SUPPLY CHAIN MANAGEMENT

Units 1 - 3 Reviewer

UNDERSTANDING SUPPLY transformed by the various entities into units

UNIT 1 of the final product sold to the customers.
● Return materials (e.g., defective units,
SUPPLY CHAIN recyclables, customer returns), requisite
● consists of all parties involved, directly or information (e.g., demand, forecasts), and
indirectly, in fulfilling a customer request. monetary payments also flow upstream or
● includes not only the manufacturer and backward from customers to suppliers, with
suppliers, but also transporters, information facilitating capacity and
warehouses, retailers inventory planning within the supply chain..
● includes all functions involved in receiving ● Physical Supply - The flow of materials
and filling a customer request. from upstream nodes into the focal entity
○ These functions include, but are not ● Physical Distribution - the flow of
limited to, new product materials from F through downstream nodes
development, marketing, toward the end customers
operations, distribution, finance, ● Distribution channel - a specific route from
and customer service. a producer (in this case, F) forward through
● dynamic and involves the constant flow of the various nodes (e.g., distributors and
information, product, and funds between wholesalers) to the end customer and is
different stages. therefore only part of the supply chain for F.
● the set of entities and relationships that ● Physical supply For focal entity, it can be
cumulatively define materials and segmented further into tiers such that 1st-
information flows both downstream toward tier suppliers have a direct linkage
the customer and upstream toward the very (represented by an arrow) to F, 2nd-tier
first supplier. suppliers have a linkage to F through 1st-
tier suppliers, and so on.
● Each entity ideally plays a value- added role
in transforming materials into the desired
final product for the customer while passing
along relevant information.

OBJECTIVE OF A SUPPLY CHAIN

● should be to maximize the overall value
generated.
● The Value
○ A.k.a. Supply Chain Surplus
○ a supply chain generates is the
difference between what the value
of the final product is to the
customer and the costs the supply
chain incurs in filling the
● Materials and requisite information (usage
customer’s request.
instructions, inventory levels, invoices,etc.)
flow downstream or forward from suppliers
●
to customers, with materials being
 SUPPLY CHAIN MANAGEMENT
● Supply chain profitability is the total profit to Two ways to view the processes performed in a
be shared across all supply chain stages supply chain:
and intermediaries. 1. Cycle View
● The higher the supply chain profitability, the ○ processes in a supply chain are
more successful is the supply chain. divided into a series of cycles, each
performed at the interface between
DECISION PHASES IN A SUPPLY CHAINN two successive stages of a supply
1. Supply Chain Strategy or Design: chain.
a. a company decides how to
structure the supply chain over the
next several years.
b. It decides what the chain’s
configuration will be, how resources
will be allocated, and what
processes each stage will perform.
2. Supply Chain Planning:
a. the time frame considered is a
quarter to a year. 2. Push/Pull View
b. The goal of planning is to maximize ○ The processes in a supply chain are
the supply chain surplus that can be divided into two categories
generated over the planning horizon depending on whether they are
given the constraints established executed in response to a customer
during the strategic or design phase. order or in anticipation of
c. Companies start the planning phase customer orders.
with a forecast for the coming year ■ Pull process
(or a comparable time frame) of ● initiated by a
demand and other factors such as customer order
costs and prices in different markets. ● Reactive process
3. Supply Chain Operation: because they react to
a. The time horizon here is weekly or customer demand
daily. ■ Push process
b. During this phase, companies make ● initiated and
decisions regarding individual performed in
customer orders. anticipation of
c. At the operational level, supply chain customer orders.
configuration is considered fixed, ● as speculative
and planning policies are already processes because
defined. The goal of supply chain they respond to
operations is to handle incoming speculated (or
customer orders in the best forecasted) rather
possible manner. than actual demand.

PROCESS VIEWS OF A SUPPLY CHAIN

A supply chain is a sequence of processes and
flows that take place within and between different
stages and combine to fill a customer need for a
product.
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SUPPLY CHAIN MANAGEMENT

● According to the Institute of Supply
Management, Supply chain management
(SCM) is the design and management of
seamless, value-added processes across
organizational boundaries to meet the real
needs of the end customer.

● SCM involves a sequence of value-added

processes that not only cut across
All supply chain processes discussed in the two organizational boundaries but also must be
process views can be classified into the following tightly integrated. To be integrated, the
three macro processes: processes must be appropriately designed
and systematically managed to allow
1. Customer Relationship Management information to flow and be deployed within
(CRM): and across them.
a. all processes that focus on the
interface between the firm and its ● SCM is often defined as the integration of
customers three (3) traditionally separate functions:
2. Internal Supply Chain Management sourcing (purchasing), operations, and
(ISCM): logistics.
a. all processes that are internal to the
firm
3. Supplier Relationship Management
(SRM):
a. all processes that focus on the
interface between the firm and its
suppliers
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SCOR ATTRIBUTES

● A product development strategy

SCOR METRICS ○ specifies the portfolio of new
● Reliability products that a company will try to
○ Perfect Order Fulfillment develop.
○ dictates whether the development
● Responsiveness effort will be made internally or
○ Order Fulfillment Cycle Time outsourced.

