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Supply Chain

Strategy

Achieving the fit

Prof. Manoj K SrivastavaOperations Management Area

Management Development Institute-Gurgaon

Supply Chain Management

Chapter-04

[email protected]://mks507.vistapanel.net

Supply Chain Efficiency Curve

Fitting the SC to the customer or vice versa?

Understand the customer Wishes

Understand the Capabilities of your SC

Match the Wishes with the Capabilities

Challenge: How to meet extensive Wishes

with limited Capabilities?

Matching the supply chain with market requirements

Lean

supply chain management

Mismatch

MismatchAgile

supply chain management

Nature of demandFunctional products Innovative products

PredictableFew changesLow varietyPrice stableLong lead-timesLow margin

UnpredictableMany changesHigh varietyPrice markdownsShort lead-timesHigh margin

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ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS

Factor Efficient Supply Chains Responsive Supply Chains

Demand Predictable, low forecast errors Unpredictable, high forecast errors

Competitive priorities

Low cost

consistent quality

on-time delivery

Development speed, fast delivery times

Customization, volume flexibility

variety, top quality

New-service/product introduction

Infrequent Frequent

Contribution margins Low High

Product variety Low High

Comparison of Efficient and Responsive Supply Chains

Efficient Responsive

Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense of greater cost

Aggressively reduce even if costs are significant

Supplier selection strategy Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low cost modes

Greater reliance on responsive (fast) modes

Achieving Strategic Fit Uncertainty/Responsiveness

Map

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand Uncertain demand

Responsiveness spectrum

Zone of

Strategic Fit

Low Cost

High CostCompanies try to move Zone of Strategic fit

SCM Impact on Strategic Thinking

Supply Chain Typology: Order Penetration Point/

Decoupling Point

Push-Pull Boundary of Supply Chains

Match Supply Chain Design with Product Category

Fit SC to the customerUnderstanding the Customer

Range of demand, pizza hut stable

Production lot size, seasonal products

Response time, organ transplantation

Service level, product availability

Product variety Innovation Accommodating poor quality

Implied trouble for SC

Achieving Strategic Fit:Consistent SCM and Competitive strategies

Implied (Demand) Uncertainty for

SC

Adding value along the chain is essential for competitiveness, however problems exist especially in complex or long chains and in cases where many business partners are involved.due to• uncertainties• need to coordinate several activities, internal units, and business partners.

• Demand forecasts are a major source of uncertainties• Competition• Prices• Weather conditions• Technological development• Customer confidence

• Uncertainties exist in delivery times• Machine failures• Road conditions• Shipments

• Quality problems may also create production delays

Supply Chain Problems

Fill Th

e G

ap

sNo clear identification of owner and customers of measures

(joint determination is very essential)Not evaluating consequences and outcomes

(Efficacy is prerequisite to customer satisfaction)Imbalance between efficiency and effectiveness

(key processes has to be identified and owned)Lack of Process Orientation of measurement

(Physical Orientation alone is not a suitable indicator)

Lack of Measures of relationships

(economic, physical, psychological measures are equally important)Lack of real-time visibility

(every affected party must be informed)Lack of Multi-firm optimization

(have to look beyond sub-optimization)* Source: various authors

Sustainability -must offer customers' consistent value. For example, based on their preferences for time, place, cost, flexibility, dependability and quality. Must identify order qualifiers and order winners and compete managing complexity

Service - the ability to deliver different quantities of goods through managing capacity not simply operationally but strategically (no longer sufficient to rely on economies of scale). Develop capabilities to manage capacity flexibly to deliver products and services to customers when they are required in the quantities demanded, e.g. from mass production to mass customization (from n to 1)

Speedy response- developing responsive capabilities to deliver goods and services when they are required, e.g. efficient consumer response, quick response

Suited to customer requirements -developing flexibility capabilities - e.g. agile, lean supply chains, innovations and new product developments

Standards - developing supply chain strategies to assure customer quality standards are met effectively and co-operate within supply chains to compete across supply chains

Systems focused on customer satisfaction -re-design business processes and develop enabling strategies for all relevant parties including customers to view supply chain information relevant to them (e.g. collaborative, co-operative rather than competitive strategies)

Structures and relationships - for example, develop digital supply chain strategies to replace unnecessary inventory movements by moving and exchanging information instead of goods

Supply chain strategies seven S's that deliver organizational strategies

Push Vs Pull Strategy

Which Strategy ?

