CIPS L5M4 - Advanced Contract and Financial Management

L01- UNDERSTAND AND APPLY TOOLS AND TECHNIQUES THAT CAN BE

USED TO MEASURE AND DEVELOP CONTRACT PERFORMANCE IN THE
SUPPLY CHAIN

Definitions:

CIPS L5M4 - Advanced Contract and Financial Management - Key Definitions

LO Word Definition
1.1 Cost The amount of money used to make a product or deliver a service
1.1 Cost-Based Metrics Measurements of organisational performance using cost.
Critical Success
1.1 Those areas that is essential for a contract to be successful.
Factor (CSF)
1.1 Historic Cost Baseline The actual cost at a past point in time when the KPI was first established
Key Performance Financial and nonfinancial metrics used to reflect the critical success factors of
1.1
Indicators (KPI) an organisation or contract.
1.1 Metrics A measure of how well a project is performing
A management tool used to address, improve, and communicate supply chain
1.1 SCOR management decisions within a company and with suppliers and customers of
a company.
1.1 SMART Specific, Measurable, Achievable, Relevant and Time bound.
1.1 Supplier Rating Measuring the performance of an existing supplier.
Reports used to track a supplier’s achievement of, or progress towards targets
1.1 Supplier Scorecard
or goals, which can include quantitative and qualitative data.
Total Cost of An estimate used to help buyers to determine the costs, both direct and
1.1
Ownership (TCO) indirect, of a product or a service.
The total cost of an asset over its whole life, including, for example, its
1.1 Whole-Life Cost purchase price and costs relating to servicing repairs, consumables, disposal
and other end of life costs
A description of the set of processes and activities that add value to raw
1.1 Value Chain
materials in order to turn them into a viable product to sell to customers.
Transcendent
1.1 The view that equates quality with excellence
Approach
User-Based
1.1 the making of a product that is fit for purpose and use
Approach
Product-Based
1.1 The view that quality is precise and measurable
Approach
Manufacturing-
1.1 The view that quality of a product that precisely meets specifications
Based Approach
Value-Based A development of the manufacturing-based approach that incorporates both
1.1
Approach cost and price.
1.1 SERVQUAL A method of analysing customer perceptions of service quality.
A framework around which the SERVQUAL measures are based (Reliability,
1.1 RATER Framework
Assurance, Tangibles, Empathy and Responsiveness)
1.1 OTIF On-time Delivery In Full = the percentage of orders that are shipped on time
and in full, meaning the customer gets everything they ordered, on the day
 they expected to receive it.
SLA (Service Level A contractual document, which sets out the expected service level and service
1.1
Agreement) credit regime in a contract for services
Compensation given by a supplier to a buyer when service fails below the
1.1 Service Credits
required level.
1.1 Health & Safety The health, safety and welfare of management, employees and contractors
Safety Performance
1.1 A calculation based on time lost and total man-hours worked.
Index (SPI)
Lost time incidents
1.1 The number of lost time incidents to date
(LTI)
Procurement &
1.2 Ensuring efficiency in the process of getting the goods you need
Supply Management
Relationship The monitoring of relationships between an organisation and its external
1.2
Management suppliers.
The Justification for undertaking a project or programme. It evaluates the
1.2 Business Case benefits, costs and risks of alternative options and provides a rationale for the
preferred solution
Performance
1.2 Insight (through measurement) into an organisation's performance.
Visibility
1.2 Hidden Waste Inefficiency in the supply chain
A system of quantitative and/or quantitative reports or other metrics used to
Supplier Rating
1.2 determine and quantify how a supplier has performed against agreed
System
measures.
A method of scoring supplier performance (using a predetermined scale)
Factor Rating
1.2 against a range of criteria, for example, price, and quality and delivery criteria
Method
might be weighted reflecting the buyer's priorities.
Use imaginative methods to find new ways to solve problems, fulfil
1.2 Novation
requirements or open up new opportunities.
1.2 Innovation Capability A company's ability to be competitive through systematic innovation.
New Product The process of bringing a new product to market through idea generation,
1.2
Development (NPD) screening, concept testing, full evaluation, etc.
1.2 innovation Audit An assessment of an organisation's capability to innovate.
Time to Market The timeframe between the generation of an idea for a product and that
1.2
(TTM) product's first emergence on the market.
First Mover The advantage enjoyed by the first major entrant to a particular market
1.2
Advantage segment.
1.2 Process Metric A measure of how well a process is performed.
The date the supplier originally quoted. Sometimes referred to as the original
1.2 Promise time
promise date
Any electronic system and internet or extranet-based site providing access to
1.2 E-System
data
1.2 System A set of interconnected inputs, processes, outputs, feedback and goals
1.2 Closed System A system that is not affected by external factors and does not influence them.
1.2 Systems integration The process of assembling a number of subsystems into one system
1.2 Big I The integration of all relevant activities into one system
1.2 Little i The networking of multiple interfaced systems.
1.2 B2B Connectivity The passage of data (not business process logic) through pre-agreed