● Agility ● A marketing and sales strategy

○ Upside/Downside Supply Chain ○ specifies how the market will be
Flexibility segmented and how the product will
be positioned, priced, and promoted.
● Costs
○ Total Supply Chain Management ● A supply chain strategy
Cost ○ determines the nature of
procurement of raw materials,
● Assets Management Efficiency transportation of materials to and
○ Return on supply chain fixed from the company, manufacture of
assets the product or operation to provide
the service, and distribution of the
product to the customer, along with
SUPPLY CHAIN PERFORMANCE any follow-up service and a
specification of whether these
Competitive and Supply Chain Strategies processes will be performed
● Company’s competitive strategy - relative to in-house or outsourced
its competitors, the set of customer needs
that it seeks to satisfy through its products For a firm to succeed, all functional strategies must
and services. support one another and the competitive strategy
○ based on how the customer
prioritizes product cost, delivery
time, variety, and quality.
 SUPPLY CHAIN MANAGEMENT
material to construct a new
ACHIEVING STRATEGIC FIT production line is likely to be large.
● requires that both the competitive and ● The Response Time That Customers Are
supply chain strategies of a company have Willing to Tolerate:
aligned goals. ○ The tolerable response time for the
● consistency between the customer priorities emergency order is likely to be short,
that the competitive strategy hopes to whereas the allowable response
satisfy and the supply chain capabilities that time for the construction order is apt
the supply chain strategy aims to build. to be long.
● Must accomplish the following: ● The Variety of Products Needed:
○ The competitive strategy and all ○ A customer may place a high
functional strategies must fit together premium on the availability of all
to form a coordinated overall parts of an emergency repair order
strategy. Each functional strategy from a single supplier. This may not
must support other functional be the case for the construction
strategies and help a firm reach its order.
competitive strategy goal. ● The Service Level Required:
○ The different functions in a company ○ A customer placing an emergency
must appropriately structure their order expects a high level of product
processes and resources to be able availability. This customer may go
to execute these strategies elsewhere if all parts of the order are
successfully. not immediately available. This is not
○ The design of the overall supply apt to happen in the case of the
chain and the role of each stage construction order for which a long
must be aligned to support the lead time is likely.
supply chain strategy. ● The Price of the Product:
○ The customer placing the
HOW STRATEGIC IS ACHIEVED? emergency order is apt to be much
will specify one or more customer segments that a less sensitive to price than the
company hopes to satisfy. customer placing the construction
There are three (3) basic steps to achieve this order.
strategic fit: ● The Desired Rate of Innovation in the
1. Understanding the Customer and Supply Product:
Chain Uncertainty ○ Customers at a high-end department
2. Understanding the Supply Chain store expect a lot of innovation and
Capabilities new designs in the store’s apparel.
3. Achieving Strategic Fit ○ Customers at local stores may be
less sensitive to new product
Step 1: Understanding the Customer and innovation.
Supply Chain Uncertainty ● each customer need can be translated into
● a company must identify the needs of the the metric of implied demand uncertainty,
customer segment being served. which is demand uncertainty imposed on
● The Quantity of the Product Needed in the supply chain because of the customer
Each Lot: needs it seeks to satisfy.
○ An emergency order for material
needed to repair a production line is
likely to be small. An order for
 SUPPLY CHAIN MANAGEMENT
Demand certainty vs. Implied demand certainty

● Demand uncertainty reflects the uncertainty

of customer demand for a product. Implied
demand uncertainty, in contrast, is the
resulting uncertainty for only the portion of
the demand that the supply chain plans to
satisfy based on the attributes the customer
desires.

Step 3: Achieving Strategic Fit

the degree of supply chain responsiveness is
Step 2: Understanding the Supply Chain consistent with the implied uncertainty. The goal is
Capabilities to target high responsiveness for a supply chain
How does the firm best meet demand in that facing high implied uncertainty, and efficiency for a
uncertain environment? supply chain facing low implied uncertainty.

Creating strategic fit is all about creating a supply Increasing implied uncertainty from customers and
chain strategy that best meets the demand a supply sources is best served by increasing
company has targeted given the uncertainty it responsiveness from the supply chain. This
faces. relationship is represented by the “zone of strategic
fit”
Supply chain responsiveness includes a supply
chain’s ability to do the following: For a high level of performance, companies should
● Respond to wide ranges of quantities move their competitive strategy (and resulting
demanded implied uncertainty) and supply chain strategy (and
● Meet short lead times resulting responsiveness) toward the zone of
● Handle a large variety of products strategic fit.
● Build highly innovative products
● Meet a high service level
● Handle supply uncertainty

Supply chain efficiency is the inverse of the cost of

making and delivering a product to the customer.
Increases in cost lower efficiency. For every
strategic choice to increase responsiveness, there
are additional costs that lower efficiency.
 SUPPLY CHAIN MANAGEMENT
competitive strategy. All sub-strategies within the
supply chain—such as manufacturing, inventory,
and purchasing—must also be consistent with the
supply chain’s level of responsiveness.

