.
Work with suppliers to correct root causes
of problems
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Social Responsibilities

Create a diversity program


Create a pollution avoidance program
Assume responsibility for managing ethics
Carbon emission reduction program

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Standardization

Create a Measurement and Standards Group


Then develop and implement a
standardization program
Hire a standards engineer to help in the effort

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Value Engineering and Value Analysis (VE/VA)


Provide training in VE/VA
Hire one or more value engineers for each
division

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Organization and Staffing


Create a hybrid organizational structure
for supply management
Reap the benefits of centralization and
decentralization
Eliminate or reduce the number of reactive
positions as the need for them is reduced
Train/educate managers to assume more
strategic activities

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Goals for Year 1

Reduce average price on incoming goods and


services by 5 percent.
Reduce average incoming defects by 10 percent
to 900 ppm

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Initiatives for Year 1

Implement strategic sourcing, starting Q1


Document and obtain verification of savings, Q1
Initiate supplier development program, starting Q2
Implement a total cost of ownership program, Q3
Develop and implement a training program, commencing Q1
Initiate study of an operating resource management system, Q3
Conduct Supplier Day in Q1 and annually thereafter
Develop or hire 8 individuals capable of developing and managing
supply alliances, Q4
Identify supplier relationships which have the potential of
progressing to alliance status, Q2
Train alliance champions, Q2
Enter into first supply alliance, Q4
Train and upgrade all staff so that they bring value to all
processes, Q2
Promote and train several Megatronics engineers for supply
engineering billets, Q2
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Initiatives for Year 1

Hire supply engineers by Q3


Include supply engineers on appropriate new development teams, Q4
Initiate reverse auctions where appropriate, Q4
Increase emphasis on quality capabilities during source selection, Q1
Ensure understanding with all suppliers of their quality, time, and service
obligations, Q1
Document all contract files on understanding issue, Q1
Initiate supplier certification program, Q3
Work with suppliers to correct root causes of quality problems, Q2
Collect and analyze feedback from suppliers on how we perform as a
customer, Q4
Design, develop, and implement aggressive social responsibilities
program, Q2
Hire a standards engineer to develop and manage a standardization
program, Q2
Add a value engineer to each divisions staff, Q2
Increase compensation of supply professionals to reflect the increased
value they provide, Q4
Study implications of purchasing Ariba, Q3
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Improved Supply Managements Impact


Increased Sales:

Faster to Market
Improved Quality
Pricing Flexibility
Innovation

Lower Total Cost:

Acquisition Cost
Processing Cost
Quality Cost
Downtime Cost
Risk Cost
Cycle Time Cost
Conversion Cost
Non-value Added Cost
Supply Chain Cost
Post Ownership Cost
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Strategic Intent
Our global supply chain will be unequaled in
performance and one of Megatronics greatest
competitive advantages.
Carrying out this strategic intent requires:
An optimized, leveraged, and responsive global supplier
base and an efficient supply chain
Unequaled performance as measured by A.T. Kearney
and as compared to competition and best-in-class
A supply chain that creates new business opportunities
for Megatronics by providing an outlet for marketing our
best practices and by allowing us to bring suppliers
innovations to Megatronics new markets.
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Strategic Plans Basis


To better serve the customer, there must be a shift
from a traditional functional organization to an
enterprise-focused SCM effort that is aligned with
business processes.
To meet business partner and supply chain
requirements, we must understand customer
requirements and improve our business
processes.
Besides our own processes, suppliers processes
must be integrated into the product delivery and
order fulfillment processes

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Goals for Year 2

Reduce average price of incoming goods and services by 5


percent

Reduce average incoming defects by 50 percent to 450 ppm

Reduce average time required to develop a new product by


10 percent

Reduce production disruptions due to late delivery of


materials by 50 percent

Increase the number of new products based on supplier


furnished technology by 10 percent

Decrease the supply base by 15 percent

Increase award of production contracts to diversity suppliers


to 5 percent
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Initiatives for Year 2

