Seaseenesensacesong POPPI rT yT SUTRA aa py a ey 1 is 1 | APICS Certified Sy ACE MRS) a eeoooo0o0cdoa cccoco ecececccCourse Overview and Module 1: Supply Chain Management Fundamentals Table of Contents COURSE OVERVIEW........ se sscnenenen evened MODULE 1: SUPPLY CHAIN MANAGEMENT FUNDAMENTALS Introduction Le Section A: Overview of Supply Chain Management Identifying Supply Chains. 13 Key Supply Chain Management Processes 19 Evolution of Supply Chain Management 1-21 Creating Value trough Supply Chain Management 1-33 Section B: Supply Chain Management Strategy lS Corporate Strategy’ Aligning Supply Chain Strategy with Corporate Strategy Supply Chain Risk Management Strategies 1-67 1-82 Section C: Managing the Supply Chain Supply Chain Objectives Using Corporate and Supply Chain Strategies to Set Priorities and Make Decisions Supply Chain Performance Mettics...... Managing the Supply Chain for Financial Performance Managing and Leading People in the Supply Chain Security and Compliance. Section D: Improving the Supply Chain ‘What Is Continuous Improvement?. 1-120 Visibility and Analysis 1-125 Assessing the Supply Chain .. 1-132 Tools and Philosophies of Continuous Improvement 1-135 Implementation and Change Management. wo l47 Bibliography...... 1-155 © 2005 APICS ‘All ight reserved.The Certified Supply Chain Professional (CSCP) Learning System was designed and developed by APICS with Holmes Corporation. We would like to formally acknowledge the following members who volunteered their time and talent 10 serve as subject matter experts and reviewers. Greg P. Allgair Chief Logistician, Bio-hazard Detection Northrop Grumman Baltimore, Maryland Alan L. Milliken, CFPIM, CIRM Business Process Optimization BASF Cantonment, Florida Chad Stricklin ‘Merchandise Supply Chain Manager Disneyland Resort Anaheim, California Eddie J. Whitfield, CPIM, CIRM Director, Solution Marketing— Manufacturing SAP Global Marketing, Inc. Houston, Texas Al Bukey, CFPIM, CIRM ABCO Engineering Ltd. Toronto, Ontario, Canada Peter W. Murray, CIRM Global Supply Chain Competeney and Development Leader DuPont Global Operations Wilmington, Delaware Robert Vokurka, Ph.D., CFPIM, CIRM Professor and Chair Texas A&M University —Corpus Christi College of Business Corpus Christi, Texas° Course Overview ‘Welcome to the APICS Certified Supply Chain Professional™ (CSCP) Learning, System, Whether you are interested in professional development or pursuing the credential, you will find the program to be a complete, easy-to-use learning and reference tool. + Getting Started Course materials Enrolling in the course This course allows you to work at your own pace to increase your understanding of supply chain and operations management and the CSCP body of knowledge. It includes four printed textbooks (called modules), which correspond to the knowledge domains tested on the CSCP exam, The course also includes online practice tests and leaning reinforcement activities. Please check that you have received the four modules and your access code (provided to you via e-mail) for the online course components. Ifanything is missing or if you have not received your access code, please contact CSCP Learning System Customer Support at 888-266-9079 or 651-905- 2664 Before you use the Web components of the course, you must enroll: 1. Go to www.LearnCSCP.com, and, from the menu sidebar, select Enroll 2, Enter your access code EXACTLY AS SHOWN; itis case-sensitive. 3. Accept the default setting “I am a new user.” Click Enroll. Enter your first name and last name. Create a user name and password between four and eight characters long. Then click OK. After enrollment, the access code is no longer needed. You will use your user name and password to log in, so write this information in the space below. APICS Certified Supply Chain Professional Learning System User name: Password: 2005 APICS All rights reservedCourse Overview Accessing the program Exiting the program Online help Learn more Course content feedback Once you are enrolled, you can access and leave the program as often as you wish. To access the program: 1. Go to www.LearnCSCP.com. 2, Enter your user name and password. 3. Click Log In to enter the course. Read the online overview, and then go to the course menu, from which you select course components ‘You may exit the program from most screens by clicking Log Out. This option allows you to leave the program and return at a later time to where you left off. All current scores and your current place in the tests are saved. You may start any activity over at any time, Ifyou start over ina test, your current score is erased. Upon completion of that test, your new score is saved and displayed on your report. The Help option on the Enroll screen is available to answer common questions related to enrollment and log-in. If you require additional assistance, please contact CSCP Leaming System Customer Support at 888-266-9079 or 651-905- 2664, Monday through Friday, 8 a.m. to 5 p.m., central time, For specific details regarding the certification exam, please visit www. APICS.org/escp. ‘The APICS CSCP Learning System combines printed material and online software plus an instructor-led option to enhance your learning effectiveness. Go to www.APICS orglesep to lea more about the advantages of APICS membership, the power of certification, and the various learning options. We appreciate your feedback regarding problems or concems you have about our program. If you have concems about @ question, note the item number and indicate it on a copy of the Course Content Feedback form included at the end of this course overview. (At the bottom of each question screen, a number such as Item: 5-59D is given to indicate which question is displayed. This number is for question tracking and does not correspond to a page number in the text.) a Completing the Course Increase your knowledge base with this enjoyable and complete program as ‘you prepare for the (CSCP examination and develop your professional expertise. © 2005 APICS All rights reserved ‘The APICS CSCP Learning System is based on the CSCP body of knowledge. Using a blend of printed text and online practice te reinforcement activities, the course provides an enjoyable and complete preparation method for the CSCP certification exam. ing and learning ‘You may complete the course in any order. The following describes the recommended, step-by-step method.The pre-test allows ‘you to evaluate your understanding of supply chain concepts and focus your study. The entire program includes more than 800 pages of text reinforced by online practice testing and learning reinforcement activities, At the end of each module section is a progress check, Progress check questions provide an opportunity for you to ‘stop and think about what you have just studied. They include a page reference with the correct answer to guide further review. © 2005 APICS All rights reserved. = Step 1: Complete the pre-test. ‘You begin the program and plan your own course of study by completing the online pre-test. This 50-question test checks your basic understanding of, supply chain concepts. As you answer each pre-test question, you will know immediately if your answer is correct or incorrect and you are given the module and section from which the question was drawn. If you leave the test, you can reenter it and will have the option either to continue or to restart the test. You may also print any page by using your browser’s print funetion. Your testis timed to enable you to determine whether you are answering questions at the pace needed to complete the CSCP certification examination within the time allotted, If you are interested in timing your test, allow yourself an uninterrupted block of time. ‘When you have completed the pre-test, you see a chart that shows your module-by-module score. You may use this chart to develop a study plan to help focus your efforts on the modules you need to examine most thoroughly. Use the print function on your browser if you want to print a copy of your pre-test results oy Step 2: Study the print modules. Based upon your individual study profile, study each of the four modules at your own pace. The modules include the following topics, which correspond to those that constitute the APICS CSCP body of knowledge. The CSCP certification exam questions will be distributed almost equally among the four modules. ‘Module 1: Supply Chain Management Fundamentals + Overview of Supply Chain Management * Supply Chain Management Strategy ‘+ Managing the Supply Chain ‘+ Improving the Supply Chain Module 2: Building Operations, Planning, and Logisties * Demand Planning ‘+ Product Design ConsCourse Overview Each module includes a bibliography referencing the books used in the development of that module, Module-specitic tests ‘check your understanding of ‘each module. eFlashcards provide an opportunity to review terms and definitions across modules. © 2005 APICS ‘Allrights reserved * Manufacturing Planning and Controlling + Logistics jer and Supplier Ret: Module 3: Managing Custo * Relationship Management in SCM ‘* Customer Relationship Management (CRM) Supplier Relationship Management (SRM) ‘+ Integrated Customer/Supplier Relationship Management Module 4: Using Information Technology to Enable Supply Chai Management ‘+ Role of IT in the Supply Chain ‘+ ERP in Supply Chain Management ‘+ Innovative Technologies and Their Uses © Using IT to Enhance Supply Chain Performance © e-Business ‘am Step 3: Complete the module-specific test. ‘Module-specific tests contain 10 questions. You may take as many tests as, you like, as often as you like. ‘After you answer each question, you will know immediately if your answer is, correct or incorrect along with the reasoning for the correct answer and the section from which the question was drawn. If you leave the test, you can reenter it and will have the option either to continue or to restart the test. You ‘may also print any sereen by using your browser's print function. ‘Your testis timed to enable you to determine whether you are answering questions at the pace needed to complete the CSCP examination within the time allotted. ‘me’ Step 4: Complete the eFlashcards. After you have studied all ofthe modules and taken the module-specific tests, complete the eFlashcards. The eFlashcards present a definition ofa term, and ‘you supply the term. This interactive drill-and-practice review option spans all modules.Post-test questions will be new. If you don't pass the post- lest, the program helps redirect your study efforts, and then you can take the fest again. Oruse the post-test asa refresher to help you stay current. Review your report to ‘measure your progress through the course at any time, Help us improve our product offerings and request your Cortiticate of Completion, © 2005 APIs All ights reserved. ‘ame’ Step 5: Complete the post-test. ‘When you reach this point, you've studied all the components of the program and are ready to measure your learning gain, The 50-question post-test draws from a different bank than you saw in the pre-test, so all the questions are new. After you answer each question, you will know immediately whether your answer is correct or incorrect and will see the reasoning for the correct answer to help clarify your understanding, The timing feature allows you to determine if you ate on track to complete the certification exam in the time allotted. If you leave the test, you can reenter it and will have the option to either continue or restart the test, ‘After you finish the post-test, you may view your report, which compares your pre-test and post-test scores and your scores on questions related to each of the four modules, You may take the post-test as many times as you wish until you are satisfied with ‘your results, Each time you retake the post-test, your last score is erased and your new score is saved. Your most recent score is available to you on your report. Step 6: Review your report. At any time, you may view an online report of your progress by clicking the Report link. The report shows the dates you have completed tests as well as your ‘most recent pre-test, module-specific test, and post-test scores. You can use this report to determine where you may have areas of strength or weakness to direct further studying ofthe course. = Step 7: Complete the Program Evaluation. Upon completion of the course, we would appreciate your feedback. Select Program Evaluation from the menu and complete the online form. Upon successful completion of the course (a post-test score of at least 80 percent), you can request a Certificate of Completion from the Program Evaluation form.Course Overview The following is a graphic representation of the APICS CSCP Learning System. APICS CSCP Learning System Qed © @ + + = E ‘Program Evalstion nd cerca of Completion © 2005 APICS All rights reserve. viAPICS Certified Supply Chain Professional (CSCP) Learning System Course Content Feedback We appreciate meaningful feedback that will assist us in enhancing this course, and we want to be sure that you receive the proper course materials in your shipment. Here’s how you can communicate with us: ‘* Should your order be incomplete, please e-mail CSCPLearningSystem@holmescorp.com, using the subject line “Incomplete CSCP Order.” Please list which materials you did receive, which you are missing, and your order number. ‘+ Should you have meaningful ideas for course enhancements, please complete the information form below and fax it as noted. Faxing allows you to attach a copy of the original document with your recommendations inserted or other documentation to better explain your recommendation. (Note that enhancement recommendations will be reviewed immediately and appropriately addressed in accordance with our update process, However, recommendations will not receive individual responses.) Thank you for taking the time to help us better serve our customers! FAX TO: CSCP Leaming Systems ( pages, including this cover) @ 651-905-2669 FROM: Name E-mail address Telephone number (in case we need to contact you for additional information) SUBJECT: CSCP Course Enhancement Recommendations Recommendation overview: If you haven’t attached documentation, please provide the question mumber (e.g., Item: 5-59D) or page ‘number to which your enhancement applies. © 2005 aPics All eights reserved,Module 1: Supply Chain Management FundamentalsIntroduction © 2005 aPics Allright reserved, There have been supply chains as long as there have been suppliers and customers, but the evolving discipline of managing those chains for competitive advantage belongs to recent decades. Even the term “supply chain” came into common usage only toward the end of the 20th century. ‘As with many other phenomena occurring in that period of time, supply chains and their management reflect the revolution in electronic communication and the shrinking of the world into one global community—what author Tom Friedman calls the flattening of the globe. There were supply chains when primitive hunters brought back skins for transformation into garments for use or trade, Marco Polo went east in search of trade routes to bring raw materials from “the Orient” to Europe. But the scope, scale, and speed of supply chain processes have all gathered revolutionary momentum—and businesses around the world hasten to catch up or, in the case of leaders like Toyota, Wal-Mart, ‘and Zara, to stay ahead. Their opportunities result from the flattening of the global playing field and advances in technology: their discoveries contribute to globalization and revolutionary technology. Supply chain management may be a young discipline, but like those other young disciplines, rocket science and brain surgery, it isn’t a simple one. It also resembles other youngsters in its rapid rate of development. Staying abreast of the theoretical and practical aspects of supply chain management—even ‘keeping up with the vocabulary—requires constant attention. This first module in the CSCP Learning System, Supply Chain Management Fundamentals, provides basic information that forms a foundation both for the following modules in the course and for the continuous learning you will do later to stay current with new developments, * Section A introduces essential concepts and vocabulary, including definitions and illustrations of the terms “supply chain” and “supply chain the continuing evolution of supply chain management.” It also trac ‘management, identifies business processes that are specific to supply chains, and deseribes ways in which supply chain management can create value for customers and investors. ‘Section B explores supply chain strategies, including their alignment with corporate strategy, how to change strategy when conditions require change, and how to manage risk. 1Module 1: Supply Chait. Management Fundamemals © 2005 APICS “All ights reserved. Section C explains the principles of supply chain management, from the setting of supply chain objectives through decision making, management of human resources, risk management, metries, and financial performance. Section D explores the methods of assessing, measuring, and improving supply chain performance.© Section A: Overview of Supply Chain Management This section is designed to Define and illustrate the supply chain as concept Define supply chain management as a concept and provide examples Describe the evolution of supply chain management globally and within companies Identify and describe key supply chain processes Identify specific ways in which supply chain management creates value for customers and investors (customer Value and financial value) ——— This overview contains answers to some basic questions about supply chain ‘management: ‘© What is a supply chain? ‘© What is supply chain management and how is it evolving? © What are the key processes in a supply chain (as opposed to the organizations, people, and resources)? ‘+ How do supply chains create value—and for whom? (Hint: More than saving money is at stake, In fact, more than money is at stake.) + Identifying Supply Chains 2005 APICS According to the APICS Dictionary, 11th edition, a supply chain is a “global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.” A supply chain, in this view, comprises a network of both entities and processes (the engineered flow). A supply chain doesn’t have to be global, but the ‘massive chains that interest us in this course—the ones that run through corporations such as Wal-Mart, Mitsubishi, Dell, and the clothing chain Zara—are decidedly global in scope. Exhibit 1-1 on the next page illustrates a very basic supply chain (one that isn’t necessarily global) with three entities—a producer with one supplier and one ‘customer. These “entities” that perform the processes can be business or ‘governmental organizations or (at least in theory) individuals. They can also be departments or functional areas or individuals within a larger organization; there ‘All sights reserved, 13Module I: Supply Chain Management Fundamentals © 2005 APICS ‘All sights reserved, are internal as well as extemal supply chains, For the most part the model applies to corporations Exhibit 1-1: The Basic Supply Chain Reverse produet flow supplier Producer commer Se ie — Primary cash IW — ‘Most work on supply chains, both theoretical and applied, involves @ ‘manufacturing firm in the middle (although service firms also have supply chains) with a supplier of materials or components on the “upstream” side and a customer on the “downstream” side, Technically, a supply chain needs only those three entities to exist, but that isn’t realistic for the types of global supply chains of interest in this course. The simplified chain in Exhibit 1-1 might be made up of the following organizations: ‘+ A supplier that provides materials, energy, services, or components for use in producing a product or service. These could include items as diverse as sugar cane, fruit, industrial metals, roofing nails, electric wiring, fabric, computer chips, aircraft turbines, natural gas, electrical power, or transportation services. ‘© A producer that receives services, materials, supplies, energy, and ‘components to use in creating finished products, such as dress shirts, packaged dinners, airplanes, electric power, legal counsel, or guided tours. (Note that supply chains for services may be more abstract than those for ‘manufacturing.) ‘* A retailer that receives shipments of finished products to deliver to its customers, who wear the shirts, eat the packaged dinners, fly the planes, or ‘turn on the lights. 