- assign roles to different stages of the supply

chain that ensure the appropriate level of
responsiveness.
- It is important to understand that the CHALLENGES TO ACHIEVING AND
desired level of responsiveness required MAINTAINING STRATEGIC FIT
across the supply chain may be attained by ● Changing Technology and Business
assigning different levels of responsiveness Environment
and efficiency to each stage of the supply ○ As customer needs and technology
chain change, firms are forced to
constantly rethink their supply chain
strategy. A strategy that may have
been very successful in one
environment can easily become a
weakness in a changed setting.

● The Environment and Sustainability

○ Issues related to the environment
and sustainability have grown in
relevance and must be accounted
for when designing supply chain
strategy.

Supply Chain I has a very responsive retailer who SUPPLY CHAIN DRIVERS AND METRICS
absorbs most of the uncertainty, allowing (actually
requiring) the manufacturer and supplier to be Driver of Supply Chain Performance
efficient. 1. Facilities
a. are the actual physical locations
Supply Chain II, in contrast, has a very responsive in the supply chain network where
manufacturer who absorbs most of the uncertainty, product is stored, assembled, or
thus allowing the other stages to focus on fabricated.
efficiency. b. The two major types of facilities are
production : sites and storage sites.
c. Decisions regarding the role,
To achieve complete strategic fit, a firm must also location, capacity, and flexibility
ensure that all its functions maintain consistent facilities have a significant impact on
strategies that support the competitive strategy. All the supply chain’s performance.
functional strategies must support the goals of the Facility costs show up under
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property, plant and equipment, if c. Sourcing decisions affect both the
facilities are owned by the firm or responsiveness and efficiency of a
under selling, general, and supply chain.
administrative if they are leased. 6. Pricing
2. Inventory a. determines how much a firm will
a. encompasses all raw materials, work charge for the goods and services
in process, and finished goods within that it makes available in the supply
a supply chain. chain.
b. The inventory belonging to a firm is b. Pricing affects the behavior of the
reported under assets. buyer of the good or service, thus
c. Changing inventory policies can affecting supply chain performance.
dramatically alter the supply chain’s
efficiency and responsiveness.
3. Transportation
a. entails moving inventory from point
to point in the supply chain.
b. Transportation can take the form of
many combinations of modes and
routes, each with its own
performance characteristics.
c. Transportation choices have a large
impact on supply chain
responsiveness and efficiency.
4. Information
a. consists of data and analysis
concerning facilities, FACILITIES
inventory,transportation, costs, Capacity
prices, and customers throughout ● A facility with little excess capacity will likely
the supply chain. be more efficient per unit of product it
b. potentially the biggest driver of produces than one with a lot of unused
performance in the supply chain capacity. The high-utilization facility,
because it directly affects each of the however, will have difficulty responding to
other drivers. demand fluctuations.
c. Information presents management
with the opportunity to make supply ● Facility-related Metrics
chains more responsive and more ○ Capacity
efficient. ○ Utilization
5. Sourcing ○ Processing/set-up/down/idle time
a. is the choice of who will perform a ○ Production cost per unit
particular supply chain activity such ○ Quality loses
as production, storage, ○ Theoretical flow/cycle time
transportation, or the management ○ Actual average flow/cycle time
of information. ○ Flow time efficiency
b. At the strategic level, these ○ Product Variety
decisions determine what functions a ● Facility-related Metrics
firm performs and what ○ Volume contribution of top 20 SKUs
functions the firm outsources. and customers
○ Production batch size
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○ Production service level ○ Products with more than a specified
number of days inventory
Inventory-related Metrics
INVENTORY ● Average replenishment batch size
Components of Inventory Decision ● Average safety inventory
● Cycle Inventory ● Seasonal Inventory
● Cycle inventory is the average amount of ● Fill rate
inventory used to satisfy demand between ● Fraction of time out of stock
receipts of supplier shipments. The size of ● Obsolete inventory
the cycle inventory is a result of the
production, transportation, or purchase of TRANSPORTATION
material in large lots Companies produce or Components of Transportation Decision
purchase in large lots to exploit economies
of scale in the production, transportation, or ● Design of Transportation Network
purchasing process. With the increase in lot ○ The transportation network is the
size, however, comes an increase in collection of transportation modes,
carrying costs. locations, and routes along which
product can be shipped. A company
● The basic trade-off supply chain managers must decide whether transportation
face is the cost of holding larger lots of from a supply source will be direct to
inventory (when cycle inventory is high) the demand point or will go through
versus the cost of ordering product intermediate consolidation points.
frequently (when cycle inventory is low). Design decisions also include
● Level of Product Availability whether multiple supply or demand
○ Level of product availability is the points will be included in a single
fraction of demand that is served on run.
time from product held in inventory.