 implementation standards.
Enterprise Resource
A single management system of integrated applications used to streamline
1.2 Planning (ERP)
processes across a business or organisation.
Systems
Supply Chain
1.2 The coordination of common processes throughout the supply chain
Integration
Customer
1.2 Relationship The process of managing an organization's interaction with its customer
Management (CRM)
Customer Service The process of managing the way assistance and advice are given to
1.2
Management customers.
Demand
1.2 The process of the planning for the demand for products and services
Management
The process of receiving, processing and delivering orders to customers while
1.2 Order Fulfilment
minimising costs.
Manufacturing Flow The business activities necessary to move goods through production and to
1.2
Management manage manufacturing flexibility across the supply chain.
Supplier Relationship The process of strategic and proactive management of relationships between
1.2
Management an organisation and its suppliers.
Product
The process of bringing a new product to market together with customers and
1.2 Development and
suppliers.
Commercialisation
Returns The process that manages product returns within the organisation and across
1.2
Management key members of is supply chain.
Active internal Integration focused on open communication between inter-functional teams
1.2
integration across an organisation
Active external
1.2 Integration focused on business process requirements across a supply chain.
integration
Electronic Data The computer to computer exchange of business transactions (including
1.2
Interchange (EDI) purchase orders and invoices), in a standard format, with standard content.
Return on A measure of the relationship between an organisation's profit and the
1.2
Investment (ROI) investment in assets it makes to generate that profit.
1.2 Payback The period of time needed to recover the cost of an investment
Net Present Value The value, for example, of a project or investment, over time but with future
1.2
(NPV) cash flowers converted into today's value (as an aid to decision-making)
A technique of dividing a project into phases separated by 'gates'. Projects
1.2 Gate Review
proceed to the next phase if agreed criteria have been met.
Quantitative
1.2 "Hard" data that can be expressed as a number or other term of quantity
measure
1.2 Qualitative measures "Soft" data including descriptions, opinions and views.
A widely used performance management tool that can be used both internally
(for example, to monitor an individual's performance) and externally (for
1.2 Balanced Scorecard example, to monitor a supplier's performance in delivery a contract), that
scorecard usually focuses on four key performance areas (generally carrying
equal weight).
1.2 Hard Measures Financial outcome information resulting from past decisions
Operational measures of e.g. customer satisfaction and internal process
1.2 Soft Measures
improvement
 1.2 Lagging measures The results of actions that have already been taken
1.2 Leading measures Operational measures that drive the organization's future performance.
The profit of the organization after all operating costs, taxes, interest and
1.2 Net Profit
depreciation have been subtracted from the total revenue of the organisation.
1.2 Total Asset Turnover A measure of an organisation's ability to produce sales efficiently
1.2 DuPont Formula A tool to assess the ROI and profitability of an organisation
1.2 Cycle time The period needed to complete one cycle of an operation
A simplistic segmentation approach based loosely on Pareto Analysis can be
1.3 ABC analysis used to breakdown an organization's total external spend based on value so its
resources used to manage these expenditures can be prioritised accordingly.
Tool used to segment an organization's supplier base by mapping supply items
1.3 Kraljic Matrix
against risk and profitability
1.3 Data Words, numbers, dates, etc ... without context
A collection of words, numbers, dates, etc, put into context and thereby given
1.3 Information
meaning
The ability to understand information and then form judgements and opinions
1.3 Knowledge
and make predictions
A process that is implemented to eliminate mistakes or defects in products
1.3 Poka-yoke
caused by the operators of equipment
Early supplier Cooperation between buyer and supplier early in the product development
1.3
involvement (ESI) process
Collaborative
1.3 Product Cooperation between different organisations on the development of a product
Development (CPD)
Continuous
1.3 The ongoing improvement of products, services or processes
Improvement
Value Stream A lean management method of analysing all steps in a business process to
1.3
Mapping (VSM) deliver most value and remove inefficiencies
Technology A planning tool supporting strategic and long-term planning by matching
1.3
RoadMap (TRM) current operational goals and long term goals with specific technology systems
The process of making a solid physical object using a three-dimensional digital
1.3 3D Printing
model, by adding layers or material to build up the desired shape
Fluctuations in inventory due to changing consumer demand. Irregularity in
1.3 Bullwhip effect ordering in the lower part of the supply chain can manifest as larger variances
higher up in the supply chain
A notification of an unusual or unexpected occurrence in a programme or
1.3 Exception Condition
system
File Transfer protocol A computer network that enables the transfer of computer files between client
1.3
(FTP) and server
1.3 EAN/UCC Standards An internationally recognised bar code system for products

