What is SCM 1

Week 2 - Agenda

• Questions from last class?• Discuss cases• What is SCM?• Why is it different and difficult?• Key SCM processes

What is SCM 2

Reading 1

• Themes from the readings and for the class– Integrating processes and optimizing the whole as

opposed to optimizing pieces

– Chains are global

– High level of interdependency among chain members

– Some seemingly strange things going on• Suppliers financing their customers

• Collaboration where we expect competition

• Moving toward sustainable supply chains

• For all the talk of IT there is lots of focus on the “touchy-feely”

What is SCM 3

Examples of SCM efforts

• Reading one gives many examples of activities being undertaken to leverage the supply chain

• Smart car– This is the state of the art for JIT and SCM Suppliers’

plants hooked into final assembly / hang on body panels -DFM /no paint booths / pay on build

• Wal-Mart and Fed-Ex Hurricane response– They along with companies like Home Depot were up

and running well before the government

What is SCM 4

Some other examples

• The airline industry - Rolls Royce (and GE jet engines– see reading 4)– Work with customers (mainly Boeing)

– Work with suppliers- and have unique incentives – suppliers pay to be revenue sharing partners

– Suppliers are financing their customers! (see Wing and a Prayer article)

– Focus on life cycle as opposed to sale

• Timber harvesting and preparation at Weyerhaeuser

What is SCM 5

Definitions

• “The process of planning and controlling the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption” (CLM)

• “… the planning and control of all factors that will have an impact on getting the correct product where it is needed, on time and at the optimal cost” (Daskin)

What is SCM 6

More definitions

• The supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage, through to the end user, as well as the associated information flows. Material and information flow both up and down the supply chain.

• Supply Chain Management is the integration of these activities through improved supply chain relationships, to achieve a sustainable competitive advantage.(Handfield and Nichols)

What is SCM 7

All this means what?

• In general many organizations are needed to create value for a customer

• In almost all of these organizations many functions create value for the customer– Reading one gave examples of these activities

• Managing each function within each organization separately is not likely to optimize the value of the good or service the customer receives.– Bullwhips

– HR at Boeing Wichita

What is SCM 8

There is a problem with all of these definitions

• All assume goods production• Is this a valid assumption?• If not why do you think the readings (and your

professor) focus on goods production?– Hint – think of the processes and outputs needed to

make a car as compared to the processes and outputs needed to do the venture funding for a new company.

• Key point – SCM is just as applicable to service production as goods production

What is SCM 9

Link back to exercise

• How did you negotiate?– Do you think your behavior built trust?

• Do you think you can optimize an entire supply chain without trust?

– Would you willing share information with someone who was obviously trying to win at your expense?

• Do you think you can optimize a supply chain without sharing information between members?

• Go back to examples from articles – look at the things companies are doing with each other

What is SCM 10

So how do we differentiate between good and bad supply chain management?

• Well run supply chains are:

• Focused on maximizing value for end customers

• Optimized globally

• Comprised of members who trust each other and share vital information

• Comprised of members who try and insure long term win/win outcomes

• Poorly run chains are:

• Optimized locally

• Have individual members who are mainly interested in their own (often short term) profits

• Do not share vital information between members

What is SCM 11

Who cares if I am making money?

• Underlying all of SCM is the following:

• Well run chains create more customer value, hence have higher sales, and in the long run create more profits for all chain members.

• Or if you prefer: chain members who care only about their outcomes can reduce the end value received by the customer and hence hurt their own long term profitability (why is Microsoft's behavior changing?)

What is SCM 12

Poorly run chains the norm?

• Your behavior and the descriptions given should make it clear that business as usual (at least in the USA) is “poorly run” chains

• The articles are exemplars not the norm. See following slide

• That’s why this class matters- business as usual is not likely to be business of the future

What is SCM 13

Some recent scary research

• Mainly fortune 1000 firms• Top purchasing and manufacturing managers• 200 companies• How many had the same strategic priorities?

