designing supply chain processes and organizations

Daily Plan-Day 1

Supply Chain Management for Competitive Advantage Reference study: SCM Overview -2

Background of Supply Chain Management The supply chain network – a new business model? Competitive advantage from the supply chain SCM Maturity and Business Performance Supply Chain Visibility and its impacts Developing Supply Chain Management Key Performance Indicators mapped to business strategy. (SCOR Card)

1

Case Study or in class exercise 1

Form groups and complete a team exercise

Day 1 - AM

Designing Supply Chain Process and Organizations Reference study: Supply Chain Planning-14

The SCOR Model – Class Exercise Aligning the SC design with business strategies. Supplier Selection – A Strategic Decision Supplier Development – Building Capabilities SCM Organization Models and how they align to the supply chain strategy

Day 1 - PM

2

Review the Maturity Assessment

Team Exercises in Supply Chain Management Maturity. A review of the assessment results.

End of the day

Module Overview

• Supply Chain Processes

• Aligning SC Design with Business Strategies

• Supplier Selection -Supplier Development

• SCM Organization Models

Supply Chain Processes

Supply Chain Operations Reference Model - SCOR

Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Internal or External Internal or External

Your Company

Source

Return Return ReturnReturn Return Return Return Return

Systems and ProcessesWhat systems and processes should be in place to support Supplier Management?

Integrated Communication Architecture

Integrated Transactional Architecture

Integrated Forecasting and Planning Systems

Integrated Intelligence Portals

Supply Chain Strategy DevelopmentSupply Chain Design and Program Management

Strategic SourcingSupplier Relationship Management

Supply Chain Capacity Planning / Logistics PlanningReplenishment Planning

Operations (Purchasing Transactions, Contract Administration, Accounts Payable)

Performance Management, Quality ManagementMaster Data Management, Supply Risk Management,

Continuous Improvement, Contract Management

Strategic

Operational

Supporting

System

s

SCS

SCDSS

PM

SRM

Business Strategy

DM

Core SC Processes

SC ManagementProcesses (operational)

CM

PSRMRP

Orders

RP

MDM

Signal

APln

CI RM

PTCA

SC Supporting Processes

ENQM

AP

SC ManagementProcesses (Strategic)

Strategic

• Supply Chain Strategy (SCS)– aligns the Supply Chain with the business goals.

• Supply Chain Design (SCD) – establishes the supply chain network architecture, manages sourcing decisions and ensures that the components are aligned with corporate and supply chain strategy, and that our supply chains are as efficient and effective as required.

Operational

• Strategic Sourcing (SS) – the application of strategic actions to the supply network in support of the business goals. This process considers the market assessment of suppliers, internal user requirements & forecasts, and planning & execution of strategies. Example: SS includes the gathering of future supply chain needs/requirements, the evaluation, selection, negotiation, and integration of new suppliers.

• Supplier Relationship Management (SRM) – SRM aligns, provides structures, and manages the supplier relationships. As an example: SRM provides strategic plans for suppliers and an escalation model for non resolved issues.

• Supply Chain Capacity (aggregate) Planning (APln) - this process consists of monitoring and totaling the resource demands from all the individual demands (jobs – notifications) and matching this total against all the available sources of supply, internal or external, so as to balance demands with supply for both the short- (firm notifications) and long-term (forecast).

• Logistics (transportation) Planning, Scheduling and Coordination (LPSC) - this process consists of developing the plans for and the execution of the logistics and transportation resources and capabilities needed by internal customers.

• Replenishment Planning (RP) – the process consists of developing, deploying, maintaining and directing the parameters and resources which control and regulate the replenishment process and system.

Operational (Planning)

Contract Administration (CA) – a set of activities within an organization that supports administration of the terms of the contract and helps to manage changes in regards to terms such as prices, delivery, etc. It includes Interpreting the Terms of the Agreement, Monitoring Performance to Agreement, Identifying Improvements to the agreement, managing the changes to the Agreement, and initiating the Closing of the agreement. CA would also audit invoicing as per terms and conditions.

Purchasing Transactions (PT) - involves all transaction elements associated establishing low risk, low complexity commercial agreements for the supply of goods and services. The scope of activities include soliciting pricing, managing purchase orders, releases form contract, and management of pricing.

