Operations & Supply

Chain Management (II)

TABLE OF CONTENTS:

2- The Supply Chain transformation. From cost center to value generator.

2.1- From efficiency to dynamic alignment

2.2- Sales and Operation Planning (S & OP)
2.3- Outsourcing in the Supply Chain

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2.- THE SUPPLY CHAIN TRANSFORMATION.
FROM COST CENTER TO VALUE
GENERATOR

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION

Not long ago the Supply Chain did not exist and was simply a little part of the
logistics department. Since its introduction some decades ago this area has faced a
huge evolution. It has evolved from being a department with a very limited
relationship with the rest of the company to a department that manages the flow of
materials and information from "the customer of my customer“ to the "supplier of
my supplier".

“My function is to serve the orders that the commercial department captures to
create the stock I have in my store in a feasible economic way.

In the next few years this role of "trunk department" will be accentuated even more.

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION

1 2 3 4 5 ….….

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

Efficiency
1

• The concept of Supply Chain is not implemented.

• The logistics department is isolated from the rest of the

company and its environment (customers, material suppliers,
services suppliers).

• Excellence in Supply Chain is related to the lowest possible costs

• Through the evolution of SC processes, costs are reduced, inventory

levels are minimized and service level is improved, although each
company finds a point from which costs can no longer be
reduced without worsening service.

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

Reliability
2

• The concept of Supply Chain is not implemented.

• The logistics department is isolated from the rest of the company and its
environment (customers , material suppliers, services suppliers).

• At this stage, the focus tries to balance costs with reliable customer service.
The objective of the SC is to have the right product, in the right place, at the right
time and with the lowest cost.

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

Global
Optimization 3
• The Supply Chain funtion is created, which manages Demand Forecasting,
Production Planning, Customer Service, Industrial Area and Procurement and
Purchasing. Its focus is global optimization.

• Cross decision-making circuits are created to coordinate Supply Chain with

Commercial Areas, Marketing and Finance: The Sales and Operation Planning
(S&OP) appears in the management environment.

• The concepts of Collaborative Forecast and "one single number" are introduced,
where all departments share the same sales forecast.

• The Supply Chain has an "internal" approach, with a trade off between cost
optimization, service improvement and stock reduction, but managing this balance
focused on internal data and criteria.

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

Generating
Value
4

• The Supply Chain moves from being a “cost center” to a key player in creating
value for the company’s customers.

• Generating value means aligning the Supply Chain strategy to the

company strategy in a sustainable way over time.

• It is fundamental to understand that generating value for the company requires to

understand the company's strategy and positioning in the market. Therefore
the decisions in the management of the Supply Chain will be good or bad if
they are or an not aligned with that strategy and help or not to make it possible.

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

Generating Generating value through the

Value
Supply Chain: Zara 4

Business Strategy
https://www.youtube.com/watch?v=13ZItq8r_g0

https://www.youtube.com/watch?v=S1qw_FRJ43Y

The Supply Chain

https://www.youtube.com/watch?v=iKUmOsmh-Gs

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

Generating Generating value through the

Value
Supply Chain: Dell 4

Business Strategy

https://www.youtube.com/watch?v=KcSgZTjtrFw

The Supply Chain

https://www.youtube.com/watch?v=G71CMm2-eiw

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

Dynamic
Alignment
5

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION

Dynamic
Alignment
5

Aligning the supply chain dynamically goes far beyond achieving the goal of generating value.
Its a methodology to achieve it in a sustainable way in time and involves coordinating
processes, functions and activities:

• Throughout exchanging Products, Services and Information between different

companies ( our company, customers, suppliers) in both directions.

• From the original supplier to the consumer

• Involving all the people in the organization.

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

Dynamic
Alignment
5

In this model the alignment focus should be consumer behavior and his satisfaction. If
we detect and focus on satisfying this behavior, we will be automatically aligned with the
company's strategy. This means that if we do processes, functions or activities throughout
the entire Supply Chain we will ensure that are done in a sustainable manner.

It is essential to bear in mind that, since consumer behavior is changing, we are talking
about a Dynamic Alignment Supply Chain. Adapting every time to the consumer’s
behavior as fast as possible becomes then an essential need.

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION STEPS

The focus of this model is to re-align our Supply Chain and our suppliers to the behavior of
our customers.

The basis of the model is the segmentation of the market by customer behaviors, and the
association of each of them with a the company ( and Supply Chain ) value proposition.

We understand the value proposition as a commitment to our customers. To achieve it:

• We must check our supply chain and detect possible "gaps" in how we meet the needs of our
customers.