– Where should priorities of functions come from?

• How many of these matches were serendipitous?

• This is not a unique data set – and this is just within a single company

What is SCM 14

Why SCM ?

• Companies have started to get beyond functional silos and NIH syndrome

• Most companies can not do everything• Outsourcing as a pure cost play does not add much• Purchasing becomes strategic –Chrysler• Logistics becomes strategic – Wal-Mart• Information systems become strategic• Leading edge success stories

What is SCM 15

Why you should care ?

• Money - SCM graduates at the few schools with such programs tend to be the highest paid and get the most job offers. People come from all over the world to recruit MSU students in this field.– Undergrad starting salaries average $60,000 (2003)– MBA salaries over $110,000– PSU claims 98% placement for last year (MBA)

• Broad knowledge base - managing value creation in many places not just one.

• Most companies do this really badly. The need has been identified but most managers do not have the skills (opportunity)– Back to the research

What is SCM 16

Why – screwing this up seems expensive (and it is)

• Measures– Car salespeople (and other salespeople) offer the most obvious

example (dealer has $1500 mark-up on a car GM is selling with a $2000 incentive?)

• We have always behaved this way– Most of the top people in an organization got there by behaving in

this manner– Micro-soft– Once this type of behavior starts it is really hard to stop

• No trust – some would claim this is a byproduct of capitalism – “business is war”– So how do you explain ISM (and many others) new found

emphasis on responsibility?

What is SCM 17

Key point

• Optimizing a supply chain requires members to share vital information (go back to articles)

• Before we can start to share information there has to be trust between the various links in the supply chain.

• Almost everything we will talk about this term is predicated on being able to share information openly with the appropriate members of the chain. Trust is then a key foundation of SCM.

What is SCM 18

Trust

• What does it mean?• Main types of trust we are concerned with

– Trust that information is truthful

– Trust that other party is being open and honest• Can you “tell the truth” and still not be open and honest?

– Trust that other party has all supply chain members’ interests in mind as opposed to just their own interests

– Microsoft

– Car salesperson

– In your exercise was there a super-ordinate goal?

What is SCM 19

Inter vs. Intra organizational trust

• I am mainly looking at trust across chain members. They may be within the same company but they are distinct entities.

• Which is harder- building trust within an organization or across the supply chains (multiple organizations)?

What is SCM 20

Building trust

• Some rules of thumb from Handfield and Nichols (1999)

• Be reliable – follow through on your commitments and act in a predictable way– Over time this is one of the best ways to build / destroy trust

• Assign competent people to the interface –technical knowledge

• Assign competent people to the interface –people skills

• Both sides need to be somewhat vulnerable– This is a key and often overlooked point

• Be loyal – supply chain relationships are often likened to marriages

What is SCM 21

Some other elements of trust

• Moving to SCM is change- and most people fear change– If you fear something you are not going to trust it’s

proponents

– The people who profit from the existing systems are not going to want to change for obvious reasons

• Microsoft

• Jostens

• Like any other change moving to SCM needs to be top down

What is SCM 22

Measurement, rewards and trust

• “Tell me how I am measured and I will tell you what I will do”

– Is the car salesperson acting rationally?

– Were you (if you value free food) acting rationally?

– What my pay is tied to

– “your” focus on grades not what you learn

• Change does not occur if measurement and rewards do not change

– Saturn dealerships – totally different pay structure to create a totally different car buying culture

– Dogs and Skunks / Dominoes’ Pizza

What is SCM 23

Structure- is also linked to trust

• Within an organization or across a supply chain you generally do not want to create conflict– Many structures create unneeded competition for

resources or duplicated effort• Why both Jostens and Dana Engine Controls (in Independence

KS) have national purchasing contracts– Creates a much tighter relationship with suppliers

• I did not go with my wife to functions in the English department when at KSU. The business school was considered the enemy by the English faculty (even though we supplied them with many customers –and cash). And the business school did not leverage the English department’s capabilities very well either.