Push / Pull Boundary

Furniture SC

Grocery SC

Traditional PC Industry

Dell - the Pull-Push boundary

When is the use of pure market mechanisms appropriate in buyer–supplier relationships?

Low HighCost of changing suppliers

Market mechanisms inappropriate

Resource dimension

Ma

rke

t d

ime

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Market mechanisms appropriate

Leverage needs

uncertainty

Leverage market

uncertainty

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Elements of process partnership relationships

Attitudes

Actions

Trust

Joint problem solving

Joint co-ordination of

activities

Joint learning

Long-term expectations

Sharing success

Multiple points of contact

Few relationships

Information transparency

Dedicated assets

Closeness of relationship

…trusting you is likely to give me more benefits than not trusting you...

Calculative trust

…I believe I can trust you because I think I

know you enough to be confident you will behave

as I would wish...

Cognitive trust

…I trust you because I know that you know that I wouldn’t let you down and you know that I know that

you wouldn’t either......

Bonding trust

De

gre

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f cl

ose

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ssBased on

knowledge

Based on feelings

Tim e

Cu

mu

lativ

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ositi

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exp

erie

nce

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Degrees of trust

Market position

Competitive behaviour

Economies of scale

Resource deficiencies

Some factors influencing the nature of network relationships

Market risks

Market structure

Transaction costs

Learning potential

OPERATIONS RESOURCES

MARKET REQUIREMENTS

Nature of network

relationship

Other Issues Affecting Strategic Fit

Multiple products and customer segmentsProduct life cycleCompetitive changes over time

Multiple Products and Customer Segments

Firms sell different products to different customer segments (with different implied demand uncertainty)

The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments

Two approaches: Different supply chains Tailor supply chain to best meet the needs of

each product’s demand

Product Life Cycle

The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle

Supply chain strategy must evolve throughout the life cycle

Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary

Late: predictable demand, lower margins, price is important

Examples: pharmaceutical firms, IntelAs the product goes through the life cycle, the

supply chain changes from one emphasizing responsiveness to one emphasizing efficiency

Competitive Changes Over Time

Competitive pressures can change over timeMore competitors may result in an increased emphasis on variety at a reasonable priceThe Internet makes it easier to offer a wide variety of productsThe supply chain must change to meet these changing competitive conditions

Expanding Strategic ScopeScope of strategic fit

The functions and stages within a supply chain that devise an integrated strategy with a shared objective

One extreme: each function at each stage develops its own strategy

Other extreme: all functions in all stages devise a strategy jointly

Five categories: Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope

Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Development

Strategy

Supply Chain Strategy

Marketing Strategy

IntracompanyIntraoperationat Distributor

IntracompanyIntrafunctionalat Distributor

IntracompanyInterfunctional

at Distributor

IntercompanyInterfunctional

Bullwhip effect

What are the reasons for the channel not being coordinated?Lack of information

Information about the demand is not transmitted up stream.

Conflicting interest Retailers would like to have daily deliveries Daily deliveries are expensive for the suppliers Manufacturers would like to have a stable production

environment. Buyers would like to have the flexibility to adjust to the

demand and change orders with a short notice.

erratic shifts in orders up and down the supply chain

order batching

rationing within the chain

price fluctuation

poor demand forecasting

Bullwhip Effect

A common way to solve the bullwhip problem is by sharing information along the supply

chain through EDI, extranets, and groupware technologies. For example employing a vendor-

managed inventory (VMI) strategy, the vendor monitors inventory levels and when it falls

below the threshold for each product this automatically triggers an immediate shipment.

Distorted information can lead to tremendous inefficiencies

• excessive inventories• poor customer service• lost revenues• ineffective shipments• missed production schedules.

Even slight demand uncertainties and variability become magnified if each distinct entity on the chain, makes ordering and inventory decisions with respect to its own interest above those of the chain

Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Minor fluctuations in retail

sales for a product can create excess inventory for distributors, manufacturers,

and suppliers.

