Master of Business Administration- MBA Semester 3

‘’ Supply Chain” Specialization

SC0009–Supply Chain Cost Management- 4 Credits
Assignment (60 Marks)
Q1. Elucidate the measures that organizations can take to align their supply chain with that of their
customers.

Answer. In today's economic environment, doing what you've always done—even if you do it very well
—is no longer acceptable. Under pressure to contain costs and produce results despite challenging
circumstances, you (and many other supply chain managers) must transform rather than simply improve
your operation. That means adopting the philosophies, methods, and processes that will make your
organization "best in class." Effective supply chain strategies are essential to the performance of most
businesses. Surprisingly, many businesses, even at the top end of town, have supply chain strategies
that are misaligned to the business goals or have strategies that are poorly articulated and
communicated within the business. This just drives poor business performance.

Building and Implementing Supply Chain Strategies that Work

Firstly, we need to appreciate that the supply chain strategy forms only one part of the overall business
strategy and takes its place alongside other strategies such as; marketing, new product development,
human resources, information technology and finance. However, these strategies must all link directly
to and support the overall business strategy. Whilst in most businesses an appropriate balance of cost
and service is the goal, in some the supply chain cost takes a clear second place to maintaining
continuity of service. Clear examples of this service supremacy abound in the Healthcare sector such as
the Red Cross Blood service. Here, the cost of providing a life saving blood product to remote hospitals
and surgeries is almost immaterial. Saving lives and maintaining critical supplies is the primary objective.
Some of these practices may be simple, straightforward, and familiar. Others may be new to your
company. Implement them all and you will have a strong foundation for supply chain excellence.

1. Establish a governing supply chain council. A governing council's purpose is to give direction and help
align supply chain strategy with the company's overall strategy. The council's membership should
include the leader of the supply chain organization as well as corporate executives, business unit
managers, and other influential company leaders. Ideally the council should hold regularly scheduled
meetings.

2. Make technology work for you. Too many companies select software they hope will make them more
efficient, and they structure their workflows and processes around that chosen technology. Instead,
they should first review the processes that need improvement, and only then select the technology that
best satisfies those process needs. That may seem self-evident, but I have seen more than a few
companies buy first and figure things out later.

3. Establish alliances with key suppliers. Best-in-class companies work closely with suppliers long after a
deal has been signed. In most circles today, this is called "supplier relationship management." But that
implies one-way communication (telling the supplier how to do it). Two-way communication, which
requires both buyer and seller to jointly manage the relationship, is more effective. A more appropriate
term for this best practice might be "alliance management," with representatives from both parties
working together to enhance the buyer/supplier relationship.

The four primary objectives of an effective alliance management program with key suppliers include:

 Provide a mechanism to ensure that the relationship stays healthy and vibrant
 Create a platform for problem resolution
 Develop continuous improvement goals with the objective of achieving value for both parties
 Ensure that performance measurement objectives are achieved

4. Focus on total cost of ownership (TCO), not price. One benefit of strategic sourcing is that it shifts the
focus from looking only at the purchase price to understanding the total cost of owning or consuming a
product or service. For significant spend areas, procurement teams at best-in-class companies are
abandoning the outmoded practice of receiving multiple bids and selecting a supplier simply on price.
Instead, they consider many other factors that affect the total cost of ownership. The balance (and
majority) of the total comprises operating, training, maintenance, warehousing, environmental, quality,
and transportation costs as well as the cost to salvage the product's value later on.

5. Take "green" initiatives and social responsibility seriously. Reducing a supply chain's carbon
footprint is no longer a "nice but not necessary" practice. It's likely that a carbon- trading regime will be
established in the United States at some point. That is why organizations such as Dun & Bradstreet now
produce reports that evaluate "green" companies. We're also seeing more and more requests for
proposal (RFPs) that ask suppliers and service providers to provide information about their green
initiatives.

Q2. Briefly discuss the eight steps of the AIM & DRIVE Process for cost management.

Answer. The word "strategy" has been defined in the Random House Dictionary to mean, "a series of
strategisms". It is a series of ideas, actions and methodologies that direct a team, organization, company
or supply chain toward a common, predetermined goal. A strategy is like a river. It originates with a
concept or idea (like a spring). It follows one clear direction (a river can only flow downhill toward
another larger body of water). Along the way, other ideas and players with a common focus join the
team and move in the same direction (a river is joined by tributaries and other rivulets that move in the
same direction as the main river). When a problem is encountered, the strategy team falls back on its
pre agreed plan of action to tackle the problem, using innovation and flexibility to deal with unforeseen
situations.