Accounts Payable (AP) – facilitates the timely and accurate payment of suppliers in accordance with the purchase agreement with that supplier.

Operational (Planning)

Supporting

• Supply Risk Management (RM) – assessment, evaluation and mitigation of the supply network disruption risk.

• Performance Management (PM) – aligns, structures and manages the performance measurement and management system.

• Contract Management (CM) – involves all activities associated with the creation of agreements for the supply of material and services between a company and suppliers.

• Master Data Management (MDM) –a set of activities within an organization that create, modify, maintain and control Master Data (pricing structures, approved suppliers, controls, approved material, approved buying channels, usage data) for the Supply Chain processes according to standard naming conventions / required elements.

Supporting

• Quality Management (QM) – involves the testing and examination of materials for specification compliance as well as performance. This also includes a system for establishing traceability of material quality and supplier testing as well as the management of certification documentation and change.

• Continuous Improvement (CI) –provides a structured and integrated process to identify and capture continuous improvement opportunities throughout the entire supply chain network including internal customers, tier-1 and tier-2 suppliers (relationships), and cross-functional teams.

• Enablers: defined as an infrastructure element; technology, leadership or organization, that enables process or performance. Enabler maturity reflects the increasing capability offered by the enabler and the breadth of its offering (inter functional, cross functional, cross company).

Aligning SC Design with Business Strategies

Mass Customization Invention

Mass Production Continuous Improvement

Pro

duct

Cha

nge

Process Change

Stable Dynamic

Sta

ble

Dyn

amic

Business Model Aligned withChange Conditions

Source: Lufttman Ch. 4


Mass Production Continuous ImprovementPro

duct

Cha

nge

Process Change

Stable Dynamic

Sta

ble

Dyn

amic



Creation through intellect and skillHigh differentiationDecentralizedBroad Jobs, few rulesSmall firms

Standardized, CentralizeRoutines WorkRules and Procedure DrivenEconomies of ScaleCost advantageMechanistic Organization

Advantages in Process Q, C and SProcess ImprovementCustomer Satisfaction Through PIProcess InnovationTeams – Horizontal Org

Customers demand drivenFlexibilityResponsivenessDynamic Networks



Pro

duct

Cha

nge

Process Change

Stable Dynamic

Sta

ble

Dyn

amic





Pro

duct

Cha

nge

Process Change

Stable Dynamic

Sta

ble

Dyn

amic

Automate Augment

Relationships

Tasks

IT Aligned withBusiness ModelAnd Change Conditions

Supplier Selection -Supplier DevelopmentSupply Base Optimization

Selection Process

Step 1: Recognize that a need exists to evaluate and select a supplier

Step 2: Identify key purchasing/sourcing requirementsStep 3: Determine appropriate sourcing strategyStep 4: Identify potential supply sources Step 5: Limit suppliers in selection poolStep 6: Determine method of supplier evaluationStep 7: Make supplier selection decisionStep 8: Negotiate and execute agreement

But it’s not that simple…

High OpportunityHigher RiskCommodities

Low Volume Purchases

Substitution difficult Monopolistic markets High entry barriers Critical geographic/

political situation

Lower OpportunityLower RiskCommodities

High Volume Purchases

BOTTLENECK SUPPLIES

Strategically important Substitution/alternate

supplier difficult Major importance for

purchasing overall

CRITICAL STRATEGICSUPPLIES

Availability adequate Standard specifications

of goods/services Substitution possible

NON-CRITICAL SUPPLIES

Availability adequate Alternative suppliers Standard product

specifications Substitution possible

LEVERAGE SUPPLIES

Instructions: Select a commodity category from your company and locate several sub-categories of it on the portfolio map below.