Develop a world-class information system, Q3


Document, verify, and track cost savings, Q1
Implement value engineering and value analysis programs, Q1
Develop or hire a cadre of 8 cost engineers, Q 2-3
Develop14 corporate-wide commodity teams, Q2-3
Expand strategic sourcing to all commodity classes, Q4
Initiate creation of a global supplier network, Q3
Open an Asian international procurement office, Q4
Develop an internal Megatronics-wide education program for
understanding and managing supplier diversity, Q2
Develop a recognition program for suppliers embracing
Megatronics pollution avoidance program, Q3
Increase supplier development efforts, ongoing
Develop four new supplier alliances, Q4
Increase integration of suppliers into the development process,
ongoing
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Initiatives for Year 2 Continued

Develop web-based applications to link suppliers with Megatronics, Q1

Analyze supply management skills systematically

Conduct training to upgrade personnel to required levels, ongoing

Develop leadership from within, ongoing

Implement a college recruiting leadership program, Q1

Recruit best candidates to fill entry-level and mid career openings, ongoing

Ensure clear employee performance goals, Q2

Provide career development opportunities, ongoing

Implement rewards and incentive plan for members of supply management


system, Q2

Ensure retention of promising employees, ongoing

Integrate supply management, logistics, and demand management, Q3

Increase compensation of supply professionals, Q4

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Goals for Year 3


Reduce average price of incoming goods and
services by 5 percent
Reduce incoming defects by 50% to an average of
225 ppm
Improve forecast accuracy to 5 percent for 30
days and 10 percent for 30 120 days

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Initiatives for Year 3

Develop 10 new supplier alliances, Q4

Document, verify, track, and control savings, Q1

Increase purchases from diversity suppliers to 6 percent of production


materials, Q2

Initiate one supplier family (a la Toyota) by a key first tier supplier, Q3

Initiate 20 quality teams, four operating groups, Q4

Develop 16 new commodity teams, Q2

Integrate inbound and outbound traffic, Q3

Upgrade order and fulfillment processes, Q1

Go global on all aspects of supply chain management, Q1

Introduce lean into Megatronics supply chain, Q2

Optimize use of the Internet, Q3

Increase emphasis on contract and relationship management, ongoing

Provide ethics training to all in-house members of supply chain


management system, Q2
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Initiatives for Year 3 Continued

Focus negotiation training on synergy with suppliers, Q2

Conduct debriefings addressing lessons learned on all


negotiations, Q1

Study implications of employing other than firm fixed price


compensation, Q2

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Goals for Year 4

Reduce total cost of ownership on incoming goods and


services by 5 percent

Reduce average incoming defects by over 50 percent to an


average of 110 ppm

Develop 17 new supplier alliances

Increase purchases from diversity suppliers to 6.5 percent of


production materials

Increase number of firms embracing Megatronics pollution


avoidance program to 53

Globalize pollution avoidance program

Add 2 supplier families

Improve forecast accuracy to 4 percent for 30 days and 8


percent for 120 days
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Initiatives for Year 4

Champion the firms pursuit of the Malcolm Baldrige Award by developing


a three year plan, Q2
Develop and deploy a new metric measuring institutional trust, Q2
Implement a program of integrated financial transaction work flows
coupled with tax effective supply chain management practices, Q3
Develop and implement supply chain scorecards, Q3
Implement an aggressive publicity program, both corporate-wide and
including suppliers, Q4
Reward 50 percent of savings documented from VA programs to suppliers,
Q1
Replace longwinded contracts with short ones whose intent is to promote
teamwork, ongoing
Experiment with allowing suppliers to construct their own contracts on our
website, Q2
Establish supply management as a recognized competency corporate
wide, ongoing
Integrate supply chain management planning tightly with other systems at
all levels, ongoing
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Initiatives for Year 4 Continued