The Aim & Drive Process, once you have convinced yourself that there is an alternative to the slash and
burn, hatchet job in reducing costs, the logical next step is to come up with a process that helps manage
costs through the supply chain. There is no reason why this has to be complex. Cost management is a
straightforward, implementable, eight step process of AIM & DRIVE (R):

1. Agreeing on the need to manage costs through the supply chain - A typical AIM & DRIVE( session
begins with a review of the business plan by senior management from both the customer and supplier.
This is in order for each (or all, in case there are more than two links in the supply chain involved) side to
have a broad idea of the "goals" of the other.
2. Identifying critical costs in the supply chain - Based on the selected primary cost, it is necessary to
map the process. In this example the team would map the process from the time the customer decides
to use a printed technical manual to accompany the laptop, until the manuals have been inserted in the
fulfillment kit. A primary cost needs to be broken down further into secondary and, if necessary, tertiary
costs. Secondary costs are sub costs of the primary cost.

3. Defining the key cost drivers and developing strategic options - The most difficult part of measuring
costs is to extract a list of cost drivers. Once this is accomplished in Step-3 of the process, the next step
is to select the key cost driver/s. You will then have to focus your attention on developing a strategy for
the selected drivers. Selecting a driver as a key cost driver can be done by a cross functional team by
observation or by using a sophisticated matrix that is beyond the scope of this article. By definition, a
key cost driver is one that, if impacted, would result in the reduction, elimination or change of an activity
that causes a cost.

4. Reducing, changing or eliminating activities that cause costs: The Strategy - The Strategy. Costs do
not disappear with the wave of a magical wand. The options for the key cost driver/s have to be
formulated into precise strategies. These strategies then have to go through a rigorous risk-benefit
analysis. The team should make sure that the risks do not violate any constraints like financial budgets,
headcount, cycle time, safety, technology and so on. A SWOT analysis is also performed in order to
prioritize the selected options.

5. Implementing an action plan - Developing an implementation plan is as critical to the cost

management process as writing a strategy. While strategies are ideas, implementation plans are a
means of converting those ideas into action. This stage involves listing the action required for each
selected strategic option. The action plan consists of determining who will do what, and by when. Yes,
even executives in industry need to be "organized" in order to successfully achieve the benefits of cost
management.

6. Verifying the plan with cost monitors - Verifying the cost management process implicitly assumes
that change is inevitable. A team needs to recognize that strategies have to be changed or modified
when conditions change. Changes in government or corporate policy, the environment or market
conditions, supply base or technology have to be accounted for and adapted to. A flexible strategy is,
therefore, essential to the successful and continued implementation of a cost management plan.

7. Eternally improving and modifying the process - Cost management is a journey, not a destination.
And the journey, like that of Total Quality Management, never ends. If the process of cost management,
spelled out in the seven preceding steps, works successfully on a set of primary, secondary or tertiary
costs, then it is time to start again on other costs in the supply chain.

Q3. What are the different approaches developed to assess the sustainability performance of the
supply chain?

Answer. Supply chain sustainability is a business issue affecting an organization’s supply chain in terms
of environmental costs, risk and social impact costs. Sustainable inputs generate sustainable products, a
prerequisite for sustainable – and thus survivable – organizations. Sustainability measurement is a term
that denotes the measurements used as the quantitative basis for the informed management of
sustainability. The metrics used for the measurement of sustainability (involving the sustainability of
environmental, social and economic domains, both individually and in various combinations) are still
evolving: they include indicators, benchmarks, audits, indexes and accounting, as well as assessment,
appraisal and other reporting systems. They are applied over a wide range of spatial and temporal
scales.

Today, more and more managers realize that a Sustainable Supply Chain implies a profitable supply
chain. Concern for sustainable supply chain improves risk management regarding unsatisfactory
performance of a supplier. This is quite crucial, since: Consumers, as well as the organization’s
shareholders, are becoming more and more sensitive to sustainability issues (e.g. pollution) and ethical
issues (e.g. child labour) and thus predisposed to “punish”, not only the organization but also the
organization’s customers and collaborators.

1. Focus on capacity building.

Position your scorecard as a long-term, capacity-building program so that suppliers are incentivized to
provide accurate, comprehensive information.

2. Collaborate with procurement and operations teams to align goals.

Make sure that EHS, supply chain operations, and procurement teams are aligned from conception to
implementation. Owner realized early on that distinct teams shared an interest in helping suppliers
improve their sustainability efforts. The company consolidated efforts to ensure that each internal
stakeholder’s interests were represented and that suppliers were not overburdened with information
requests.