Commodity Portfolio Example: Category-MetalsSub- Categories-TitaniumStainless Steel-tubesStainless Steel- sheetsCarbon Steel

TitaniumStainless Steel-tubes

Carbon Steel Stainless Steel -sheets

Supply Base Portfolio Analysis

Value to

Buyer

Number of Capable Suppliers

Low

High

Few Many

Strategic Leverage

Acquisition Multiple

Categorizing Suppliers

Supplier PerformanceDefects/Total Cost/Late Delivery/Cycle Time/Service/Safety/Environment

Sub Category

TOP TENLIST

TOP TENLIST

SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED SUPPLY BASE

SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED SUPPLY BASE

High Performance

Minimally acceptable performance driven by customer requirements

High

Low

Eliminate

Eliminate

Identify Candidates for Development

Instructions: Select a 3 or 4 suppliers from your company for a sub category, select a performance measure (Quality, On time delivery, Cost, etc.) and plot them on the portfolio map below.

Carbon Steel

Sub Category Sub Category

TitaniumStainless Steel-tubes

Supply Base Optimization

• Supply base optimization or rationalization is the process of determining the right mix and number of suppliers to maintain

• A continuous process that strives for the ideal number and mix of capable suppliers– Optimization does not only mean adding or reducing suppliers. It

can mean switching suppliers, also – Optimization does not mean supply base reduction, although

historically North American firms have too many tier one suppliers

• As companies continue to rely on fewer total suppliers, the selection process takes on even greater importance


• Why is optimization critical?– The costs associated with multiple suppliers for each

purchased good or service usually outweigh any perceived reduction in supply risk

– Optimization is a critical prerequisite to the development of a world-class supply base

– Some leading-edge activities and strategies are simply not feasible with too large a supply base--

• Supplier integration• Collaborative agreements• Supplier development• Joint total quality/cost reduction efforts


• Adjustment activity over the last five years --– 74% of firms surveyed decreased their total

number of tier one suppliers • Average reduction was in the 21%-30% range

– 7% said the size of their supply base remained the same

– 19% increased the size of their supply base• Average increase was 10%

(Trent and Monczka 1998)


• Adjustment activity expected over the next several years --– 84% of firms surveyed expect to decrease their total

number of tier one suppliers

• Average reduction expected to be in the 21%-30% range

– 7% expect the size of their supply base to remain the same

– 9% expect to increase the size of their supply base• Average increase expected to be less than 10%

(Trent and Monczka 1999)


• Expected benefits of an optimized supply base --– Opportunity to work with world-class suppliers,

which leads to improved value-chain performance– Lower transactions costs--many suppliers creates

overhead– Leverage leading to lower purchase costs– Ability to pursue value-added activities– Reduced supply base risk (how can that be?)


• Formal Approaches to Supply Base Optimization

– Requires an analysis to identify the 20% of suppliers receiving the majority of purchase dollars

– A firm can also identify the minority of suppliers causing the majority of problems

– This approach often assumes the best suppliers receive the majority of purchase dollars--is this really the case?

20/80rule

20/80rule

These approaches adapted from Monczka, Trent, and Handfield, “Purchasing andSupply Chain Management,” and K.R. Bhote, “Strategic Supply Management”



– All suppliers, regardless of history, have a chance to remain in the supply base

– Suppliers have a specified period to meet stringent performance requirements in cost, quality, delivery, etc.

– Suppliers who fall short may soon become ex-suppliers– Suppliers may perceive this approach as heavy handed

Improve or Else Approach

Improve or Else Approach



– Requires careful evaluation of the performance record of each supplier to place suppliers into one of three categories

– First category (and likely the largest) includes those suppliers incapable of meeting current or future performance requirements

– Second category includes suppliers falling short but demonstrating performance potential

– Third category includes near-perfect suppliers requiring no improvement assistance

Triage Approach

Triage Approach



– Requires suppliers to pass a successive series of cuts to remain in the supply base

– Suppliers must pass a series of hurdles similar to climbing a staircase– Purchaser defines the hurdles--possible areas include quality, delivery,

technical capability, willingness to share information, supplier size

Competency Staircase Approach

Competency Staircase Approach


• Supply base optimization critical success factors– Time– Cross-functional teams– A supplier measurement system and data

warehouse– A strategy development process that considers

optimization goals– Overall supply base vision with management

support

Buyer-Supplier Relationships

• Developing closer relationships with suppliers is often an objective of the supplier evaluation and selection process