Bullwhip effect Bullwhip effect refers to the phenomenon where orders to the supplier tend to

have larger variance than sales to the buyer (i.e., information distortion) and the distortion propagates upstream in an amplified form (i.e., variance amplification).

Examples

At P&G, diaper orders issued by distributors have a degree of variability that cannot be explained by consumer fluctuations alone

At Hewlett-Packard, the orders placed to the printer division by resellers have much bigger swings and variations that customer demands

Consequences of bullwhip effect

Increased safety stock

Reduced service level

Inefficient allocation of resources

Increased transportation costs

Bullwhip effect leads to higher variance in demands as observed by the upstream members of the supply chain. This requires

Higher safety stock

A more flexible production system and/or higher smoothing costs in production

A more flexible transportation system and/or higher smoothing costs in transportation

Order synchronization Multiple retailers who tend to order around the same time period Manufacturers responding to an MRP system that place raw material orders at the beginning of the month

Order batching In order to save on shipping or ordering costs, firms order a full pallet or full truck load

Trade promotions and forward buying Supplier offers a discount on product ordered in a specific time period Supplier offers a quantity discount A retailer orders a large quantity intending to take advantage of a discount and sells excess product to a

second retailer (this strategy is called diversion)

Reactive and over-reactive ordering A retailer who is not sure that demand is stable over time may act aggressively when faced with periods of

lower or higher than expected demand

Shortage gaming A retailer who wants to insure product from an under-capacitated supplier may over order expecting to only

receive a portion of the ordered quantity

Demand forecast updating / Inflated Orders IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over

Christmas

Long cycle times Long lead times magnify this effect

Bullwhip effect: Causes

Centralizing demand information occurs when customer demand information is available to all members of the supply chain.

Reducing uncertainty. This can be accomplished by centralizing demand information.

Reducing variability. This can be accomplished by using a technique made popular by WalMart and then Home Depot called everyday low pricing (EDLP). EDLP eliminates promotions as well as the shifts in demand that accompany them.

Reducing lead time. Order times can be reduced by using EDI (electronic data interchange).

Strategic partnerships. The use of strategic partnerships can change how information is shared and how inventory is managed within the supply chain. These will be discussed later.

Bullwhip effect: Remedies

Cross-docking. This involves unloading goods arriving from a supplier and immediately loading these goods onto outbound trucks bound for various retailer locations. This eliminates storage at the retailer’s inbound warehouse, cuts the lead time, and has been used very successfully by WalMart and Xerox among others.

Delayed differentiation. This involves adding differentiating features to standard products late in the process. For example, Bennetton decided to make all of their wool sweaters in undyed yarn and then dye the sweaters when they had more accurate demand data. Another term for delayed differentiation is postponement.

Direct shipping. This allows a firm to ship directly to customers rather than through retailers. This approach eliminates steps in the supply chain and reduces lead time. Reducing one or more steps in the supply chain is known as disintermediation. Companies such as Dell use this approach.

Sharing Information: Retailers may give the supplier frequent access to actual consumer demand data so that the supplier can make its production plans accordingly.

Vendor Managed inventory: The retailer no longer decides when and how much inventory to order. Instead, the supplier decides the timing and quantity of shipments to the retailer (e.g. P&G and Wal-Mart)

Smoothing the flow of products: Supplier and the retailers coordinate the timing of orders so that retailers do not place orders at the same time.

Achieving Coordination in Practice

Quantify the bullwhip effect

Get top management commitment for coordination

Devote resources to coordination

Focus on communication with other stages

Try to achieve coordination in the entire supply chain network

Use technology to improve connectivity in the supply chain

Share the benefits of coordination equitably

Causes of bullwhip effect: Demand signal processing

Reasons

If the supply chain player updates the order-up-to-level based on its new estimate of demand, the variance in orders it places exceeds the variance in demand it observes.