3. Situate the scorecard in a broader sustainability approach.

Integrate the scorecard into your sustainability strategy to gain corporate buy-in and tie the initiative to
long-term goals. Owner developed a three-pronged approach to drive sustainability in its supply chain:
(1) environmental reduction savings, (2) a supplier green network, and (3) employee and supplier
engagement. Far from being a pet project or side initiative, the scorecard helps suppliers and employees
understand the priority owner places on sustainability and also overall sustainability program with hard
data.

4. Provide an ROI for your suppliers.

To gain credibility as a constructive partner to your suppliers, demonstrate a tangible return on the
investment of time that suppliers make. After scoring their suppliers, owner conducts coaching sessions
to improve supplier capacity in the areas of energy, water, and waste management. Through these
trainings, both suppliers hope to realize operational efficiencies, which contribute to cost reductions for
both.

5. Realize it’s a work in progress.

Set goals and chart progress, but realize that your scorecard efforts can always improve. Pfizer piloted its
scorecard with 100 suppliers and only saw a 55 percent compliance rate after the first year. Sustained
efforts saw that number rise to 85 percent by year three.

Q4. Explain how organizations can apply web 2.0 technology to communicate new ideas.
Answer. Web applications have undergone significant change over the last decade; ten years ago, there
were no Web-sharing sites or applications, merely sites composed of static pages or ecommerce
applications. Companies that had customer-facing Web sites were able to connect with Internet-savvy
consumers and use their Web sites as channels to market and sell their products; corporate intranets
were used mainly as places to post news and company policies. More recently, Web sites have become
destinations for communities of users to create and share rich and complex data, such as music, images,
and video, and to discuss and rate that content. Enterprise 2.0 aims to help employees, customers and
suppliers collaborate, share, and organize information via Web 2.0 technologies. Andrew McAfee
describes Enterprise 2.0 as "the use of emergent social software platforms within companies, or
between companies and their partners or customers."

The Web as a Platform

Web 2.0 systems use the Web as a platform, as a huge range of interconnected devices which can
provide a new level of rich and immersive experience for the user, an easy-to-use and lightweight
programming model for the developer, and a rapid and flexible deployment mechanism for the supplier.
Web 2.0 re-envisions the Internet from the user, the developer, and the supplier's perspectives, each of
which allows new and creative uses of the Internet. The concept of service underpins all connected
systems, including, of course, Web 2.0. A service-based system is based on the principle of separation of
concerns through the use of loose coupling or message passing. Loose coupling allows functionality to
be created as a service and delivered over a network; for example, in the Web 2.0 world, diary
functionality can be provided by a blog engine and be delivered as a service to the end user or blogger
over the Internet.

Common business capabilities

1. Expertise location

Expertise-location capability provides corporations with the ability to solve business problems that are
difficult to articulate or communicate explicitly and that involve highly skilled people.[citation needed]
Dynamic people-profiles and -searches are increasingly[quantify] seen as integral components of a
support environment that encourages unplanned collaboration and informal interactions as effective
ways to solve business problems. Expertise location increases productivity and organizational success by
identifying the status and location of human expertise in globally dispersed and increasingly virtual
organizations. Publishing of employee profiles and searches against those profiles are increasingly seen
by strategists as integral components of a business process that encourages unplanned collaboration
and informal interactions as effective ways to solve business problems.[3] Social network tools help
managers find the right person or group for the appropriate task

2. Idea generation

Idea generation - also known as ideation - can involve a structured business methodology for collecting
and incubating innovative ideas that could mature with community participation. Large corporations use
idea management systems to solicit ideas from their customers and employees. Idea generation in some
cases fuels the product pipeline. Ideation is the creative process of generating, developing, and
communicating new ideas, where an idea is understood as a basic element of thought that can be visual,
concrete, or abstract. Ideation comprises all stages of a thought cycle, from innovation, to development,
to actualization. Methods of innovation include:

a. Problem solution
This is the simplest method of progress, where someone has found a problem and as a result, solves it.

b. Evolutionary idea

Evolutionary ideas derive from somewhere else, taking something that already exists and improving on
it.

c. Symbiotic idea

A symbiotic method of idea creation is when multiple ideas are combined, using different elements of
each to make a whole.

d. Revolutionary idea

A revolutionary idea breaks away from traditional thought and creates a brand new perspective.

Q5. Explain the three ways that help customers to extract vital cost information about a particular
service or product.

