Improving the Competitivenessof Supply ChainsAdvanced Diplomain Procurement and Supply

Evolutionary stages of purchasing• Clerical (transactional)

Purchasing is perceived as a low-ranking routine function, characterised by a focus on internal performance and efficiency.

• CommercialThe focus shifts to price and cost savings, obtained mainly

through the interface with suppliers. This stage is characterised by adversarial relationships with suppliers and the exploitation of short-term tactical advantages.

• Strategic (proactive)The focus is on effective contribution to competitive advantage.

Strategies are introduced to improve the performance of external supply chains, through a more holistic approach to logistics or supply chain management.

The chain metaphor • It emphasises ‘serial co-operation’ or ‘working

together in turn’• It emphasises mutual dependency and collaboration,

because each link in a chain is essential to the completeness and strength of the whole

• It emphasises the importance of ‘linkages’ or interfaces between members

• It is continuous and non-directional

• Integrating the objectives of units and functions throughout the value chain

• Encouraging procurement staff to be proactive in planning procurements

• Reducing resistance to procurement involvement in strategic issues and processes

• Enhancing procurement’s role and status in the organisation

Benefits of a ‘customer-focused’ approach

Supply networks

• It is a more strategic model for mapping and analysing supply chain relationships

• It raises the possibility of a wider range of collaborations • It recognises the potential of ‘extended enterprises’ and

virtual organisations• It recognises that extended enterprises may overlap, creating

complex patterns of relationship, competition and potential risk

Seeing the supply chain as a network is helpful for a number of reasons:

Value-adding strategies• Value engineering

Analysing the value of products at the design and development stage

• Lean supplyCollaborating closely with the supply chain to eliminate or

minimise wastes in all activities and processes

• Agile supplyCollaborating closely with the supply chain to increase its speed

and flexibility of response to changing customer demands

• Value-adding negotiations and relationshipsWorking collaboratively and constructively with suppliers to

find ways of continuously improving and adding value, with mutual benefit to all parties

TRADITIONAL WAYS NEW WAYS

Key feature: Independence Key feature: Integration

Independent of next link Dependency

Links are protective End-to-end visibility

Uncertainty More certainty

Unresponsive to change Quicker response

High cost, low service High service, lower cost

Fragmented internally ‘Joined up’ structures

‘Blame’ (adversarial) culture ‘Gain’ (collaborative value-adding) culture

Competing companies Competing supply chains

The shift to supply chain management

Supply network design decisions• How should the network be configured?• Where should each part of the network owned by the

organisation be located? • What physical capability should each part of the

network owned by the company have?

All manufacturing performed by top-level purchaser

Top-level purchaser outsources most manufacturing

• Effective supply base management, integration and collaboration

• Effective supplier and customer relationships• Supplier selection and contract award on the basis of

recycling or ecologically friendly disposal capacity • Product and packaging design to facilitate return,

recycling and safe disposal• Visibility: the ability to access and view relevant logistics

data, in order to manage the operation effectively• Reverse logistical activities

Management issues in closed-loop supply chains

Characteristics of network sourcingCHARACTERISTICA tiered supply structure, with heavy reliance on a small number of firmsA small number of direct suppliers, with individual parts sourced from one supplier, but within a competitive dual sourcing environmentHigh degrees of asset specificity among suppliers, and risk sharing between customer and supplierA ‘maximum buy’ strategy by each company within the semi-permanent supplier network, but a ‘maximum make’ strategy within the network as a wholeA high degree of co-operative design and value engineering, employing the skills and knowledge of customer and supplierA high degree of supplier innovation in new products and processesClose, long-term relations between network membersThe use of rigorous supplier grading systems, increasingly giving way to supplier self-certificationA high level of supplier coordination by the customer company at each level of the tiered supply structureA significant effort made by customers at each of these levels to develop their suppliers

Risks of a narrow supplier base • Over-dependence on a few suppliers, in the event of supplier

failure• Supply disruption • The loss of preferred suppliers’ goodwill and co-operation• Preferred suppliers growing complacent, and ceasing to offer

competitive value• Being ‘locked in’ to long-term relationship and co-investment

with suppliers who turn out to be under-performing or incompatible with the culture, ethics or objectives of the buying organisation

• Missing out on seeking or utilising new or more competitive suppliers in the wider supply market

• Cost pressures • Time pressures • Reliability pressures• Response pressures • Transparency pressures • Globalisation pressure

Drivers for supply chain management

Benefits of an SCM approach• Reduced total costs• Improved responsiveness to customers’ requirements • Access to complementary resources and capabilities • Enhanced product and service quality• Improved supply chain communication • Improved inventory management• Reduced cycle times• Greater transparency for cost and risk management• Greater supply chain visibility• Optimising the balance of service levels and costs

Improving quality• Selecting suppliers with third party approved or accredited quality

management systems• Appraising the quality management systems and ‘track record’ of

suppliers• Preparing preferred or approved supplier lists• Influencing the quality of product design• Translating design requirements into clear, accurate materials and

service specifications• Developing goods inwards procedures for quality inspection and testing• Managing relationships with suppliers• Monitoring and controlling suppliers’ quality performance over time• Working with suppliers to resolve quality disputes, solve quality

problems and/or make ongoing quality improvements

Supporting innovation • Enhanced access to market intelligence• Faster and more effective product design and development processes• Tapping into synergies and opportunities available from pooling

information, ideas and expertise • Creating incentives for supply chain partners to innovate • The intentional selection of long-term strategic supply chain partners • Supporting the use of collaborative techniques • Supporting the ongoing development of supplier innovation capability• Supporting supply chain management techniques which are themselves

regarded as ‘innovative’ in traditional procurement settings• Supporting continuous supply chain improvement and development

Reducing risk• Encouraging the proactive monitoring, identification and assessment of

risks• Providing greater end-to-end supply chain data sharing, transparency and

visibility • Supporting greater transparency and trust in individual supplier

relationships • Improving security and continuity of supply• Promoting the intentional and rigorous selection of long-term strategic

supply chain partners• Promoting the effective management of contracts, suppliers and supplier

performance• Encouraging systems integration and joint development,• Encouraging supply chain mapping and analysis• Creating improved end-to-end supply chain visibility

Added value• The core product represents the key benefits received

directly from purchasing the product• The actual product is the key elements of the product

which differentiate one product from another• The augmented product may include a range of

tangible and intangible elements which add value (and often differentiate competing products)

Porter’s value chain

The value system

Problems with Porter’s model• Despite its customer perspective, the model still

focuses on profitability as the primary objective• Despite its recognition of the importance of linkages,

the model is not highly integrative• The distinction between primary and support

functions is somewhat arbitrary• It is a static model, based solely on American firms

Organisational structure• To define work roles and relationships• To define work tasks and responsibilities• To channel information flows efficiently through the organisation• To coordinate goals and activities of different units• To control the flow of work, information and resources• To support flexible working and adaptability to changing internal

and external demands• To encourage and support the commitment, involvement and

satisfaction of the people who work for the organisation• To support and improve the efficiency, effectiveness and

competitiveness of the organisation’s performance through all of the above

• The flattening of organisation hierarchies, or ‘delayering’.

• Chunked structures• Project management• Horizontal structures• Core-periphery structures• Network structures• Virtual structures

Key modern trends in flexible organisation

Advantages of centralisation• Specialisation of procurement staff• Potential for the consolidation of requirements• Greater co-ordination of procurement activities• More effective control of procurement activity• Avoidance of conflict between business divisions• Access to specialist skills, contacts and resources

• Better communication and coordination between procurement and operating departments

• Customer focus• Quicker response to operational and user needs and

environmental changes and problems by local buyers • Knowledge of, and relationships with, local suppliers • Smaller purchase quantities • Accountability• Freeing central procurement units to focus on higher-level,

value-adding tasks

Advantages in devolving procurement

Organisational systems• Communication, data-sharing and management

information systems• Requirements planning systems • Inventory and warehouse management systems• Transport planning and management systems• Purchase to pay (P2P) systems, potentially part of a

broader e-procurement or e-sourcing system• Quality management systems • Environmental management systems

Process mapping and management

• Sources of process inefficiency and non-value-adding activity • Sources of process ineffectiveness• Points of process complexity • Points of risk• Points of cost• Points of profit and opportunity

Identifying the nature of process flows, and the sequence of process activities, enables the identification of:

Flowchart symbols

Process map for getting out of bed in the morning!

