www.regenesys.co.za

Brad Bell

September 2017

MBA9

OPERATIONS &

SUPPLY CHAIN

MANAGEMENT

SESSION 3

FROM THE PREVIOUS SESSIONS …

• Did you grab a copy of the prescribed textbook?

• Have you been doing your MCQs (‘digital assessments’

online for each section?

CLASS SCHEDULE 2017

SCOPE OF CONTENT

Day

17.1

Supply chain, performance drivers &

metrics1 – 3

Day

2

7.2 The supply chain process 5,6

7.3 Forecasting & planning 7,8

Day

3

7.4 Global sourcing & procurement 15 -17

7.5OSCM – management information

systems(18)

Day

4

7.6 Ethics & CSI in OSCM -

Overview of group & individual assignments

Unit in study guide Chapter in prescribed text book

MBA9

Operations & Supply Chain Management

SECTION 7.4

Global sourcing and procurement

HOW’S OUR PROGRESS?

7.1 (a) Supply chain, performance drivers & metrics

7.1 (b) Supply chain, performance drivers & metrics

7.2 The supply chain process

7.3 Forecasting and planning

7.4Global sourcing and procurement

– Famous Brands x 2

7.5 OSCM – management information systems

7.6Enterprise ethics and corporate social

investment in OSCM

Overview of assignments

7.4.1 ROLE OF SOURCING IN SUPPLY CHAIN

• Procurement is core to operations and the supply chain.

Without goods, customers have nothing to buy and firms

have nothing to sell

• This chapter looks at the role of sourcing in a supply chain

and the decisions whether to operate parts of the supply

chain in-house or to outsource them.

• Sourcing decisions, the impact of global sourcing and

various life-cycle models are discussed, as well as the

aspects involved in offshoring production

• Finally, management of pricing and revenue and the

sustainability of the supply chain are addressed

OUTSOURCING SCM ACTIVITIES

• Procurement is the process by which companies obtain

their raw materials, components, products, services, or

other resources so that they can make other goods or

conduct operations

• Sourcing refers to the business processes required to

purchase goods and services

• Three questions are asked when addressing outsourcing of

supply chain activities:-

1.Will the third party increase the supply chain surplus

relative to performing the activity inhouse?

2.To what extent do risks grow upon outsourcing?

3.Are there strategic reasons to outsource?

7.4.2 IN-HOUSE OR OUTSOURCE?

• The decision to maintain the purchasing function or

procurement in-house or to outsource depends on the

growth in the supply chain

• Should the growth in surplus be large with small increases

in risk, outsourcing should be considered. If growth in

surplus is small or the increase in risk is high, keep the

function in-house

OUTSOURCING AND ‘AGGREGATION’

• Capacity aggregation

• Inventory aggregation

• Transport aggregation

• Warehousing aggregation

• Procurement aggregation

• Information aggregation

• Receivables aggregation

• Relationship aggregation

• Lower costs and higher quality

• A third party may be able to provide a sustainable growth of the surplus. This is achieved by aggregating to a higher level than the firm itself

FACTORS INFLUENCING SURPLUS

• Three factors affect the increase in surplus that a third party

provides

• These are:-

• Scale

• Uncertainty

• Specificity of assets

• A firm gains the most by outsourcing to a third party if its

needs are small, highly uncertain, and shared by other

firms sourcing from the same third party

RISKS OF USING 3RD PARTY

• There are a number of risks to bear in mind before

outsourcing to third parties, such as:-

1.The process is broken.

2.Underestimation of the cost of co-ordination.

3.Reduced customer-supplier contact.

4.Loss of internal capability and growth in third-party power.

5.Leakage of sensitive data and information.

6. Ineffective contracts

7.Loss of supply chain visibility.

8.Negative reputational impact.

GROUP WORK BASED ON 7.4.2

• Research the sourcing model used by Famous Brands in

Port Elizabeth when it started to produce tomato puree

• Group 1: Appraise Famous Brands’ decision to inhouse v

outsource their tomato sauce supply.

• Group 2: What is ‘aggregation’ and how, if at all, can it

benefit Famous Brands’ tomato sauce operation?

• Group 3: What is ‘surplus’ and how, if at all, can it benefit

Famous Brands’ tomato sauce operation?

• Group 4: What are ‘3rd party risks’ and how, if at all, could

they impact on Famous Brands’ tomato sauce operation?