Key Formula/s
CIPS L5M4 - Advanced Contract and Financial Management - Key FORMULAS
LO FORMULA
1.2 ROI - Net Profit / total invested capital x 100
ROI at a departmental level - department's net operating income / average operating assets of the
1.2 department
 1.2 ROI at a project level - ROI = net benefits / total costs x 100
1.2 ROI = gain from the investment - cost of investment / cost of investment

Business Models
CIPS L5M4 - Advanced
Contract and Financial
Management - Key
Definitions
LO Business Model/Theorist Description
On KPI@s - characteristics on effective KPIs: Sparse, Drilliable, Simple,
1.1 Eckerson (2009) Actionable, Owned, Referenced, Correlated, Balanced, Aligned and
Validated.
KPIs in performance measurements as per Neely’s Four CPs of
1.1 Neely’s Four CPs of measurements 1998: 1. Check position. 2. Communicate Position. 3.
measurements 1998 Confirm Priorities. 4. Compel Progress.
Dolan, 2004 regarding This is so via: 1. Supplier partnership initiatives. 2. Performance against cost
1.1 continuous improvements reduction targets
relating to cost 3. Cost reduction recommendations submitted by the supplier.
Garvin (1984) identified five
1. Transcendent approach. 2. user-based approach. 3. product-based
1.1 major approaches to how
approach. 4. manufacturing-based approach. 5. Value based approach.
quality is defined;
Hiles (1993) defined an SLA as “An agreement between the provider of a
1.1 service and its users, which quantifies the min. quality of service which
Hiles (1993) defined an SLA meets business needs.”
1. Align supplier performance goals with organisational goals. 2. Determine
an evaluation approach. 3. Develop a method to collect information about
supplier. 4. Design and develop a robust assessment system. 5. Deploy a
Gordon 2005 Steps for
supplier performance assessment system. 6. Give feedback to suppliers on
development of an effective
1.2 their performance. 7. Produce results from measuring supplier
supplier performance
performance. Gordon gave a further five:
management system
a. Increase performance visibility. b. Uncover and remove hidden waste
and cost drivers in the supply chain. c. Leverage the supply base. d. Align
customer and supplier business practices. e. Mitigate risk.
Step 1 identifies critical supply chain partners
Step 2 and 3 develop supply chain strategies
Step 4 concerns the development of internal process performance
1.2 Wisner, Leong & Tan’s measures
supply chain integration Step 5 & 6 are about improving internal processes and measures
model: Steps to supply chain Step 7 & 8 - improving external processes
integration Step 9 is to annually re-evaluate the model to ensure changes can be made.
1. Customer relationship management (CRM). 2. Customer service
Bowersox, Closs and Cooper management. 3. Demand management. 4. Order fulfilment. 5.
2002 8 key processes for Manufacturing flow management.6. Supplier relationship management. 7.
1.2 supply chain integration Product development and commercialisation. 8. Returns management.
Krause et al - Supplier 1. Competitive pressure. 2. Evaluatinand certification systems. 3.
1.3 Development Strategies Incentives. 4. Direct involvement.
1. Identify critical commodities for development. 2. Identify critical
suppliers for development. 3. Form cross-functional commodity team. 4.
Initiative communication with supplier’s management. 5. Provide Joint
Supplier Development has resources. 6. Develop agreements. 7. Identify opportunities and probability
been summarised by for improvements. 8. Identify critical performance areas. 9. Reward and
Handfield et al 2000 in ten recognition. 10. Systematically institute on-going continuous
1.3 steps improvements.
1.3 Performance Capability Capability factors and Performance factors.
 Matrix by Sarkar and
Mohapatra 2006
Jacobs 2007 categories
technologies used in
manufacturing as hardware
systems and software
1.3 systems.
AT Kearney 2013 key areas
where technology is used in
1.3 Supply Chain;
Hardware. 1. Numerical controlled machines. 2. Machining centres. 3.
Industrial robots. 4. Automated materials handling AMH inc. automated
guided vehicle AGV systems. Software. 1. CAD - Computer Aided Design. 2.
CAPP. - computer aided process planning. 3. CAM - Computer Aided
Manufacturing.
1. Tracking goods. 2. Transaction processing. 3. Planning support. 4.
Decision support. 5. Automation in handling and across operations.