A high level of product availability ● Choice of Transportation Mode
provides a high level of ○ The mode of transportation is the
responsiveness but increases cost manner in which a product is moved
because much inventory is held but from one location in the supply chain
rarely used. In contrast, a low level network to another. Companies can
of product availability lowers choose among air, truck, rail, sea,
inventory holding cost but results in and pipeline as modes of transport
a higher fraction of customers who for products. Each mode has
are not served on time. The basic different characteristics with respect
trade -off when determining the level to the speed, size of shipments, cost
of product availability is between the of shipping, and flexibility that lead
cost of inventory to increase product companies to choose one mode over
availability and the loss from not the others.
serving customers on time. ● Transportation-related Metrics
○ Average inbound transportation
● Inventory-related Metrics ○ Average incoming shipment
○ Cash-to-cash cycle time ○ Average inbound transportation cost
○ Average inventory per shipment
○ Inventory turns ○ Average outbound transportation
cost
 SUPPLY CHAIN MANAGEMENT
○ Average outbound shipment size affects both the demand on a firm’s
○ Average outbound transportation suppliers and the supply to its
cost per. customers.
○ Fraction transported by mode
● Enabling Technologies
INFORMATION ○ Managers must decide which
Components of Information Decision technologies to use and how to
integrate them into their supply
● Push vs Pull chain. Some of these technologies
○ Push systems start with forecasts include the following:
that are used to build the master ● Enabling Technologies
production schedule and roll it back, Managers must decide which technologies
creating schedules for suppliers with to use and how to integrate them into their
part types, quantities, and delivery supply chain. Some of these technologies
dates. Pull systems require include the following:
information on actual demand to be ○ Electronic Data Interchange (EDI)
transmitted extremely quickly ○ Internet
throughout the entire chain so that ○ Enterprise resource planning (ERP)
production and distribution of system
products can reflect the real demand ○ Supply Chain Management (SCM)
accurately. system
○ Radio frequency identification (RFID)
● Coordination and Information Sharing
○ Supply chain coordination occurs ● Information-related Metrics
when all stages of a supply chain ○ Forecast horizon
work toward the objective of ○ Frequency of update
maximizing total supply chain ○ Forecast error
profitability based on shared ○ Seasonal factors
information. Coordination among ○ Variance from plans
different stages in a supply chain ○ Ratio of demand to order variability
requires each stage to share
appropriate information with other
stages.
● Sales and Operations Planning SOURCING
○ Sales and operations planning In-house of Outsource
(S&OP) is the process of creating an The most significant sourcing decision for a firm is
overall supply plan (production and whether to perform a task in -house or outsource it
inventories) to meet the anticipated to a third party. This decision should be driven in
level of demand (sales). The goal of part by its impact on the total supply chain surplus.
S&OP is to come up with an It is best to outsource if the growth in total supply
agreed-upon sales, production, and chain surplus is significant with little additional risk.
inventory plan that can be used to
plan supply chain needs and project Supplier Selection
revenues and profits. The sales and Managers must decide on the number of suppliers
operations plan becomes a critical they will have for a particular activity. They must
piece of information to be shared then identify the criteria along which suppliers will
across the supply chain because it be evaluated and how they will be selected. For the
 SUPPLY CHAIN MANAGEMENT
selection process, managers must decide whether A firm must decide whether it will charge a
they will use direct negotiations or resort to an fixed price for its supply chain activities or
auction. If an auction is used, it must be structured have a menu with prices that vary with some
to ensure the desired outcome. other attribute, such as the response time or
location of delivery. If marginal supply chain
Procurement costs or the value to the customer vary
Procurement is the process of obtaining goods and significantly along some attribute, it is often
services within a supply chain. Managers must effective to have a pricing menu.
structure procurement with a goal of increasing
supply chain surplus. For example, a firm should ● Pricing-related Metrics
set up procurement for direct materials to ensure ○ Profit Margin
good coordination between the supplier and buyer. ○ Days sales outstanding
In contrast, the procurement of MRO products ○ Incremental fixed cost per order
should be structured to ensure that transaction ○ Incremental variable cost per order
costs are low. ○ Average sale price
○ Average order size
Sourcing-related Metrics ○ Range of sale price
● Days payable outstanding ○ Range of periodic sales
● Average purchase price —------------------------------------------------------------------
● Range of purchase price
● Average purchase quantity
● Supply quality
● Supply lead time
● Fraction of on-time deliveries
● Supplier reliability

PRICING
Components of Pricing Decision

● Pricing and Economies of Scale

Most supply chain activities display economies of
scale. Changeovers make small production runs
more expensive per unit than large production runs.
Loading and unloading costs make it cheaper to
deliver a truckload to one location than four. In each
case, the provider of the supply chain activity must
decide how to price it appropriately to reflect these
economies of scale.