The iDEF process map

Value-added flowchart• List all steps in a process and create a simple flowchart with

the steps in a sequence of boxes• Add to each box the time currently required to complete each

step • Identify steps that do not add value• Move the boxes representing non-value-added processes to

the right of the boxes representing value-added processes • Total the times in the value-added column to derive a value-

added cycle time, and the times in the non-value-added column to derive a non-value-added cycle time

• Calculate the percentage of the total cycle time that results from non-value-added operations

Value chain analysis• Identifying sub-activities for each primary activity and

support activity• Identifying linkages• Looking for opportunities to increase value

Managing stages of the processSTAGEIdentifying business needsSpecificationSurveying and engaging the marketSourcing planSupplier pre-qualification and appraisalSupplier selection and contract awardContract development and communicationContract managementContract and supplier performance managementRelationship management

The 10 Cs of supplier appraisal• Competence (or capability)• Capacity• Commitment • Control • Cash• Consistency • Cost• Compatibility• Compliance • Communication

• In-house or outsource• Supplier selection• Procurement• Sourcing-related metrics

Key components of sourcing decisions

The relationship spectrum

Appropriate relationship factors • The nature and importance of the items being purchased• The competence, capability, co-operation and

performance of the supplier• Geographical distance• The compatibility of the supply partners• The organisation’s and purchasing function’s objectives

and priorities• Supply market conditions• Legal and regulatory requirements

• A joint and mutual search for greater efficiency and competitiveness• Joint planning for the future by the customer and the supplier.• Agreed shared objectives• Understanding between the customer and the supplier that there

should be a joint effort to eliminate waste from the supply chain• Openness and transparency between the organisations• Each party understands the expectations of the other, and seeks to

meet or exceed them• The relationship is one of equal partners• They recognise that the relationship might not last for ever, and

have a prepared and agreed exit strategy

Features of a constructive supply partnership

• Cultural compatibility between the partners• A high level of trust, knowledge sharing and openness between

customer and supplier• Mutual acceptance of the concept of win-win within the supply chain• Relevant expertise, resources or competencies in complementary areas • Clear joint objectives and meaningful performance measures for

assessing supply chain performance• The use of cross-functional teams to enhance co-ordination, process

focus and continuous improvement• A total quality management philosophy, focused on co-operative

efforts to maximise quality and secure continuous improvement• A high degree of systems integration

Key characteristics of partnership sourcing

PartneringADVANTAGES FOR THE BUYER DISADVANTAGES FOR THE BUYER

Greater stability of supply and supply prices Risk of complacency re cost and quality

Sharing of risk and investment Less flexibility to change suppliers at need

Better supplier motivation and responsiveness Possible risk to confidentiality, intellectual property

Cost savings from reduced supplier base, collaborative cost reduction

May be locked into relationship with an incompatible or inflexible supplier

Access to supplier’s technology and expertise Restricted in EU public sector procurement directives

Joint planning and information sharing, supporting capacity planning and efficiency

May be locked into relationship, despite supply market changes and opportunities

Ability to plan long-term improvements Costs of relationship management

More attention to relationship management Mutual dependency may create loss of flexibility and control

Partnering (contd)ADVANTAGES FOR THE SUPPLIER DISADVANTAGES FOR THE SUPPLIER

Greater stability and volume of business, enabling investment in development

May be locked into relationship with an incompatible or inflexible customer

Working with customers, enabling improved service, learning and development

Gains and risks may not be fairly shared in the partnership (depending on power balance)

Joint planning and information sharing, supporting capacity planning and efficiency

Risk of customer exploiting transparency

Sharing of risk and investment Investment in relationship management

Cost savings from efficiency, collaborative cost reduction, payment on time

Dependency on customer may create loss of flexibility and control

Access to customer’s technology and expertise Restricted by EU public sector procurement directives

More attention to relationship management: eg access to a vendor manager

May be locked into relationship, despite market changes and opportunities

• Lack of trust and therefore little information sharing• A one-off or short-term transaction focus• The use of power and negotiation to seek the best

possible deal • Rigorously enforced compliance with contract terms • Little co-operation or recognition of mutual interests

Characteristics of adversarial relationships

Supplier switchingRISKS OF SUPPLIER SWITCHING

The new supplier may fail to perform

Process incompatibility

Cultural or inter-personal incompatibility

Loss of knowledge

Learning curve: time for the new supplier to achieve peak performance, teething problems

Exposure to new and unfamiliar supply risks

Exposure of intellectual property, confidential data

Problems of adversarial hand-over from the old supplier to the new

Supplier switching (contd)COSTS OF SUPPLIER SWITCHING

Identifying and qualifying new suppliers

Initiating and administering tendering exercises or other sourcing and contracting processes

Settlement of not-yet-delivered items from old supplier

Change of internal systems and processes to align with the new supplier

Familiarising or training the new supplier in systems, procedures and requirements

Contract development and management

Risk mitigation and adjustment

Make/do or buy decisions• Strategic make/do or buy decisions

determine the long-term activities, capabilities, resources and ‘boundaries’ of the firm

• Tactical make-do or buy decisionsreflect the organisation’s response to short-term or cyclical

changes in demand for its products or services, in order to utilise available productive capacity efficiently

• Operational or ‘component’ make-or-buy decisionsbasically product design and manufacturing decisions,

determining whether a particular component of a product should be manufactured in-house or bought in from the external supply chain

Business process outsourcing• Business process outsourcing (BPO)

‘the transfer of responsibility to a third party of activities which used to be performed internally’

• Facilities management outsourcing solutions in which the customer transfers to an external

services provider the responsibility for the operation and maintenance of one or more facilities

• Shared services the outsourcing of a business function to an expert internal

department or unit

• Managed servicesthe outsourcing of responsibility for managing service operations and

project or programme activity

• In-sourcingthe reverse process: the transfer of an outsourced function to an

internal department of the company, to be managed by employees

Drivers for outsourcing• Quality drivers• Cost drivers• Business focus drivers• Financial drivers• Relationship drivers• Human resource drivers

OutsourcingADVANTAGES/BENEFITS

Supports organisational rationalisation and downsizing

Allows focused investment of managerial, staff and other resources on the organisation’s core activities and competencies

Accesses and leverages the specialist expertise, technology and resources of contractors

Access to economies of scale since contractors may serve many customers

Adds competitive performance incentives, where internal service providers may be complacent

Leverages collaborative supply relationships, and can support synergies

Cost certainty (negotiated contract price) for activities where demand and costs are uncertain or fluctuating

Outsourcing (contd)DISADVANTAGES/RISKS

Potentially higher cost of services

Difficulty of ensuring service quality and consistency and corporate social responsibility

Potential loss of in-house expertise, knowledge, contacts or technologies in the service area

Potential loss of control over key areas of performance and risk

Added distance from the customer or end-user, by having an intermediary service provider

Risks of ‘lock in’ to an incompatible or under-performing relationship

Risks of loss of control over confidential data and intellectual property

Competencies and contractor competence

• The need for the outsource decision to be based on clear objectives and measurable benefits

• The need for rigorous supplier selection• Rigorous supplier contracting• Clear and agreed service levels, standards and key

performance indicators• Consistent and rigorous monitoring of service delivery and

quality• Ongoing contract and supplier management• Contract review

Supply chain management issues in outsourcing

International sourcing advantages• Access to required materials, facilities and/or skills, which may not

be available (or available at the right price) in local supply markets.• Availability of culturally distinctive goods• Access to a wider supplier base• Opportunities for cost savings• Exchange rate advantages• Competitive quality• Reduced regulatory and compliance burden• Leveraging available ICT developments• Support for supply chain agility• Ability to compete with competitors who are benefiting from any or

all of the above advantages

Local and international sourcingBENEFITS OF INTERNATIONAL SOURCING DRAWBACKS OF INTERNATIONAL SOURCING

Availability of required materials and/or skills: increased supply capacity and competitiveness

Exchange rate risk, currency management issues etc

Competitive price and cost savings High sourcing and transaction costs

Less onerous constraints and costs re environmental and labour compliance

Cost savings and lower standards may create sustainability, compliance and reputational risk

Leverages ICT systems Different legal frameworks, time zones, standards, language and culture

International trade (arguably) promotes development, prosperity, international relations etc

Additional risks: political, transport, payment, supplier standards monitoring etc

The opportunity to develop expertise, contacts and supply networks in countries identified as potential markets

Environmental impacts of transport and haulage

Local and international sourcingBENEFITS OF LOCAL SOURCING DRAWBACKS OF LOCAL SOURCING

Investment in local community, employment, skills etc

Materials, skills or capabilities may not be available locally (or may be more costly)

Accessibility for supplier development and contract management

Ethical and reputational risks of close social ties with suppliers, common spheres etc

Supplier knowledge of local market, sustainability issues, regulatory standards etc.