• We have to have the right organizational structure, the right staff, and the skills to satisfy our
value proposition

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2.1- From efficiency to dynamic alignment
2.1- From efficiency to dynamic alignment
SUPPLY CHAIN EVOLUTION

1 2 3 4 5
Global Genetrating Dynamic
Efficiency Reliability
Optimization Value Alignment

In – Out Focus Out – In Focus

¿ In which situation can we find

the Supply Chain of your company ?
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2.2- Sales and Operation Planning (S & OP)
SALES AND OPERATION PLANNING (S&OP)

"It is a transversal process that aims to determine in a

consensual way the forecast of sales and the decision
making associated with this forecast that allows the
company to reach the global optimum along the
Supply Chain"

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2.2- Sales and Operation Planning (S & OP)
2.2- Sales and Operation Planning (S & OP)
SALES AND OPERATION PLANNING (S&OP)

As we saw, in the first two stages of the Supply Chain evolution (search for efficiency,
search for reliability), the Supply Chain as we understand it does not exist.

The logistics department handles orders from the commercial department to create
stock simply valuing the balance between costs and service, without worrying about
anything else.

At the time when the organization seeks for the global optimum above the optimum
in each of its functions, the need for coordination between departments arises. If we
want to improve the service to our customers and the overall benefit of the company,
we have to manage the flow of materials and information: the concept of
Supply Chain borns to face this situation.

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2.2- Sales and Operation Planning (S & OP)
2.2- Sales and Operation Planning (S & OP)
SALES AND OPERATION PLANNING (S&OP)

The coordination of this flow of materials and information must be done in a structured
way and must involve the functions of logistics, procurement and procurement, planning,
commercial, marketing and industrial areas

•Sales / Marketing

•Purchasing /
Procurement •Logistics

•Planning ( Demand Planning/

•Production
Production Planning)

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2.2- Sales and Operation Planning (S & OP)
2.2- Sales and Operation Planning (S & OP)
SALES AND OPERATION PLANNING (S&OP)

First step: Demand Planning consensus

The sales forecast will be more accurate if first-hand information from the commercial
and marketing departments is taken into account. That helps the demand planner to
modify the statistical forecast of the demand with REAL information of the customers
and the final consumers.

Demand Planner
Sales
Promotional Marketing
campaings
Consensual
Sales Statistical Sales
in the past Projection Forecasting

Advertising
campaigns

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2.1- From efficiency to dynamic alignment
2.2- Sales and Operation Planning (S & OP)
SALES AND OPERATION PLANNING (S&OP)

Second Step: Production Planning consensus

After the sales forecasts have been agreed between the Demand Planner and the
departments of commercial and marketing:

• The production planning department validates that the production plan

required to meet the demand can be executed (that there is sufficient
production capacity in terms of hours / machine and personnel)

• The procurement department checks that the raw material procurement

requirements are feasible based on agreements with suppliers.

Production Planning
Production
Procurement

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2.2- Sales and Operation Planning (S & OP)
2.2- Sales and Operation Planning (S & OP)
SALES AND OPERATION PLANNING (S&OP)

Using this way, where all the actors involved in the decision-making
process have participated, we ensure that the sales foreseen for the
future can be satisfied.

Demand Planner
Sales
Marketing
Production Planning
Production
Procurement

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2.2- Sales and Operation Planning (S & OP)
2.2- Sales and Operation Planning (S & OP)
S & OP stakeholders

Demand Planner Responsible for the process of forecasting (coordination & output)

Supply Planner Responsible for defining inventory policies and ensuring viability of needs to
production
Production Optimization of the production program of finished goods, taking into
Planner account swap times, machine availability, direct labour and raw
materials
Logistics Management of material flow and optimization of transport
executor
Procurement Responsible for the planning and execution of supplies of raw material and
packaging.
Sales Provide the information of commercial events agreed with customers with
advance and potential impacts on sales
Marketing Inform of planned marketing campaigns for each brand, family or SKU and
the potential impact on sales

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2.2- Sales and Operation Planning (S & OP)
2.2- Sales and Operation Planning (S & OP)
S & OP stakeholders
•Demand •Supply •Procurement
•Production •Sales & Mktg
Planner planner / Purchasing

• Forecast Accuracy

• Finished Goods Stock Levels

• Expiration Level

• Raw Materials Stock Levels

• Production Costs

• Production Plan Accuracy

• Service Level

•Direct •Shared
•Contribute
Responsability Responsability

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2.2- Sales and Operation Planning (S & OP)
2.2- Sales and Operation Planning (S & OP)
S & OP INFORMATION FLOW

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
WHAT IS OURSOURGING?

OUTSOURCING is getting services/products from an external

source/supplier.

BPO (Business Process Outsourcing): Transfer of the

management of a Business Process (such as accounting or payroll) to
a supplier skilled in this process. The underlying theory is that the
provider can make this process more efficiently and, at the same time,
the company can focus on its "Core competencies".

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 2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
THE CONTEXT HAS CHANGED

CHANGES CONSEQUENCES
• Market and demand volatility
Difficult to plan and to pursue

• Product life cycle reduction

Shorter investment pay-back • Higher flexibility
• Outsourcing
• Product range • Suppliers participate
Mass customization in value creation

• Multiple competences
Looking for different skills

• Price competition
Cost structure (variable vs. fixed costs)

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
MAKE OR BUY DECISION

• Strategic dilemma: What to buy and what to make?