What is SCM 24

Processes and trust

• Process tend to be housed in an individual function or company. Yet in reality almost all functions are linked to other functions and or companies.

• Therefore it is suggested that managing as many processes cross functionally as is possible is a way to build trust.– In many companies (BAE systems) they have material

management people who are responsible for the flow of materials from the moment it is loaded on a truck at the supplier’s until it leaves the plant. The material manager then interfaces with the supplier, the purchasing people, the warehouse people, the manufacturing people and the shipping people.

• MC Ink / Tow vehicles

– Chrysler’s design process was one of the key reasons Mercedes bought them

What is SCM 25

Need to build a culture of trust

• Different members of the supply chain need to have:

– A reason to work together

– Measures that encourage them to work together• If I had told you ahead of time that my measure of success for

the negotiation exercise was going to be the combined scores the first thing you would have done was share information

– Structures that encourage cross functional processes

• Combined this will build a culture where various chain members can trust each other and share information –so that they work toward supply chain goals not individual goals

What is SCM 26

Culture of trust as part of a responsible business

• In reading one there is an article entitled “Responsible business = good business”. Responsible business from ISM’s perspective includes:– Community– Diversity– Ethics– Financial responsibility– Human rights– Safety

• Can you be responsible if others don’t trust you?

What is SCM 27

How a focus on Responsibility / Sustainability/ Stewardship expands the supply chain

• I started by talking about trust between direct chain members but in reality supply chains are being pushed to:

– Prove they can be trusted members of a community – think Wal-Mart backlash

– Prove they can be trusted with the ecological environment – actually they have often failed here hence lots of regulation – Think EU

• Most managers are missing a massive opportunity here!

• Now a company / supply chain needs to be trusted by governments, NGO’s, and society at large.

• Milton Friedman says ignore this stuff – should you?

What is SCM 28

Information and information systems

• Once we have trust information can start to flow through the chain – this is the ivory tower view of the world

• Reality- usually we build trust over time- and as the level of trust increases the types of information change and the volume of information increases.

• The growth of SCM has coincided with the growth in information systems- for good reason– When all information was stored on paper sharing it

across entities was time consuming, error prone, and very expensive.

What is SCM 29

Where is the information flowing to and from? Key functions in a supply chain

• Operations- anyplace a process is performed to transform something– machining and other traditional factory tasks

– calculation of credit risk in a venture capital supply chain

• Purchasing - anytime we buy a good, service, or information from another organization

• Logistics - moving goods and or information from step to step in a supply chain -and to the end customer

What is SCM 30

A note on terminology

• If you look back at our definitions of logistics and SCM the only real difference is that definitions of logistics do not deal with transformation processes.

• Purchasing, logistics and operations have traditionally been dealt with as different processes and functions - but a supply chain view tends to obscure these differences. So the key point is we are talking about the flows (stuff, information and $$) through a supply chain - regardless of what we call it.

What is SCM 31

So what does this all mean?

• Pick an industry• We will then draw the supply chain• Discuss what flows through the chain – both

tangible and intangible• Discuss information flows• Discuss how a global / win win / SCM view

changes how this chain functions

What is SCM 32

First case

• Pluses and minuses of going first• I plan on an in-class critique of the first group to

help other groups prepare• The first group should be given some leeway

because expectations unknown• I am planning on giving feedback immediately –

but grades will not be assigned until after all groups have gone – part of my learning process. – This is to your benefit

What is SCM 33

Reminders for case

• Group presenting does not have to do a brief• All other groups do – I must receive via e-mail by

noon Tuesday• You may do briefs individually• You are all expected to be prepared for class and

to participate – your grade depends on it.

What is SCM 34

Interface questions• Can Interface sell some form of ESA to University of

Texas? If so how would it be structured?

• Is this answer generalizable to other customers – please be explicit on similarities and differences

– Things to consider

• What are Interface’s goals?

• What are their customers’ needs / goals?

• What does a win / win scenario look like in this setting?

• Are there other changes that need to be made to make this work?