Smaller suppliers: no economies of scale (higher costs), greater dependency issues

Reduced transport, payment, cultural risks and costs

Local sourcing policy may make local suppliers complacent or un-competitive

Short supply chain eg supporting JIT, lower environmental impact of transport

Five approaches to quality• The transcendent approach

equating quality with ‘excellence’

• The user-based approachbased on making a product that is ‘fit for purpose and use’

• The product-based approachbased on precise and measurable product attributes

• The manufacturing-based approachbased on making a product that precisely conforms to

specification

• The value-based approachdeveloping the manufacturing perspective further, by

incorporating both cost and price

Eight dimensions of quality• Performance• Features• Reliability• Durability• Conformance• Serviceability• Aesthetics• Perceived quality

The importance of quality

• Differentiate their products advantageously in relation to their competitors

• Position their brands in the market as ‘quality’ brands• Develop customer retention and loyalty • Comply with law and regulation• Avoid the financial and reputational costs of product recalls,

returns and customer compensation

Most organisations will seek to maintain the quality of their offerings, in order to:

The costs of getting quality wrongInternal failure costs• The scrapping or re-working of

faulty items• Re-inspection of products that have

been reworked or corrected• ‘Downgrading’ of products at lower

prices, resulting in lost sales income• Waste incurred in holding

contingency stocks, providing additional storage and duplicating work

• Time and cost of activities required to establish the causes of the failure

External failure costs• Costs of ‘reverse logistics’ to collect

and/or handle returned products• Costs of repairing or replacing

defective products, or re-doing of inadequate services

• The cost of customer claims for compensation under guarantees or warranties, or where the company is liable for negligence

• The administration costs of handling complaints, processing refunds etc

• The cost of lost customer loyalty and future sales

• Reputational damage

Statistical process control (SPC) • The measurement of a production run• Comparison against expectations• An investigation into why variations have occurred• A gradual reduction of variations

• Systems design achieved through careful selection and evaluation of parts,

materials and equipment

• Parameter design setting target values within specified parameters, to be met

with minimum variation

• Tolerance design reducing variation around the target values, by tightening

tolerances that have a large impact on variation

Quality assurance: The Taguchi methodology

ISO 9000The ISO 9000 model contains eight quality management principles

• Customer focus• Leadership• Involvement of people• Process approach• Systems approach to management• Continuous improvement• Factual approach to decision-making• Mutually beneficial supplier relationships

The importance of relationships• To encourage awareness and understanding that all links in the value chain are

responsible for maintaining the quality that reaches the customer• To provide secure, long-term volumes of business as an incentive for suppliers

to invest in quality, standards certification and continuous improvement• To provide a secure, long-term relationship framework for collaborative

process improvement and development• To avoid buying practices which may result in supply quality ‘short-cuts’• To create a culture of openness, collaboration and mutual benefit • To create a ‘commitment’ to excellence and improvement • To improve supply chain visibility and transparency• To support knowledge management and best practice sharing• To build buyers’ trust in suppliers and their processes • To build awareness of customers’ needs, wants and definitions of quality and

value

The SERVQUAL model • Tangibles

appearance of physical facilities, equipment, personnel, communications

• Reliabilityability to perform the promised service dependably and accurately

• Responsivenesswillingness to help customers and provide prompt service

• Assurancecustomer confidence in the service provider, based on

demonstrated competence, courtesy, credibility and security

• Empathycustomer confidence that the service provider will identify with the

customer’s needs and expectations

SERVQUAL ‘service gaps’GAP EXPLANATION BUYER REMEDY

Gap between buyer and supplier perceptions of quality

The supplier’s definition of quality may not be the same as the buyer’s

Buyer and supplier will need to work together on developing mutual understanding of the requirement

Gap between concept and specification

Resource constraints or poor specification skills

Buyers will need to co-operate with users and suppliers to develop accurate service specifications

Gap between specification and performance

Supplier-side specifications and service level agreements do not translate into actual service levels

The buyer will have to pre-evaluate the supplier’s capability to deliver

Gap between communication and performance

The supplier’s communications may create inaccurate quality expectations

Buyers will need to verify information provided by service providers.

Gap between buyer expectations and perceived service

What buyers or users perceive they have received may fall short of what they expected

Buyers will need to manage user expectations and perceptions

Key principles of TQM• Focus on the customer• Quality chains• Quality culture• Total involvement• Quality through people• Team-based management• Get it right first time• Process alignment• Quality management systems• Continuous improvement or kaizen• Sharing best practice

Benefits of TQM• When there are no defects, there are no failure costs.• At a strategic level, robust quality systems mean that processes

and performance will continually improve, and customer service will more reliably meet or exceed expectation

• Encouraging quality-focused communication and problem-solving

• Encouraging integrated internal and external supply chain management

• Creating a strong motivating and guiding organisational culture, based on quality values

• Encouraging the education and empowerment of work teams• Enabling the organisation to differentiate itself competitively, on

the basis of quality and service

1. Lack of constancy of purpose2. Emphasis on short-term profits3. Evaluation of individual performance4. Mobility of management, or managerial job turnover5. Running a company on visible figures alone6. Excessive medical costs7. Excessive costs of warranty and legal damage awards

Seven deadly diseases of management

Deming’s 14 points of management• Create constancy of purpose

towards improvement of product and service

• Adopt a new philosophy of quality for a new economic age

• Cease dependence on mass final inspection

• Consider total cost• Improve constantly and forever

the system of production and service

• Institute training• Institute leadership across the

organisation

• Drive out fear• Break down barriers to

communication and work flow • Eliminate slogans, warnings and

targets for the workforce• Eliminate numerical productivity

goals• Encourage pride of workmanship• Support continuous learning and

self-improvement• Take action for transformation

Stage 1: Uncertainty‘We don’t know why we have problems with quality.’

Stage 2: Awakening‘Is it absolutely necessary to always have problems with quality?’

Stage 3: Enlightenment‘Through management commitment and quality improvement, we are

identifying and resolving our problems.’

Stage 4: Wisdom‘Defect prevention is a routine part of our operation.’

Stage 5: Certainty‘We know why we do not have problems with quality’.

Crosby’s quality management maturity grid

• Defined performance criteria (such as KPIs or service level agreements)

to establish whether the aimed-for or agreed level of performance has been achieved

• Previous performance to identify deterioration or improvement trends

• The performance of other organisations (suppliers, purchasing functions) or standard benchmarks

to identify areas where performance falls short of best practice or the practice of competitors, and where there is therefore room for improvement

Performance measurement in supply chains

Effective objectives: ‘SMART’• Specific

clear and well-defined statement of precisely what the desired outcomes or deliverables are

• Measurablesusceptible to monitoring, review and measurement

• Attainableachievable and realistic, given the time and resources available

• Relevantperformance measures should be relevant to, and aligned with,

the strategic objectives of the organisation and the policies and objectives of the procurement function

• Time-boundedgiven defined timescales and deadlines for completion (or

review)

Developing key performance indicators

STRATEGIC TACTICAL OPERATIONALLead time against norm Efficiency of order cycle Delivery performance

(OTIF)Quality status and aspirations

Quality assurance methodology

Quality conformance or non-conformance rates

Future growth, innovation, and/or integration potential

Capacity flexibility Technical support levels

Cost saving initiatives and potential

Cashflow management Speed of response to change in planned requirements

Risk management processes

Performance measurement at different levels

Performance monitoring and review • Continuous monitoring • Key stages of a process, project or contract• Periodic reviews • Post-completion reviews

Vendor ratingFactor rating method

Performance factor Weighting Score Supplier rating

Price 0.4 0.94 0.376Quality 0.4 0.97 0.388Delivery 0.2 0.72 0.144

Overall evaluation 1.0 0.908

Factor Weighting (%) Points award Measurement criterion

Quality  30 1.50 PPM (0.7),reject frequency (0.3)

Delivery  25 1.25 On-time-in-full delivery (1.0)

Support systems  15 0.75 Quality management systems,

eg ISO 9000 (1.0)

Commercial  30 1.50 Cost savings (0.7), after-sales support (0.3)

Total 100 5.00

Vendor ratingWeighted factor supplier scorecard

Vendor rating

Statistical sampling• Simple random sampling

the sampler uses a random number generator to select items from the population

• Systematic samplingwe select every nth item from the total population

• Stratified samplingthe population is broken down into various categories, using

any classification relevant to the object of the investigation• Cluster sampling

clusters of items are sampled instead of individual items• Multistage sampling

sub-divisions are progressively created for sampling

Averages• The arithmetic mean (denoted by x)

defined as the total value of the items divided by the total number of the items in a data set

• The mediancalculated as the middle term in a data set, once all the

items have been arranged in order of magnitude

• The modethe value that occurs most frequently among all the items in

the data set

–

Measures of dispersion• The range

the difference between the extreme values of the distribution

• The standard deviationin essence, it is calculating the average distance of items

from their mean

Probability distributionsFOCUS APPLICATIONS

Binomial distribution

The occurrence of discrete events with only two either/or outcomes

• Probability of a batch containing defects or non-defects; x or more/fewer-than-x defects

• Customers buying or not buying a brand.• Success or failure of a project; delivery on time or late.