14© 2005 APICS All rights reserved, Section A: Overview of Supply Chain Management Four basic flows connect these entities together: + The flow of physical materials and services from suppliers through the intermediate entities that transform them into consumable items for Aistribution to the final customer ‘+ The flow of eash from the customer back “upstream” toward the raw material supplier ‘The flow of information back and forth along the chain (also back and forth Within the entities and between the chain and external entities, such as governments, markets, and competitors) + The reverse flow of products returned for repairs, recycling, or disposal (This, is called the reverse supply chain, and itis handled by reverse logistics, which involve different arrangements from the forward logistics that carried ‘materials and products in the other direction.) Consider, as a very simplified instance of a young girl and her sister who set up a lemonade stand, The supplier is the corner store that sells basic ingredients to the mother. The mother is the “producer” who stripped-down supply chain model, ‘tums the ingredients into lemonade. The stand, operated by the girl, is the retailer ‘who sells lemonade to the customers, consisting of the thirsty, or perhaps merely sympathetic, passersby who pay for a glass of lemonade. (In this case the retailer is most likely not a paying customer of the producer, but at least in theory the ‘mother might be taking a cut of the profits.) Notice that even in this simplest of supply chains, the basic model needs amplification. For instance, there are more suppliers than one. While sugar and lemons may be procured from the same comer store, water comes from the kitchen faucet, and the supplier of water may actually be a government entity rather than another business. Electricity is supplied to light the kitchen “manufacturing center.” Adjacent to the work site is a warehouse of sorts with refrigeration for storing the fruit plus shelves and drawers to hold various supplies, such as glasses and utensils. There is also wood to build the stand and poster paper and markers for making signs to advertise the stand. Somewhere in the chain, though they remain invisible in our model, are suppliers’ suppliers, who bring materials, components, or services to the comer grocery and the utilities. Exhibit 1-2 on the next page at least hints at the organizational complexity that appears in corporate supply chains by adding a second tier of suppliers and more distribution centers and customers. Notice that there are suppliers of services as well as materials. Discussions of supply chains typically put manufacturing at the center and suppliers of components to the immediate left. It may be that ‘component suppliers are the most crucial consideration when designing andModule I: Supply Chain Management Fundamentals managing a supply chain for manufactured products, but utilities and other services are not inconsequential contributors to the cost of operations, Exhibit 1-2: Manufacturing Supply Chain Model e_====» Termin r Customer ; Ter) mails Distributor Tier2 aerate |_—aL_SoPatior L LJ) customer ‘ple osene Tir 2 seve Tier | materials Manufacturer = supplier 2a Customer i Tier I service L “ten Distributor “Ter 2aenvce rn Customer — Finary cash tow In the case of our lemonade stand, services most obviously include utilities, transportation, warehousing, carpentry, and cleanup, among others. Utilities, which are suppliers to all manufacturers, are crucial considerations when locating plants and warehouses. If water and electricity (or natural gas, or both) are not available at a proposed site, they cannot be readily made available. The exhibit also shows that Tier 1 suppliers have their own suppliers in Tier 2. The grocery store that supplies the lemons and sugar for the lemonade has its material and service suppliers—and they have their suppliers, and so forth, The sugar is not a raw material but a product with its own supply chain that begins in a cane field (probably in a different country) and is processed in a plant, shipped to a wholesaler, and distributed to the comer store. No ‘matter how far you travel toward the left, you will never run out of new tiers of suppliers, Even a raw material extractor, such as a coal mine, has its own suppliers of extraction machinery and services. In fact, the coal mine may ship coal to a generating plant that supplies power to the manufacturer that produces @ machine that is shipped to a distributor that sells mining ‘equipment to the same mine that began the process; supply chains can double back on themselves. © 2005 Pics All rights reserved 16© Section A: Overview of Supply Chain Management ‘And this implies that services, too, have their own supply chains that require sophisticated management. Exhibit 1-3 illustrates, in simple form, the supply chain (or network) of an electric utility. It receives products, services, and supplies of its own and dispenses its services into three distribution channels: home customers, commercial customers, and other utilities. Exhibit 1-3: Electric Utility Supply Chain Home customers Commercial Other utilities leotie backup | Fuel supplies ee Se Facility vices | | Prmetamming rmaincenance | | Jesters! ser services 2005 APICS All rights reserved, ‘The flows in our lemonade stand example aren’t quite as simple as might be supposed, either. The “products” that move through the chain could include ‘materials, supplies, and the components used in the production of the lemonade. Information flows may be fairly rudimentary: orders submitted by end users of the product, by the distributor to the manufacturer, and by the manufacturer to the supplier. There will be recipes and shopping lists, discussions of potential demand, perhaps records of last year’s results, The flows of cash may be based "upon information contained in cash register or credit card receipts at the comer store, mailed (or e-mailed) utility bills, and, of course, a coupon book from the mortgage company that holds the paper on the manufacturing center/warehouse/residence. Quite possibly the utility bills are paid electronically—a significant improvement in the velocity of that part of the supply chain and a time saver for the accounting department. (Perhaps the father pays the bills.) Cash travels in several separate flows from the manufacturer to suppliers of products and services and, of course, to the mortgage company. ‘There are also logistics concems: transportation from one entity to the other pethaps drawing upon the private fleet of two cars—as well as the warehousing decisions, which are more likely thought of as kitchen design in this ease. And finally, the reverse supply chain—you’ll read more about that later in this module and in Module 2—exists to return any unacceptable lemons (or any overstock), to recycle the peels into a composter, to reuse glasses and other supplies after sterile cleansing, and to dispose responsibly of any packaging,Module I: Supply Chain Management Fundamentals © 2005 APICS Al rights reserved Our lemonade business avoids many complexities that confront a profit ‘making enterprise, There are no competitors, for one thing, although competition is not out of the question. Other children in the neighborhood ‘might set up a business to distribute store-bought lemonade, thus cutting out the manufacturer in the kitehen and putting the supplier in charge of product design. Another stand might be set up with “make-to-order” lemonade squeezed and sweetened to each customer's taste. There are also no taxes, no regulations (atleast none that the family takes into account), and no labor contracts. All those complications might loom down the road, however. Many global businesses began in someone’s home office, garage, or basement with the glimmering of an idea for, let us say, a computer operating system or a new idea for consumer-to-consumer e-commerce. Perhaps Mom comes up with a new twist on the old recipe for lemonade; a customer is impressed and asks the girls to cater a party; someone at the party owns a neighborhood store or restaurant,..and before long the family has purchased a processing facility to supply fruit-based drinks to franchised “Thirst-Ade” stands in three time zones and has direet links to farms around the world for fresh fruit in all seasons. It's surprising how many challenges and opportunities confronting the largest corporations and supply networks are anticipated—and can be s sn most casily—in a very simple model. Notice one last aspect of this lemonade stand supply chain. Unlike many traditional supply chains involving corporations, this one quite likely included good deal of collaborative planning in regard to demand forecasts and replenishment, at least involving the manufacturer and distributors. Finance may also have contributed to the plans. Some of the problems that supply chain management strives to overcome are implicit in a simple model— because the problems have arisen as a direct result of the massive scale of modern supply chains. ‘There are many variations on the basic supply chain models presented so far. ‘Here are some basic points to keep in mind as the discussion continues and ‘grows more complex. + A supply chain involves, directly or indirectly, everyone and everything, required to extract materials, transform them into a product, and sell the product to a user, ‘+ Supply chains include various entities, such as raw material extractors, service and component suppliers, a material product manufacturer or & producer of services, distributors, and end customers.© Section Av Overview of Supply Chain Management * Supply chains can be viewed in terms of processes, such as the gathering, and processing of marketing data, distribution and payment of invoices, processing and shipping of materials, scheduling, fulfillment of orders, and so forth, Such functions cut across entities. + Supply chains also run in reverse, starting with the customer who sends back such items as components for replacement or repair, retumed goods for remanufacture, and obsolete goods for recycling or disposal. The reverse chain, like the forward chain, also comprises information flows and cash or eredits * There are three flows in a chain—products, information, and cash—and each flow can be engineered to increase the overail value produced by the chain, ‘+ There are stakeholders outside the basic supply chain model that can significantly affect its functioning for good or ill. These include, most significantly, governments that may build infrastructure, enforce regulations, levy (or forgive) taxes, and in various ways create a climate in which businesses either thrive or stagnate, Other stakeholders include the public at large and providers of knowledge, such as universities and trade associations. (Information flows into a supply chain from such sources as ‘well as flowing back and forward among entities in the chain.) Finally, competitors also affect the functioning of a supply chain in more ways than one, Competition can not only threaten a chain; it can energize it as well, And sometimes competing businesses directly foster each other's ‘growth by participation in trade associations and joint ventures. Whenever a competitor creates an improved product or business process, the entire ‘marketplace is enriched by the new ideas. + Key Supply Chain Management Processes 2005 APICS All rights reserved, ‘The definition of supply chain seems fairly solid when you consider the chain as linked organizations —supplier, producer, and customer connected by product, information, and payment flows. But the supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials, for transformation into products (or perhaps services) for distribution to customers. Those processes are carried out by the various functional areas Within the organizations that constitute the supply chain. When considered as a set of processes rather than a succession of companies, the supply chain becomes just alittle more difficult to identify—let alone manage. 19Module 1: Supply Chain Monagement Fundamentals Supply chain management definitions © 2005 APICS All ights reserved In this discussion of key processes, we'll outline two important process- oriented models: * The Supply-Chain Operations Reference (SCOR*) model developed and ‘maintained by the Supply-Chain Council (SCC), a nonprofit membership organization open to all interested corporations, nonprofit organizations, government and military agencies, consultants, and academicians ‘+ The GSCF model developed by the Global Supply Chain Forum of Ohio State University We'll also apply a version of the process model to service supply chains, which have received much less attention than manufacturing chains, But before we look at the models, we'll analyze several definitions of supply chain management. Not all authors agree on the definition of supply chain, and that can be a source of confusion. We'll attempt to sort out the various standard definitions here to help clear away the fog. ‘You may see references to the supply chain that include only the suppliers. In this view, supply chain management is restricted to supply management. The rest of the chain (possibly excepting production) is called the distribution chain and is subject to distribution management. For this course, we're interested only 1) that apply to the supply and in definitions of supply chain management (S distribution functions as well as to production. In the Supply Chain Management Review, Douglas Lambert notes that some people equate SCM with logistics, while others consider it to be another name for purchasing, operations, or both together. He adopts the definition used by the Global Supply Chain Forum (GSCF), which is, “Supply chain management is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders.” This definition assumes (though it’s not obvious from the wording) that the supply chain is dominated by a manufacturing firm—not & retailer or a producer and distributor of services. That's consistent, as noted earlier, with the preponderance of supply chain thinking. We'll have more to say about that later in this section. Exhibit 1-4 illustrates the GSCF model, showing, among other things, that ‘manufacturing is one of the eight processes determined to be key to supply chains.° Supply Chain ‘Management Process Section A: Overview of Supply Chain Management Exhibit 1-4: The Global Supply Chain Forum SCM Model eS ———— Source: “The Eight Essential Supply Chain Management Processes" by Douglas M. Lambert 2005 APICS: ‘All ights reserved, In most ways this process model is consistent with the model used so far in this course, with the addition of the process list at the bottom. The basic chain is @ three-part model with a manufacturing firm at the nucleus and its customers and suppliers on either side, It also includes information flow and product flow (which, by implication, includes materials, components, supplies, and services—since those are necessary to production), but it eaves off specific reference to the flow of payments. It does, however, include the finance function in the departments represented in the nucleus firm’s internal chain, We'll come back to Lambert’s version of the GSCF supply chain processes later in this section to describe the eight key processes. Another source of confusion about definitions comes from the sometimes interchangeable use of “value chain” and “supply chain.” Although many would assume that a supply chain is, in fact, a value chain—at least it is if well ‘managed—others draw a distinction between the two. A value chain can be any series of activities that increases the value of a product or service as it passes through stages of development and distribution before reaching the end user. But the term also has been given a more specific meaning by some authors, one of ‘whom, Robert J. Trent, asserts that the supply chain is but one part of the value chain. In his article “What Everyone Needs to Know About SCM,” Trent identifies specific functional areas that support the supply chain without being part of it. Exhibit 1-5 illustrates his view, specifying both the functions that constitute the supply chain and those that don’t,Module 1: Supply Chain Management Fundamentals © 2005 aPics All rights reserved Exhibit 1-5: The Place of the Supply Chain wit T a l re =—> << necis — 2008 APICS All rights reserved, ‘When the nucleus firm concentrates only on improvements within its separate departments, it may find its efforts wasted through lack of communication, For example, market researchers and well-trained sales reps may uncover market ‘opportunities among current and potential customers without being provided an opportunity to share this information in a structured collaboration with product designers. Warehousing may improve cost effectiveness by closing inefficient facilities but fal to consider the impact of transportation costs. Instead, ‘transportation (or “traffic”) is merely instructed to find carriers to travel the new routes. Or they may add new machines only to find that the current workforce is, tunable to use them properly or they aren’t well adapted to the layout or size of current facilities. Inventory management may reduce the amount of warehoused stock to bring down costs but fail to consider the consequences for order fulfillment, resulting in stockouts that drive away customers. In any case department managers are likely to continue competing with one another for shares of the corporate budget without looking for ways to interact more effectively to bring greater value to the customer and higher returns to investors. In Stage 2, some functions may be automated—MRP (material requirements planning) software, for instance, may put bills of