CHAPTER ONE

Summary notes from Study Guide FOR LEARNING OUTCOME ONE

Learning Outcomes for LO1 - Understand and apply tools and techniques that can be used to measure and
develop contract performance in procurement and supply

1.1 Assess the use of KPIs

- KPI and their role in performance with a focus on cost, quality, delivery and safety.
- Transfer organisations needs into KPIs, organisations can measure how successful they are.
- Performance - relates to how a business is doing.
- Indicator - relates to the ways that this performance is measured.
- KPIs & Supplier rating - supplier rating can be used to evaluate the performance of an existing supplier
but it is not usually suitable for assessing the supplier's future capabilities.
- KPIs in the context of contract management, Critical Success Factors (CSF) are those areas that are
essential for a contract to be successful.

- Three steps in developing KPIs:

1. Identify CS
2. Identify measure of success/improvement of reach CSF
3. Develop and Agree KPIs with stakeholders
- KPIs must be:
- SMART
- KPIs must be aligned to service delivery goals
- Provide context
- Create meaning at all organisational levels
- Eckerson (2009) model: characteristics of effective KPI’s: Sparse, Drillable, Simple, Actionable,
Owned, Referenced, Correlated, Balanced, Aligned and Validated.
 - Purpose of KPIs in relation to contracts:
- Measure improvement and performance
- Reward performance
- Develop suppliers
- Manage supplier improvements
- Improve and strengthen relations with suppliers.
- Justify inclusion of each supplier in the supply base.
- Identify suppliers who can no longer meet requirements
- KPIs in performance measurements as per Neely’s Four CPs of measurements 1998: 1. Check
position. 2. Communicate Position. 3. Confirm Priorities. 4. Compel Progress.

- Advantages of KPIs
- Motivate compliance and improvement
- Manage supply risk
- Support contract management
- Identify high performing suppliers
- Identify closer partnership suppliers
- Give feedback for learning and continuous improvement.
- Disadvantages of KPIs
- Focus is on the measured areas only
- Can lead to cutting corners on quality or service to achieve targets.
- KPIs can be misaligned with corporate objectives
- Can be time consuming to create, monitor and manage
- There is a risk that the wrong metrics can be selected
- can become out of date
Metrics
● Supply chain metrics have three crucial components:
○ Must translate financial objectives and targets into effective measure of operational
performance
○ must translate operational performance into accurate predictions of future earnings or sales
○ Must engineer behaviour across the supply chain that supports the organisation's overall
business strategy
● SCOR
● Supplier Score cards

● Cost
o Cost reduction target. We can look at historic cost baseline. A more sophisticated metric is
the TCO (total cost of ownership. This exams a much wider range of costs incurred by the
business.
o Dolan, 2004 says that suppliers might also be rated on costs in relation to continuous
improvement via the following:
▪ Supplier partnership initiatives

▪ Performance against cost reduction targets

▪ Cost reduction recommendations submitted by the supplier.

o Typical KPIs for supplier price/cost performance:
▪ basic purchase price or price range

▪ Whole-life costs compared with suppliers / benchmark

▪ Percentage range of acceptable price/cost

o Total price performance score - the total score of all cost-related factors on the scorecard
reflects the cost of doing business with the supplier, and the contribution that the supplier
makes in relation to the market average.
● Quality
o Garvin (1984) identified five major approaches to how quality is defined;
▪ Transcendent Approach - equates quality with excellence

▪ User-based approach - making a product that is fit for purpose (Juan 2010)

▪ Product-based approach - sees quality precise and measurable.

▪ Manufacturing based approach - regards quality as the manufacture of products

that meets specs
▪ Value based approach - develops the manufacturing based approach to further by
incorporating both cost and price.
o SERVQUAL - related to service quality.
o RATER’s five dimensions:
▪ Reliability

▪ Assurance

▪ Tangibles

▪ Empathy

▪ Responsiveness
o Quality KPIs - a point system for quality performance allocates points well beyond general
conformance to specification.
o Parts per million - rejected parts per million (PPM) is calculated monthly and fed into the
supplier scorecard.
● Delivery
o Delivery can relate to service delivery, product delivery or on-time logistics.
o Deliver at the right time, in the right quantity and at the right place.
o Delivery measure can include:
▪ Percentage on OTIF (On Time In Full)

▪ Percentage of early deliveries

▪ Percentage of late deliveries

▪ Percentage of delivers over order quantity

▪ Percentage of deliveries with the correct paperwork

o SLAs & KPIs - The SLA may take the form of a schedule to the main contact. Hales (1993)
defined an SLA as “An agreement between the provider of a service and its users, which
quantifies the min. quality of service which meets business needs.”
o Service Credits - when service performance is below the required performance level, service
credits will usually apply. They may be in the form of financial recompense or a credit offset
against future payment due to the supplier. - used as an incentive for the supplier to improve
poor performance.
● Safety
o Project success can be viewed in terms of
▪ The Iron Triangle - quality, cost and time