Poisson distribution

The occurrence of discrete events occurring within a continuous medium .

Quality control and risk assessment eg:•Defects in a pipeline (or other continuous medium).•Supplier failures over a time period•Machine breakdown over a time period•Problems occurring within a given time period

Normal distribution

Ranges of possibilities and how likely they are to occur

Statistical process control: ‘If defects are normally distributed, calculate the probability that defects are between 3 and 7 (tolerance level) per delivery’.

The normal distributionHistogram (with equal class intervals)

The normal distributionBell curve (normal distribution)

Using the bell curve

Example of a process distribution

SPC charts

Failure mode and effects analysis • Identify the components forming part of the product• For each component, list the different ways in which failure may occur

and the causes of each• For each failure mode identified, list the effects on the overall product• Assess the probability (P) of each failure on a scale of 1 (not very

probable) to 10 (extremely probable)• Assess the seriousness (S) of each failure mode by considering its

effects, again on a scale of 1 (not very serious) to 10 (extremely serious)• Assess the difficulty (D) of detecting the failure before the customer

uses the product, on a scale of 1 (easy to detect) to 10 (very difficult to detect)

• Calculate the criticality index (C) for each failure mode by use of the formula: C = P × S × D

The 5M fishbone diagram (manufacturing)

Ishikawa/fishbone diagram applied to late delivery problem

Cause-effect-cause diagrams

(a) Factor A is the cause of Factor B; Factor B is an effect.(b) Factor A is a cause of both Factors B and C.(c) Factors A and C are each (partial) causes of Factor B.

Five-Why Analysis

Temporary counter measures: [measure… date…]Permanent corrective action: [measure… date…]Review: no recurrence in three months?

Failure mode:  Enamel finish defectsWhy #1? Enamel dimpling (an ‘orange peel’ effect) arises

from holding spray guns at the wrong angle.Why #2? New operators are not fully trained.Why #3? Absenteeism during the training schedule; new

operators placed on the job before fully trained… [and so on…]

Two Sigma and Six Sigma processes

Process improvementSix Sigma uses a DMAIC methodology:• Define:

What is it that we are seeking to improve? • Measure (the process):

What is the current capability of the process? What averages, what variability in process output is evident?

• Analyse:Based on preliminary ideas, theories are generated and investigated to

determine the root cause(s) of the defects. • Improve:

The identified root causes are removed by designing and implementing changes to the process.

• Control:New statistical process controls are designed and implemented to

improve visibility, control future process performance and sustain the gains made.

Selecting a Six Sigma team• Champions

executives who understand Six Sigma and serve as mentors to black belts and interface with senior management

• Mentors drive the project forward and give support and direction.

• Master black beltsexperienced, full-time leaders with a developed knowledge of

Six Sigma• Black belts

will lead quality projects, usually on a full-time basis until they are complete

• Green belts work on projects on a part-time basis but will often lead teams

in their own area or function

The Plan-Do-Check-Act (PDCA) cycle• Plan

plan ahead for change, and analyse and predict the results

• Doimplement the solution, taking small steps in controlled

circumstances

• Checkmeasure the performance of the solution or impact of the

change

• Actdevelop further action plans to standardise or improve the

process

Continuous cycle of improvement

• Build on existing skills, routines and beliefs in the organisation

• Allow flexibility and responsiveness to environmental changes and feedback

• Allow a continuous sense of progress, even through uncertainty and difficulty

• Empower employees

Incremental improvement approaches

Reasons for holding inventory • Inventory reduces the risks of disruption to production from unforeseen

events• Inventory reduces the risks of disruption to production from long or

uncertain delivery lead times• Inventory allows rapid replenishment of goods which are in constant use

and demand• Inventory reduces the risk of stockouts• Buyers may be able to take advantage of bulk discounts, lower prices or

reduced transaction costs by placing fewer, larger orders• Buyers may be able to protect against anticipated shortages, price

increases, or exchange rate fluctuations• Stocks of finished or almost-finished goods may be prepared ready for

unexpected peaks in demand – or for late customisation of products• Stocks of finished goods may be prepared during periods of slow demand,

ready to meet peaks of demand

Inventory management methods • Accurate demand forecasting through the supply chain,

and transparency about demand data • Standardisation and variety reduction• The use of systems contracts, call-off contracts,

framework agreements and other forms of commercial agreement

• The use of appropriate stock replenishment systems for independent demand items

• The use of appropriate ‘pull’ inventory management techniques for dependent demand items

• Just in time (JIT) supply

• Push systems aim to provide supplies of inputs in anticipation of demand

• Pull systems based on producing goods in response to actual demand (in

the form of customer orders)

‘Push’ and ‘pull’ inventory strategies

JIT – key performance objectives• Quality

All tiers of suppliers must share the commitment to quality, as there is no slack for inspection, rework or rejection

• SpeedLittle work in progress is held, with most of the work effectively

being made on a make-to-order basis

• FlexibilityJIT is designed to react flexibly to customers’ changing

requirements

• DependabilityPursuing quality, speed and flexibility leads to the exposure and

rectification of inefficiencies and process variability, which can be addressed

Traditional versus JIT supplyTRADITIONAL PROCUREMENT JIT PROCUREMENT• Production runs are long and standardised• Delivery timings are not critical, and long

lead times are built into calculation of order quantities.

• Production runs are short and frequently switched

• Delivery dates and times are carefully defined by the buyer’s production schedule

• Inventory buffers are held as a safety net, to protect service levels

• ‘Inventory is evil’: reduced or eliminated

• A certain level of quality defects is expected • Quality management is based on inspection

of incoming goods

• Zero-defect targets are set• Inspections are replaced by supplier quality

assurance• Contracts are awarded on lowest price • Long-term relational contracts are awarded

on quality and delivery performance, flexibility and willingness to pursue JIT

• Wide supplier base and competitive orientation support opportunistic switching

• Narrow supplier base allows focus on relationship and supplier development

• Administrative bureaucracy and formal communication interfaces to control supply

• Internal flexibility and communication

Limitations and risks to JIT • The gains of JIT are offset by some reduction in capacity

utilisation, loss of economies of scale, and additional transport costs

• The gains of JIT come at a risk: there are no time or stock buffers, if the supplier or the system fails

• There may be additional costs associated with the evaluation, development and management of high-quality, long-term supply partners

• ‘What might look like a cost saving to one firm could mean increased costs to the supply chain as a whole’ (Christopher)

• Buyers may pay a higher unit price to compensate for the supplier’s costs in supplying on a JIT basis

Key principles to lean thinking• Specify what creates value as seen from the

customer’s perspective• Identify all steps across the value stream• Make actions that create value ‘flow’• Only make what is pulled by customer demand, just

in time• Strive for perfection by continually removing

successive layers of waste

Taichi Ohno’s seven wastesWASTE ACTIVITY

Over-production

Transportation

Waiting

Motion

Over-processing

Inventory

Defects and corrections

The 5-S methodology• Shitsuke – or Self-discipline

a foundational value of the framework, and of kaizen in general

• Seiri – or Straightenvaluing tidiness

• Seiton – or Sortestablishing a state of orderliness

• Seizo – or Sweepvaluing cleanliness

• Seiketsu – or Standardisespecifically, standardising clean-up processes

Benefits claimed for lean supply• The progressive removal of wastes, reducing costs and improving

quality• Closer collaborative relationships within the supply chain,

creating opportunities for shared competitive advantage and synergies

• Cross-functional teamworking, involvement and flexibility within the organisation

• Reduced inventories (also improving cashflow)• Shorter cycle and delivery times, enabling better service to

consumers• More efficient process flows, allowing better resource utilisation• Fewer defects, creating customer loyalty and lower failure costs

Requirements for achieving agility • Streamlining the physical flow of parts from suppliers• Streamlining and synchronising the flow of

information• Adaptability in responding to changing needs of the

market• Measuring the performance of the supply chain using

suitable agility metrics

Agile v lean supplyDIMENSION AGILE SUPPLY LEAN SUPPLY

Focus Rapid response to unpredictable demand

Meeting predictable demand efficiently Eliminating waste from the supply chain

Most powerful when: Service and customer value enhancement are key

Cost and quality are key

Inventory strategy Deployment of buffer or work in progress stock to meet demand

Minimal inventory, high stock turn

Capacity management Late customisation Pull systems (eg JIT)