● Everyday Low Pricing vs High-Low Pricing

Everyday low pricing is keeping prices steady over
time, leading to stable demand. The high–low
pricing offers steep discounts on a subset of their
product every period resulting to peak in demand
for the discount period.
● Fixed Price vs Menu Pricing
 SUPPLY CHAIN MANAGEMENT
PROCUREMENT STRATEGIES 1. Corporate Strategies: These strategies are
UNIT 3 concerned with (1) the definition of businesses in
which the corporation wishes to participate and (2)
Supply Management and Commodity Strategy the acquisition and allocation of resources to these
Development business units.

Aligning Supply Management and Enterprise 2. Business Unit Strategies: These strategies are
Objectives concerned with (1) the scope or boundaries of each
A company’s leadership team, in defining business and the links with corporate strategy and
how the firm will compete and succeed in the global (2) the basis on which the business unit will achieve
environment, must clearly and succinctly and maintain a competitive advantage within an
communicate the following to their executive team: industry.

What markets will the firm compete in, and 3. Supply Management Strategies: These
on what basis? strategies, which are part of a level of strategy
What are the long-term and short-term development called functional strategies, specify
business goals the company seeks to how supply management will (1) support the
achieve? desired competitive business-level strategy and (2)
What are the budgetary and economic complement other functional strategies (such as
resource constraints, and how will these be marketing and operations).
allocated to functional groups and business
units? 4. Commodity Strategies: These strategies
specify how a group tasked with developing the
The first part of this process requires that strategy for the specific commodity being
the leadership team understand its key markets and purchased will achieve goals that in turn will
economic forecasts, and provide a clear vision of support the supply management–, business unit–,
how the enterprise will differentiate itself from its and ultimately corporate level strategies.
competitors, achieve growth objectives, manage
costs, achieve customer satisfaction, and maintain
continued profitability in order to meet or exceed
the expectations of stakeholders.

Translating Supply Management Objectives into

Supply Management Goals

Cost-Reduction Objective
Integrative Strategy Development
● Be the low-cost producer within our industry.
The strategy development process takes place on (Goal: Reduce material costs by 15% in one
four levels: year.)
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● Reduce the levels of inventory required to programming, call centers), and office supplies (all
supply internal customers. (Goal: Reduce industries).
raw material inventory to 20 days’ supply or
less.) A category team is often composed of
personnel from the operational group, product
Technology/New-Product design, process engineering, marketing, finance,
● Development Objective Outsource and supply management. The personnel involved
non-core-competency activities. (Goal: should be familiar with the commodity being
Qualify two new suppliers for all major evaluated.
services by the end of the fiscal year.) For instance, if the team is tasked with
● Reduce product development time. (Goal: supply management computers, then users from
Develop a formal supplier integration information systems should be included. If the team
process manual by the end of the fiscal purchases vehicles and vehicle parts, then it would
year.) be a good idea to include maintenance managers
who are familiar with the characteristics of these
Supply Base Reduction Objective commodities. In general, the more important the
● Reduce the number of suppliers used. commodity, the more likely that cross-functional
(Goal: Reduce the total supply base by 30% members and user groups will be involved.
over the next six months.) Together, the commodity team will develop a
● Joint problem-solve with remaining commodity strategy that provides the specific
suppliers. (Goal: Identify $300,000 in details and outlines the actions to follow in
potential cost savings opportunities with two managing the commodity.
suppliers by the end of the fiscal year.)
To enable an effective category strategy, the team
Supply Assurance Objective must:
● Assure uninterrupted supply from those
suppliers best suited to filling specific needs. 1. Spend money on resources initially, including
(Goal: Reduce cycle time on key parts to assessment of current spend, data collection,
one week or less within six months.) Quality market research, training, and people.
Objective
● Increase quality of services and products. 2. Validate the savings or contribution to other
(Goal: Reduce average defects by 200 ppm company objectives achieved by supply
on all material receipts within one year.) management and drive them to the bottom line.

What is a Category Strategy? 3. Sustain the initiative through presentations to

Although not always the case, companies senior executives who support the move toward an
often use commodity teams to develop supply integrated supply management function with other
management strategies. Supply management functional groups in the supply chain, including
strategies often apply to categories—general marketing, research and development, and
families of purchased products or services. accounting.
Examples of major commodity classifications
across different industries include body side The individual who will ensure that this can
moldings (automotive), microprocessors happen will often report to the chief financial officer
(computer), steel (metalworking), cotton (apparel), (CFO)—so making a solid business case is an
wood (pulp and paper), petroleum products important element in building support for category
(chemicals), outsourced business processes (IT strategies in most firms.
 SUPPLY CHAIN MANAGEMENT
The most common approach for building a an important component for planning annual
business case is through an annual process review budgets for spending in the coming year.)
of where the company is spending its money: the
“spend analysis.” ➔ Are there opportunities to combine
volumes of spending from different
Conducting a Spend Analysis businesses, and standardize product
requirements, reduce the number of
As we discussed in Unit 2, a robust suppliers providing these products, or
procure to pay process is critical, in order to exploit market conditions to receive
facilitate an accurate spend analysis. Why is it better pricing? (This is an important input
important to capture the transaction level data into strategic sourcing planning).
associated with all purchasing processes? Because
from time to time the firm must identify opportunities
for savings through a process known as a spend
analysis. A spend analysis becomes a critical input
into building category strategies.