7.4.3 OUTSOURCING LIFECYCLE MODELS

• The importance of outsourcing has been recognised by the

International Standards Organization (ISO), which has

published a public domain outsourcing guide, ISO 37500

which focuses on the outsourcing life-cycle model

• The intention of the standard, which has seen wide

international consultation and interaction with the value

chain, was to bring standardisation of life-cycle approach to

the global outsourcing market

ISO 37500 (BABIN, 2016)

WITH SIGNIFICANT DETAIL FOR EACH STEP

AND COMPARISONS WITH OTHER MODELS

1. “Managing Outsourcing: The Lifecycle Imperative” (London

School of Economics working paper 139)

2. “Outsourcing Professional’s Body of Knowledge” (IAOP)

3. “Vendor Sourcing and Management Model” (International

Data Corporation – IDC)

4. “The Outsourcing Lifecycle” (National Outsourcing

Association – NOA)

7.4.4 OFFSHORING PRODUCTION

• Mugurusi and de Boer’s literature review (2013) provides a

good foundation for an understanding of offshore

production

• A third of the articles reviewed cover integration and

governance when production facilities are dispersed. This is

one of the biggest concerns in any supply chain, as control

is more difficult

• Questions about managing this environment are of two

main kinds:-

• How the relationships between the elements in a firm’s

production network are developed and change over time;

• How the factories in the network are governed?

7.4.5 SUCCESSFUL THIRD-PARTY SUPPLIERS

• Chopra and Meindl (2016) provide many third-party-

supplier success stories.

• As you review their examples, try to localise your thinking

and add companies where you have seen similar success

stories in your own region

7.4.6 INCENTIVES AND OUTSOURCING

• Supply chain incentives can have unintended

consequences when the third party’s information is not

clear, or its actions are hard to observe. It is important to

understand and address the negative consequences of

these incentives. Misaligned incentives can spell disaster

• Remember the power of incentives to shape behaviour

from Target in Canada??

THE PROBLEM …

THE SOLUTION …

7.4.7 DESIGNING A SOURCING PORTFOLIO

• Organisations structuring a supplier portfolio have many

options

• They can decide to produce inhouse or to outsource to a

third party (as highlighted earlier)

• They must decide whether cost efficiency or a fast

response time is most needed. The choices extend to on-

shoring, near-shoring and off-shoring

• The design depends on a variety of product and market

characteristics

7.4.8 MAKING SOURCING DECISIONS

• When considering a practical approach to making sourcing

decisions, the following are recommended:-

1.Use multifunctional teams.

2.Ensure appropriate co-ordination across regions and

business units.

3.Always evaluate the total cost of ownership.

4.Build long-term relationships with key suppliers.

7.4.9 GLOBAL SOURCING

• There are five steps to global sourcing:-

1. Investigation and tendering;

2.Evaluation;

3.Supplier selection and development;

4. Implementation; and

5.Performance measurement and continual improvement.

7.4.10 PRICING & REVENUE MANAGEMENT

• Pricing can be used to increase supply chain profits though

better matching supply and demand

• This is especially true when there are multiple customers

willing to pay different prices for an asset

• When we talk about revenue management, this is the use

of pricing to increase the supply chain surplus and profit

generated from a limited availability of supply chain assets

• Supply chain assets can exist in two forms; capacity and

inventory

… AND FOR PERISHABLE ASSETS

• Pricing of goods that lose value, such as vegetables and

fruit, and high-tech items that are replaced by new models,

is variable and must be considered in any pricing decisions

• Any items that are not utilised are also seen as perishable.

• The prescribed book refers to two revenue management

tactics that should be considered when dealing with

perishable assets:-

1.Vary price dynamically over time to maximise expected

revenue

2.Overbook sales of the asset to account for cancellations

… AND FOR SEASONAL DEMAND

• Certain industries required short-term capacity to manage

seasonality. But this can be expensive and may affect profit

margins. Managing this means that orders are channelled

to a certain time and must be completed before a date,

reducing the need to increase the capacity at the stores or

where the picking and despatch takes place

• The same applies to hotels or travel companies and is

known as ‘overbooking’. Providing attractive rates over a

weekend helps to keep rooms occupied. Smoothing the use

of rooms means that employees can be effectively utilised

instead of having to employ more of them when there is an

increase, as in the middle of the week in the case of hotels

… AND FOR BULK AND SPOT CONTRACTS

• Most of us are familiar with the concept of buying in bulk

presenting a price advantage. The same applies to the

supply chain, especially with regard to space, as in the

case of a warehouse

• The trade-off is leasing space to a bulk buyer at a discount,

or keeping some space in case it is required (although it

may not be). This impacts the targeting of certain large or

small customers

• Some companies can remain profitable, but their decisions

may impact future business, especially when it comes to

selling in bulk. Determining how much should be reserved

for spot contracts compared to bulk contracts can be done

using the formulae in the prescribed book

7.4.11 SUSTAINABILITY AND SCM

• Sustainability is a key priority when it comes to design and operation of modern supply chains

• In 2005 the World Summit of the United Nations proposed three pillars of sustainable development:-

• Economic;

• Environmental; and

• Social sustainability.