Lead time strategy Invest aggressively in resources for shortest possible lead times

Shorten lead time where compatible with cost reduction

Supplier selection Based on speed, flexibility plus quality Based on cost, quality

Supplier relationships Fluid ICT-integrated (virtual) network: rapid and short-term partnership to seize opportunities

Long-term partnerships with downsized supply base

Work organisation Self-management, entrepreneurship, flexible response

Standardisation for efficiency

Performance measures Customer-facing metrics World class measures

Demand/supply characteristics and pipeline selection strategy

The trade-off model

The sand cone model

The MOST framework for BPRManagement • Leaders must redefine the business sequence from customer requirement to

fulfilment• Leaders must develop, communicate and model the vision for effective change• Leaders must take the decision to stop doing things that only add marginal

value, and to automate or outsource activities where possible

Organisation • Horizontal structures and accountabilities should be formed to deliver outputs across functional boundaries

• Work organisation should be re-designed, removing work fragmentation and bureaucratic (vertical) structures

Social systems • People should be given accountability for larger and more meaningful tasks• The role of management will change: decentralising authority and

accountability, changing from internal to external focus, facilitating rather than controlling

• The organisation culture may need to change

Technology • Extensive use of ICT supports BPR through integration, communication and decision support

• Activities not requiring or facilitating human decision-making should be automated to reduce costs

PRECONDITIONS FOR SUCCESS OF BPR REASONS FOR FAILURE OF BPR

Senior management support The wrong sponsor

Realistic expectations Cost-cutting focus

Empowered and collaborative workers

Narrow, technical focus

Strategic context of growth and expansion

Unsound financial condition of the organisation

Shared vision Too many projects underway

Appropriate investment of resources Fear and lack of optimism

BPR: preconditions for success and reasons for failure

Benchmarking approaches• Internal benchmarking

comparison with high-performing units in the same organisation

• Competitor benchmarkingcomparison with high-performing competitors in key areas

which give them their competitive advantage

• Functional benchmarkingcomparison with another, high-performing organisation

• Generic benchmarkingcomparison of business processes across functional and

industry boundaries

Supplier performance benchmark report

• Planprocesses that balance aggregate demand and supply to develop a course of

action which best meets sourcing, production and delivery requirements

• Sourceprocesses that procure goods and services to meet planned or actual demand

• Makeprocesses that transform product to a finished state to meet planned or actual

demand

• Deliverprocesses that provide finished goods and services to meet planned or actual

demand

• Returnprocesses associated with returning or receiving returned products for any

reason, and including post-delivery customer support

The Supply Chain Operations Reference (SCOR) model

• Developing a more comprehensive understanding about the process being analysed, especially relating to cost and performance

• Moving the organisation from ‘compliance’-based quality systems (conformance to specification and standards) to performance-based evaluations

• Replacing an ad hoc or subjective approach to improvement and competition with a set of objective, systematic criteria

• Raising awareness of changing customer (and other stakeholder) needs and expectations

• Encouraging innovative thinking for process improvement• Establishing realistic but stretching goals and action plans for

process improvement

Potential advantages of benchmarking

Porter’s generic strategies for competitive advantage

Innovation capability advantages• Capturing new ideas and technological developments, and

recognising market opportunities more creatively or swiftly than competitors

• Translating new ideas into business process (re)design more swiftly and effectively than competitors

• Translating new ideas into deliverable and marketable products and services more swiftly or appealingly than competitors

• Securing design rights and patents on new products to create barriers to imitation

• Getting new products and services to market more swiftly or cost-effectively than competitors

• Marketing new ideas to early adopters and influencers more effectively than competitors, in order to secure the diffusion of innovation

• Consistently excellent customer service, seeking not just to ‘satisfy’ but to ‘delight’ the customer at every point of contact and every service encounter

• Leveraging technology tools eg to personalise communications, establish ongoing dialogue and multiple-contact relationships with customers, or develop customer communities and ‘belonging’

• A distinctive character of customer service• Supply chain agility and responsiveness for the late

customisation of products• The development of a total service experience

Customer care as a source of differentiation

• Threshold competencies the basic capabilities necessary to support a particular

strategy or to enable the organisation to compete in a given market

• Core competencies distinctive value-creating skills, capabilities and resources

which add value in the eyes of the customer; are scarce and difficult for competitors to imitate; and are flexible for future needs

Competitive resources and competencies

Potential supplier contributions• New product development and process innovation

contributing ideas based on their expertise in the materials, components or technologies involved

• Availability and deliveryoffering swift, flexible delivery of inputs

• Qualityensuring the quality of the materials and components delivered;

collaborating with purchasing and operations to improve quality management processes; and committing to continuous improvement programmes

• Value for moneykeeping materials, supply and inventory costs low, or collaborating

with the organisation on cost reduction programmes

• Service, advice and informationeg in the case of advertising agencies, management consultancies,

third-party logistics providers and so on

Relationship managementA range of activities designed to:

• Gather information about the other parties in the supply market and existing supply network

• Segment and prioritise the firm’s portfolio of commercial relationships

• Develop approaches and action plans for managing key relationships

• Implement action plans for communication and collaboration• Monitor and evaluate the effectiveness of relationships and

communication

Risk assessment grid

The Kraljic procurement portfolio matrix

Limitations of Kraljic’s matrix• The analysis largely ignores the fact that not all

supply risks arise within the buyer-supplier relationship, or can be mitigated by developing and managing such relationships

• The analysis applies primarily to supplies, rather than to suppliers

• The perceptions of a buyer and its suppliers may differ

The supplier preferencing model

The relationship lifecycle

Using the lifecycle model

• Where in the lifecycle is the relationship with a given supplier or client?

• Where should it be, in light of the type of purchase – and how can this be managed?

• What risks and conflicts of interest are likely to arise at each stage of the cycle, and how can they be managed?

• What opportunities for competitive advantage are presented at each stage?

Lifecycle models draw attention to helpful questions such as:

• Monitoring and managing risks of being ‘locked into’ longer-term ties, given environmental changes

• Improving communication at all levels and points of contact between the organisations

• Implementing or improving performance measurement• Ensuring strategic as well as operational ‘fit’ between the

organisations• Monitoring ‘trade-offs’ in the objectives of the alliance

Managing a shift towards closer relationship

Supplier incentives• Staged payments or contingency

payments • Specific key performance

indicators (KPIs) or improvement targets linked to recognition and rewards

• Revenue, profit or gain sharing • The promise of long-term business

agreements or increased business, or the award of ‘preferred supplier’ status

• Guaranteed or fixed order levels• Opportunities for innovation

• A capped price for the product or service that decreases year on year, motivating the supplier progressively to improve efficiency in order to preserve his profit margins

• The offer of development support • Supplier award programmes,

giving high-performing suppliers public recognition

• Positive feedback sharing, praise and thanks from the buying team for a job well done

• Model the behaviours you expect• Keep and exceed commitments• Proactively develop trust• Disclose information• Measure trust• Be empathetic: understand the impact of your

actions through the eyes of the other party

Six key elements to developing high-trust supplier relationships

Termination: key issues• Timing

Whenever possible, the termination should coincide with expiration of a current agreement or contract

• Relationship aspectsTerminations should be handled constructively and

professionally, in order to avoid hostility and reputational damage

• Legal considerationsThese should be anticipated in drawing up supply contracts, but

may need to be negotiated

• Succession issuesBefore terminating a supplier, steps should be taken to secure

continuity of supply

Step 1: Which markets and which products and services?

Step 2: Sell the idea

Step 3: Choose your partners

Step 4: Define what you want from the partnership relationship

Step 5: Make your first partnering relationship work

Step 6: Refine and develop

Creating partnership sourcing arrangements

Selecting suitable partners• Has the organisation signalled a willingness

or commitment to a partnership-type arrangement?

• Is the organisation willing to commit resources that it cannot use in other relationships?

• How early in the product design stage is the organisation willing or able to participate?

• What does the organisation bring to the relationship that is unique?

• Will the organisation have a genuine interest in joint problem solving and a win-win agreement?

• Is the organisation’s senior management committed to the process inherent in strategic partnerships?

• Will there be free and open exchange of information?

• Does the organisation have the infrastructure to support such cross-functional interdependence?

• How much future planning is the organisation willing to share with us?

• Is the need for confidential treatment taken seriously?

• What is the general level of comfort between companies?

• How well does the organisation know our business?

• Will the organisation share cost data?• What will be the organisation’s

commitment to understanding our problems and concerns?

• Will we be special to the organisation or just another customer or supplier?