materials in the computer to 1.28Stage 3: Integrated enterprise Gamies) Soe Qe © 2005 PICs All rights reserved, Section A: Overview of Supply Chain Management streamline workflow. But new software in one department may be incompatible with current software in other areas. Finally, if savings are achieved by any of these intrafunctional efforts, management may pass them along entirely in reduced prices for customers or retums to investors without reserving a portion for continued improvement of products and processes. In the third stage of supply chain evolution, the individual firm begins to focus ‘on business processes rather than compartmentalized functions. Historically, this shift in supply chain strategy is associated with the late 1980s and early 1990s—at the same time that personal computers were becoming more powerful, reliable, and affordable. In any firm, however, integration of internal processes through cross-functional collaboration is an absolute necessity as a prelude to developing end-to-end supply chain management. Exhibit 1-12 provides a visual representation of a linked internal supply chain with collaboration between functions and sharing of information through companywide enterprise resources planning (ERP) software, Exhibit 1-12: Integrated Enterprise CS Materials > productslsenvices Although the focus on business processes rather than isolated departmental functions doesn’t, as a concept, depend upon technology, it certainly becomes ‘more practical with the increased availability of e-mail, file transfers, powerful databases, and enterprisewide software applications. Cross-funetional cooperation becomes much faster and easier when communication takes place almost instantaneously across functions—and not only across functions, but also across time zones and international boundaries. Through the 1990s companies aggressively moved the information once stored in file folders and communicated by mail or fax into databases available on companywide servers. Slide presentations once delivered in meetings or seminars could be put up on the corporate intranet for simultaneous access anywhere in the world, Most significantly, technology firms have been steadily developing enterprisewide software applications that allow all company departments simultaneous access to the same data, The first step in this process was the development of material requirements planning (MRP) in the 1950s to automate the bill of materials 1:29‘Module 1: Supply Chain Management Fundamentals © 2005 aPICs All rights reserved, Later, MRP was upgraded to MRP Il, a breakthrough development that allowed cross-functional communication between manufacturing and finance. ERP extended that process by adding modules for each functional area until the most advanced versions tied together entire companies. Further advances have reached through the corporate wall to tie supply chain partners together. ‘Along with the new focus on cross-functional collaboration, companies have been developing new training programs and knowledge bases that include both “hard” and “soft” skills, such as needs-based selling, coaching, career development, effective communication skills, and cross-functional team building, Collaboration across departmental lines may be tentative and experimental at first, as it was historically, but pioneering corporations have developed cross- functional approaches to certain processes such as CPFR (collaborative planning, forecasting, and replenishment). In place of traditional production planning, in which sales and marketing develop demand forecasts and production develops schedules, corporations at the forefront of supply chain development have instituted periodic sales and operations planning (S&OP) ‘meetings in which representatives of sales and marketing, production (or operations), and other functions meet to coordinate demand planning and production scheduling, Product design in some firms is now a team effort in which production engineers and other stakeholders, such as marketing and purchasing, collaborate with design engineers to “design-for-marketing,” “design-for-logistics,” “or design for the environment.” By bringing their expertise to bear, representatives from diverse functions can help develop a design that is more than an engineering marvel but is also on target for customer desires ready to be manufactured without making costly modifications in processes, equipment, or staffing. Other advances in Stage 3 include improvements in customer service arising from more astute segmentation of markets and the development of more efficient replenishment policies suited to each segment, Inventory receives more strategic treatment in Stage 3 as Just-in-Time procedures, more accurate demand planning, and improved logistics work together to make fulfillment more efficient and reliable. Warehouse management benefits from more advanced equipment and automation. Moreover, warehousing and transportation decisions are carried out in tandem to achieve the optimal balance of cost-effectiveness and customer service. At this point, the nucleus firm may begin to take a step toward integration with the external members of the chain 130Stage 4: Extended enterprise Section A: Overview of Supply Chain Management by contracting with a logistics supplier, such as DHL or UPS, to “insource” by using its expertise to help optimize logistics decisions. Some authorities identify discrete steps between internal supply chain integration and a fully networked supply chain. This presentation has no quarrel with that approach but chooses for simplicity’s sake to combine those steps into a continuous process. This approach assumes that the most significant breakthrough at this evolutionary juncture is the decision to extend at least one business process beyond the boundary of the individual corporation. When the nucleus firm decides to collaborate on planning, design, replenishment, logistics, or another business process with one of its suppliers or customers, the barrier to developing the extended enterprise from end to end of the supply chain integration has been breached. Of course, the process can stop there and progress no further toward the fully integrated, end-to-end supply chain; without question, real-world supply chains exist with various degrees of connectivity. Nevertheless, that first step. leap over the reassuring confines of the four corporate walls, seems like the starting point for @ process that can continue all the way toward a because it involves completely integrated supply chain—as illustrated in Exhibit 1-13 Exhibit 1-13: Extended Enterprise ‘Networked information flow Supplier Suppliers suppliers 2 Sur Matra! productservices Pores © 2005 APics All sights reserved, ‘The process that may lead to an extended enterprise typically begins with an exploratory collaboration between a channel master and one or several partners in the chain—often a manufacturer and one component supplier or a retailer and one supplier of finished goods. It may involve only one component or product: the famous collaboration between Procter & Gamble and Wal-Mart began (as we'll see later) with diapers. If this first collaboration succeeds, it can lead to a more fully networked relationship between the first two partners—more products might be involved, more complete sharing of information across integrated electronic networks, more formal team building and planning across corporate boundaries, and so on. And that relationship can become the model for other partnerships and, eventually, to multifirm collaborations that stretch from retailer through manufacturer into one or more tiers of suppliers. 131Module 1: Supply Chain Management Fundamentals © 2005 PICS All rights reserved, On the other hand, the first collaboration can also be the last one if the arrangement fails to produce positive results for the weaker partner as well as for the channel master. Early manufacturer-supplier linkages, for example, were too often the result of coercion by the dominant partner, who was looking for guaranteed on-time delivery of quality items at a relatively low price. Powerful retailers, as well as channel-dominating manufacturers, can also exert considerable leverage over their suppliers, gaining agreement on difficult-o- keep promises in exchange for access to enormous global markets. The more powerful firm may, for example, rd itself of inventory holding costs by requiring the suppliers to keep the inventory in its warehouse to ensure that goods will be available for regular orders and for unexpectedly large orders. 1g the ‘True partnership requires a contract that benefits all stakeholders, inclu end customer, investors, and the immediate partners to the agreement, As in Stage 3, the new links forged in Stage 4 depend first of all on a conceptual breakthrough, not on technology—with the exception of e-commerce, But in Stage 4, technology enables the extended enterprise to reach farther, to add new partners, to move faster in response to market changes, and to operate with, broader scope than in Stage 3. Although technology is deeply embedded in the extended enterprise, it has been @ presence in all phases of supply chain evolution. In Stage 1, material requirements planning (MRP) software put the bill of materials (the list of all components necessary to make one finished product) on the computer, making it possible to automate some aspects of planning. As software, hardware, and users all grew more sophisticated, MRP matured into MRP II and broke through the functional wall between finance and operations—thus contributing to cross-functional developments in Stage 2 of supply chain evolution. Building on that progress, MRP II merged with other functional applications and transformed into ERP, enterprisewide planning software with the potential to link the entire intemal supply chain together on one platform, After the pioneering work in such business-to-consumer enterprises as Amazon.com, e-commerce has become a necessary part ofall business planning. In this and other ways the extended enterprise is inherently electronic—networked, in other words, in every sense of the word. Networking, as a concept, refers to any kind of links between people or entities; a network of supply chain managers could meet once a month in a coffee shop to discuss ‘business records scrawled on memo pads. But in Stage 4, the networked 4o-peer networks, the Internet, or to synchronize their ERP enterprise is built on intranets, extranets, p ‘a combination of those platforms. Partners begi 132Section A: Overview of Supply Chain Management systems across corporate boundaries (as noted earlier in regard to Stage 3) so they can share data as necessary for their efficient collaboration. A retailer may, for example, send information from the point of sale (POS) to suppliers each. time a customer purchases an item to trigger production of a replacement, Dell Computer is able to fill orders taken on the Internet without keeping its own inventory of machines because customers’ specifications are sent immediately through to component suppliers so the computer can be assembled to order. ‘The progression in e-commerce advances predictably (and with increasing rapidity) from static Web sites describing a firm’s business all the way to interactive sites that allow end customers to order products such as books and services such as plane tickets and travel packages, to pay online, to track the shipping of their goods, to communicate by e-mail with customer service in real time, and to perform other functions related to their purchases. In these Stage 4 e-commerce channels, electronic communication not only generates new possibilities, new types of jobs, and advanced skill training, it ean wipe out entire echelons of the supply chain. As airlines began to sell their tickets irectly online, for example, the need for intermediaries such as travel agents and business travel departments rapidly waned—until there was no need for an intermediary agent or even for a printed ticket. (At roughly the same time, however, new jobs were generated for security personnel to check passengers into terminals, and new machines were required to x-ray luggage. As we'll see, planning for security is as inescapable a part of global supply chain design as, planning for e-commerce.) Behind the scenes of such consumer-to-business e- commerce, there is also increasing business-to-business e-commerce taking place on wired and wireless networks. In the global arena, competition no longer takes place only among individual companies; whole supply chains are now battling one another for customers, for workers, and for capital in multiple countries across the globe. Cooperation among companies is integral, in other words, to competition among supply chains. It just might be a revolutionary development. * Creating Value through Supply Chain Management What is value? © 2005 PICS All rights reserved, Supply chain management, like any other type of business management, aims to create value. That is easy to say, of course, but not so easy to do. In fact, it’s not even easy to define, “Value” is a concept that has fueled debate since long before Socrates was invited to quaff a cup of hemlock for questioning the values of the local authorities. Everyone might agree, at least in a capitalist context, that businesses exist to make money. Turing a profit definitely constitutes a 133Module 1: Supply Chain Management Fundamentals © 2005 APICS ‘All tights reserve. ‘measure of business success. Granted that money is a necessary measure of the success of supply chain management, is it also a sufficient measure? Are other values involved? Are there limits on the ways money can be generated? The answer to those questions has to be yes. ‘There are, for one thing, methods of making money that may be forbidden for social or ethical reasons. Many societies forbid certain activities because the value they create for consumers or business owners does not justify the harm they cause the community (which, afterall, often includes the owners and consumers). And this points out the fact that businesses have many stakeholders—not only consumers and investors but also employees, the community members at large, and the government as the public’s representative. In the case of global supply chains, multiple communities and ‘governments may have a stake in the way business is conducted, As the primary stakeholder, the business itself (ora group of business acting as coordinated supply chain) must receive enough money from the sale of its product or service to sustain itself. Equally important for the longer term, the profits must not only fund the competitive needs of the business (or businesses); ‘they must also satisfy the demands of investors for a return on their money. ‘There are other stakeholders in a supply chain in addition to customers (meaning end users) and investors (meaning bankers, public shareholders, or private owners). Employees, directors, the public, and governments, for instance, all have stakes in how a supply chain creates value. Stakeholders ‘may—usually do, in fact—have different views of what value a supply chain should create, So managing a chain successfully sometimes requires carefully balancing increases in value for one stakeholder with decreases for another. In the end, everyone must be satisfied enough to continue participating (customers have to keep buying, investors have to keep investing, workers have to keep showing up and giving their best, and so on). To borrow from Abraham Lincoln's famous words, you can’t satisfy all the stakeholders all the time, In the end, making a profit may be the ultimate measure of business value, but profits follow on the creation of customer value. Moreover, making a profit doesn’t by itself keep a supply chain competitive. It’s the way that profit is distributed to bring value to customers, keep the business healthy, and attract, investors that brings long-term success. Supply chains and supply chain processes exist not only in for-profit companies but also in many nonprofit, charitable, governmental, and military organizations comprising flows of materials, funds, and information.Financial value © 2005 aPics All rights reserved Section A: Overview of Supply Chain Management ‘The discussion that follows focuses on three types of value that supply chains can (and must) create: financial value, customer value, and social value. Early supply chain management efforts generally aimed to improve financial performance by reducing costs. While squeezing excess costs out of an enterprise certainly has the potential to provide value to one or more stakeholders, it has to be done carefully for three reasons: ‘+ Tradeoffs may be self-defeating. ‘One danger in pursuing cost reductions is the possibility that spending less in one area of the business will simply mean spending more elsewhere— possibly creating a net loss, Cost cutting, therefore, needs to aim for net gains at the bottom line. For instance, reducing costs in one area may simply mean raising them in another area. In the functional stage of supply chain evolution, this sort of self-defeating tradeoff happens all too often. The warehouse manager might, for example, eliminate one or more storage facilites to save warchousing costs without consulting the traffic manager about the need for compensating changes in transportation. More highly evolved supply chain management coordinates selection of warehouse ‘numbers and location with costs of transportation, impact on fulfillment, and other relevant considerations using sophisticated optimization sofiware—and perhaps putting the entire process under third-party management. The same consideration holds throughout the supply chain. Changes at any one point in the system will create changes elsewhere; therefore, change has to be viewed holistically. Supply chain management necessitates cross-functional teamwork for the intemal change and cross- entity teamwork for the lateral chain. The guiding principle always has to be creation of value at the customer's end of the chain. Ifa leaner supply chain can deliver the same customer satisfaction with a greater profit, then cost-cutting is fully justified. While the problem of self-defeating tradeoffs applies in any business venture, supply chains add a layer of complexity because they involve ‘more than one business. Shifting costs from one department to another in a single corporation doesn’t necessarily harm the bottom line (although it might, depending on the departments). But shifting costs from one entity in the chain to another definitely creates a problem for the business that takes on the added load. Nor is this a merely academic observation. Powerful supply chain nucleus firms have been known to reduce their cost of holding inventory, for one example, by shifting the burden to suppliers 1:35Module 1: Supply Chain Management Fundamemals © 2005 APICS All ights reserved with less leverage, thus increasing the nucleus firm's financial performance at the supplier's expense. “It takes money to make money.” ‘The old cliché applies in a major way to supply chains. Any manager