A spend analysis is an annual review of a firm’s

entire set of purchases. This review provides
answers to the following questions:

➔ What did the business spend its money

on over the past year? (This value is an
important component in calculating the cost
of goods sold in the financial statement.
Purchased goods and materials are often
more than 50% of the total cost of goods
sold.)

➔ Did the business receive the right

amount of products and services given
what it paid for them? (accountability and
correct reporting of financial statements to
the SEC.)

➔ What suppliers received the majority of

the business, and did they charge an
accurate price across all the divisions in
comparison to the requirements in the
POs, contracts, and statements of work?
(This is an important component to ensure
contract compliance.)

➔ Which divisions of the business spent

their money on products and services
that were correctly budgeted for? (This is
 SUPPLY CHAIN MANAGEMENT
involved, as well as the key subject matter experts
who may be part of the extended team.

Once developed, the team should then define the

scope of the category strategy, publish a project
charter, and develop a work plan and
communication plan. These steps help to define the
purpose, boundaries, and goals of the process;
identify the tasks involved; and provide a plan for
communicating the results to the primary
stakeholders.

Category Strategy Development The project charter is a clear statement of the

goals and objectives of the sourcing project, which
Once the decision has been made to is officially announced shortly after the team’s first
outsource a product or service, firms will typically few meetings. The project charter can be issued
use a process known as strategic sourcing to before or after the cross -functional sourcing team
decide to whom to outsource the product or service, has been formed, and in fact, it can be used to
as well as the structure and type of relationship that garner interest from potential participants in the
should be established. process. The purpose of a project charter is to
A sourcing strategy is typically focused on a demonstrate management support for the project
category of products or services, and for that and its manager.
reason, the strategy is sometimes called a category
strategy. A category strategy is a decision process Step 2: Conduct Market Research on Suppliers
used to identify which suppliers should provide a
group of products or services, the form of the The second step when developing a sourcing
contract, the performance measures used to strategy is to fully understand the purchase
measure supplier performance, and the appropriate requirement relative to the business unit objectives.
level of price, quality, and delivery arrangements Also involved in this step is a thorough supplier
that should be negotiated. spend analysis to determine past expenditures for
each commodity and supplier, as well as the total
expenditures for the commodity as a percentage of
the total.

To make an informed decision about sourcing,

several pieces of information are needed. These
include the following:

○ Information on total annual purchase

volumes. This is often an important
element from the spend analysis.
This analysis should show how
much was spent on the category of
Step 1: Build the Team and the Project Charter goods or services by supplier, by
business unit, and by subgroups.
Part of the first phase of the category management
process is to identify the people who should be
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○ Interviews with stakeholders to deep market intelligence through focused
determine their forecasted discussions with key stakeholders and subject
requirements. For example, if the matter experts. The tool helps to predict supplier
annual purchase volume last year and buyer behaviour in the marketplace and is a
was $10 million, is this figure critical element in shaping supply strategy.
expected to go up or down next year
based on the predicted amount of
work? Stakeholders should also be
interviewed to determine any new
sourcing elements that may not have
been included in last year’s figure.

○ External market research identifying

information on key suppliers,
available capacity, technology
trends, price and cost data and
trends, technical requirements, SWOT Analysis
environmental and regulatory issues, An analysis that examines strengths,
and any other data that is available. weaknesses, opportunities, and threats (SWOT)
In effect the team must educate can provide insight even with limited data. As a
themselves through a detailed strategic planning tool, the goal is to minimize
analysis of the marketplace and weakness and threats, and exploit strengths and
identify how best to meet the opportunities.
forecasted demand (generated by
the spend analysis and interviews Establish Benchmarks
with stakeholders) given the market Benchmarking is an important element in
conditions that will occur in the next building competitive strategy. Benchmarking
year. requires identifying the critical performance criteria
that are being benchmarked and identifying relative
competitive performance. Industry benchmarks
involve comparisons of performance with firms in
the same industry, whereas external benchmarks
involve best practices and performance levels
achieved by firms that are not within the same
industry.

Request for Information (RFI)

A request for information (RFI) is generally
used before a specific requisition of an item is
issued. Most organizations will issue an RFI if they
have determined that there are several potential
suppliers. The RFI is a solicitation document that is
used by organizations to obtain general information
Porter’s Five Forces about services, products, or suppliers. This
Data for creation of a Five Forces analysis document does not constitute a binding agreement
requires a review of all of the different data sources by either the supplier or the purchaser. The
described to date in this section. It may also involve information gathered from an RFI can be
 SUPPLY CHAIN MANAGEMENT
disseminated throughout the organization or to
specific departments.