Factors constraining relationship development• Lack of support from senior

managers in the organisation, or in the purchasing function

• Conflicts of interest between the two parties

• An adversarial approach on the part of a buyer or supplier,

• Imbalance of power between the parties, and the exploitation of the weaker party by the stronger

• Lack of trust

• Changes of personnel• Communication breakdown• Dissatisfaction, conflict and

lack of trust arising from repeated failure to meet agreed terms (or expectations)

• Incompatibility of culture and values, processes and procedures, or systems and technology

• Commercial factors

Price management• Price analysis

the process of seeking to determine if the price offered is a fair and appropriate price for the goods

• Cost analysis often used to support price negotiations where the supplier

justifies its price by the need to cover its costs

• Price leveragecan be secured in the supply chain by means such as:

• aggregating demand or consortium buying• negotiating ‘harder’ on price • using competitive leverage sourcing methods (such as e-auctions

or competitive bidding)

Cost analysis

• Cost analysis can be used to keep prices realistic and to negotiate reduced prices

• It focuses attention on what costs ought to be involved in producing the goods or services

• It identifies the minimum price the supplier can afford to charge for sustainable supply

• It enables the buyer to estimate how valuable the business or contract will be to the supplier

If buyers can ascertain the supplier’s cost structure, the information will be useful in several ways:

Open book costing

• Giving the buyer a better understanding of the supplier’s operations, processes and capabilities

• Allowing buyer and supplier to collaborate on finding ways to reduce costs and add value

• Developing trust by reassuring the buying organisation that it is receiving supply value

Supporters of open book costing argue that increased cost visibility supports supplier development by:

Pricing arrangements• Fixed pricing

fixed amounts are agreed in advance

• Variable pricingthere is an agreed price review and adjustment process and/or

an agreed formula or index for price adjustment over the life of the contract

• Incentivised pricingagreed incentive fees are added to a fixed price for attainment

of specified KPIs, and/or formulae agreed for sharing cost savings

• Cost-plus pricingthe buyer agrees to reimburse the supplier for all allowable,

allocable and reasonable costs incurred in performing the contract, in addition to an agreed profit percentage

Pricing arrangements (showing risks to the buyer)

Variable pricing

• Under-estimation of costs at the forecasting stage • Price inflation, escalating materials costs• Wage inflation, escalating labour costs• Commodity and energy price fluctuations• Exchange rate fluctuations • Overtime or incentive payments required to ‘crash’ the schedule• Failure costs incurred by unforeseen quality problems• Changes in the scope of the contract• Unforeseen contingencies

The supplier’s costs in performing a contract may fluctuate for a wide range of reasons:

Cost plus pricing• A cost plus fixed fee (CPFF) contract

includes payment of allowed costs plus a predetermined fixed amount, as the fee for doing the work

• Cost without feefor non-profit-making providers

• Cost sharingwhere the supplier stands to benefit from its own work

• Time and materialsfor contracts where the precise work to be done cannot be

predicted in advance

Target costing• The cost-plus approach

Builds up the cost of a product by analysing its components step by step. A profit margin is then added and the result is the selling price of the product.

• A target costing approachThe supplier estimates the maximum selling price that the

market will be willing to pay for a product with specific features, or negotiates a maximum price (including an agreed profit) with a particular buyer. It then works backwards to calculate the production cost that must be achieved in order to provide a reasonable profit, and attacks costs to reduce them to the required level.

Options for incentivisation• Staged payments or contingency payments• The establishment of a negotiated target cost for supply, on which a

fixed maximum price is based• Specified bonus payments (or incentive fees) added to the fixed price• A cost plus incentive fee (CPIF) arrangement, offering payment of

allowed costs plus a higher fee for meeting or exceeding performance or cost targets or KPIs

• A cost plus award fee (CPAF) arrangement, offering payment of allowed costs plus a fee (bonus) based on the contractor’s performance

• Revenue, profit or gain sharing• A fixed price for the product or service that decreases year on year

through the contract, motivating the supplier progressively to improve efficiency in order to preserve its profit margins

The gainshare model• Negotiated cost

Selling price = £1,000Supplier production cost = £800Supplier profit = £200

• Actual costsSupplier production cost = £600Savings from original cost = £200

• A 50: 50 gainsharing arrangement would divide the £200 savings between both parties. Both buyer and supplier would benefit equally from the supplier’s cost reduction:

Buyer savings = £1,000 – £900 = £100Supplier profits = £900 – £600 = £300 (an additional

£100)

Evaluating gainsharingADVANTAGES DISADVANTAGESCan generate a win-win culture and improved relational interface; can also provide a foundation for more significant programmes of change and continuous improvement

Complex projects can be unwieldy and some of the gainshare motivational aspects for both supplier and buyer companies may be lost in that context

Flexibility – gainshare clauses can be negotiated to suit each particular contract

Needs to be overseen, reviewed and managed on a regular basis

It can be used to focus attention on supply chain productivity by working more efficiently and effectively

Business systems need to be transparent, clearly understood, and easily measured by both parties

Can help to improve the operational and financial performance of both supplier and buyer company

High level of mutual trust required

Gainsharing schemes can have a positive impact on negotiations between buyer and supplier; in this context, it can help to foster a partnership approach

Flexible KPIs – frustration might ensue if the gainshare clause is set up in a totally rigid manner and cannot accommodate changing circumstances beyond the control of both parties

Gainsharing creates both an opportunity and a rationale for greater supplier involvement

Understand the drivers for reducing costUnderstand why excess costs exist in the supply chainFocus and prioritise cost-down initiativesDevelop appropriate strategies and tacticsReview and measure performance

Five steps to supply chain cost reduction

Collaborative approaches to supply• Cost reduction opportunities are not confined to the buyer or

supplier organisation, but arise from their interaction or ‘linkages’ in the value chain

• Collaborative approaches seek to secure end-to-end supply chain cost reductions, increasing the competitiveness of the whole supply chain

• Techniques such as target costing, open book costing and cost transparency depend on close co-operation and trust between members of the supply chain

• Cost reduction approaches such as lean supply, supply base rationalisation, outsourcing, early supplier involvement, simultaneous engineering, systems integration and collaborative demand management all depend on the development of close, trusting, long-term relationships with supply chain partners

• They can lead to unnecessarily high procurement costs• They fail to exploit the value-adding and competitive

potential of concentrating on more collaborative relationships with fewer suppliers

• They can lead to waste, by retaining suppliers who cannot meet the firm’s requirements, or are otherwise not often used – and perhaps by increasing stock variety and proliferation

Key disadvantages of multiple sourcing arrangements

• Reducing market engagement, sourcing and transaction costs

• Reducing supplier management costs• Freeing up procurement capability for strategic cost

reduction activities • Leveraging supplier relationships and capabilities for

ongoing continuous improvement, waste elimination and other cost reduction programmes

Cost advantages of supplier rationalisation

Supplier rationalisationSupplier analysis and segmentation

• Detailed analysis of current supply base

Establish evaluation criteria

• Develop business retention criteria and performance qualifiers: clear business indicators and order-winning criteria for the requirements being supplied

• Tactical criteria can also be established

Supplier evaluation • Review suppliers against the established qualifiers

Supplier selection • Internal communication is essential: supplier elimination, without process checks and balances, may cause conflict with other stakeholders

• Check existing contractual obligations• Design specifications as a mechanism to minimise future

increases of the supply base

Implementation plan • Develop a realistic time-phased plan for implementation• Remove de-selected suppliers in a professional and ethical

manner

Aggregation of requirements• Centralising procurement• Using purchasing cards for low-value, recurring purchases • Negotiating volume, systems or call-off contracts • Initiating consortium or collaborative procurement with

other sites, units or organisations • Implementing standardisation and variety reduction

exercises• Designing or redesigning logistics networks to support

consolidated orders• Outsourcing processes and activities to third parties,

which are able to aggregate the requirements of multiple clients and pass on economies of scale

Consortium procurementAdvantages• The consortium can obtain

discounts that would not be available to individual members

• A consortium can establish framework agreements, simplifying purchase administration for members

• Consortium members can pool expertise, knowledge and contacts

Disadvantages• Costs and effort associated with

communication and coordination, and staff and policy development

• There is an issue of transparency between consortium members

• Consortia may suffer from lengthy negotiation and decision processes

• Members are not obliged to purchase to the agreed specification

• Very large consortia may fall foul of laws and regulations designed to prevent dominant market players from abusing their dominant market position

Value analysis – tests for value• Does use of the material, part or process contribute

value?• Is the cost of the material, part or process

proportionate to its usefulness?• Are all the product features actually needed?• Can a lower-cost method be used while retaining the

features and functions that add value?• Is anyone paying less for this part?