This gets amplified if the supply chain player does not observe the final demand (at the retailer), but forecasts demand based on the orders it received from downstream

Larger the lead time, larger the bullwhip effects caused by demand signal processing

A special case where the demand is forecasted using moving average method (Chen et al)

Mitigating Strategies

Allow access to end customer demand to all members in the supply chain (share POS)

Sell-thru data in contracts at HP, Apple, IBM

Single control of replenishment

Make the manufacturer responsible for replenishing the supply chain, i.e., Vendor Managed Inventory (VMI) for companies like P&G and Wal-Mart

Reduce the lead times

Quick response systems in apparel industry, flexible manufacturing

Causes of bullwhip effect: Constrained SupplyReasons

When the demand downstream (e.g. retailers) exceeds the capacity upstream (e.g. manufacturer)

The typical practice for the upstream (manufacturer) is to allocate the supply to different downstream entities (retailers) in proportion to their orders.

This leads to retailers ordering more than they need in order to get more share from the supply

In theory, the order quantity (equilibrium order quantity) where retailers are competing in such a setting exceeds the order quantity (standard newsboy order quantity) where the retailers assume infinite capacity at the manufacturing level

Note also these inefficiencies may occur even though there is no real shortage, but the retailers perceive that there is shortage at the manufacturing level

Mitigating Strategies Allocate supply based on the final

demand not based on orders received GM, HP and TI allocating based

on sales history Remove the perceptions that the

supply will be short Share the production and

inventory information with downstream

Reduce the buyer’s flexibility Construct contracts that will

restrict the order quantities Eliminate constraints on the supply by

collaborating with retailers

Causes of bullwhip effect: Order batchingReasons Retailers do not order every time they face

a demand as a result of

Periodic review process

Setup costs associated with ordering

As a result, the retailers batch their orders which leads to distortion in demand information

This distortion is magnified when there are multiple retailers and their ordering is not synchronized

Distortion is highest when ordering is correlated

Distortion is smallest when ordering is balanced

Larger the review period, higher the distortion

Mitigating Strategies Reduce order costs

Reduce paperwork, implement EDI for ordering

Reduce transportation costs Reduce the desire for full truck

loads Allow mixed truckloads (P&G) Use third party logistics (3PL)

companies for efficient transportation

Synchronize ordering Move away from correlated

ordering to balanced ordering

Causes of bullwhip effect: Price variationsReasons If the manufacturers are offering

promotions, retailers may act by procuring more than they currently need in anticipation of future demand (i.e., forward buy)

In theory, the order-up-to-level in one period changes with the procurement cost in that period

This leads to further distortion in the demand information communicated to the manufacturer

The result is higher inventory costs at both ends

Since the retailers need to keep inventory ahead of the need

Since the manufacturers need to prepare in advance for the surge in demand created by the promotion

Mitigating Strategies Stop manufacturer’s trade promotions

Everyday Low Pricing (EDLP) by P&G, etc

Savings through forward buying may be illusive Justify forward buying by also

considering inventory carrying costs

Implement purchase contracts (synchronize purchase and delivery schedules) Still offer promotions and/or

quantity discounts but allow multiple shipments over time at the same price

Cause 1: Demand Forecast Updating (Demand Signal Processing)

• Retailers forecast customers demand and then place orders with manufacturer

• Manufacturer receives orders from retailers

Orders from downstream in the past p time periods Dt-p, Dt-p+1, …, Dt-1

Order Qt goes to upstream

CustomersMfctr.Lead time L

Demand variability gets amplified from downstream to upstream!

- Commonly, the variability of Q is 2 to 15 times the variability of D

Retailers

When product demand exceeds supply, a manufacturer often rations its product to customers. Example:

Cause 2: Rationing and Shortage Gaming

• Knowing the manufacturer policy, customers exaggerate their real needs when they order (game the system). Example:

• As a result, customers’ orders give the supplier little information on a product’s real demand, a particularly vexing problem for new products

Car ManufacturerAvailable = 200

Dealer 1

Dealer 2

Order = 100

Order = 200

Received = 67

Received = 133Only 2/3 of the order can be fulfilled

Car Manufacturer

Dealer 1

Dealer 2

Need = 120

Need = 180

Order = 180

Order = 270 Order more than needed so that if only 2/3 of the order is filled you still get what you actually need