Value Chain Analysis

Used to help identify the cost savings
opportunities that exist within the supply chain. The
goal is to be able to understand, identify, and
exploit cost savings opportunities that may have
been overlooked by business unit managers or
even by suppliers in bringing the products and
services to the appropriate location.

Supplier Research
Required to identify the specific capabilities
and financial health of key suppliers that are in the
supply base or that may not currently be in the
supply base

Step 3: Strategy Development

Once the team has educated themselves to the

point that they feel they know enough about the
supply market conditions, the forecasted spend,
and the user stakeholder requirements, they are
faced with a different challenge. The team must Supplier Evaluation
convert all of this data into meaningful knowledge Once the portfolio analysis is completed, the
and apply some meaningful tools to structure the team must then dive into the category and evaluate
information so that it will render an effective individual suppliers as to their suitability, narrowing
decision. Two tools are most often used in this the list down to a critical few. The ultimate result of
process: a portfolio analysis matrix (sometimes this step is to make supplier recommendations, so
called the strategic sourcing matrix), and the the team must first identify current and potential
supplier evaluation scorecard. suppliers, determine any information technology
requirements, and identify opportunities to leverage
Strategy Portfolio Matrix for Category the commodity expenditures with similar
Management commodities.

Portfolio analysis is a tool to structure and ● Process and design capabilities

segment the supply base, and is used as a means ● Management capability
of classifying suppliers into one of four types. The ● Financial condition and cost structure
objective is to categorize every purchase or family ● Planning and control systems
of purchases into one of four categories. The ● Environmental regulation compliance
premise of portfolio analysis is that every purchase ● Longer-term relationship potential
or family of purchases can be classified into one of ● Supplier selection scorecards
four categories or quadrants: (1) Critical, (2)
Routine, (3) Leverage, and (4) Bottleneck. Step 4: Contract Negotiation
 SUPPLY CHAIN MANAGEMENT
After the sourcing strategy has been determined The buying firm should also continuously monitor
and suppliers have been recommended, it is time to the performance of suppliers based on
implement the strategy and negotiate the contract. predetermined and agreed-upon criteria such as
Effective implementation of the strategy includes quality, delivery performance, and continuous cost
establishing tasks and timelines, assigning improvement. And there should be a plan in place
accountabilities and process ownership, and to manage any conflicts that occur with suppliers.
ensuring adequate resources are made available to
the process owners. The strategy should also be One of the most important tools used to monitor
communicated to all stakeholders, including supplier performance is the supplier scorecard.
suppliers and internal customers, in order to obtain Just like the supplier evaluation matrix, the
buy -in and participation. scorecard often reflects the same set of categories
used during the evaluation process, but the scores
Before entering into contract negotiations, the are updated typically once a quarter, and reviewed
commodity team should perform an analysis of with the supplier. Over time, the nature of the
market and pricing issues so that a fair price for classifications used in the scorecard may also
both parties can be agreed upon. This analysis change, as the stakeholders’ requirements and
attempts to define the marketplace, including best their requests may change. Scorecards typically
price, average price, and the business unit’s price, include the categories of price, quality, and delivery
and determines expected trends in pricing. In reliability used in the evaluation process, but the
preparation for negotiations, the buyer should team may also choose to add categories such as
develop a negotiation plan and an ideal contract. “Responsiveness” (how quickly does the supplier
There should also be a contingency plan in case return a call when there is a problem?). These
negotiations with the recommended suppliers do scorecards are used in regularly scheduled review
not go as expected. Finally, the negotiation is meetings with suppliers, so that deficiencies in
conducted, and a contract is signed. performance can be noted, discussed, and acted
upon.
Can be through Competitive Bidding or
Negotiation Supply base optimization
Supply base optimization is the process of
Step 5: Supplier Relationship Management determining the appropriate number and mix of
suppliers to maintain. Although this has also been
The strategic sourcing process does not end when referred to as rightsizing, it usually refers to
a contract is signed with a supplier. Although the reducing the number of suppliers used. Moreover,
sourcing team may disband and go their separate suppliers that are not capable of achieving
ways once the contract is signed, typically one world-class performance, either currently or in the
member of the team will continue to work with the near future, may be eliminated from the supply
supplier in the role of supplier relationship manager. base. This process is continuous because the
This individual must continuously monitor the needs of the business unit are always changing.
performance of the sourcing strategy, as well as the Optimization requires an analysis of the number of
supplier. The buying firm should revisit the sourcing suppliers required currently and in the future for
strategy at predetermined intervals, to ensure that it each purchased item. For example, General Motors
is achieving its stated objectives, and may need to was ready to eliminate 160 suppliers worldwide that
make modifications to the strategy if it is not it considered poor performers in 2003 and 2004.
working as planned or if there are changes in the Chapter 9 discusses supply base optimization in
market. detail.