can reduce costs by reducing staff, cutting outlays for research or training, and delaying expenditures on equipment, but that’s generally a recipe for immediate stagnation and eventual failure. Many of the improvements in supply chain performance require investments of money up front to realize ‘greater revenues, profits, or both down the line—or simply to remain competitive on a global playing field. As always, the end result has to be a net gain. If an improvement in the supply chain brings in more revenue than the cost of the investment, then it’s fully justified. Purchasing automated machinery to improve warehousing, upgrading hardware and software, training managers in team building, and other investments may be necessary to build and maintain @ competitive supply chain. Again, the ultimate aim must always be for creation of value at the customer's end of the chain—with sufficient profits to satisfy the needs of other stakeholders, Gains must be equitably distributed. A third danger to avoid when pursuing efficiency or effectiveness is creating a financial gain that isn’t distributed with the needs of all stakeholders in mind. Possibly the most common mistake in this regard is, to send all cost savings all the way to the consumers’ end of the chain, If all efficiencies are plowed into retail price reductions, the supply chain itself will suffer from lack of financial sustenance. Lean is good; starving is not so good. While customer discounts bring immediate gains in volume and market share, other stakeholders also have to be rewarded. Investors require a competitive return on loans and equity. Infrastructure has to be ‘maintained and upgraded. In the age of electronic communications, especially, keeping up with the cutting edge requires virtually continuous investment. Employees have to be compensated at a competitive rate, trained in new processes and products, and, more fundamentally, recognized for their contributions. Research and development need support in locating market needs and creating products and services to satisfy them. And perhaps most challenging of all in a lateral supply chain is the need for productive sharing of any financial gains. As noted earlier, a powerful nucleus firm can gather in the benefits of an alteration in the placement of inventory (or any other process change) at the expense of its suppliers. This constitutes exploitation rather than partnership and has the 1:36Section A: Overview of Supply Chain Management potential to be self-defeating if it drives away quality suppliers. Teamwork across company boundaries can create more inventive and effective ways to improve value for customers for a net financial gain that is equitably shared by all stakeholders. Customer In a competitive economy, making money depends upon serving customer value needs. The ultimate goal of supply chain management, therefore, must always be to deliver products and services that the customer values—and, of course, will pay for. Depending upon the market being served, a supply chain may be ‘managed with an eye to delivering one or more of the following values to its + end customers. © Quality of product or service “Quality” is a highly variable concept, but it applies to all products and services from “sensible shoes” through spa treatments. Decisions all along the chain have to be coordinated to get the appropriate level of quality through the right design, the right production, and the right materials + Affordabi The notion of affordability naturally calls up visions of discount bins and dingy department stores. This is misleading for two reasons. First, almost all products and services have an appropriate price level, not just items of ‘modest value, (One might suspect that people for whom “money is no object” are generally spending someone else’s money.) There are billionaires who drive pickup trucks, because that’s the vehicle priced right for the quality of transportation they desire. There are people of modest ‘means who pour substantial portions of their net worth into a Porsche or a Cadillac. Even Porsche is cost-conscious in its choice of outsourced ‘manufacturing that can speed up or slow down production to match variations in customer demand. People will pay more for a brand like Porsche—but there is a limit. The supply chain has to invest in the processes, people, and technology appropriate to creating a product at the right price, Second, the supply chain process that delivers items at the everyday low price may itself be of extraordinarily high quality, since the objective of keeping goods affordable demands complete efficiency in the supply chain. Competition for this market drives supply chain managers to develop collaborative design processes that result in specifications for products of good quality that can be efficiently manufactured from readily available materials, Efficiency does not generally arise from poorly trained ‘workers, low-bid suppliers, indifferent design engineers, and half-haphazard process management. © 2005 APIcs Al rights reserved, 137Module I: Supply Chain Management Fundamentals © 2008 PICs “All rights reserved + Availability For some products or customers, availability is 2 paramount value and the ton supply chain has to be designed to deliver products and services ri time. This may affect not only the placement of inventories but the selection of transportation modes (overnight delivery, reftigerated containers, ete.) + Service ‘There is an indistinct line that separates product and service, An automobile is a product, for example, but it competes with transportation services (planes for long trips, buses around town). Moreover, the delivery of the automobile to the customer is wrapped in services—financing, dealer preparation, sales, warranty agreements, and, perhaps, available repair and replacement services at the dealership. In recent years, the reverse supply chain, also called the service chain by some authors, has grown in importance. An effective supply chain management pro service issues arise in the product design stage. Collaborative design will include input from marketing, manufacturing, and supply to create a ss will ensure that product that is easy to repair. At the same time the team will develop the reverse chain that takes products back for repair, replacement, ot recycling—and is up and running on the day the product is introduced. ‘The emphasis on one value or another will depend upon the nucleus firms ‘market strategy. A retailer whose strategy is to serve a mass market with everyday low prices may have a different approach to all these values than a manufacturer whose intent is to market luxury goods at the high end of the income scale. No firm that wants to remain competitive will deliver low-quality items on an unpredictable schedule at a high price. But all these values have different meanings for, say, the purchaser of a pair of work boots than they have for the buyer of a pair of high-heeled shoes for use by a fashion model. The supply chain for each will be managed accordingly, with more resources invested in creating the value of greatest importance to the market. If, for example, availability is a key value to customers, emphasis in the planning stage might be placed upon outsourcing to a supplier with overnight delivery capability, such as Federal Express or DHL, even if that requires putting extra resources into logistics and cutting back elsewhere to stay within budget. Similarly, perishable quantities —which tend to be of high value— require special handling by high-end carriers. On the other hand, if the customer doesn’t value immediate availability (and the product doesn’t require it), then putting money into rapid delivery is not a rational supply chain 1:38Social value © 2008 APICS Allrghts reserved. Section A: Overview of Supply Chain Management decision. There is no logic in making customers pay for quality or service that they don’t value. If affordability (everyday low cost) is the key to unlocking a mass market, the supply chain may have to be kept very lean. Wal-Mart is (always) the prime example of such a supply chain, Quality in the mass market ‘may mean durability rather than high style, and that will require a collaborative effort stretching back along the supply chain to manufacturers and suppliers ‘who ean produce sturdy products from durable materials at commodity pricing, But what brought Wal-Mart to prominence in supply chain management journals —what helped it grow from a small operation off the beaten track in Arkansas to a market-dominating, globe-spanning behemoth—was a ferocious emphasis on the quality of its supply chain, Wal-Mart was an earlier investor in technology that allowed it to track individual items through its supply chain, because Sam Walton knew that delivering goods to his out-of-the-way stores at the lowest price would require investments in logistics. Money saved by not building and decorating fancy stores or stylish corporate offices went into strategic supply chain investments, A clothing company such as Zara, on the other hand, succeeds by focusing its attention on high-style products, continuous innovation, and rapid product development to capture the latest trends in taste for each new season, All their decisions about suppliers and distribution have to serve those values. This argues for an entirely different focus in all parts ofthe supply chain, The creation of customer value, in other words, is the primary factor in determining, supply chain strategy, and that’s a subject to be handled in more detail in the next section of this module. ‘Supply chains are also judged on their contribution to the public and the governments that (sometimes) represent their wishes. Generally speaking, a supply chain’s contributions to society come from two directions. ‘+ Creating a positive good through delivering socially desired and useful products or services On the positive side, supply chains deliver products and servic embedded in a social and cultural environment. Businesses produce what society demands, in other words. (And, many argue, what businesses produce also shapes culture and society—for better or for worse.) Sometimes that are the connection between private business and public need is very direct. For example, heavy manufacturers serve governments directly when they produce motor vehicles and planes for purchase by the military. Even those vehicles not sold to governments, however, serve social purposes as well as 139Module 1: Supply Chain Management Fundamentals providing transportation for vehicle owners and passengers. Bullet trains in Asia and Burope exist because those societies value public transportation. And, by contrast, travel and freight carriage on trains has historically been hampered because each country maintains separate facilities, standards, and regulations that make crossing borders time-consuming and, in some cases, impossible. (Railroad tracks may be different gauges, for example.) The U.S. interstate highway system was constructed, beginning in the 1950s, because the nation placed a high value upon private automobiles—as well as to facilitate commercial truck transport and military logistics. A similar analysis applies to virtually any product or service to some degree; therefore, the + success of a supply chain in delivering quality and service always has a social aspect. Beyond the production of goods and services, supply chains also affect society by the number and types of jobs they create—either for good or ill—and in the generation of tax money to support social purposes. ‘+ Avoiding or reducing negative environmental side effects of activities such as extraction, processing, and construction In the past several decades there has been growing attention to the impact of business on the natural environment. This applies to supply chain activities all the way from extraction of raw materials through manufacturing processes, logistics, and distribution, Through laws and regulatory agencies, society requires businesses to contribute, through sustainable practices, to a healthy environment. Conforming to these regulations has become an increasingly significant part of supply chain management. It has also resulted in the identification of the reverse supply chain that handles products returning from customers rather than products and services flowing toward customers. Some of the business of the reverse supply chain involves repairs and replacements —warranty work, for example. (As we'll see in Module 2, this can be a profit center if managed properly.) The reverse supply chain also deals with products that have reached the end of their life cycle and are ready to be recycled or disposed of in a responsible manner. Alll the activities in the reverse supply chain have the potential to create environmental value by reducing, reusing, and recycling resources rather than simply using them up and throwing them away. © 2005 APICS All rights reserved 1-40Section A: Overview of Supply Chain Management + Progress Check Read each question and respond in the spa provided. Answers and page references appear on the page following the progress check questions, 1. Technically speaking, which of the following combinations of firms is sufficient to constitute a supply chain? ) b. c. 4. e. Any network of suppliers ‘Two suppliers and a customer ‘A supplier, a nucleus firm, and a customer ‘Two manufacturers and a distributor All of the above 2. True or false? Supply chain management can be applied only to supply chains with a manufacturing company in the middle. True C) C) False Match each description below to the name of the corresponding supply chain process from the Global Supply Chain Forum (GSCF) model, assuming the point of view of a “downstream” supply chain partner. Creation and signing of product and service a. Order fulfillment agreements (PSAs) Daily monitoring of the PSA b. Customer relationship management ¢. Customer service management Disassembly of a modular product 4. Retums Right product at the right time 7. Which of the following processes is part of the SCOR process model? () c) C) c) a b, c ct Customer relationship management Design Return Marketing, 8. When Henry Ford organized Ford Motor Company to include raw materials extraction and. dealerships as well as his assembly lines, he created which of the following? C) () c) C) © 2005 PICs pooe All sights reserved, Vertical supply chain Lateral supply chain U.S. equivalent of a keiretsu Monopoly LalModule 1: Supply Chain Management Fundamentals 9. Which of the following is the primary benefit of a vertical supply chain strategy? () a Multiorganization connectivity along the chain (Cb. Economies of scale at each supply chain node ©) & Control () 4. Focus on core functions 10, Which of the following pieces of software exists in versions with the power to tie together supply chain partners? ( ) a ERP ()b. MRP. () & MRPIT () d. Closed loop MRP © 2005 APICS All ights reserved, 142Section A: Overview of Supply Chain Management Progress check answers c(p.1-3) False (p. 1-4) b (pp. 1-18-1-19) €(. 1-19) d(p.1-21) a(p. 1-19) €(p. 1-16) a (pp. 1-22-1-23) . € (p. 1-24) 10, a(p. 1-30) © 2005 aPics All rights reserved. 143° Section B: Supply Chain Management Strategy 2005 APICS section is designed to Define “corporate strategy” and “supply chain strategy” and explain the need to align the two strategies Explain the strategic importance of customer focus and the demand-driven supply chain Outline the elements that must be present to support alignment of supply chain and corporate strategy, including organizational design, supply chain processes, global metrics, technology and systems, and people Explain the need to be able to alter or abandon strategies in reaction to specified changes in the business environment or in the business itself Outline risk management strategies that focus on security and continuity of operations a ‘There’s a kind of magic in some words, “strategy” and “strategic” among them. Place “strategic” in front of the name of any business process and suddenly that process acquires an aura of great importance. Strategic sourcing sounds so much ‘grander than mere sourcing (let alone procurement). Strategic objectives cry out to be achieved in a way that simple objectives do not. Strategic planning sounds considerably more sophisticated and powerful than plain old planning. There's a reason those words have such power, and it’s not mere rhetorical biuster. Strategy, originally a military term, is how generals marshal all available resources in pursuit of victory. Strategy wins football games and chess matches—or loses them. Corporate strategy, if intelligently conceived and ‘masterfully carried out, governs all of a corporation's processes and brings it success in the global competition for markets. ‘And if corporate strategy is, ike military strategy, the marshaling of all resources, then it becomes clear that the corporation’s supply chain (SC) can be its most potent strategic resource. Designing and building the right supply chain may just be the most powerful way to gain an edge on the competition, to move faster, deliver more value, and be more flexible in the face of both steady change and surprises, From that perspective, supply chain strategy is corporate strategy—one way corporations distinguish themselves in the competitive contest to create value for their customers an« All rights reserved, 144Section B: Supply Chain Management Strategy In the end, the adjective “strategic” may be more evocative in connection with corporate and supply chain thinking than the noun “strategy.” The noun implies something static. In a world of whirlwind change, the adjective may just be a little mote practical and even more magical. The strategic thinker stands ready to seize whatever opportunity arises, to make whatever change is necessary, in pursuit of an underlying goal or even a vision. The strategic thinker will, in fact, drop an underperforming strategy at a moment's notice when chance delivers a new opportunity. When a young fellow named Bill Gates talked IBM into letting him keep the rights to develop his own markets for his quick and dirty operating system called DOS, IBM thought that was all right. They had a strategy for selling hardware. DOS just made the hardware run. Gates built the software engine for IBM, but he was thinking strategically looking at every situation for the hidden possibilities. IBM didn’t see the wider world of software development independent of their metal boxes. They missed a huge strategic opportunity; Gates saw it and seized it, By the time IBM caught on and developed OS/2, it ‘was too late to catch Microsoft, The rest, as they say, is history; or maybe it’s magic. In this section, we'll explore some fundamental aspects of corporate and supply chain management strategies: © Corporate strategy as it relates to supply chain strategy ‘© Aligning supply chain strategy with corporate strategy and changing strategy when conditions change * Collaboration © Risk management strategies + Corporate Strategy © 2005 APICS All ight reserved “The strategy of an enterprise,” the APICS Dictionary, 11th