Available = 500

Received = 180

Received = 270

Coping with the Bullwhip Effect in Leading Companies

Reduce uncertainty POS Sharing information Sharing forecasts and policies

Reduce variability Eliminate promotions Year-round low pricing

Reduce lead times EDI Cross docking

Strategic partnerships Vendor managed inventory Data sharing

Conflicting Objectives in Supply Chain

1. Decentralized supply chain: each member has his own interest and act independently

2. Self-interested decision makers: every member of the supply chain optimizes his own objective.

3. These self-interested members’ decisions may not align with the optimal decisions for the overall performance of the supply chain.

4. Inefficiencies across supply chain lead to decentralization cost

5. Solution: to coordinate the members to act as if they are a centralized supply chain (i.e., one decision-maker makes decisions in behalf of the whole supply chain)

Our goal: to attain performance of centralized supply chain with decentralized decision making

How do we do that?1. A contract is agreed by and announced to all members before

they make decisions2. Each member independently decides and acts3. The contract is executed

We say a decentralized SC is coordinated by a contract, if The total profit of decentralized SC equals the total profit of

centralized SC, and All members are better off under this contract, compared to the

case without such a contract (uncoordinated case)

Coordinating S.C. Inventory Consider a simple demand driven supply chain: a buyer and a

supplier

The buyer produces D = 10,000 units/year of a product at a constant rate. Each time the buyer places an order for a certain component, the ordering cost is Sb = $100. The buyer’s inventory holding cost is H = $10/yr and optimal ordering quantity:

The supplier produces an order whenever one is received from the buyer.

Each time the seller sets up to produce a batch of components, the production setup cost is Ss = $300.

The supplier’s total (setup) cost = Ss(D/EOQb) = 300(10,000/447) = 6711

Optimal ordering quantity for the centralized supply chain:

BuyerSupplier Customers

2 2(10,000)(100)447

10b

b

DSEOQ

H

2 ( ) 2(10,000)(100 300)894

10b s

SC

D S SEOQ

H

Supplier’s cost (at Q=447)

= Ss (D/EOQb) = 300(10,000/447)

= $6,711

Buyer’s cost (at Q=447)

= (2 x D x H x Sb)

= (2 x 10000 x 10 x 100)

= $ 4,472

Supplier’s cost (at Q=894)

= Ss (D/EOQb) = 300(10,000/894)

= $3,356

SC overall cost (at Q=894)

= (2 x D x H x (Sb + Ss))

= (2 x 10000 x 10 x 400)

= $ 8,944

$ 8,944

$ 5,589

$ 3,356

$ 4,472

$ 6,711

$ 11,184

TC = 894 x 10/2 + (10000/894) x 100 = $ 5,589

If buyer orders Q=894, supply chain’s total cost is reduced

But, buyer incurs a higher cost, and will not order Q=894

The SC is NOT coordinated without a compensation for buyer

Buyer's optimal quantity

Centralized supply chain's optimal quantity Cost saving

Q=447 Q=894Supplier cost $6,711 $3,356 $3,356Buyer cost $4,472 $5,589 -$1,116Supply chain cost $11,184 $8,944 $2,239

For any order quantity Q, the buyer always bears a fraction of of the total cost of the supply chain Supplier promises to pay buyer = (1–) (buy’s total holding and

setup cost) The buyer promises to pay the supplier = () (supplier’s total setup cost)

Buy’s optimal quantity = SC’s optimal quantity = centralized SC’s optimal quantity = 894

There exist a such that buyer and suppliers are both better off than ordering Q = 447

Example: Quick Response at Benetton

Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy.

Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion.

Many attribute Benetton’s success to successful use of communication and information technologies.

Benetton uses an effective strategy, referred to as Quick Response, in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton’s mainframe computer in Italy.

Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors.

How Does Benetton Cope with the Bullwhip Effect?

1. Integrated Information Systems

• Global EDI network that links agents with production and inventory information

• EDI order transmission to HQ

• EDI linkage with air carriers

• Data linked to manufacturing

2. Coordinated Planning

• Frequent review allows fast reaction

• Integrated distribution strategy

Vendor Managed Inventory

Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in the grocery industry’s pursuit of “efficient consumer response” and the garment industry’s “quick response.”

Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms like Barilla (the pasta manufacturer).

The supplier—usually the manufacturer but sometimes a reseller or distributor—makes the main inventory replenishment decisions for the consuming organization.

The supplier monitors the buyer’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing.

Transactions customarily initiated by the buyer (like purchase orders) are initiated by the supplier instead.

The purchase order acknowledgment from the supplier may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in transit.

Solutions for Battling Bullwhip EffectVendor Managed Inventory (VMI)

Vendors take control of inventory management at the retailers

Quick Response (QR) Vendors receive POS data from retailers, and

use this information to synchronize their production and inventory activities.

Vendor Managed Inventory (VMI)How does it work?

The vendor (supplier) receives inventory and point-of-sales (POS) data from the retailers and calculates how much to ship to retailers.

The vendor places orders for supply.

VMI projects Dillard Department Stores, JCPenney and Wal-Mart Sales increases of 20 to 25% 30% inventory turnover improvements

Quick ResponseThe supplier receives POS data from

retailers, and use this information to synchronize their production and inventory activities.

The retailer prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.

Quick Response vs. VMISales information passed back to the

supplier.Bullwhip effect is reduced.What’s the difference?

Who chooses the order quantity? VMI: Supplier QR: Retailer

Who chooses when to order? VMI: Supplier QR: Retailer

Functional Products(Soup)

Innovative Products(Fashion clothing)

Demand Uncertainty Low (forecast error) High (forecast error)

Life Cycle Long Short

Risk of Obsolescence Low High

Profit Margin Low High

Variety Low High

Demand volume High Low

Two Types of Products

Tow Main Functions of Supply ChainsPhysical function

Transformation process – converting raw materials to finished goods and moving them along SC

Market mediation Ensuring that the right variety of products are

available at the right place, at the right time, in the right quantities

introducing

EPC

Information Visibility

Prof. Manoj K SrivastavaOperations Management Area

Management Development Institute-Gurgaon

Supply Chain Management

Chapter-09

[email protected]://mks507.vistapanel.net

What is EPC? The Electronic Product Code (EPC) is an identification scheme for universally

identifying physical objects via Radio Frequency Identification (RFID) tags and other means.

Extremely long barcodes, this greater data capacity affects the business process because it in turn allows a greater degree of unique identification.

The Key Difference

UPC – contains just enough information to identify the class of a product

EPC – contains more information to identify the product uniquely

It is not necessary for UPC to be “universal”

A typical example would be an automotive tyre

Universal Product Code (UPC) will say “this is a class-x tyre”

The Electronic Product Code (EPC) will say “this is a class-x tyre with a serial #35686975.”

RFID: UPC vs. EPCUPC

-Requires line-of-sight readers

-Only one product can be scanned at a time

EPC-Tags can be read from many ranges

-Many products can be scanned simultaneously

-Tags can store large amounts of data

-Uniquely identifies products

Research says worldwide RFID spending will jump

from $300 million in 2004 to $2.8 billion by 2009,

and that most will centre on the global supply chain

(EPC Global the Source January 2005)

An AMR Research study found early EPC/RFID adopters in the retail and consumer

packaged goods (CPG) industries have lowered their supply chain costs between

three and five percent.EPC= specific instance of a productUPC= A class of product

Beyond Barcode268 million companies can each categorize 16 million different products and each product category may contain over 687 billion individual items.

Electronic

Product Code (E

PC) 96 bits

How It works.

Types of Tags

Passive Operational power scavenged from reader radiated power• Require no internal power source or maintenance

Semi-passive Operational power provided by battery

Active Operational power provided by battery - transmitter built

into tag More reliable and efficient in rugged environments

DifferenceActive RFID Passive RFID

Tag Power Source Internal to tagEnergy transferred using RF from reader

Tag Battery Yes No

Availability of power

Continuous Only in field of reader

Required signal strength to Tag

Very Low Very High

Range Up to 100m Up to 3-5m, usually less

Multi-tag reading1000’s of tags recognized

Few hundred within 3m of reader

Data StorageUp to 128Kb or read/write with sophisticated search and access

128 bytes of read/write

100 kHz 1 MHz 10 MHz 100 MHz 1 GHz 10 GHz

Low Freq.