▪ Other factors; time, cost, quality health and safety performance and client
satisfaction.
 o Bushtit and Almohawis 1994 - noted with regards to safety in relation to construction
projects; “the degree to which the general conditions promote the competition of a project
without major accidents or injuries.
o Project KPIs include:
▪ Accidents reported

▪ Lost time as a result of accidents

▪ Industrial accident rates (cover lost time, external medical treatment, basic first aid,
etc)
▪ Accidents avoided
o A safety performance Index - SPI. SPI = (LTI x C) divided by M.
▪ LTI - Lost Time Incidents

▪ M - total man hours

▪ C - Constant
o CSF - The Service shall ensure a safe and stimulating environment for stakeholders.
o KPI - Health, Safety and environment standards are regularly monitored.
o Performance measures -
▪ Accident incident reports

▪ Number of reportable accidents

▪ Audit non conformances

▪ HSE reports

1.2 Evaluate methods of measuring and improving supply chain performance

- Advantages of measuring and monitoring supplier performance

- Identify performance problems early
- Drive continuous improvement
- Praise good practice and giving constructive feedback can improve supplier relationship
- Disadvantages of measuring and monitoring supplier performance
- Can be time consuming
- Can be costly
- Negative reporting on performance can damage relationships with suppliers.
- Three aspects of performance management of suppliers
- Analysing the suppliers
- Measuring performance
- Managing the supplier
- Supplier performance monitoring typically occurs in three ways
- An integral part of an existing contract
- Part of the process of managing approved supplier lists
- Part of the supplier appraisal process when an existing supplier is competing for the renewal
of a contract.
- Gordon 2005 proposed the following seven steps for the development of an effective supplier
performance management system:
1. Align supplier performance goals with organisational goals.
2. Determine an evaluation approach.
3. Develop a method to collect information about suppliers.
4. Design and develop a robust assessment system.
5. Deploy a supplier performance assessment system.
6. Give feedback to suppliers on their performance.
7. Produce results from measuring supplier
 Further five:
● Increase performance visibility
● Uncover and remove hidden waste and cost drivers in the supply chain
● Leverage the supply base
● Align customer and supplier business practices
● Mitigate risk.

● Collate and analyse data

○ Gathering feedback from internal and external customers and other stakeholders
○ Gathering performance through observation, testing, etc.
○ Budgetary control - monitoring of actual costs against budgets
○ Formal Performance reviews or appraisal
○ Contract Management - continue monitor compliance
○ Meetings
○ Project management
○ Consultants
○ Technical specialists

● Measure supplier innovation against agreed matrix

○ Innovation does not have to relate to a new invention, it could relate to:
■ Increased efficiency
■ Reduced risk
■ Improved product design & quality
■ Lower costs
○ Innovation can be classed in three different ways:
■ Incremental
■ Radical
■ Discontinuous
○ Innovation capability can be broken down into four key abilities:
■ Ability to develop new products that satisfy existing market needs
■ Ability to apply appropriate processes in the production of new products
■ Ability to develop and adopt new products and processes to satisfy future market
needs
■ Ability to respond to technological opportunities unwittingly created by competitors
○ Supplier innovation measure that are used:
■ R&D capability
■ Investment on R&D
■ Innovations proposed/implemented
■ Type of innovation
■ Expenditure on new tech
■ Tech support
■ Design capability
■ Invention lead time
■ Product development capability and time
■ Level of collaboration in cross-organizational innovation.
○ Innovation capabilities and NPD (New Product Development):
■ White box - supplier has little involvement
■ Grey box - supplier and owner are jointly responsible for design
■ Black box - supplier has full responsibility
○ Innovation audits - assessment tools such as IMP3rove (2018). It consists of 47 questions
and seeks to help an organisation understand critical success factor (CSF) of innovation
across innovation management areas:
■ Innovation strategy
■ Innovation organisation and culture
■ Innovation life cycle processes
■ Enabling factors
■ Innovation results
 ○ Technological Innovation Capabilities (TIC). Seven dimensions of the TIC framework are:
■ Learning capability
■ R&D Capability
■ Resource allocation capability
■ Manufacturing capability
■ Marketing capability
■ Organisation capability
■ Strategic planning capability

● Measure time to market against agreed timescales

● Time to Market (TTM):

○ Using TTM in supply chain performance measurement - areas of innovation and learning:
■ Financial perspective
■ Buyer perspective
■ Internal business perspective
■ Innovation and learning perspective

● Create E-Systems integration across the organisation and its supplier network
○ Key elements of a system:
■ Inputs
■ Transformation processes
■ Outputs
■ Feedback
○ Gulledge 2006 identified two main types of systems integrations:
■ BIG ! (where all relevant activities are on one system and
■ Secondly, Little i (a network of reliable interfaced systems.