edition, tells us, “identifies how a company will function in its environment. The strategy specifies how to satisfy customers, how to make the business grow, how to compete in its environment, how to manage the organization and develop capabilities within the business, and how to achieve financial objectives.” How hard can that be? Let’s begin parsing that definition with the part about satisfying customers, ‘The main point to keep in mind is this: Whatever strategy the corporation adopts to satisfy customers, grow, compete, organize itself, and make money, 145Module 1: Supply Chain Management Fundamentals Strategy: Customer focus © 2008 APIcs All rights reserved the supply chain has to operate to further those goals. To give a simple ‘example, if customers are clamoring for deeply discounted prices on durable, high-volume goods with stable demand, a supply chain strategy that invests heavily in speedy delivery is very likely to be wasting the corporation's money. (However, with supply chains every decision takes place within a matrix of decisions, so you can never say never about any individual strategy. Speedy delivery might somehow fit in with a successful overall approach, But the focus of investment scems likely to be off the mark in the example.) ‘A supporting point to keep in mind is this: Unless a supply chain is vertically integrated within one company, it will contain a number of independent organizations, each with its own goals, processes, operations, technology, and strategy. So, when we refer to the necessity of aligning supply chain strategy with corporate strategy, we have to be specific about which corporation’s strategy we mean. In general, the reference is to the strategies of a channel, ‘master or nucleus firm, Traditionally, that’s the manufacturer of a product the company that sits right at the center of the chain (or network) with suppliers in tiers on one side and customers on the other. But the dominant firm, with the dominant strategy, may instead be a large retailer, in which case the strategies of the supplier-manufacturers have to align not only with their own corporate goals but with their customer's corporate and supply chain strategies. The suppliers of suppliers also have strategies to be brought into alignment. Finally, the strategies, once aligned, have to do two things: serve the end customer’s needs and be profitable for the chain as a whole and each company individually. The cartoonist Al Capp, creator of “Lil Abner,” drew a satirical character named General Bullmoose who was fond of saying, “What's good for General Bullmoose is good for the USA.” (Bullmoose was based on a real person, a former head of General Motors and a Secretary of Defense in the 1950s, who actually said something similar.) While it’s easy to see that this is wrong- headed—the reverse of the truth—falling into that way of thinking about one’s ‘own company or project is all too easy. When it comes to supply chains, it's ‘what’s good for the customer that counts—not what's good for the nucleus company or even what seems to be good for the supply chain itself. Supply chain management ought to be all about giving the final customer the right product at the right time and place for the right price. It isn’t necessarily about the most advanced product or service, nor is it always about the lowest pric the fastest time, or the most convenient place. It’s about the balance of quality, price, and availability (timing and place) that’s just right for the supply chain's customer. 1-46© 2005 APICS All rights reserved Section B: Supply Chain Management Strategy Is determining what's right on all those measures easy? Well, no, of course it isn’t, And achieving all those values wouldn’t be easy, either, even if they were completely obvious, which they seldom are, Only two things are obvious. First, serving the end-user customer is the primary driver of supply chain decisions, ‘And, second, the organizations in the supply chain have to make a profit and stay in business to serve the customer. Design engineers—or, better yet, design teams from across the network—design produets that are right for the end customer (and can be sold profitably). Market research looks for the true, and not always obvious, needs in potential consumers that the supply chain can be engineered to satisfy profitably. Logistics strategy begins with data about customer demands for availability—of materials, components, service, or finished products, depending upon the customer—and then it looks for ways t0 ‘move products in a cost-effective way with acceptable risk. Decisions are never jjust about product features or just about price or just about speedy delivery. They are about the right features at the right price on the right schedule, DOS ‘was not a great operating system; it was just the right operating system for the time and the market. As we saw in the previous section, there are other stakeholders who also have to be brought along for the ride. In fact, “customer” is a complex concept in relation to supply chains, because there are multiple customers with different stakes in the process. When we talk about customer focus, we mean the end user, the consumer of the product. But only the retailer actually sees the end user and has a direct relationship with that person or entity. Everyone else in the supply chain has a more immediate customer just downstream to our left in the supply chain diagram. Ifthe supply chain is completely aligned in its focus on the end customer, then, atleast in theory, serving the customer just to an organization’s downstream side would automatically serve the end user and also be in the supplying organization’s best interest as well as the interest of investors, Moreover, within each supply chain partner there are internal “customers” whose needs also must be aligned with corporate and supply chain strategies. Each manager must understand his or her role in making the supply chain profitable, and staff, too, must be rewarded, motivated, and trained in alignment with the needs of the supply chain’s end customer. The society at large and the government that (sometimes) codifies social value in its laws and regulations must also be served. Ultimately, what’s good for the supply chain is—to reverse General Bullmoose—good for the customer, within the limits set by those other stakeholders. But achieving that happy alignment of all strategies along the chain requires strong leadership, constant attention, and, perhaps, a little magic. 1.47‘Module 1: Supply Chain Management Fundamentals Strategy: Demand- driven enterprise Driven by forecasts © 2005 APICs All eights reserved, One of the traditional problems with meeting customers’ availability requirements arises from the difficulty of knowing what those requirements will be from day to day, month to month, quarter to quarter, and so on. Ifa manufacturer could be guaranteed that its wholesale or retail customers were going to need 1,000 SKUs (stockkeeping units) every Wednesday afternoon, getting products to customers at the right time and place would be a matter of simple calculation based upon lead times for production and delivery. In turn, the manufacturer would look at the bill of materials (the list of all components ‘required to manufacture or assemble the product), determine the lead time for each, and submit schedules to its suppliers. Unfortunately, it’s difficult to predict even the most stable demand—say, for a product like diapers. There is some variability in demand for diapers, even though they aren’t subject to seasonal style changes or rapid peaks and valleys in response to outside influences affecting ability to pay. (That's why Procter & Gamble cooperates with Wal-Mart to plan for demand and replenishment of diapers.) The chain of demand (to coin a phrase) begins at the far retail end of the supply chain and works its way back toward the source of raw materials used in making the product. And the traditional way of attempting to satisfy this demand is to forecast it. (In Module 2 we'll look in some detail at forecasting methods.) Forecasting works along the chain like this: ‘© The retailer forecasts demand from young parents. ‘©The wholesaler forecasts demand from all its retailers, ‘©The manufacturer forecasts demand from the distributors, ‘+ The component suppliers forecast demand from manufacturers. ‘The raw materials suppliers forecast demand from the component ‘manufacturers, (Somewhere way upstream at the source of the diaper chain, assuming old-fashioned cloth diapers, is somebody growing cotton and hedging risk with futures contracts.) How well does this work? Let’s say you don’t want to be placing large bets on the accuracy of all those forecasts. Here’s what happens: ‘© Those young parents vary their diaper-buying pattems in fairly small increments due to factors nobody fully understands. Perhaps they just go to different stores for a change, shop on Tuesday instead of Thursday, or buy ‘more at one time because the diapers are on sale (and nobody mentioned the retailer's promotion plans upstream to all those companies affected by the variability in demand), or flu season affects volume needs. At any rate, demand never quite meets the forecast. So the retailer pads each order with a little extra “safety stock” to putin the storeroom, 1-48© Ln Customer Driven by demand 2005 APICS All rights reserved Section B: Supply Chain Management Strategy * The distributor forecasts demand based on past orders from its retailers. Now, those demand patterns have a wider variability than the demand pattern at the retailer's checkout counters. Why? Because of that safety stock. Sometimes the safety stock accumulates because demand is less than the forecast, and this means that the retailer’s next order is for less than its forecast—or perhaps it doesn’t have to order at the usual time at all, because it has a glut of diapers—which it probably sells off in a promotion. The upshot of all this is that the small variations in end-user demand (no pun intended) is magnified at the distributor. * Up the chain, the manufacturer of those diapers looks at the demand patter from the retailer and makes its own forecasts, which show an even wider swing in variability. ‘+ And (you get the picture) so it goes up the chain with ever-wider swings in variability until it hits that cotton farm. This pattern of variability is called the “bullwhip effect,” and it affects all manner of supply chains that are based on serial forecasting by each independent division or firm that touches the product as it travels from raw material to finished retail item. If you imagine snapping a bullwhip and watching the ripples widen as they move toward your hand, you can picture the trend line of the supply chain’s bullwhip effect, Exhibit 1-14 provides a different sort of graphic representation of the bullwhip effect. The snakelike ripples aren’t graphed, but the increasing distortion in demand patterns is described as it moves up the chain from the retail customer toward the raw ‘material supply. Exhibit 1-14: Bullwhip Effect ‘Small demand uncertainty becomes more ‘and more distorted, Retailer Gab tte Distributor Factory Supplier The bullwhip effect is driven by demand forecasts; the solution is to substitute actual information for the forecasts—which are always wrong, This isn’t Lag)Module 1: Supply Chain Management Fundamentals: © 2005 APICS ‘All sights reserved necessarily a simple matter, either, but supply chain professionals have evolved techniques for letting actual orders—not forecasts—drive production and distribution, It’s called “make-to-order” instead of “make-to-stock” (which could be called “make-to-forecast”) ‘When a supply chain works in response to forecasts, it's called a “push” chain, Everything is, in a manner of speaking, pushed downstream from one point to the next according to schedules based on the forecasts. The supplier delivers components in the amounts determined by the schedule to inventory, where they await use in manufacturing. The plant tums them into finished products and pushes the products to the distribution center or the retailer where they await an order from downstream. At that point the product isn’t being pushed; it’s being pulled. In the demand-driven chain, by contrast, no product is produced until an order comes in—moving the “pushipull frontier,” as it's called, back up the chain at least to the plant. Instead of producing to the forecast and sending finished products to inventory, the production process doesn’t begin until information comes in based on sales. There is, in other words, no fixed production schedule in a strictly demand-driven supply chain, Product is turned out only in response to an actual order, “on demand,” in other words. Note however that on the supplier side of the plant forecasts still determine delivery of raw material. The art of forecasting remains crucial, even in a demand-driven chain. The challenge in changing from forecast-driven to demand-driven, from push to pull, is reducing inventory without also lowering customer satisfaction. ‘When a demand-driven system is set up and managed properly, it can actually enhance customer service while reducing costs. But stockouts are a risk. As always with supply chains, the decision to switch to a demand-pull process trades one type of risk for another. In the push-forecast process, the risk is related to the build-up of inventory all along the chain, Not only does inventory cost money while it sits in a retail stockroom, distribution center, or preproduction storage area; it tins the risk of becoming obsolete or relevant for a number of reasons. In a world of rapid innovation, inventory obsolescence is a very real threat, Cisco Systems, for years an exemplar of successful and innovative supply chain management, had to dispose of $2.25 billion worth of useless inventory when the dot-com bubble burst at the beginning of this millennium, All those season close-out sales you see in clothing and department stores are a way of clearing out the overstock. Bookstore remainder tables (which are much less in evidence than they were a decade or two in the past) are a sign of inventory overhang caused by failed© 2005 APICs All ih reserved Section B: Supply Chain Management Sirategy forecasting. Magazine distributors used to destroy huge quantities of monthly ‘magazines 12 times a year when they came back from retail outlets, Those are the results of producing to forecasts no one trusts and purposely overstocking to be sure of meeting unexpectedly high demand. The risk in the build-to- order model, on the other hand, is that orders will begin to come in above capacity and all along the chain there will be expensive activity to run the plant overtime, buy more and faster transportation, or sweet-talk customers into waiting for their orders to be filled or substituting 2 different product. (Running short of stock is also a risk in the forecast-driven chain, Forecasts can be wrong in either direction. That’s why the safety stock builds up at each point where orders come in.) Building a demand-driven enterprise can require significant changes in all supply chain processes. The following lists some major considerations: ‘* Access to real demand data along the chain (visibility) ‘The first requirement is to replace the forecasts with real data, The only supply chain partner with access to these data firsthand is the retailer, and retailers in the past have been no more willing to share business data than any other firms. The other partners lack “visibility"—one of the main supply chain principles promoted by APICS. They simply cannot see what’s going on with the end customer. But visibility is a necessity for building a pull system, and pioneers like Wal-Mart have led the way in that regard. With point-of-sale scanning or radio frequency identification (RFID), a retailer can alert its suppliers to customer activity instantaneously. Instead of producing to the monthly forecast, ‘manufacturers with that kind of immediate signal from the front lines can plan one day's production runs at the end of the preceding day. They produce just enough to replace the sold items. ‘+ Trust and collaboration among supply chain partners Collaboration is implied in the sharing of information. But more is at stake than simply sharing sales information. Partners may have to invest in new technology and develop new systems to be able to use the real- time data. With orders going out on a very different schedule (in fact, not ‘on a schedule) all processes will have to be altered—warehousing (storage no longer needed), packaging, shipping, and planning will all be handled differently in the new system. In return for receiving real-time data that allow reduction of inventory, suppliers and distributors have to agree to change their processes in whatever ways may be necessary to make the new system function without disrupting customer service.Module 1: Supply Chain Management Fundamentals Strategy: How many chains? © 2005 APICS All rights reserved, Agility Because the inventory buffers leave the supply chain, the trade partners need to develop agility—the ability to respond to the variability in the flow of orders based on sales, The plant, for example, may have to undergo considerable change if it has to produce several different kinds of products under the new circumstances. When building to forecast, a plant can run a larger volume of each product to send to inventory. But when building to order, the plant may have to produce several different types of products in a day, There will be no room for long changeover times between runs of different products; therefore, equipment, processes, work center layouts, staffing, or siting—or all these things—may have to change to create the capacity required to handle the new system, To return to the simple model of the lemonade stand, make: that Mom mixes a batch of lemonade just before the stand opens based on the ‘number of customers from the previous day. (That would be a “naive forecast,” as you'll see in Module 2.) If the forecast is wrong—say, the weather turns bad -to-forecast might mean midway through “business hours’—there will be leflover lemonade, which most likely won't be problematic unless the operators drink too much of it and spoil their appetites. The other possibility is that demand will overwhelm supply and. perhaps Mom has gone to pick up big sister at soccer practice and customers go away thirsty. With forecasts being so unreliable, the lemonade stand proprietors might decide to switch to a make-to-order schedule. After each sale, they could call into the kitchen to update the lemonade manufacturer, who would probably want to keep a few glasses ahead. Inventory could be made much smaller, if not climinated. The drinks might be a bit fresher. There would be a tradeoff in cost, however, because more trips from kitchen to stand would be required. (Transportation and warehousing always have to be balanced.) Raw materials— Jemons, sugar, water—would still be purchased on forecasts, since running to the comer store for more lemons would be wasteful of time and money. The sisters might also