• The traditional supply model featuring multiple suppliers, short-term contracts, and mutual mistrust can create undesirable consequences--– Supplier profit maximization– No incentive to invest in assets to support the relationship– Limited joint innovation and improvement efforts– Higher transaction and maintenance costs– Limited opportunity to pursue value-creating activities with

suppliers

Buyer-Supplier Relationships

Spectrum of Buyer-Supplier Relationships

Antagonistic CollaborativeAdversarial Cooperative

Lose/Lose Win/Lose Win/Win

Parties work actively against the needs of the other

Neither party takes responsibility for anything that happens in the relationship

Parties are engaged in competitive struggle

Parties attempt to capture the maximum value for their side

Parties realize the benefit of working together

Closer relations are a result of mutual goals

Supplier input and involvement begins to increase

Congruence of goals exists

Parties work together to satisfy the needs of each other and create new value

Parties search for creative solutions jointly

Financial Ratio Analysis

• For new suppliers

• For purchase requirements involving significant dollars

• For critical items

• When pursuing longer-term agreements

• To manage business risk

• To eliminate marginal suppliers early in the evaluation process

Supplier Financial Analysis

Do it when?

Why do it?


Sources of Supplier Financial Information

Company-published annual reportsCompany-published annual reports

Company-supplied 10-K and 10-Q reportsCompany-supplied 10-K and 10-Q reports

Dun and Bradstreet reportsDun and Bradstreet reports

TRW credit reportsTRW credit reports

Trade and business journalsTrade and business journals

Supplier provided dataSupplier provided data


Liquidity Ratios

Leverage Ratios

Activity Ratios

Profitability Ratios

How capable is the supplier of meeting short-term cash needs?

Current ratio Quick ratio

Is the supplier over-leveraged and capable of paying long-term obligations?

Debt to assets Time interest earned Fixed charge coverage

How effectively is the supplier managing assets? Inventory turnover Average collection period Return on net assets

How profitable is the supplier? What rate of return is the supplier earning?

Gross and net profit margin Return on equity Return on investment

Specific techniques/tools/activities that firms employ in supplier development vary. The following framework organizes supplier development:

PRODUCT FOCUS PROCESS FOCUS

Supply BaseManagement

Activities

SupplierDevelopment

Activities

Provides for Overall Supply

Base Improvement

Provides forSpecific

Buyer/Supplier Improvement

New product development teams

Sharing forecasts with suppliers

Value analysis teams Cost savings projects Developing full service

supplier capabilities Co-location

Supplier awareness Supply base reduction Cost savings programs Supplier suggestion programs New product development

information sharing Technology sharing Part level qualification

databases

Supplier Quality Assurance programs

Supplier Councils Quality audits ISO 9000 Information system

developments EDI/planning systems

Buyer-supplier alignment Process mapping Quality engineering work

teams Joint cost savings sharing

projects Supplier training Supplier certification Supplier continuous

improvement Joint improvement efforts

Supplier Development Activities

SCM Organization Models


Mass Production Continuous ImprovementPro

duct

Cha

nge

Process Change

Stable Dynamic

Sta

ble

Dyn

amic


Creation through intellect and skillHigh differentiationDecentralizedBroad Jobs, few rulesSmall firms

Standardized, CentralizeRoutines WorkRules and Procedure DrivenEconomies of ScaleCost advantageMechanistic Organization

Advantages in Process Q, C and SProcess ImprovementCustomer Satisfaction Through PIProcess InnovationTeams – Horizontal Org

Customers demand drivenFlexibilityResponsivenessDynamic Networks

Margin

Volume

High Margin

Low Volume

Low Margin

High Volume

AugmentAutomate

Relationships

Tasks

ChevronTexaco Procurement

Chief Procurement Officer

Administrative Specialist

Gen. Mgr.CTOP

Gen. Mgr.CTNAU Gen. Mgr.

Midstream/Corp. StaffsSenior Legal Counsel

Gen. Mgr.Supplier

Management& Integration

Gen. Mgr.Strategic Sourcing

and Capital Projects

Gen. Mgr.Procurement Mgmnt

Technologies(eProcurement)

Business Manager

Vice Pres.Global Downstream

HR Business Partner

Supply Chain Organizations in Duke Energy

Global Sourcing & Logistics

VP Global Sourcing & Logistics& Chief Procurement Officer

ManagerStrategic Sourcing


General MgrPlng, Govern., etc.