○ Levels of integration
○ Wisner, Leong & Tan’s supply chain integration model: Steps to supply chain integration
■ Step 1 identifies critical supply chain partners
■ Step 2 and 3 develop supply chain strategies
■ Step 4 concerns the development of internal process performance measures
■ Step 5 & 6 are about improving internal processes and measures
■ Step 7 & 8 - improving external processes
■ Step 9 is to annually re-evaluate the model to ensure changes can be made.
○ Bowersox, Closs and Cooper 2002 8 key processes for supply chain integration:
1. Customer relationship management (CRM)
2. Customer service management
3. Demand management
4. Order fulfilment
5. Manufacturing Flow management
6. Supplier relationship management
7. Product development and commercialisation
8. Returns management
○ ERP systems:

○ Integration process involves:

■ Preparation - this involves breaking down the barriers to integration of information
systems
■ Active internal integration. Inter-functional teams need to be formed.
Communication Must be open and info must be shared throughout the entire
organization
■ Active external integration. Supply chain info system requirements and key business
process requirements must be identified.
○ Examples of the main challenges to successful systems integration across globalised supply
chain:
■ Cost of integration
■ Language and cultural issues
■ Capability of applications and the work involved i
■ The impact of Big I and LIttle i
■ Capacity and capability of resources to deliver
■ The time zone issues
■ Resistance and fear of loss of jobs
■ Speed and networking
 ■ Selection of the best system
■ Issues relating to different national data security
■ The people and aspects required for success.
○ EDI (Electronic Data Interchange defined as the paperless business transaction process. B2B
communication.
○ Benefits of EDI
■ Reduction in cycle
■ Increase in transaction visibility
■ Improvement in tracing and tracking materials and products
■ Reduction in number of errors
■ Reduction in transaction costs
■ Increase in speed of payments
■ Improvement in customer service
○ Problems with EDI
■ Initial cost can be expensive
■ Training and education staff is required: costs can be incurred
■ High volume of transactions may be required to justify the expenditure
■ Lack of common EDI standards
■ Data security: EDI system will need protection from cyber attack
■ EDI reduces the supply base: not all members may have or want EDI
■ Legal issues: disputes can occur so all members need clear terms.

● Cost and benefits of investments measurement

○ Return on Investment (ROI)
○ Pay back
○ NPV (Net Present Value)
● Ensure a balance between qualitative and quantitative measures of performance
Supplier Evaluation Quantitative Measures
○ KPIs are easier to establish
○ Easier to monitor over time
○ Measures focus one efficiency
○ Particularly suited to the purchase of products
○ Examples include; delivery performance, price reject rates
Supplier Evaluation Qualitative measures
○ KPIs are likely to be subjective
○ Monitoring over time is subjective
○ Measures focus on effectiveness
○ Suitable for purchase of services
○ Examples include; staff issues, management capability, level of technology development,
willingness to collaborate closely.
Balance scorecards:

○ Two types of performance measures are relevant:

■ Lagging measures - financial outcomes measures tired of the financial perspective
that are the results of past decisions
■ Leading measure - non financial measure driving future financial outcomes and
relating to customers, internal business processes and learning and growth
perspectives
○ Key ideas incorporated in the balanced scorecard:
■ A balance of measures
■ Hard and soft measures
■ Lagging and leading indicators
● Measure return on investment
○ ROI expressed as ratio or percentage
○ ROI at organisational, department and project level.
○ Measure ROI in a supplier performance management context in two ways:
 ■ Estimate the failure costs and calculate how much these could be reduced with
effective supplier performance management
■ Estimate the percentage that is lost to poor supplier performance factors and the
cost savings that would come as a result of a reduction in this percentage
○ ROI vs. TCO (Return on Investment versus Total Cost of Ownership):
■ ROI - quantify both the costs and the expected benefits of a project
■ TCO is solely concerned with costs
○ Advantages of ROI
■ ROI encourages managers to focus on both generated profits and the investment
required.
■ ROI produces one single measurement
■ ROI can be used to evaluate the relative performance of other investments centres
and companies
○ Issues with ROI
■ ROI calculations can be easily manipulated
■ It is difficult to measure many investment benefits as they may be qualitative
■ Benefits may be affected by other investments and can be difficult to separate out.
○ Disadvantages of RO
■ Many methods for calculating ROI
■ Over simplify a complex decision
■ Purchasing new assets will increase the amount of capital investment and this will
affect ROI. This may delay new investment
■ Practical application of ROI can encounter issues.
■ May cause under investment
■ Different account policies can make comparisons difficult.