decide to move part of production closer to the customer by adding sugar to taste, But “postponement” is another topic for Module 2. When we're drawing pictures of supply chain models, it's customary to assume that ‘one chain connects each partner to the next, In fact, one firm can have more than ‘one supply chain, depending upon the number and type of products that are passing along the chain and other variables. For a product with a complex bill of materials (many parts that combine into many components to make the final products), a ‘manufacturer may be bringing in materials from many suppliers. And these ‘materials might range from low-priced commodities to fragile or sophisticated ‘materials that require special shipping and handling. Suppliers might range from 1-82© 2005 APICS All rights reserved. Section B: Supply Chain Management Strategy small specialized firms to raw materials giants larger than the manufacturer. Some are key accounts; some might be occasional buyers. The finished products may be sold through several very different channels—e-commetee, printed catalogs, commercial, and retail, These variables may combine in different ways, each suggesting its own type of supply chain strategy. We'll consider some effective and ineffective alignments of supply chain types and product variables. In “What Is the Right Supply Chain for Your Product?” Marshall L. Fisher distinguished two types of products that call for different supply chain strategies: functional and innovative. They differ as follows: Functional produets, like canned soup and blue jeans, have longer life cycles (Perhaps more than two years), relatively low contribution margins, and litle variety. Because demand for them is stable, they are fairly easy to forecast, with a ‘margin of error in the 10 percent range, very few stockouts, and no end-of-season markdowns. On the other hand, made-to-order products in this category have very long lead times (six months to a year). The appropriate supply chain for these products should emphasize predictability and low cost with performance indicators such as the following: ‘© High average utilization rate in manufacturing Minimal inventory with high inventory tums * Short lead time (consistent with low cost) ‘Suppliers chosen for cost and quality ‘© Product design that strives for maximum performance and minimal cost Innovative produets contrast to functional products on every dimension. They have unpredictable demand, relatively short life cycles (three months for seasonal clothing), and high contribution margins of 20 to 60 percent. They may have millions of variants in each category, an average stockout rate from 10 to 40, percent, and end-of-seasons markdowns in the range of 10 to 25 percent of regular price, The margin of error on forecasts for innovative products is high—40 to 100 percent, but the lead time to make them to order may be as low as one day and ‘generally is no more than two weeks. The supply chain for innovative products should emphasize market responsiveness rather than physical efficiency, with indicators such as the following: ‘+ Excess buffer capacity and significant buffer (or safety) stock of parts or finished items ‘© Agaressive reduction of lead times ‘+ Suppliers chosen for speed, flexibility, and quality (rather than cost) ‘+ Modular design that postpones differentiation as long as possible 1-53Moduile I: Supply Chain Management Fimdamemals © 2005 APIcs Al rights reserved, The key performance indicators for each supply chain differ because of the product characteristics. Aggressively reducing lead times, for example, is, appropriate for innovative products but would be irrelevant for functional products that can be manufactured and delivered on predictable schedules in high volumes. Inventory reduction makes good sense as @ performance indicator for supply chains if the product is functional but not if its innovative Because margins are low on functional products (those markets tend to be very competitive), cost reduction in the supply chain is essential. Innovative products, on the other hand, with their high margins and unpredictable demand, justify extra expense for holding costs. (Fisher also proposes, however, that manufacturers of innovative products can look for other solutions to the problem of unpredictable demand, such as aggressively reducing lead times and producing products to order rather than for inventory.) ‘The same class of product, the author argues, can be either innovative or functional. Automobiles fit that description, with a low-priced, no-frills car like a base model Chevrolet Cobalt or Hyundai Excel representing the functional end of the spectrum and a Porsche representing the other end. Similarly, coffee can be functional—as anyone who has worked in an office knows, in which case it should be available quickly at « low price with perhaps cream and sugar as options. At a high-end coffee shop, on the other hand, patrons are willing to endure longer lead times and pay more money for their coffee, but they want variety in return. The idea that the same type of product can be either functional or innovative implies that one company might have more than one supply chain, And that’s the contention of Jonathan Bymes, a professor at MIT. Writing in the Harvard Business School’s Working Knowledge, Bymes asserts that one supply chain is not enough; two, three, or more would be preferable. “One size fits all” supply chains may have been sufficient in the past, he believes, when that was the competitive norm, but new information technology makes it possible to have multiple, dynamic chains that can accommodate different product and information flows, Byres breaks products into three categories: staples, seasonal products, and fashion, Much like Fisher’s functional products, staples (white underwear is Fisher's example) have steady, year-round demand and low margins. He advises stocking them only in retail outlets in small quantities and transporting them in truckload quantities. (A full truck, as you'll see in Module 2, is more cost-effective for the shipper than a partially loaded vehicle.) Fashion products are like Fisher's innovative items with unpredictable demand. Zara, theSupply chain versus supply chain? © 2005 Pics All ight reserved, Section B: Supply Chain Management Strategy Spanish clothing manufacturer mentioned earlier, has two supply chains, one for staples and the other for fashion clothing. To get the fastest response time, Zara uses European suppliers for the fashion items. But for the more predictable demand items, i¢ uses eastern European suppliers which have poor response time (not a concer) and lower cost. In addition to varying the supply chain by product type, Fisher recommends several other variables to consider—store type and time in season or product cycle, Demand varies considerably over the life cycle of many products. The same item might have infrequent demand at first, more stable demand in its maturity phase, and falling demand at the end of its life eycle, With more than one supply chain, the nucleus firm can move its products from one chain to the other in response to changing variables, such as type of channel or life-cycle stage. It’s commonly said that competition increasingly occurs between supply cchains rather than between companies. There is truth in this observation, but it isn’t quite as straightforward as it sounds at first hearing. In Section A we described management of horizontal supply chains as evolving through a series of steps, from functional decision making through intemal integration across functions and then outward toward the extended ‘enterprise made up of supply chain partnerships and information networks. We also looked at the more traditional architecture of vertical integration, or bringing many supply chain activities inside one company instead of outsourcing functions to partner firms in a linked chain. Extrapolating from the evolutionary trend toward more outsourcing and the building of electronically linked virtual enterprises, many observers and participants see a future global ‘marketplace in which giant supply chains compete for shares of many markets around the globe. A study published in the Supply Chain Management Review Games B. Rice Jr. and Richard M. Hoppe, “Supply Chain vs. Supply Chain: ‘The Hype and the Reality”) tested this idea and found some weaknesses in both its predictive power and its clarity, Rice, the director of the Integrated Supply Chain Management Program at MIT, and Hoppe, a consultant, made several discoveries relevant to supply chain strategy: ‘+ Even experts in a Delphi study (a focus group that responds anonymously to questionnaires) interpreted the SC vs. SC in rather different scenarios. ‘+ For various reasons, direct competition between supply chains, in the most literal interpretation, simply can’t occur in some industries because of the structure of the marketplace. 1-55Modiile 1: Supply Chain Management Fundamentals: Three ways to compete with supply chain strategy © 2005 APICS “Al rights reserved. Let's look at the different ways in which experts interpreted the SC vs. SC idea first and then see why supply chains literally cannot be competitors in some industries While most of the assembled experts believed that, indeed, the future belongs to competing supply chains, analysis of their responses revealed considerable divergence of opinion about the meaning of the terms used in the description of competing supply chains, As the authors point out, if we're not all speaking the same language in these fundamental matters, we can get ourselves and our supply networks out of alignment. When we talk about supply chains competing against other supply chains, we might be referring to any (or all) of the following situations: * Groups of companies allied as partners in supply networks (the authors” preferred term) will compete with other groups of companies allied in supply networks. The networks will be distinct from one another in all ways. For example, they won't all be getting their logistics advice from FedEx, their marketing strategies from the same consulting firm, and their components from the same suppliers. This is the most literal view of the matter. According to Rice and Hoppe, competition at ths literal level exists in only a limited degree and is not likely to become the model of the future. In point of fact, they offer no examples that seem to fit the model, The companies they offer to exemplify head-to-head supply chain competitors tend toward the vertically integrated company rather than the extended enterprise, They propose the fashion and poultry industries as arenas in which supply chains compete with supply chains. The Spanish manufacturer Zara, for instance, relies upon a network of European suppliers to gain speed to market with new fashions for its European customers. While these manufacturers are more expensive than the offshore manufacturers used by some competing firms, Zara judges the ability to get fashions into the stores rapidly to be worth the investment. Thus, their supply chain strategy dovetails nicely with their corporate strategy. However, they maintain a near vertical chain rather than a network of outsourced suppliers, according to Rice and Hoppe; only their sewing is sent outside, They are not, therefore, an example of a true supply network of independent companies, Similarly, in the poultry business, competitors Perdue Famns and Tyson Foods have well-developed supply chain management strategies, but both are nearly vertical in their integration, The message holds that supply chain excellence, when aligned with corporate strategy, can lead to competitive success. But the vision of the wholly outsourced network of affiliated partner firms may, as the authors claim, not be the wave of the future or the reality of the present, 1-56© 2005 APICS Al rights reserved Section B: Supply Chain Management Strategy Almost equally popular was the view that competition will be carried out between, or among, individual companies on the basis of their supply chain ‘management capabilities. This sounds like a subtle difference from the “literal” view, but it does have application in the real marketplace of competing companies. One company, while it might not be entirely distinct from another in its choice of suppliers, for example, might still excel in some area of supply chain management, such as array of product choices, reliability, or price based on the skill with which the company integrates its various internal functions and external partnerships. U.S. automobile ‘manufacturers may, as the article points out, purchase components from many of the same suppliers—now that they have all outsourced their parts divisions. In fact, many of those suppliers may be the same non-U.S. companies, such as Japanese electronies manufacturers who also supply Japanese auto companies who may have their plants in the United States or Canada. Despite all the overlap in their supply chains, however, the companies remain quite distinct, and heavily reliant upon effective supply chain management. Another ‘example mentioned in the article is the competition among computer companies. Dell, Gateway, and HP-Compaq assemble computers with chips bought from AMD and Intel, software from Microsoft, graphics and audio subsystems from the same group of (competing) suppliers, and so on. They can’t be seen, therefore, as pure and literal competing supply networks. However, computer companies definitely do compete on the basis of their supply chain models, with Dell selling solely through the Internet and operating as a virtual company with order information shared instantaneously among its suppliers. Dell and Apple Computer, or HP-Compag and Apple, approach the personal computer buyer through very distinct supply chains, competing on the basis of different supply chain designs, with less overlap in suppliers. But they are still single companies rather than distinctive supply networks, ‘The nature of networks in the personal computer industry is complex enough to be beyond easy graphic illustration. On the PC side, for example, Intel and AMD (Advanced Micro Devices) supply processors to all the competing brands. Intel insists that computers with its processor feature the “Intel Inside” ogo, Intel and AMD, in other words, are competing for the same customers as, say, Dell and HP-Compaq, but they are doing it through the computer makers, While this fits the model of supply chain collaboration, the supplier partners are lending support to competitors. The chipmakers also sell their processors independently to individual users and to off-brand companies that ‘will assemble a computer to order for retail customers who want to mix and 1stModule I: Supply Chain Management Fundamentals Limits on SC vs. SC competition © 2005 PICS All ights reserved match parts from different companies. Similarly, makers of monitors, such as Sony and LG, provide their products independently on store shelves and in package deals with various computer makers, where they may retain their brand name or be rebranded as if they belonged to the computer manufacturer. Sony also sells computers under its own brand, Printers provide similarly complicated examples of network arrangements, ‘© Assmaller minority of Delphi study participants thought that competing supply chains would be dominated by channel masters whose policies would determine the nature of the entire supply network. This would distinguish the model from the vertical integration of a Zara or Tyson on the one hand and from the network of independent partners on the other. This certainly would seem to provide another example of supply chain strategy as corporate strategy. The major examples of this channel master approach to supply chain competition—Dell, Wal-Mart, and the automotive manufacturers—overlap with other SC models. In this arena, Sears provides an interesting example of ‘the complexity of the channel master chain (or did for its long history before the take-over by Kmart). It could be, on the one hand, a retailer of brands available elsewhere in casual clothing and many other departments. It could be the sole retailer of a product line, such as Kenmore Applianees—which ‘were manufactured for Sears by companies such as Whirlpool, which also sold their competing appliances in the same department of the store handling the Kenmore brand, And it could be the sole retailer of Craftsman tools and awn mowers. A channel master may be able to organize the supply chain to serve its corporate strategy, but that may leave the other firms in the chain to align their strategy with the channel! master’s. This can pose considerable hardship ‘on the dominated partner. Dell Computer is able to require its component suppliers to open distribution centers near its plants, for example, and Wal- Mart is legendary for its power to require suppliers to conform to its policies. Of course, a Dell or a Wal-Mart offers suppliers access to an enormous world- wide market. In fact, the leverage of Wal-Mart is so great that it counts Dell ‘among its suppliers. And why not, since, in holiday season, Wal-Mart moves as many 4,000 Dell computers per day. ‘The Rice and Hoppe view of supply chain vs. supply chain competition offers support for the idea that there are not universal supply chain models and that the best configuration for any firm is the one that conforms to its corporate strategy. But it also reinforces a cautious view about the current and future 1-58Steps for building collaborative relationships © 2005 aPIcs All ight reserved. Section B: Supply Chaity Management S possibilities for supply chain vs, supply chain competition in the literal sense. Here are some of the limitations they envision: * Use of common suppliers in competing chains may work to the advantage of both competitors, but at the very least the situation invites conflict of interest. Insofar as manufacturers want to keep their designs and processes proprietary, they take a risk when they link up with competing component suppliers—and the suppliers also risk their intellectual property. © When one partner invests in its suppliers to build a partnership that brings uunique value to their shared customer, it may be investing in capabilities that also benefit competitors who use the same supplier. * Aligning business strategies with supply chain strategies can be made ifficult or impossible when supply chains are sharing suppliers. ‘© Sharing information with partners is one requirement for supply chain integration, but it also creates the risk of losing control of the information to competitors or to the supplier, who may become a competitor. The authors also point to some perhaps even more daunting limitations, Industries with a small number of dominant suppliers do not provide fertile ground for coordinated supplier-customer relationships. Supply networks, ‘when they do form, may lack the central authority necessity to mount a campaign against competitors—unless they are vertically integrated chains under unitary corporate ownership. Finally, the authors cast doubt upon the practical benefits of coordinating a chain across more than three tiers—one tier upstream and one down. Going beyond those boundaries, they believe, creates a complex, inflexible system, Nevertheless, true supply chain competition may still be feasible in limited ‘number of situations—when the competitors are vertically integrated, when the ‘companies in the chain have sole-source suppliers, and in fragmented industries with suppliers wholly dedicated to one or another chain, And beyond that, competitors will still depend upon their supply chain strategies to differentiate themselves and realize their goals. It’s ust not quite as simple a proposition as the common wisdom might make it seem. Central to the design of supply chain strategy is the development of collaborative relationships among the supplicr-customer partners along the chain. There can be little hope of strategic alignment without well-developed collaborations. 