HighFreq.

MediumFreq.

134 kHz 13.56 MHz 915 MHz 2.45 GHz T1-RFID T1-RFID UHF T1-RFID1 Hyper X

Ultra High Freq.

Microwave

Freq.

ITEM PACKAGING TRANSPORT UNIT UNIT LOAD CONTAINER MOVEMENT VEHICLE

LF MF HF VHF UF MICROWAVE

Active RFID

ISO 18000-7

GPRS

Passive RFID

125 kHz & 13.56 MHz ISO 15693 & ISO 14443-3

868 MHz EPCglobal Gen 2 ISO 18000-6

Bar Code

Frequency Range Tag cost Applications

Low-frequency125 - 148 KHz

3 feet $1+ •Pet and ranch animal identification•Car key locks

High-frequency13.56 MHz

3 feet $0.50 •Library book identification•Clothing identification•smart cards

Ultra-high freq915 MHz

25 feet $0.50 •Supply chain tracking:• Box, pallet, container, trailer tracking

Microwave:2.45GHz

100 feet $25+ •Highway toll collection•Vehicle fleet identification

Tags need to be closer to the readerPoor discrimination

Tags can be read from relatively greater distancesTags can hold more information

Longest range

More interfe

rence

Frequencies of operation

2003

Source: http://www.symbol.com/products/rfid/rfid_next_generation.html

Comprehensiveness

Applications

Keyless entryEPCProximity cardsLibrariesSecurity device

Bookstores

• Animal and human implantation– Avid– Pet-ID– VeriChip

• RFID-privacy legislation– REAL ID Act

Balanced Supply Chain Scorecardformulating 3rd Generation BSC for supply chain

manoj kumar srivastava

The

Importance- performance

matrix

Performance Measurement

Categories of Performance Measurement

Cost Quality Time

Supplier

performance

Customer

satisfaction

Return on assets (ROA)

Increase ROA with higher net income and

fewer total assets

Total assetsAchieve the same or better performance with fewer assets

Working capitalReduce working capital by reducing inventory investment, lead times,

and backlogs

Fixed assetsReduce the number of warehouses through

improved supply chain design

Net incomeImprove profits with greater revenue and

lower costs

Measures of Supply Chain PerformanceTotal revenueIncrease sales through better customer service

Cost of goods soldReduce costs of

transportation and purchased materials

Operating expensesReduce fixed expenses by

reducing overhead associated with supply

chain operations

Net cash flowsImprove positive cash flows by reducing lead times and

backlogs

InventoryIncrease inventory turnover

How Supply Chain Decisions Can Affect ROA

Supply exceeds demand

New market and new productssupply and demand are low

Established market, supply anddemand are balanced

Demand exceeds supply

Four measurement categories:1. Customer Service

2. Internal Efficiency

3. Demand Flexibility

4. Product Development

1. Assets committed to inventory

Measuring Supply Chain Performance

2. Inventory turnover

Measuring Supply Chain Performance

Inventory

turnover

=Cost of goods sold

Inventory investment

Inventory turnover

Measuring Supply Chain Performance

Inventory turns =$34,416,000

$425, 000, 000

Days of supply =($425,000,000)/(365)

$34,416,000

= 12.3

= 29.6

1. Cost of goods sold: $425 million2. Production materials and parts: $4,629,0003. Work-in-process: $17,465,0004. Finished goods: $12,322,0005. Total average aggregate value of inventory (2+3+4): $34,416,000

Number of days to achieve an unplanned 20% change in orders without a cost penalty

Production flexibility

Number of days for supply chain to respond to an unplanned significant change in demand without a cost penalty

Supply chain response time

Supply Chain Flexibility

Number of days from order receipt to customer delivery

Order fulfillment lead time

Supply Chain Responsiveness

Percentage of orders delivered on time and in full, perfectly matched with order with no errors