Answer. Information extraction (IE) is the task of automatically extracting structured information from
unstructured and/or semi-structured machine-readable documents. In most of the cases this activity
concerns processing human language texts by means of natural language processing (NLP). Recent
activities in multimedia document processing like automatic annotation and content extraction out of
images/audio/video could be seen as information extraction.

Costs Associated With Manufactured Products

As Chilton's Distribution observes, there are myriad potential costs associated with selling a product
which may be directly or indirectly linked to the actual production process. Possible costs include:

 Developing and maintaining supplier relationships.

 Transportation costs, including carrier payment terms; special charges in the realms of
packaging, handling, and loading and unloading; and loss and damage expenses.
 Sales and freight terms that define payment terms, sales, and title transfers.
 Payment terms—options here range from 15 days to as many as 90 days in some industries, and
letter of credit terms provide additional options.

Cash Flow Concept - The cash flow approach simply looks at the sources and uses of cash generated or
used by the enterprise. This concept is useful only for analyzing the short term liquidity of the
enterprise. It should not be used to analyze the profitability of the enterprise. It includes scheduled term
debt principal payments, unfinanced capital purchases and family living expenses, including income and
social security taxes.

Financial Concept - This method is useful for determining the viability of the enterprise in the short
term. For it to be feasible to continue, the enterprise should be generating accounting or financial
profits. Returns and costs are based on the accrual method of accounting and include those items
normally included for income tax purposes. This concept does not include opportunity costs or charges
for unpaid operator labor and equity capital and does not include family living expenses. Depreciation
expense is based on tax laws or regulations, which may or may not represent the actual useful life of an
asset.

Q6. How do you develop strategic options for selected cost drivers?

Answer. "How are you going to win in the period ahead?" That's the key question behind developing
strategy. To be successful means knowing how to use your talent and resources to best advantage, and
it's very difficult to "win" if you don't have this game plan in place. These methods constitute examples
of either internal or external development and are organized into a model termed the 'expansion
methods matrix'.

Approaches to Strategy

In a for-profit company, for which competition and profitability are important, your goals will differ from
those of a nonprofit or government department. Likewise, objectives for a department or team will have
a different scope from objectives for your organization as a whole.

For example, and depending on scope and circumstances, you may want to develop strategies to:

 Increase profitability.
 Gain more market share.
 Increase approval ratings, or boost customer satisfaction.
 Complete a project under budget.

To determine your strategy, you must understand fully the internal and external environmental factors
that affect you. With that understanding, you can identify your clear advantages and use these to be
successful. From there, you can make informed choices and implement your strategy effectively. So,
strategy creation follows a three-stage process:

1. Analyzing the context in which you're operating. –

Analyze Your Organization

Firstly, examine your resources, liabilities, capabilities, strengths, and weaknesses. A SWOT Analysis is a
great tool for uncovering what you do well and where you have weaknesses, providing that you use it
rigorously. It's much easier to achieve your objectives when your strategy uses your strengths without
exposing your weaknesses. Also, look at your Core Competencies. These highlight your unique strengths,
and help you think about how you can set yourself apart from your competitors.

Analyze Your Environment

As you prepare to create your strategy, make sure that you're working in a way that's aligned with
changes in your operating environment, rather than working against them. These external factors are
often beyond your control, so if you pursue a strategy that requires a change in one of these elements,
you may have a long, exhausting, unprofitable battle ahead of you.

2. Identifying strategic options. –

Examine Opportunities and Threats

Your SWOT Analysis identified some of the main opportunities and threats you face. Using this as a
starting point, brainstorm additional ways to maximize your opportunities, minimize your threats, or
perhaps even turn your threats into opportunities.

Solve Problems

A problem-solving approach can also help at this stage. If your problem is that you're not achieving your
goals, ask yourself how you can ensure that you do. (If everyone in your industry finds it hard to deal
with a particular problem, then you may gain a competitive edge by dealing with it.)

3. Evaluating and selecting the best options. –

Evaluate Options

By this stage, you've probably identified a range of good projects that you could run. You must now
evaluate these to choose the best strategic options. Consider every option you've identified, but don't
make a final judgment until you've completed your assessment.

Choose the Best Way Forward

With your evaluation complete, you now must choose the best strategic option or strategic options,
making sure that you don't choose so many options that you spread your resources too thinly.

Check your ideas for consistency with your organization's Vision, Mission and Values, and update these
if necessary. It's easy to forget about these critical elements during strategic planning, so ensure that
what you want to "win" is something that contributes towards the organization's overall purpose.