• Factors driving the focus on supply chain sustainability can be divided into three categories:-

1.Reducing risk and improving the financial performance of the supply chain

2.Community pressures and government mandates

3.Attracting customers that value sustainability

SUSTAINABILITY & SUPPLY CHAIN DRIVERS

• The goal for each organisation is to measure the

environmental impact for each drive in the social and

environmental categories.

• Any effort to increase sustainability will improve when

customers place greater value on it. The supply chain

surplus can only grow if supply chains are sustainable,

even if costs are higher

• OSCM provides opportunities to improve supply chain

sustainability for each of the following supply chain drivers:-

• Facilities and inventory;

• Transport and sourcing;

• Information and pricing, etc.

GROUP WORK BASED ON 7.4.6 – 7.4.11

• Research the sourcing model used by Famous Brands in Port Elizabeth when it started to produce tomato puree

• Group 1: What are ‘incentives’ and how could Famous Brands best apply them within their tomato supply chain?

• Group 2: What is a ‘sourcing portfolio’ and how should Famous Brands ensure a portfolio of tomato suppliers while building good long-term relationships?

• Group 3: What type of pricing structure should Famous Brands implement with its network of tomato suppliers, especially considering tomatoes are perishable?

• Group 4: What is ‘sustainability’ and how is, or how should, Famous Brands be ensuring their own, and their communities’, sustainability?

www.regenesys.co.za

END

OF

THE

UNIT

Congratulations!

Nice going … !!

Please remember not to forget to

remember to:-

1. Check out the ‘Key Points’

summarising this unit

2. Do your digital assessment

(MCQs) for this unit online

MBA9

Operations & Supply Chain Management

SECTION 7.5

OSCM – Management information systems

HOW’S OUR PROGRESS?

7.1 (a) Supply chain, performance drivers & metrics

7.1 (b) Supply chain, performance drivers & metrics

7.2 The supply chain process

7.3 Forecasting and planning

7.4 Global sourcing and procurement

7.5

OSCM – management information

systems

– ‘Double marginalisation’

7.6Enterprise ethics and corporate social

investment in OSCM

Overview of assignments

GENERAL INTRODUCTION

• Textbook, pp 56 – 58

• A supply chain’s performance in terms of responsiveness and efficiency is based on the interaction between the following logistical and cross-functional drivers of supply chain performance:

• facilities, inventory,

• transportation,

• information, sourcing,

• and pricing.

LOGISTICAL DRIVERS

1. Facilities are the actual physical locations in the supply

chain network where product is stored, assembled, or

fabricated. The two major types of facilities are production

sites and storage sites

2. Inventory encompasses all raw materials, work in process,

and finished goods within a supply chain

3. Transportation entails moving inventory from point to point

in the supply chain. Transportation can take the form of

many combinations of modes and routes, each with its own

performance characteristics

CROSS-FUNCTIONAL DRIVERS

4. Information consists of data and analysis concerning facilities, inventory, transportation, costs, prices, and customers throughout the supply chain. Information is potentially the biggest driver of performance in the supply chain

5. Sourcing is the choice of who (e.g. inhouse, outsourced?) will perform a particular supply chain activity, such as production, storage, transportation, or the management of information

6. *Pricing determines how much a firm will charge for the goods and services that it makes available in the supply chain. Pricing affects the behaviour of the buyer of the good or service, thus affecting demand and supply chain performance

7.5.1 THE SECOND ECONOMY

• The second economy is vast, interconnected,

extraordinarily productive, and is creating a new economic

world

• The question is how this is embraced, adapted to and

profited from

• In many areas of the value chain and across economies in

the developed world, physical processes are entering the

digital economy through interaction among multiple servers

and semi-intelligent nodes

• This has a direct effect on operations and supply chains

around the world through state-of-the-art supply chain

processes, which result in savings

7.5.2 IMPACT OF I.T. ON SCM

• In an ideal world, all parties in a supply chain would have seamless information technology, and be able to review changing information and adjust course at the click of a button. However, while supply chains have spread globally, a lack of standardisation between systems and data formats presents difficulties, while the organisations, or parts of organisations, continue to work in silos that produce subsets of incompatible data

• Central data repositories can accept various data formats, standardise them, and make the data available in real time in the cloud (a hosted, off-site, always-on, data farm that has worldwide reach, typically accessed through a web browser), allowing service providers to monitor supplier processes in real time