The value analysis process • Information• Speculation• Analysis• Proposal

Types of cross-functional team• Multi-functional or multi-disciplinary teams

bring together individuals from different functional specialisms or departments, so that their competencies can be pooled or exchanged

• Multi-skilled teamsbring together a number of functionally versatile individuals,

each of whom can perform any of the group’s tasks

• Project teams and task forcesshort-term cross-functional teams formed for a particular

purpose or outcome and disbanded once the task is complete

• Virtual teamsinterconnected groups of people who function as a team but

who are not physically present in the same location

Cross-functional team downsides• While representing different viewpoints and interests can enhance

decisions, it also adds potential for time-consuming complexity, conflict and consensus-seeking

• Matrix-style structures and cross-functional relationships may lack clear lines of authority

• There may be difficulties of dual authority structures and conflicting demands

• All teams take time to develop before they perform effectively• There may be practical difficulties of organising meetings and

information flows, given different functional work patterns, locations and so on

• Teams may themselves become mini ‘silos’, separated from functional departments

Cross-functional input

• Supply market awareness• Supplier contacts• Awareness of commercial aspects of procurements• Awareness of legal aspects of procurements• Procurement disciplines

The procurement function is in a good position to add value through contributing:

Early supplier involvement (ESI)ADVANTAGES OF ESI DISADVANTAGES/PROBLEMS OF ESI

Quicker development lead time to bring a concept to the market

Longer development lead time, if the process is conflicted or inefficient

Improved product specifications and improved manufacturability of products

Heavy investment in inter-company communication

Enhanced quality and lower development costs

May get ‘trapped’ with incompatible supplier because of co-investment in R & D

Access to new technologies ahead of competitors

Potential for conflict from different goals and agendas

Shared expertise for problem-solving Risk if supplier or technology is unfamiliar

Exchange of knowledge and information, building trust and alliance

Risk of leakage of information and intellectual property

Improved understanding of supplier capabilities

Risk if products or services are designed around the supplier (dependency)

Defining innovation

• InventionScientifically or technically new ideas are devised for a

product or process

• InnovationThe ideas are developed into marketable products and

processes, which are introduced to the market

• Diffusion (or dissemination)The innovation proves successful and gradually comes to be

widely available for use

Three stages in the process by which new ideas develop and become adopted by an industry or market:

The supply innovation process• Development and application of new products,

processes, and services to satisfy previously unmet market needs

• Development and application of new products, processes, and services to serve existing market needs

• Use of existing products, processes, and services in new applications

• Incremental improvements to existing products, processes, and services for their existing applications

ORGANISATION ACTIONS OUTCOME

Starbucks Starbucks will work with its suppliers to develop a paper coffee cup that contains 10% post-consumer recycled paper. A first for this industry.

The cup has created a new greener product which other companies can now purchase and has the capacity to become the new market standard.

Unilever and ‘Refrigerants, Naturally’

A commitment to replace hydro-fluorocarbons (HFCs) with hydrocarbons (HCs) in point-of-sale cooling applications.

All ice cream cabinet suppliers in Europe are now capable of producing HC refrigerated units.

FCP driving supply chain innovation

Innovation council functionality

Supplier associations• Facilitate the flow of information across the supplier network, and the

level of effective communication between buyers and suppliers• Create ‘virtuous circles’, where best practice and positive feedback

sharing creates a cascade of learning and improvement through the supply chain

• Keep suppliers in touch with market developments• Increase supply chain agility and flexibility, enabling more responsive

adjustments to market developments• Support early supplier involvement and supply chain innovation• Help smaller suppliers lacking specialist resources • Support supplier development and sustainability as a result of

increased market share, stable business relationships and disseminated knowledge

• Increase the duration and strength of business relationships

Knowledge communities• Organisations increasingly need their employees to become

‘knowledge workers’

• Knowledge communities link people who are interested in jointly developing a shared collection of resources to support work in a specific field

• Knowledge communities are also useful in:• orienting new employees• helping customer-facing staff to respond to customer problems and questions• saving time on the ‘reinvention of the wheel’ • developing and disseminating best practice• generating new ideas

• It may be argued that they also encourage performance-focused communication, collaboration and problem-solving within an organisation and stakeholder networks

Drawbacks of technology• High capital investment and set-up costs • High initial learning curve costs• Reliability issues• Compatibility issues

The executive sponsor’s role • Coordinate internal and external interactions with key suppliers and

take on responsibility for overall supplier performance and relational development

• Ensure the alignment of organisational strategic objectives with supplier development objectives across all touch-points

• Actively promote the relational alliance concept within both buyer and supplier organisations

• Review achievements related to mutually established key initiatives that are required to bring added value to the relationship and ensure that expectations are being met

• Resolve relational barriers• Input suggestions and recommendations for future supplier

relational enhancements

Supplier development programmes

Supplier development programmes

Supplier development activitiesBUYER’S PERSPECTIVE

COSTS BENEFITS

Cost of management time in researching, identifying and negotiating opportunities

Support for outsourcing strategies

Cost of development activities and resources: risk of over-investment in a supply relationship which may not last or prove compatible

Improved products and services: time-to-market, quality, price, delivery – supporting increased sales and profitability

Costs of ongoing relationship management (where required)

Streamlining systems and processes: reduced waste, process efficiencies, cost reduction

Risks of sharing information and intellectual property

Gaining discounts or other benefits as a quid pro quo for development

Supplier development activitiesSUPPLIER’S PERSPECTIVE

COSTS BENEFITS

Cost of management time in researching, identifying and negotiating opportunities

Support for production and process efficiencies and cost savings

Cost of development: risk of over-investment/over-dependence, if customer turns out to be demanding or unprofitable

Improvements in customer service and satisfaction, leading to retained or increased business

Costs of ongoing relationship management (where required)

Improved capacity and service levels, leading to additional sales to other customers

Risks of sharing information and intellectual property

Direct gains in knowledge and resources provided by the customer

Cost of discounts or exclusivity agreements given as quid pro quo

Enhanced learning and flexibility: skills for problem-solving and continuous improvement

The general impact of technology• Opening up new supply markets • Changing business processes• Raising supply chain capacity and productivity• Improving communication and the visibility of information

throughout the internal and external supply chain• Changing the way that supply chains are organised and managed• Offering opportunities for cost reductions, through a wider supply

base, streamlined processes and lower prices• Freeing up procurement professionals’ time• Enhancing management information and feedback • Supporting the development of supply chain relationships• Reducing the risk of fraud

• IndependenceProcurement operates within its own guidelines, with a focus on

functional efficiencies and improvements.

• DependenceProcurement dovetails with other functions via consultation and

reporting, but still uses a standalone information system.

• Business integrationProcurement systematically integrates with other functions in the

internal supply chain.

• Chain integrationProcurement has a key role in securing systematic co-operation and

information-sharing across the supply chain.

The development of procurement systems

The e-purchasing process

Inventory management systems• Demand management: ensuring that supplies are available in the

right quantities at the right time • Forecasting demand in order to avoid over-stocking• Controlling stock levels, and monitoring and maintaining target

minimum and maximum stock levels• Ensuring that supplies are replenished in accordance with

procurement policies• Developing cost-effective systems and procedures for ordering and

procurement of supplies• Controlling the receipt, inspection, storage and issuing of supplies to

users• Ensuring that stocks are safe and secure from deterioration,

damage, theft or obsolescence

Requirement planning systems• Integrated systems for resource planning

• materials requirements planning (MRP)• manufacturing resources planning (MRPII) • enterprise resource planning (ERP)

• Design and development systems • computer aided design and manufacture – CAD/CAM

E-sourcing tools• E-catalogues

suppliers exhibit their products in electronic catalogues, which can be viewed online or downloaded by potential purchasers

• Supplier portals and market exchangessites where multiple buyers and sellers share information about

requirements and offerings

• Online supplier evaluation data third party reports, customer feedback, approved or accredited

supplier registers and directories, benchmarking reports, market intelligence tools and so on

• E-auctions,conducted online using the buyer’s or seller’s website, or third party

auction sites

• E-tendering, using e-RFQs (electronic requests for quotation) and specifications

posted online or emailed to potential suppliers

E-auctionsBenefits • Efficient administration and reduction in

acquisition lead time• Savings for buyers, as a result of

competition• Improved value for buyers• Access for buyers to a wider range of

potential suppliers • Less time ‘wasted’ on interpersonal

interaction • Opportunities for suppliers to enter

previously closed markets or accounts • Opportunities for suppliers to gather

competitor and market pricing data

Criticisms• Based on a zero-sum, adversarial or

‘win-lose’ approach• Suppliers are vulnerable to coercion

and manipulation • There may be long-term adverse effects

on the economic performance of the supplier

• There may be long-term adverse effects on the economic performance of the buyer