• Economic theory: tells us when the conditions for outsourcing do

exist (Transaction Cost Theory)  Market enablers

• Management theory: tells us when outsourcing is convenient and

how to manage relationships with suppliers  Strategic drivers

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
MAKE OR BUY DECISION

STEPS:

1- Do the conditions for an intermediate market exist (B2B)? =

Does an outsourcing opportunity exist?

• Transactional logic and incentives structure

• Market enablers

If a market does exist (even if potential):

2- Does the strategic option for outsourcing exist? = Is this

outsourcing opportunity interesting for us?

• Strategic drivers: Relevant factors for the choice

• Supplier selection criteria

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
DO THE CONDITIONS FOR AN INTERMEDIATE MARKET EXIST (B2B)?

CHECK MARKET ENABLERS (3)

1- COMPLEXITY  How difficult is the contract that has to be signed

2- ASSET SPECIFICITY  How complex is your product/service to

produce

3- UNCERTAINTY  How many factors you don’t control

IF THE 3 MARKET ENABLERS ARE LOW  It exists an outsourcing

opportunity

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
DOES THE STRATEGIC OPTION FOR OUTSOURCING EXIST?

CHECK STRATEGIC DRIVERS (3)  They define if the outsoucing opportunity

is interesting for us

1- COMPETENCES

2- COST

3- CAPEX

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
STRATEGIC DRIVER 1: COMPETENCES:
WHICH COMPETENCES SHOULD WE OUTSOURCE?

• "Non-core“ ( It is not a competitive advantage and it is not

difficult to imitate by competitors )

• Standards

• Well-defined services (processes, workflows, ...)

CONDITIONS:

• With well defined requirements and known results

• With outputs that can be measured

• With clear criteria to decide if the service agreement has been achieved

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
STRATEGIC DRIVER 1: COMPETENCES:

WHAT SHOULD WE OUTSOURCE?

SOURCE: Gottfredson,Puyear &Phillips, 2005.

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
STRATEGIC DRIVER 2: COST:

We should outsource things that bring us:

• Cost Reduction
▪ The supplier has economies of scale
▪ The supplier has cheaper labour
▪ The supplier is overhead its competitors

• Flexibility
▪ Outsourcing permits us turning fixed costs into variable costs
▪ Demand aggregation and smoothing upstream

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
STRATEGIC DRIVER 3: CAPEX:

Outsourcing should:
• Allow reducing the required investments to perform a specific activity
(lowering entrance barriers) which will permit us:

▪ Launch new businesses (e.g. XBox)

▪ Diversification of the business portfolio (e.g. 7Eleven)

• Improve our financial indicators, thanks to the assets reduction

Diversification and good financial indicators are key prerequirements to

have GOOD RATINGS on the financial markets

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
SUPPLIER SELECTION CRITERIA:

• Quality
• Customer Service and Support
• History and references
• Claims policy and guarantees
• Capacity and facilities
• Financial Stability
• Geographic location
• Technical capacity
• Experience in the process
• Ability to share information
• Improvement opportunities
• Compatibility of corporate cultures
• Confidence

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
OUTSOURCING: BENEFITS:

• Coping with the growing complexity due to brand extensión

• Simplifying the processes (making simply assembly)

• Improving financial performance

• Flexible source of manufacturing capacity and capability,

allowing to minimize investments (due to manufacturing fixed
costs, e.g. manpower, machines)

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
OUTSOURCING: RISKS:

• Increased transaction costs

▪ Distance can add substantially higher delivery and inventory
costs (e.g., air freight, air mail, etc.)
▪ Rising wages
▪ Expenses of negotiating, maintaining, and enforcing outsourcing
agreements may outweight the benefits

• Loss of control
▪ Dependence of the client on the outsource provider
▪ Loss of flexibility in controlling business activities and final
product by client managers
▪ Loss of skills and experience that might be needed in the future
▪ Security risk issues and information confidentiality

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
OUTSOURCING: RISKS:

• Negative impact on customer and sustainability

▪ Lead time in service from foreign outsource provider may delay
delivery and increase costs to the final client
▪ Can disrupt operations during the transition of the outsourced
activity from the outsource provider to the client
▪ Fossil fuels and pollutants due to transportation

• Difficulties in managing relationship

▪ Communication and cultural barriers
▪ Excessive investment of time in building a relationship with the
outsource provider
▪ Design changes in products can be difficult in far facilities
▪ Outsource provider may be unable to communicate difficulties
and opportunities
▪ Risk of global outsourcing

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
SO, WHAT IS THE RIGHT LEVEL OF OUTSOURGING?

• Only a part of the process

• May change overtime

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2.3- Outsourcing in the Supply Chain
2.3- Outsourcing in the Supply Chain
SUCCESS FACTORS OF THE OUTSOURCING PROCESS

1. Decision based on strategic objectives (Nottactical urgency)

2. Obtain commitment from senior management
3. Retain knowledge in-house
4. Follow a formal outsourcing process
• Investing in a robust process of supplier selection
• Appropriate definition of performance measures
5. Develop a communication plan for outsourcing project
6. Recognize risks
7. Manage the relationship
8. Recognize the impact of cultural differences

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