7.5.3 ENTERPRISE RESOURCE PLANNING

• Enterprise resource planning (ERP) systems (e.g. SAP and Oracle) are large systems that handle transactions and data structure capabilities so as to permit intra-organisational communication, visualise demand, and reduce uncertainty

• ERPs, which are usually costly investments, are key enablers of real-time sharing and integration of information. Such systems help align business decisions and increase visibility of transactions across the organisation

• Such systems are key to aligning tactical and strategic performance metrics, which affects economic outcomes. ERPs deployed end-to-end in supply chains integrate transactions from finance, human resources, procurement operations sales, marketing and logistics

7.5.4 VALUE OF ERP IN OSCM

• Although enterprise planning systems often require huge

investments, and can be complicated and time consuming

to implement, there is a benefit in profitability, especially in

improved stock return levels and profitability for supply

chain management modules

• Research has shown that ERPs provide some return on

investment, specifically in the form of improved supply

management performance

• Such systems provide a foundation to measure and

manage third-party spending, which forms the basis of

higher-order supply management strategies, strategic

sourcing, category management and supplier relationship

management

7.5.5 VALUE OF ERP IN OPERATIONS

• There are two aspects of ERP: enabling and constraining

• Enabling ERP supports employees and managers to do their work better through providing feedback, identifying problems and showing opportunities and prioritisation of actions. The enabling ERP:-

• Improves performance and extends abilities;

• Creates new connections and enables new opportunities.

• The constraining ERPs serve only higher management’s needs, and control employees’ behaviour. These technologies can undermine employees’ commitment, foster dissatisfaction and even limit innovation. The constraining ERP is:-

• A straitjacket and eliminator of uniqueness & value; and

• An uncertainty and risk creator.

7.5.6 ENTERPRISE PLANNING AND

PERFORMANCE MANAGEMENT

• Businesses exist to make a profit and to create value for

their shareholders. Supply chain management that

performs well creates value for the customers, which adds

value to their lives and ultimately to the brand and company

• When considering performance in the supply chain we

distinguish between

• inventory measures, such as customer satisfaction,

weeks of supply and inventory turnover; and

• financial measures, such as return on assets or cost of

goods sold

OSCM I.T./ERP IN PRACTICE(‘Online Chapter 18’, pp 10 – 11)

Managers need to keep in mind several general ideas when

they are making a decision regarding supply chain IT:-

1. Select an IT system that addresses the company’s key

success factors (e.g. the ability to set inventory levels

optimally)

2. Take incremental steps and measure value. Some of the

worst IT disasters result when companies try to implement

IT systems in a wide variety of processes at the same time

3. Align the level of sophistication with the need for

sophistication. There is a trade-off between the ease of

implementing a system and the system’s level of complexity

4. Use IT systems to support decision making, not to make

decisions. Although the software available today can make

many supply chain decisions, management must keep its

focus on the supply chain because as the competitive and

customer landscapes change, there must be corresponding

changes in the supply chain

5. Think about the future. If trends in a company’s industry

indicate that insignificant characteristics will become crucial

in the future, managers must make sure that their IT

choices take these trends into account

‘DOUBLE MARGINALISATION’(Textbook, pp 306 – 307)

• Price #1 – Manufacturer sells to retailer (costs + margin)

• Price #2 – Retailer sells to customer (purchase price + margin)

• The supply chain profit is usually lower if each stage of the supply chain makes its pricing decisions independently, with the objective of maximizing its own profit

• Double marginalization leads to a loss in profit because the supply chain margin is divided between two stages, but each stage makes its pricing decision considering only its own local profits

• A coordinated solution results in higher overall supply chain profit

MY EXAMPLE (BEFORE ‘SOLVER’)

• The two partners, pricing separately, are jointly profiting by

R16,000 from this supply chain

MY EXAMPLE (AFTER ‘SOLVER’)

• There is a maximum total of profit available in this supply

chain of R18,000; pricing together, both partners can profit

more

YOUR EXAMPLE

• There is a manufacturer of Cola, where it costs R5 to bottle

a 2-litre soft drink

• The retailer who is supplied by this manufacturer sold the 2-

litre Cola at R12 and demand was 10,000 bottles per week

• The same retailer sold the same Cola at R14 and the

demand was R7,500 per week

• Working together, how should the manufacturer and retailer

price the 2-litre Cola to maximise supply chain profit for

everyone?

www.regenesys.co.za

END

OF

THE

UNIT

Congratulations!

Nice going … !!

Please remember not to forget to

remember to:-

1. Check out the ‘Key Points’

summarising this unit

2. Do your digital assessment

(MCQs) for this unit online

www.regenesys.co.za

Travel home

safely!