• Promised savings may not materialise• Suppliers get the message that price is

the most important factor in winning business

• The process leaves little scope to take adequate account of non-price criteria

E-tendering• The invitation to tender (ITT) is published on the buyer’s e-tender

web portal, for potential suppliers to view• Suppliers respond to the ITT by sending their bids using secure

email to the e-tendering system’s ‘electronic vault’, and are registered as bidders

• Buyers can observe and manage the tendering process through a ‘front end’ web function

• In-built security features prohibit access to any of the tender responses until a specified time

• The system may include automatic scoring and evaluation capability

• Successful and unsuccessful bidders can be automatically notified of the award

Potential benefits of e-sourcing• Reduced costs through increased process efficiencies, reduced

sourcing costs, improvements in contract performance management etc

• Best practice development: consistent, transparent use of controlled procedures

• Enhanced quality and capability, because the total sourcing and management process is transparent

• Reduced sourcing cycle times• Enhanced internal collaboration• Improved training and efficiency• Strategic focus: allowing procurement professionals to focus

on value-adding and strategic activity

Computerising the P2P cycle • Electronic data interchange• Online track and trace• Expediting by exception• Receipt and inspection• Invoice management and electronic payment• Contract management systems• Database information

• Electronic communication toolssynchronous conferencing, e-mail, instant messaging,

webcasting and web publishing and so on

• Electronic conferencing toolsfacilitate the sharing of information in an interactive way

• Collaborative management toolsfacilitate and manage group activities

Three levels of collaborative technology

Cloud computing• Infrastructure

• eg computers, servers, networks and storage capacity• installed in data centres

• Platforms• eg operating system, database, web server and development tools• allow application developers to develop and run software solutions on

a cloud platform

• Software• eg email, communication, office productivity, CRM and SRM• the users do not need to install or run the applications on their own

computers, simplifying maintenance, support and flexibility

Integrated supply chain management softwareOne example is SAP’s software suite for:

• Supply chain management (SCM)• End-to-end logistics and fulfilment• On-time, on-demand supply chain• Quality management through network traceability

• Completeness or adequacy for its purpose• Timeliness, currency or up-to-dateness• Accuracy

in the sense of correctness or freedom from error

• Validityin the sense of internal consistency and/or authorisation

Four basic dimensions of data integrity

Risks to data security • Unauthorised access to confidential or commercially sensitive data• Industrial espionage, data fraud and data theft• Data corruption • Input or transcription errors • Lack of controlled data management, protocols and ‘housekeeping’

disciplines • Systems failure, and associated data loss • Lack of systems integration and compatibility • Compliance risk in regard to law and contractual provisions • Risks to the organisation’s intellectual property• Risks to the confidentiality of the organisation’s sensitive

commercial data• Turnover of key personnel and/or the outsourcing of organisational

activities

• Systematic risk assessmentidentification of assets, vulnerabilities and threats, and

analysisof risks

• Risk management planning:proposing counter-measures to ‘treat’ identified risks,

including prevention, detection and response to threats

• Agreement, implementation, testing and evaluation of the risk management plan

A typical IA (information assurance) project

• To recognise the impact of buyer-side processes and behaviours on the performance, efficiency and sustainability of the supply chain

• To identify problems within the buyer-supplier relationship that may impair the performance of either party, with a view to collaborative problem resolution

• To support long-term value-adding relationships, by ensuring mutual advantage and the equitable sharing of relationship risks and rewards

• To encourage collaboration on continuous measurable improvements in supply chain performance and relationship satisfaction

Objectives of joint performance appraisal systems

BENEFITS FOR THE BUYER BENEFITS FOR THE SUPPLIERElimination of waste at the interface between buyer and supplier

Improved financial stability and ability to plan resources over longer period

Improved quality and delivery Better payment arrangementsShorter lead times Improved process capabilityEnables unnecessary cost to be ‘designed out’ of products

Opportunities to improve management capability

Improves security of supply Improved knowledge of buyer’s situation

Increases purchasing’s contribution to profit

Benefits of joint performance appraisal

Operational performance measures• Fairness, transparency and efficiency of quotation and tender

processes• Efficient and fair negotiation of contract terms and contract

management • Quality of information and communication • Prompt and fair payment of invoices• Accessibility of the buyer in the event of queries or problems• Constructive handling of conflicts or disputes• Collaboration on reverse logistics• Ethical conduct • Fair sharing of the risks and rewards of supply, innovation and

so on

Performance measuresSUPPLIER SATISFACTION MEASURES:WHAT DO OUR SUPPLIERS WANT AND NEED FROM US?

SUPPLIER CONTRIBUTION MEASURES:WHAT DO WE WANT AND NEED FROM OUR SUPPLIERS?

• Supplier satisfaction level• Average spend per supplier• Average supplier retention (length of

service)• Percentage of value purchased through

single-source supplier arrangements• Percentage of suppliers to whom demand

visibility provided• Level of demand forecast accuracy• Level of specification changes• Level of supplier payments overdue• Level of supplier billing errors

• Contribution to revenues and cost savings• Complaints about supplier performance• Level of product quality non-conformance• Level of late deliveries (to promise or

request)• Level of after-sales product or service

problems• Level of customer warranty or liability

claims attributed to supplier failure• Level of supplier-generated improvement

suggestions contributed and implemented• Perceived value for money of supplier

contribution

• Whether the relationship is being suitably managed• Contract performance and therefore the quality of contract management• Operational efficiency• The quality of rapport, trust, communication and problem-solving • The fair sharing of the risks, costs and rewards of doing business together• How effectively, positively and collaboratively problems and disputes are

resolved• The extent to which the supplier demonstrates willingness to go beyond

contract compliance to offer added value• The willingness and potential for the relationship to develop further and to

offer added value or competitive advantage for the supply chain

Key aspects of the supply relationship

A purchaser-supplier satisfaction model

Tools for moving positionsBUYER-SIDE CRUNCH TOOLS BUYER-SIDE STROKING TOOLS

Complete severance of purchases without advance notice

Granting of substantial volumes of business or long-term commitments

Refusal to pay bills Sharing of internal informationRefusal to accept shipments Evidence of willingness to change behaviourUse or threat of legal action Rapid positive response to requests from

suppliersSELLER-SIDE CRUNCH TOOLS SELLER-SIDE STROKING TOOLSRefusal to send shipments as promised Willingness to make rapid adjustments to

price, delivery etcUnilateral price increase without notice Inviting the purchaser to discuss areas of

differenceInsistence on unreasonable length of contract, onerous escalation clauses etc

Giving ample advance notice of pending changes in price, lead times etc

The balanced scorecard

A balanced scorecardSCORECARD PERSPECTIVE

FUNCTIONAL GOAL PURCHASING MEASURES

Customer (internal perspective, eg production departments)

Increase number of orders delivered on time

% orders delivered on time vs. number of deliveries due

Improve internal client satisfaction

Internal survey trend analysis – quarterly

Reduce number of reported stockouts

Monthly trend of reported stockouts

Improve internal customer communication channels

Number of purchasing-led internal meetings held per month

A balanced scorecard (cont.)SCORECARD PERSPECTIVE

FUNCTIONAL GOAL PURCHASING MEASURES

Financial (cost reduction and revenue generation)

Achieve increased environmentally orientated focus

Cost saving achieved per quarter via renegotiated ‘green’ suppliers

Negotiate and award new collaborative contracts

Number of new contracts awarded monthly

Increase purchasing leverage via collaborative partnerships

Cost savings achieved per quarter

Reduce purchasing administration overheads via the increased usage of vendor-managed inventory (VMI)

Number of VMI supply partnerships created per quarter and associated overhead savings (£)

A balanced scorecard (cont.)SCORECARD PERSPECTIVE

FUNCTIONAL GOAL PURCHASING MEASURES

Internal processes (functional efficiency improvements)

Increase number of purchase orders placed via e-procurement

Number of e-procurement orders per quarter

Improve departmental turn time for processing requisitions

(%) reduction of cycle times per quarter

Increase number of e-procurement suppliers

Suppliers added per quarter

A balanced scorecard (cont.)SCORECARD PERSPECTIVE

FUNCTIONAL GOAL PURCHASING MEASURES

Learning and growth

Increase purchasing employee training in hours

(%) of training hours vs. total available hours

Performance evaluations completed annually

(%) of evaluations completed

Performance evaluations with PDP targets aligned with strategic objectives (PDP = personal development plan)

Number of quarterly aligned personal development plan targets