1.3 Examine approaches available for supplier development

● Knowledge and technology transfer
○ Krause et al - Supplier Development Strategies:
■ Competitive pressure
■ Evaluating and certification systems
■ Incentives
■ Direct involvement
○ The supplier development process has three steps: Prepare, Develop and Monitor

○ Supplier Development has been summarised by Handfield et al 2000 in ten steps

○ Knowledge and technology transfer

■ Both used to increase supplier’s performance and capability.
 ■ Knowledge is explicit or tacit
■ Kotabe, Martin & Doot 2003 - knowledge transfer takes two forms: Simple technical
exchanges and secondly, technology transfer associated with higher-level
capabilities.
○ Major barriers to knowledge transfer include;
■ Supplier’s inability to absorb the information
■ Suppliers lack of receptivity or motivation]Buyer’s lack of credibility when delivery
the knowledge
■ Poor buyer/supplier relationships
■ Causal ambiguity - a lack of understanding due to the complexity of knowledge
required.
○ Formal technology transfer takes place in the following forms;
■ Machinery acquisition
■ Technology licensing
■ Intellectual property licensing
■ Know-How and technical services
■ Training

● Collaborative product/service development

○ New product development process

○ Potential advantages of early supplier involvement in the development of a new product;

■ Reduced product development costs
■ Improved performance
■ Higher Return on R&D
■ Faster product development
■ Greater flexibility
■ lower risk
■ Access to product development capabilities of the supplier knowledge of the buyer
○ ESI//CPD (Earlier Supplier Involvement / Collaborate Product Development) brings the
following risk;
■ Sharing of skills, etc - potential leaks
■ Financial & time costs
■ Loss of direct control
■ Poor communication within and between organisations due to incompatible
systems.
 ■ Documentation problems
■ Opportunity costs - time and money that could have been spent on another project
■ Trust Issues
■ High risk where a buyer relies on a sole supplier for the development of a core
component.
○ Continuous improvement reviews and strategies
■ Deming's - Plan Do, Check, Act. Also, Benchmarking & Collaboration
○ Meeting targets
○ Identify areas for support
○ Improvement of supplier’s performance can be summarised in 6 steps;
■ Analyse the suppliers current situation
■ Identify failure to meet performance targets
■ Develop improvements plan
■ Implement improvement plan
■ Measure level of improved performance
■ Repeat the cycle to ensure continuous improvement
○ Precesses & Improvement activities
○ Continuous improvement of the supply base, key responsibilities include;
■ Establish processing to align continuous improvement
■ Focusing on manufacturing process approaches
■ VSM (Value Stream Mapping)
■ Improving commodity manufacturing process capability
■ Reducing scrap
■ Six Sigma projects
● Definition: Six Sigma is a set of techniques and tools for process
improvement. It was introduced by American engineer Bill Smith while
working at Motorola in 1980. Jack Welch made it central to his business
strategy at General Electric in 1995. Wikipedia
● IMAGE

■ Lean implementations

● Supplier capability assessment

○ Sarkar and Mohapatra 2006 - Supplier Performance Capability matrix:
○ Supplier Selection Criteria
■ Potential direct benefit
■ Project success factor
■ Strategic factors
● Top management capability of the supplier to support the development
● General level of supplier commitment from owner/top management.
● Quality Of the buyer/supplier relationships
● Buyer support capability and availability of resources.

○ Carters 10 C’s (to evaluate the risks of procuring goods or services from a particular supplier)
 ○ Technology road maps - an effective road map addresses three questions; 1. Where do I
want to go? Where are we now? How can we get there?
○ Some questions an organisation should consider when selecting suppliers for join new
product development;
■ Which suppliers should be included?
■ Can the supplier meet het requirements?
■ Does the supplier’s technology road map align with the road map?
■ To what extent should the supplier be involved in the project?
■ At what stage should the supplier be involved in the project?
● Identify opportunities to use technology
○ Jacobs 2007 categories technologies used in manufacturing as hardware systems and
software systems.
■ Hardware
● Numerical controlled machines
● Machining centres
● Industrial robots
● Automated materials handling AMH systems. Automated guided vehicle
AGV systems
■ Software
● Computer Aided Design (CAD)
● Computer Aided Process Planning (CAPP)
● Computer Aided Manufacturing (CAM)
○ 3D printing / Additive manufacturing. Benefits of 3D Printing
■ Cost savings
■ Reduction of waste
■ Reduced carbon footprint
 Technology and automation in supply chain.
■ AT Kearney 2013 key areas where technology is used in Supply Chain;
● Tracking goods
● Transaction processing
● Planning support
● Decision support
● Automation in handling and across operations
○ Information technology
■ EDI - Electronic Data Interchange
■ Barcodes
■ RFID -Radio frequency identification
■ The internet
○ Challenges in implementing new technology
■ implementing a new technology is always disruptive
■ You need to demonstrate benefits and ROI.
■ Change management is a big part of it. You have to show how this change is for the
better.
■ When moving from old to new system - you need to decide what relevant data
needs to be carried over.
○ ERP software has a beneficial impact on supplier performance and development;
■ Time Savings
■ Transparency
■ Communication
○ Cloud computing. Advantages include;
■ Communication
■ Coordination
■ Collaboration
■ Cost control
■ Competitive Advantage
○ Extranets - formed by extending the intranet beyond a company to its customers.
Advantages include:
■ Improved supply chain integration
■ reduced operational costs
■ Improved collaboration and relationship potential between users.
■ Authorised business information can be accessed.
■ Improved communication security.
○ Collaborative planning, forecasting and replenishment (CPFR)
■ Collaborative activities to improve supply chain performance
● Strategy and planning
● Demand and Supply Management
● Execution
● Analysis
■ CPFR technology. Solutions have been developed;
● Forecast and historical data sharing
● Automation of the collaboration arrangement and the joint business plan
● Evaluation of exception conditions
● The enabling of revision and commentary