159Module I: Supply Chain Management Funcamemals Building these partnerships depends upon the following: © Auditable information exchange and technology for connectivity ‘+ Deterrence-based arrangements such as formal contracts that make adherence to proper behavior a matter of self-interest ‘© Incentive-based arrangements such as aligning sales and management goals to collaborative objectives ‘ Process-based arrangements such as long-term trust building based on constant communications and feedback that spiral out into greater trust over time ‘Assignment of leaders with the appropriate level of authority to enforce the relationship * Focus on the entire supply chain + Network-wide visibility and measurement of the bullwhip effect to assess the impact of collective management of inventory ‘+ Sharing of knowledge, not mere data ‘+ Clearly visible sharing of both the benefits and the burdens of the relationship ‘+ Varied types of commitment, depending upon factors such as length of relationship, feedback, and amount of added value by each potential partner Exhibit 1-15 summarizes the benefits to the supply chain of collaborative relationships. Exhibit 1-15: Features and Benefits of Collaboration Collaborative Relationship Contents Benefits + Joint development of shared processes Lower costs + Open sharing of information and : laowede + Improved quality + Jointly developed performance metrics + Bener customer service ‘+ Open two-way communications : Facet inven + Network-wide visibil + Rapid project results © Gee rals and vespontbiltes | + Reduced cycle times andlor lead times + Joint problem solving + More effective working relationships + Commitment to the relationship + Enhanced commitment to one another Another primary requirement is top management commitment, demonstrated by actions and relationship building, Actions include information sharing with © 2008 APICS All rights reserved. 1-60° 2005 APICS All ights reserved, Section B: Supply Chain Management Strategy external parties and with intemal staff, changing of incentives to match collaborative goals, enforcement of agreements by departments and staf, stabilization of pricing and ordering, and improvement of operations. Relationship building includes seeking out external relationships and working, to improve personal communications to develop greater trust as well as internal verbal and proactive support forthe relationships to develop team spirit. Division managers across every enterprise in the network must place the interests of the whole above their local interests. These managers will also be asked to make major changes in how they operate, These major changes will occur only when top management changes the individual incentives of their managers and puts personal pressure on these managers to make the required. changes, ‘The first task for managers who wish to build collaboration is to designate relationship goals and plan the steps necessary to reach them. Managers should begin this process by determining the specific contribution of each party and the criteria for measuring that contribution, Obviously, total profits should be one of the criteria, but there should be other specific measures, including nonfinancial contributions. The criteria should be flexible enough to allow each party to use innovation to mect its goals. In early stages, relationships should emphasize equity in profits among all parties. Equity will help motivate all parties to work toward the good of the whole, The second task is to define roles for each party, taking care to avoid redundant efforts. Conflicts can occur if these roles make one party more dependent upon another than they wish to be. To alleviate this common problem, networks should avoid sequential interdependence, in which the second party cannot begin work until the first party is done. Instead, they should establish reciprocal independence, in which the exchange of tasks and services occurs in both directions. Examples of this include CPFR (collaborative planning, forecasting, and replenishment). Although mutual interdependence is more complex to manage, it can also provide much greater rewards, Since no contract can cover all contingencies, the third task is to create a policy for resolving conflicts. If conflict is serious enough to require amending the contract, negotiations to do so should include all affected partis. Many firms prefer to resolve differences through informal negotiation rather 161Module 1: Supply Chain Management Fundamentals Barriers to collaborative commerce © 2005 APICS All ights reserved. than by revisiting the contract. All parties to the contract should agree upon a plan to govern such negotiations to ensure that they aren’t too informal. The plan should call for regular meetings among key managers and cross-enterprise teams, and it should include guidelines for referring problems to the highest level necessary to resolve the conflict, Either the contract should specify how finance and IT establish rules for transactions, or a policy and procedures guide should do so. Contracts, policies, procedures, and informal conflict resolution must be sensitive to cultural differences. In the United States, courts can resolve conflicts without detriment to long-term relationships among parties to a contract. The opposite is true in most Asian countries, Finally, managers must stay involved after the design phase. The best design will fall apart if not constantly maintained, and top management must not, abdicate its responsibility for adhering to the collaborative arrangements. Without management commitment, each party tends to revert to its own self interests. Weaker parties in the relationship may bear the brunt of problems; without an effort to maintain equity, the relationships will tend to fall apart ‘The design’s benefits and flaws will be easier to see if monitored, and ‘managers should continually adjust the plan in response to any problems that arise in practice. Building successful collaborations requires overcoming predictable obstacles, including the following constraints. ‘+ Suboptimization ‘When supply chains are not truly connected at the planning level, each part of the supply chain will work to maximize its own profits or to increase other measures at the expense of the supply chain partners. When thi ‘oceurs despite the recommendations of a holistic optimization tool, it is a double loss because the investment in global planning is being put to waste. For example, when a product is available in limited amounts, retail orders must be monitored across the chain. If each store is allowed to determine its own order quantity, the result might be overstocking of locations that order early and stockouts elsewhere, Transportation costs are another area commonly suboptimized, ‘© Individual incentives that conflict with organizational goals Incentives, such as sales force bonuses, structured without thought for the supply chain strategy, can often be counterproductive. For example, sales quotas for distributors or manufacturers are often based on monthly or 1-62© 2005 APICS All rights reserved, Section B: Supply Chain Management Strategy quarterly targets for sales to retailers instead of on those retailer's actual sales. While the distributor doesn’t actually control retail sales, this practice can lead to channel stuffing (intentionally selling too much inventory) and is ‘aggravated by promotions intended to increase sales at the end of a period ‘These practices create a great deal of excess inventory as well as variability in demand that the manufacturer must then deal with, Instead sales goals must be aligned with actual demand. Many companies have stopped giving sales incentives and instead have tumed to other metries that more effectively align sales with company objectives. Working with competitors Supply chain management books tout the success of collaborations among competitors, but many of these ventures also fail. This is partly due to lack of trust and cultural rigidity, but it also reflects the reality that one firm is trying to win market share atthe expense of the other. Such relationships should be kept at arm's length to ensure fairness, and extra caution must be devoted to sharing information. Companies may pretend to embrace collaboration when they really only want access to information for their own benefit. Companies will always have good reason to treat competitors warily. Bottlenecks caused by weaker partners The slowest or least integrated partner in a network will often limit the technological collaboration level of a company as well as the level of trust that can be built. Ifthe firm is not willing to invest in a technical and social change process, the only alternative may be to find a more willing or able partner who can keep up with the network’s collaboration curve Technology barriers ‘When potential partners have incompatible systems, it increases the difficulty of sharing data, especially when one or more companies uses very old legacy or ERP systems that do not adapt well to the newer integration solutions such as business process management (BPM), discussed in Section A of Module 4, or Web services, discussed in Section D of Module 4. Incompatible and/or antiquated hardware infrastructures can also prove a barrier to collaboration, Power-based relationships Rather than building relationships based upon trust and mutual benefit, the nucleus firm may use its leverage to dictate the terms of relationships to the ‘other members. While the profits of the nucleus firm increase, other ‘members of the network may suffer losses. When this occurs, the disadvantaged partners may rebel. Resistance may result in redundancy, 1-63Module 1: Supply Chain Manogement Fundamentals Levels of communica- tion © 2005 PICs All rights reserved loss of overall profitability for the chain, or an actual reversal of the power relationship. Once in power, the mistreated party may retaliate instead of using the opportunity to develop equitable relationships along the chain, ‘+ Underestimated benefits ‘When collaboration is seen as another type of process reengineering, the partners generally measure the results in reduced cost and cycle time rather than retum on investment (ROD. Simply measuring efficiency increases will fail to see some of the true long-term benefits of collaboration. This may lead managers to reject a collaborative venture based on a failure to see such ‘gains as removal of reduplicated efforts, enhanced innovation, and better use of total system assets and processes, © Cutture conflicts Cultures tend to be egocentric and thus tend to resist external collaboration. ‘They feel that their ways are the best ways of doing things and will often reject a different way without even considering it. Culture conflicts are increased when each company relies on its own sources of information and is unable to see the impact of its choices on other areas of the network, When companies don’t see the negative results of their actions, they can’t leam from their mistakes. Another culture conflict arises when managers delay or prevent collaboration, Such managers generally have safeguarded their positions by not sharing information so that they must be sought for their expertise Others feel that collaboration is a fad or a bad idea altogether. Still others talk about collaboration, but they are only interested in receiving the benefits from a partner without reciprocating, ‘Communication between partners can take place on different levels; not all collaborations depend upon the same degree or intensity of communication. ‘We'll consider four levels of communication: ‘+ Transactional with information sharing At this level of communication, each partner has access to a single source of data about matters such as workflow, forecasts, and transactions, Contracts are generally medium term, ‘+ Shared processes and partnership At this level, partners collaborate in specific processes such as design. They create share knowledge across the network. Contracts are longer term.Determining level of collaborative intensity © 2005 aPIcs All rights reserved Section B: Supply Chain Management Strategy + Linked competitive vision and strategic alliance AL this level, supply chain partners function as a virtual entity, working out even the highest level of strategy together. The partners develop considerable trust and achieve social and cultural understanding as well as information, sharing, Strategic alliances may last for decades. + Backward integration (mergers and acquisitions) ‘While purchasing other entities in the supply chain may seem to go against the historical grain, it does happen, Outsourcing current funetions isn’t the only way to forge links in a chain. Mergers or acquisitions may involve two companies in the same echelon rather than horizontal supplier-customer partners. The merger of Gillette with Procter & Gamble is one such merger as is the purchase of Sears by Kmart, There has been a great deal of amalgamation among service firms, including bank mergers to inerease national and international presence; mergers of banks with other financial providers to create “one-stop shopping” for consumers of financial products; and mergers in heavy industry, such as the purchase of Jaguar and shares of ‘Mazda by Ford Motor Company and the merger of Daimler Benz with Chrysler. Although mergers would seem to provide the deepest level of trust and communication, the sudden clash of business, regional, and national cultures involved often requires years of work to align attitudes, technology, and business practices. Determining the level of collaborative intensity that each relationship requires depends on cost, quality, delivery reliability, precision, and flexibility. Cost speaks for itself, but cost and quality often are inversely proportional. Quality and delivery reliability are usually measured by number of defects allowed or late orders and are often collectively rated by members of an exchange using supplier history. Precision is measured as degree of variance from specifications. (Small variances in components from different vendors may actually prevent assembly.) Flexibility is the ability of the supplier or manufacturer to deliver in varying quantities when given a specific number of days’ notice. These criteria are strongly influenced by four factors related to the product or service: strategic importance, complexity, number of suppliers, and uncertainty. + The primary sourcing consideration is the strategic importance of the product or service, If the company cannot afford to make mistakes, it should produce the item in-house, even if this is more expensive. Ifthe company lacks internal capability, it should form an alliance with one or ‘more firms that can make the item or perform the service. Multiple sources 1-65Module 1: Supply Chain Management Fundamentals © 2005 PICS All sighs reserved, provide a back-up. Commodity products, by contrast, are widely available and have litle strategic importance and should be purchased at arm’s length at the lowest available price. This includes modular products and ‘overhead items such as electricity ‘+The next factoris the complexity of the item and of the process steps required to produce it. Strategic alliances may be needed for very complex items simply because of the level of collaborative planning needed to get the item right in the necessary time frame, Examples include military technologies such as missiles. Many contractors may need to form strategic alliances to get all of the components to work together and to provide the appropriate level of security. Airplanes also require alliances for many major systems, although minor systems can be sourced through lower-level relationships. ‘+ The number of suppliers available for a product or service will also determine how much the company should escalate the relationship. When very few or only one supplier is available to produce the specific component or good required, the company may need to form a strategic relationship in order to guarantee continued availability of the item. For example, Canon is one of the only producers of high-quality engines suitable for use in laser printers, so HP has a strategic alliance with them for this part even though the two compete on printer sales directly. Focusing only on price or time to market with such a supplier would be a mistake ‘+ Finally, uncertainty is a primary concem in building relationships. Uncertainty isthe risk that the good or service may not be available or may have strong fluctuations in price or quality. Even if there are hundreds of suppliers of finished lumber on the market, there may be great variability in quality and in precision of milling. If a manufacturer that uses this lumber advertises its superior quality of lumber as a selling point, then it is well advised not to simply buy at arm's length but to develop a partnership with ‘one or more suppliers who can meet these stringent levels of quality. They ‘may be able to have a middle-level relationship or even purchase on a private exchange if such a service provides prequalification as a value- added service, however. fan item combines more than one of these categories, such as few suppliers and uncertainty, then the need for higher collaborative intensity is stepped up quickly. Strategic importance can be considered one part of the perspective, while the supply chain challenges of complexity, number of suppliers, and 1-66Section B: Supply Chain Management Strategy ‘uncertainty can be grouped together to form a second perspective. Exhibit 1-16 shows how this creates four basic categories of goods. Exhibit 1-16: Strategic Impact Versus Supply Chain Difficulty Low Supply Chain jh Supply Chain Difficulty Difficulty Low Strategic | Commodity Bottleneck materials Importance _| materials High Strategic | Leveragable Direct/core Importance materials competency materials As mentioned before, cost reduction is the priority for commodity items. These items are best purchased at arm’s length, Bottleneck materials are also of low strategic importance, but efforts must be made to ensure that the need for these items is fulfilled. Therefore some level of ongoing relationship may be called for. Items of high strategic importance