Pres. And COODuke Energy Business Services

Note: Duke Energy has a matrixed, decentralized organization that works together throughthe Enterprise Procurement Council. Ultimately, everyone reports up to the Company president.

Inventory SupportHarold Dellinger

Inventory Support Contract Administration/HydroJack Shelton

Contract Administration/Hydro

Judy NealAdmv SpcJudy NealAdmv Spc

• Inventory Analysis• Data Base Management• Inventory Process• Stock Reorders (Carolinas) 3 Positions

Merchant Operations

Supply Chain Services provided at site

Material Handling & Storage

Invoice Processing

Inventory Management

Tools & Equipment

Contract Administration

Procurement

California C.T.Facilities 8CC & 4SC [20] [22]

General Manager F/H Supply Chain

Contract Adm6 positions

Tools &Equip

2 positions

HydroRegion

3 positions

Jerry MooreBelews Creek/Dan RiverManager

Material Handling6 Positions

On-Site Procurement2 Positions

Marshall/BuckJimmy BrownMarshall/Buck

Manager



Kay CourseyAllen / Riverbend / Lark



Cliffside/LeeRandy BennettCliffside / Lee

Manager



Manager

7

Duke Energy Field ServicesSupply Chain Organization

DirectorMaterials Management

RegionalMaterials Manager


CentralizedFleet Coordinator



Strategic Sourcing Manager


Shell Oil

• Decentralised worldwide procurement organisation about 2100 professional procurement staff across the globe.

• Shell's total 3rd party spend is about $30 Billion per year across all the Businesses in Shell

• One senior executive charged with looking after Procurement for the Royal Dutch Shell Group of Companies (Group Director of Contracting & Procurement).

• The Group Director of Contracting & Procurement reports to Vice Chairman of our Committee of Managing Directors (CMD).

• Heads of Procurement from Business report dotted line to Group Director

• Heads report directly to the Business Executive Committee and usually the CFO of that Business.

• The CMD is headed by the Chairman and the CMD operates much like an office of the CEO.

• In turn, the CMD is accountable to the Supervisory Board of Shell

Organization Principle

• Any organization requires both strong parts and a strong center. The term “Decentralization is actually misleading—though far too common by now to be discarded. Federal decentralization requires strong guidance from the center through the setting of clear, meaningful and high objectives for the whole. The objectives must demand both a high degree of business performance and a high standard of conduct throughout the enterprise.”[1]

•[1] Drucker, Peter, The Practice of Management, 1956, p. 214.

Conceptualized Supply Chain Organization

A d m in R e so u rce

M a na g erA c cou n ts P aya b le

S C M an a g erO il S a n ds

S C M an a g erN a tu ra l G as

S C M an a g erS a rn ia

S C M an a g erD e n v er

S C M an a g erP ip e lin es

S C M an a g erM a jo r P ro je c ts

S C M an a g erT o ro n to

D ire c to rS u p p ly C h a in

O p e ra tio ns

M a na g erM a s te r D a ta

5 R ep o rts

M a rke t In te llige n ce

M a rke t In te llige n ce

A u d itV e nd o r P e rfo rm a n ce

T ra in ing

S p e nd A na lys isS a v in g s M e a su re m e nt


B u s In te llig en ce /In teg ra tion

A d m in R e so u rce

S C M an a g erR e la tion sh ip M g m t

1 0 R ep o rts

S C M an a g erC o n tra c ting S tra te gy

1 2 R ep o rts


S tra te gy

V ice P re sid e n tS u p p ly C h a in M a na g e m e nt

S u p p ly C h a in C o u n c il

CEO

This is the ideal structure to enable this vision of a decentralized business process with a strong centralized vision, which captures elements of “best-in-class” organizational designs identified in the research.

Team Exercise

Pick a supply chain for your group and..

1. Describe the organization in terms of centralized v decentralized.

2. Access the maturity of your SCD processes. Build a one year plan to improve it.

designing supply chain processes and organizations

Business

procedure

supply base

change conditions

supply base

supply base

supply chain

business goals

continuous