1.4 Assess innovative measures to improve the supply chain

● Cross-functional working
○ Cross functional team
■ Customer
■ Operations Logistics team
■ Sourcing team
■ Design team
○ Cross-functional team - advantages
■ Provides different settings
 ■ Reduce communication barriers
■ Realise synergies by combining individual and functions
■ Time compression; rather than operating with a complex process, cross function can
simplify.
○ Cross-functional team - disadvantages
■ High requirements and expectations of the people involved.
■ Run into process loss risk, when gains from teams interactional e less than the costs
of achieving them.
■ Teams often display a group eve bias. Groupthink
● Simultaneous engineering
○ Simultaneous engineering attempts to optimise the design of the product and manufacturing
process to achieve reduced lead times and improved quality and cost.
○ Principles of simultaneous engineering (source Moges 2007)
■ People
■ Technology & Tools
■ Process
○ Seven simultaneous engineering implementation steps
■ Develop a strategy
■ Assess
■ Create a culture
■ Prioritise
■ Plan the change
■ Implement
■ Support
○ Advantages of simultaneous engineering
■ Getting products to marker in a shorter time.
■ Incorporate more features of variety in the product at less cost
■ Producing more new products more often
○ Disadvantages for simultaneous engineering;
■ Lack of in house expertise
■ Lack of training
■ Lack of management support
■ Lack of communication
■ Inadequate reward system
■ improper company culture

● Early supplier involvement

○ Form of vertical collaboration
○ Advantages of ESI - CIPS
■ Reduced development costs
■ Reduced lead times
■ Improved product functionality
■ Van Echtelt 2004
● Short term benefits - Better production quality, lower production costs,
shorter development cycle and lower development costs.
● Long term benefits - More efficient and effective future collaboration,
alignment of technology strategies
■ Improved access to supplier’s technologies
■ A contribution to product differentiation
○ Disadvantages of ESI
■ Increased dependency
■ Decreased flexibility
■ third main risk is the loss of information
○ Fundamental to the success of early supplier involvement are three factors
■ Supplier selection
■ Supplier relationship development
■ Internal capabilities of the buyer
● Supplier forums and associations
○ Supplier forums associations support collaborative ways of working in the supply chain.
○ Kyoryoku Kai - Japanese term for a supplier association
○ Purpose of associations (CIPS definition):
■ To devolve strategy and policy throughout the chain to create a sense of common
purpose.
■ To strengthen trust and the relationships of the members
■ to shrek knowledge and expertise
■ To facilitate join development and learning
■ To jointly identify ways minimising waste
○ Hines et al 2008 the aims and objectives of the Kyoryoku Kai:
■ To improve abilities and skills suppliers in terms of;
● JIT (Just in Time)
● TQM (total quality management)
● Statistical process control
● Value Analysis
● CAD, CAPP and CAM
● Management flexibility
● Cost reduction
■ Produce a uniform supply system
■ Facilitate the flow of info
■ Increase trust between buyers and suppliers.
■ Keep suppliers and buyers in touch with market developments
■ Enhance the reputation of the buyer as someone suppliers should try to do business
with
■ Help the smaller suppliers that lack specialist trainers
■ Increase the length of relationships
■ Allow development benefits to be shared
■ Provide examples of subcontractors of how to coordinate and develop their own
suppliers.
○ Problems with associations as per Izushi and Morgan 1998
■ Associations can be more talking about techniques than implementation
■ Do it yourself approach can prevent development of trust
■ Association can lose momentum.
■ Inactivity can result from lack of management support or change of key personnel
○ Six ways to overcome these problems;
■ One to one assistance
■ Leadership and opennes of the buyer
■ use of expertise from member suppliers
■ Measurable glad and regular check ups
■ Selection of members conductive to collaboration
■ Internal consensus and training