Supply Risk Management

 SUPPLY CHAIN MANAGEMENT
Typhoons, Earthquakes and other force source for components, services, and finished
majeure events and corresponding escalating goods. It can be used to access new markets or to
commodity prices have highlighted more than ever gain access to the same suppliers that are helping
the impact of disruptions on supply chain global companies become more competitive.
operations and global competition. Although many Although true global sourcing is somewhat limited
events are not easily predicted, there are many in most industries, more and more companies are
other sources of supply chain disruption that have beginning to view the world as both a market and a
the potential to be better managed, thereby source of supply.
reducing the impact on firm agility and profitability.
The major objective of global sourcing is to
As firms outsource a greater proportion of provide immediate and dramatic improvements in
products and services from China, India, and other cost and quality as determined through the
low-cost countries, the hidden perils of these commodity research process. Global sourcing is
approaches are often not considered, especially also an opportunity to gain exposure to product and
within the context of enterprise risk management process technology, increase the number of
(ERM). Global outsourcing affords many benefits in available sources, satisfy countertrade
the form of lower prices and expanded market requirements, and establish a presence in foreign
access, but only recently have senior executives markets. This strategy is not contradictory to supply
begun to recognize the increased risk attributed to base optimization because it involves locating the
the higher probability of product and service flow worldwide best -in-class suppliers for a given
disruptions in global sourcing networks. A major commodity. Some buyers also source globally to
disruption in the offshore supply chain can shut introduce competition to domestic suppliers.
down a company and have dire consequences for
profitability. There are several major barriers to global
sourcing that must be overcome. Some serious
The impact of supply chain disruptions, issues are that some firms are inexperienced with
although difficult to quantify, can be costly. A study global business processes and practices, and there
investigated stock market reactions when firms are few personnel qualified to develop and
publicly announced that they were experiencing negotiate with global suppliers or manage long
supply chain glitches or disruptions causing material pipelines. In addition, more complex
production or shipping delays. logistics and currency fluctuations require
measuring all relevant costs before committing to a
One factor that is increasing the risk worldwide source.
exposure to supply chain disruption is the
increasing propensity of companies to outsource Finally, organizations may not be prepared
processes to global suppliers. The complexity to deal with the different negotiating styles practiced
associated with multiple hand-offs in global supply by different cultures, and they may have to work
chains increases the probability of disruptions. As through a foreign host nation in order to establish
the number of hand-offs required to ship products contacts and an agreement. Chapter 10 addresses
through multiple carriers, multiple ports, and global sourcing in detail.
multiple government checkpoints increases, so
does the probability of poor communication, human Long-Term Supplier Relationship
error, and missed shipments. Longer-term supplier relationships involve
the selection of and continuous involvement with
Global Sourcing Global suppliers viewed as critical over an extended period
An approach that requires supply of time (e.g., three years and beyond). In general,
management to view the entire world as a potential the use of longer -term supplier relationships is
 SUPPLY CHAIN MANAGEMENT
growing in importance, and there will probably be may accelerate overall supplier improvement at a
greater pursuit of these relationships through faster rate than will actions taken independently by
longer-term contracts. Some purchasers are the supplier. The basic motivation behind this
familiar with the practice, whereas for others it strategy is that supplier improvement and success
represents a radical departure from traditional short lead to longer -term benefits to both buyer and
-term approaches to supply base management. seller. This approach supports the development of
worldclass suppliers in new areas of product and
Longer-term relationships are sought with process technology.
suppliers that have exceptional performance or
unique technological expertise. Within the portfolio Total Cost of Ownership
matrix described earlier, this would involve the few Total cost of ownership (TCO) is the process
suppliers that provide items and services that are of identifying cost considerations beyond unit price,
critical or of higher value. A longer-term relationship transport, and tooling. It requires the business unit
may include a joint product development to define and measure the various cost components
relationship with shared development costs and associated with a purchased item. In many cases,
intellectual property. In other cases, it may simply this includes costs associated with late delivery,
be an informal process of identifying suppliers that poor quality, or other forms of supplier non
receive preferential treatment. performance. Total cost of ownership can lead to
better decision making because it identifies all costs
Early Supplier Design Involvement associated with a supply management decision and
Early supplier design involvement and the costs associated with supplier nonperformance.
selection requires key suppliers to participate at the Cost variances from planned results can be
concept or predesign stage of new-product analyzed to determine the cause of the variance.
development. Supplier involvement may be Corrective action can then prevent further
informal, although the supplier may already have a problems.
purchase contract for the production of an existing
item. Early involvement will increasingly take place
through participation on cross-functional product
development teams. This strategy recognizes that
qualified suppliers have more to offer than simply
the basic production of items that meet engineering
specifications. Early supplier design involvement is
a simultaneous engineering approach that occurs
between buyer and seller, and seeks to maximize
the benefits received by taking advantage of the
supplier’s design capabilities.

Supplier Development
In some cases, purchasers may find that
suppliers’ capabilities are not high enough to meet
current or future expectations, yet they do not want
to eliminate the supplier from the supply base.
(Switching costs may be high or the supplier has
performance potential.) A solution in such cases is
to work directly with a supplier to facilitate
improvement in a designated functional or activity
area. Buyer -seller consulting teams working jointly