but low difficulty levels call for collaboration to maximize both cost savings and reliability through means such as bulk purchasing by multiple members of the supply chain. Items of high strategic importance and high difficulty call for strategic partnerships to ensure availability and quality Sometimes firms do not heed these factors and end up buying at arm’s length to get the lowest price for items that are critical in one or more of these ways. ‘Sometimes the cost of the process of checking goods for defects or repairing them or for resolving problems with customers after resale is quite a bit higher than the cost savings found by switching from supplier to supplier. Some damage to reputation may be irrevocable but hard to measure. Companies must add these costs to the cost of the product when determining how much they are actually spending. + Aligning Supply Chain Strategy with Corporate Strategy © 2005 APICS All rights reserved, Whatever type of supply chain a company establishes internally across functions and externally with trading partners, success depends first upon alignment of supply chain strategy and corporate strategy (or corporate strategies, in the case of horizontal chains). As we've seen, a channel master such as Zara may develop two supply chains aligned to different product lines and markets—one supply chain to support a low-price functional line of products with relatively stable demand and the other to support higher- ‘margin, fashion-oriented products with rapid turnover. After alignment, the 1-67Module 1: Supply Chain Management Fundamentals Strategic planning Market and external environment SEES ae other essential factor is the infrastructure of the chain—the resources that sive the internal and external partners the power to act in concert to achieve their competitive objectives. A supply chain is constructed of organizations, people, processes, and information. And all of those resources must also be aligned with one another and with the corporate and supply chain strategies. ‘The success of the supply chain in achieving its two-sided goal of creating ‘customer value and financial value rests upon sound strategic planning in the following areas: ‘+ Organizational design © Supply chain processes Systems and technology + People ‘© Supply chain metries Exhibit 1-17 provides a graphic representation of the decision-making process that goes into aligning corporate and supply chain strategies. Exhibit 1-17: Aligning Corporate and Supply Chain Strategies ret cot Pere analyses poet renee Gremio Ris Corporate strategy Future direction (global |. [Competitive priorities strategy, new procs | (cos, quality, ime, [__andservices, ete) | price, ete.) Must develop the F Capabilities— supply chain ‘capabilites required 4 current needed, plans | Pron ects strategy Organizational design © 2005 APICS All rights reserved, finance, marketing, supply chain, Functional area strtegies— ‘and others Organizational design refers to all the structured relationships in an organization—the organizations that make up a supply chain, in this case. 1-68© 2005 PICS All rights reserved Section B: Supply Chain Management Strategy Organizational design includes the nature and arrangement of such elements as communication, the chains of authority and responsibility, financial ‘management, and job descriptions. In the previous section we looked at the stages of supply chain evolution; each stage was linked to a significant alteration of organizational design. Development of an effective supply chain, in other words, necessitates development of an organizational design that will support the supply chain. Inthe first stage, decisions about matters related to supply and distribution ‘might be made almost on an ad hoc basis. Formal communication may be limited to tactical, job-related matters. Meetings are scattered and poorly organized. Training may be nonexistent. With an ad hoe design, an organization has no possibility of forming or participating in an effective supply chain, In the second stage, organizational design follows functional lines, with ‘marketing and sales, production, warehousing, distribution, and so forth each ensconced in its own silo and focused on meeting its own goals. Supply chain decisions, such as number and location of warehouses, inventory ‘management, or modes of transportation are made entirely within their separate silos. Communication flows upward through the chain of command or, pethaps, horizontally in departmental teams. There is little or no formal communication through the silo walls to coordinate supply and distribution- related decisions. Systems with functions may be automated with specific software applications, Jobs may be enriched to include more variety and wider responsibility. Training in some areas includes “soft skill” seminars in ‘management, communications, and needs-based sales, laying the groundwork for more strategic and innovative approaches to marketing and operations. In the third stage, cross-functional teams are formed to measure and improve business-wide processes, building (in the better cases) on continuous improvement initiatives undertaken within functional areas. The company adopts a cross-functional team approach to product design. Marketing and sales team up with operations in a continuous sales and operations planning (S&OP) process to coordinate aggregate planning across the enterprise to maintain alignment with the strategic and business plans of the organization, Formal communication occurs among members of structured peer groups, and the topics become multidisciplinary. Training follows suit by adding coaching and team formation workshops. Automation crosses functional boundaries, following the early historical breakthrough 1-69Module 1: Supply Chain Management Fundamentals Processes © 2005 PICS All rights reserved, with MRP II that ties the bill of materials together with finance. In more recent times ERP evolves from MRP II, adding functional modules until it ‘makes data accessible across the entire enterprise. Supply chain decisions can now become more effectively aligned with corporate strategy because of, the focus on company-wide processes and improved communication, In the fourth stage, the organization takes advantage of its integrated operations to begin forming partnerships with suppliers or customers. For example, a retailer may send point-of-sale data directly up the chain to ‘manufacturers through synchronized intranet and extranet or Internet connections. This level of collaboration can't take place until suppliers and customers have overcome barriers in their own organizations—such as functional organization and lack of technological sophistication. Electronic communication and point-of-scale scanners give other partners in @ chain instant access to POS data—no matter where they are. The organization may take advantage of its internal coherence to begin outsourcing its peripheral funetions to concentrate on one or a few areas of strength. A logistics specialist, such as DHL or UPS, may step in to further integrate warchouse- inventory-transportation processes. Components and services, both, can be supplied from multiple trading partners located anywhere in the world where local infrastructure permits and labor with necessary skills is available at a competitive price. The internal systems at this point may be thoroughly merged with external systems so that trade partners function in seamless harmony to form a virtual company. Cross-funetional teams in charge of supply chain processes need to be centrally coordinated, To give the proper organizational visibility to supply chain activities, these activities should be directed from the executive level. Supply chain management covers a series of linked processes. It’s true that organizations have always been involved in managing such functions as planning, buying, manufacturing and delivering products, and getting paid But supply chain management (and organizational design) have evolved from control of discrete business functions like procurement, manufacturing planning, and logistics to an emphasis on business process excellence and the ‘management of a network of relationships tied together by complex information flows, Although management of any one activity or link in the chain may be straightforward, effective supply chain management requires mastery of the connected processes. 1-70© 2005 APICS All ights reserved. Section B: Supply Chain Management Strategy As we saw in the previous section, the Global Supply Chain Forum identifies the following eight key supply chain processes that cut across functional ‘+ Customer relationship management Insofar as customer relationships are the primary responsibility of ‘marketing and sales, the alignment of the customer relationship process with corporate and supply chain strategies requires close consultation between marketing and sales management and supply chain leaders. Segmenting a market for cars, for example, influences—and is influenced by—the development of models, The same is true in other industries. Zara, again, provides an excellent example of market segmentation aligned with creation of two separate supply chains to serve two distinct ‘markets with separate product needs. Beyond alignment of supply chain and marketing/sales strategies, other functions should contribute to this process. Operations contributes a realistic view of what the company can produce—a view that should be brought to bear in a cross-functional sales and operations planning process (which is described in Module 2). This will include information about available capacity and modifications required to meet the needs of the market. Product design engineers are also important contributors to this process, since they must design products that meet market requirements such as quality, availability, and Pricing. To do so, designers must consider available production capacity, the existence of suppliers who can provide materials of appropriate cost and quality, and the ability of logistics to move materials and products efficiently, Finance needs to be involved in every process. A fully integrated customer relationship depends upon an organizational design that allows cross-functional collaboration and communication. In sum, everyone from outside suppliers to potential customers can contribute to the customer relationship process to achieve full alignment with corporate and supply chain strategies. ‘+ Customer service management Customer service manages the details of all the supply chain relationships created and defined by the customer relationship teams. This includes logistics in both the forward and reverse supply chains (that is, products going to the customer as finished goods and products returning from the customer for replacement, repair, recycling, or disposal). Service strategies need to be developed and controlled in alignment with the ‘overall supply chain strategy to ensure that customers receive the level of 1Module 1: Supply Chain Management Fundamentals © 2005 aPIcs All rights reserved service requited to keep them loyal while keeping costs in line with the financial goals of all supply chain partners, ‘Demand management Forecasting and controlling customer demand are methods of counteracting some of the uncertainty that afflicts a supply chain. While forecasts are always off the mark to some degree, a good forecasting process with continuous monitoring can help smooth out the fluctuations in orders. Marketing can also schedule promotions to increase demand and, at the end of the product cycle, clear out products approaching, obsolescence. Promotions, especially, need to be coordinated with the entire chain so they don’t cause unexpected increases in demand that upset other processes, such as supply management and production. Activities meant to stimulate demand, such as discounts, specials, and all forms of advertising, need to be kept in alignment with the supply chain strategy. An everyday low price strategy, for example, makes “specials” problematic, since discounts send a signal that prices may not be as low as, possible. Also, in luxury-oriented chains, demand management strategy may have to focus on service rather than price. Order fulfiliment As noted earlier, order fulfillment is the delivery of the right product in the right amounts at the right time and place—and in the right condition. All of these “rights” should be determined in alignment with the supply chain strategy. One reason for having more than a single supply chain is the very different types of order fulfillment processes used in different markets, Order timing might be crucial in one supply chain and only a secondary consideration in another, for example, There are also multiple ordering points along a supply chain, and they have to be coordinated, not handled separately. Orders at the raw material end will most likely, in both amount and timing, be based on forecasts. Orders in the delivery chain may be pulled through by customer demand—should be, in fact. ‘The forecasts that set supplies coming into the plan must be carefully ‘monitored in the sales and operations process to ensure that inventory is always available in sufficient amounts to meet production needs determined by the “pull” chain. The order fulfillment process, therefore, must be govemed by the coordinated needs of all members of the chain, focused on the customer, and aligned with strategic decisions about the type of supply chain required for that market. Ln© 2005 APICS All rights reserved Section B: Supply Chain Management Strategy ‘Manufacturing flow management Both quality and availability depend upon coordinating manufacturing flow with the overall supply chain strategy. Total quality initiatives, lean manufacturing (as well as lean supply chain thinking), Just-in-Time production, plant layout, worker training—all these sources of raising ‘quality and reducing (long-term) manufacturing costs need to be considered when developing a production strategy for gaining and keeping a share of the chosen market. Of course cost management is an important part of designing and controlling the manufacturing flow. Supplier relationship management Supplier relationship management (SRM) mates with customer relationship management (CRM) where two supply chains join together. Between them, these two processes bind partners together in long-term collaborations. In that sense, SRM and CRM are processes that create and, ‘maintain alignment—at least between two organizations in a lateral chain. Supplier management consists, in part, in the monitoring of product and service agreements written and signed at the beginning of the collaboration. If the agreements create proper alignment of strategies, then simply maintaining the policies set down at that time is sufficient, If conditions change, however, then SRM is the point at which the agreements must be reviewed and altered as necessary. SRM also includes identification of appropriate suppliers and negotiation of partnership agreements (or management of transactions for commodity products). In a globe-straddling chain, suppliers can be sourced from any area of the world, so the cost of the materials or labor in each area must be balanced against other considerations, such as the costs of logistics, taxation, import duties, and any technology upgrades required to create and sustain the linkage. Sourcing of suppliers—as in the Zara example— has to be done in alignment with the overall strategy, not in isolation, Product development and commercialization Supply chain strategies and comporate product strategies are mutually reinforcing processes so long as they remain in alignment. If product innovation is part of the corporate strategy, for example, then the supply chain partners have to create a rapid, continuous development process that coordinates market research, production, supply, inventory control policies, and logistics to ensure that new products with the right features are available on the right schedule to maintain a share of the market for pioneering products. 13Module I: Supply Chain Management Fundamentals Information technology © 2005 APICS Allrighs reserved. + Returns management Retums management is a service aspect of supply chains (even if they are ‘manufacturing chains). Designing this part of the chain requires alignment with other processes as well as with overall strategies. Service can differentiate a product by making it more ac particular market segment. A generous warranty agreement, for example, sible and attractive to a can ease low-end customers into a low-priced produet by making it seem safer to own, Some of the least expensive cars coming into the U.S. market from less established brands in the 1990s pioneered 100,000-mile warranties, for example, At the higher end of the market, service arrangements may make a product seem more compatible with the expectations of high-end buyers, Some automobiles in the luxury category, for example, feature “roadside service” policies, free maintenance, and similar features that appeal to a sense of entitlement. Advertisements for such products may play on the theme of being treated like royalty. The reverse supply chain can also create “customer intimacy” with segments of the market concemed about the environmental impact of their ‘consumption decisions. The European countries have paid particular attention to this aspect of comporate and supply chain policy, but U.S~ based companies have also moved away from the “no deposit-no return” mentality of the mid-20th century. An important part of the evolution of supply chain management has been the development of sophisticated software that can automate various supply chain activities. A perhaps even more important advance in technology has been the development of integrated networks—intranets, extranets, and the Internet. And still in progress is the evolution of software that can use networks to tie together the various software applications associated with specific activities within supply chain processes. Enterprise resources planning (ERP) packages from competing software consulting (or vending) companies have steadily advanced from the ability to manage operations in one plant to enterprise-wide integrations and on to cross-company functionality. In addition to automation and networking, made possible by the computer revolution, other technologies have come along that can feed information into the networks for instant access by all users. Bar codes on products and radio frequency devices implanted within can pick up sales data and send them instantaneously throughout a network for use in revising forecasts and triggering operations along the chain. Such data can also be fed into databases for marketing analysis to gain insight into customer behavior. Along with global positioning, RFID makes it possible to track SKUs anywhere in the world to provide customers with information 14© 2005 APICS Al rights reserved. Section B: Supply Chain Management Strategy about the progress of shipments and to alert shippers and consignees to any

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