Align Strategic Sourcing strategies across the enterprise, ongoing

Optimize global logistics operations (inbound and outbound), ongoing

Develop a globally integrated order fulfillment process, Q1

Set consistent performance standards, Q2

Communicate expectations and feedback results to suppliers, Q2

Expand Megatronics supplier network around the globe, ongoing

Enable suppliers to interact seamlessly within Megatronics, ongoing

Support strategic sourcing, supplier integration, product delivery and


order fulfillment processes with timely and effective cost/financial
information, Q3

Utilize supplier development to transform the supply chain towards


lean manufacturing, maximum flexibility, reduced cycle times,
improved quality and reduced overall total cost in the supply chain,
ongoing
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Initiatives for Year 4 Continued

Integrate the supply chain into the technology delivery process, ongoing

Integrate e-Commerce II processes with all the key processes to enable


better integration and strategic planning, Q3

Develop worldwide purchase data gathering and sharing capabilities,


ongoing

Provide needed education and training, globally, across the enterprise and
enable distance learning, ongoing

Provide meaningful work, challenging assignments, and development


opportunities, ongoing

Develop individual development and succession plans, ongoing

Identify common activities and roles where redundancies can be


eliminated, ongoing

Identify and optimize synergies across the supply chain, ongoing

Identify and develop business marketplaces enabling supply chain


leverage and synergy, ongoing
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2012
Its January, 2012, four and a half years since you
were hired
Megatronics stock has increased 5-fold
You enter your new office and get a thrill out of
the sign on your new door:
Office of the President and Chief Executive
Officer

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Megatronics Corporation: Representative SCM


Organization
VP of Supply
Chain
Management

Corporate
Level

Director of
Supplier
Development
(16 FTE)

Director of
Supply
Engineering
(2 FTE)

Division
Level

Dir. Supply
Chain Mgmt.
Surgical
Division

Dir. Supply
Chain Mgmt.
Optics
Division

60 FTE

Demand
Management
(2 FTE)

Commodity
Managers
(8 FTE)

Supply
Managers
(32 FTE)

Executive Assistant

Director of
Measurements
and Standards
(4 FTE)

Director of
Alliances and
Networks
(12 FTE)

Dir. Supply
Chain Mgmt.
Test
Division

Dir. Supply
Chain Mgmt.
Medical
Division

62 FTE

Value
Engineers
(4 FTE)

Director of
Supply Systems
and Logistics
(3 FTE)

75 FTE

Project Supply
Managers
(12 FTE)

Support Staff
(2 FTE)

Cost
Engineers
(2 FTE)

Logistics
(10 FTE)

Supply
Engineers
(2 FTE)

22-49

Corporate Level (Expanded View)


Top Half
VP of Supply
Chain
Management

Director of
Supplier
Development (16
FTE)

Director of
Supply
Engineering
(2 FTE)

Director of
Measurements
and Standards (4
FTE)

Executive
Assistant

Director of
Alliances and
Networks
(12 FTE)

Director of
Supply Systems
and Logistics
(3 FTE)

22-50

Division Level (Expanded View)


Bottom Half

Dir. Supply
Chain Mgmt.
Surgical
Division

Dir. Supply
Chain Mgmt.
Optics
Division

60 FTE

Demand
Management
(2 FTE)

Commodity
Managers
(8 FTE)

Supply
Managers
(32 FTE)

Dir. Supply
Chain Mgmt.
Test
Division

Dir. Supply
Chain Mgmt.
Medical
Division

62 FTE

Value
Engineers
(4 FTE)

Project
Supply
Managers
(12 FTE)

75 FTE

Support Staff
(2 FTE)

Cost
Engineers
(2 FTE)

Logistics
(10 FTE)

Supply
Engineers
(2 FTE)

22-51

Concluding Remarks
Implementing Value Network Management
is as much about leadership and
management as it is about supply
management concepts and practices
Based on its integrative, relationship, and
boundary spanning nature, there is no
question in our minds:
World class supply managers have the
essential skill set to become Chief
Executive Officers!
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