Perfect order fulfillment

Percentage of orders shipped within24 hours of order receipt

Fill rate

Percentage of orders delivered on time and in full to the customer

Delivery performance

Supply Chain Delivery Reliability

DefinitionPerformance Metric

Performance Attribute

SCOR: Customer Facing

DefinitionPerformance Metric

Performance Attribute

SCOR: Internal Facing

Revenue divided by total assets including working capital and fixed assets

Asset turns

Number of days that cash is tied up as inventoryInventory days of supply

Number of days that cash is tied up as working capital

Cash-to-cash cycle time

Supply Chain Asset Management Efficiency

Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory

Warranty/returns processing cost

Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee

Value-added productivity

Direct cost of material and labor to produce a product or service

Cost of goods sold

Direct and indirect cost to plan, source and deliver products and services

Supply chain management cost

Supply Chain Cost

PART-IPerformance Measurement Systems

Balanced Scorecard Approach:A brief Introduction

recommends the use of executive information systems (EIS) limited number of balanced metrics, closely aligned to strategic objectives expected to be used by 40% of Fortune 1000 companies

When applied to supply chain context a small number of balanced supply chain measures be tracked based on four perspectives:

1. Financial perspective (e.g., cost of manufacturing and cost of warehousing )

2. Customer perspective (e.g., on-time delivery and order fill rate)

3. Internal business perspective (e.g., manufacturing adherence-to-plan and forecast errors)

4. Innovative and learning perspective (e.g., APICS-certified employees and new product

development cycle time)

Kaplan R S and Norton D P (1992) "The balanced scorecard: measures that drive performance", Harvard Business Review, Jan – Feb, pp71-80

aligning activities with strategy

The Vision & StrategyThe Vision & Strategy

To achieve and maintain a competitive position, how must the organization learn and improve?

To achieve and maintain a competitive position, how must the organization learn and improve?

Innovation, Learning & Growth

The Strategic Balanced Scorecard Framework

Cause

Results

Actions

Effect

To satisfy our customers, in which internal business processes must we excel?

To satisfy our customers, in which internal business processes must we excel?

Internal Business Process

To achieve our financial goals, what customer needs must we satisfy?

To achieve our financial goals, what customer needs must we satisfy?

Customer

To satisfy our shareholders, what financial objectives must we accomplish?

To satisfy our shareholders, what financial objectives must we accomplish?

Financial

What Questions Does a Scorecard System Answer?

Vision MissionStrategy

To succeed financially, how should we appear to

our owners?

To satisfy our customers, at what business processes

must we excel?To achieve our vision, how will we sustain our ability to learn

and improve?

To achieve our vision, how should we appear

to our customers?

Objective Measure Target InitiativeFinancial

Measure Target InitiativeInternal Business Process

Objective

Measure Target Initiative ObjectiveLearning & Growth

CustomerMeasure Target Initiative Objective

1. Stakeholder Satisfaction – who are the key stakeholders and what do they want and need?2. Strategies – what strategies do we have to put in place to satisfy the wants and needs of these key

stakeholders?3. Processes – what critical processes do we require if we are to execute these strategies?4. Capabilities – what capabilities do we need to operate and enhance these processes?5. Stakeholder Contribution – what contributions do we require from our stakeholders if we are to

maintain and develop these capabilities?

Neely, A.; Adams, C. (2001) “Perspectives on Performance: The Performance Prism”, Journal of Cost Management, Vol. 15, issue 1, p7-15

ThePerformance Prism

Know your stakeholders and their want

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Skandia Navigator™Edvinsson and Malone (1997)

Intellectual capital is measured through the analysis of up to 164 metric measures (91 intellectually based and 73 traditional metrics) that cover five components: (1) financial; (2) customer; (3) process; (4) renewal and development; and (5) human

The philosophy behind the report was that traditional financial statements represent only past financial information about an organization. Additional information about intellectual capital is needed to understand both an organization's current and future capabilities. To fill this void, Skandia developed a framework for reporting that combined traditional financial reporting with measures of intellectual capital. This reporting framework is called a "navigator" for two reasons. First, it is intended to guide an organization in managing intellectual assets. Second, it is intended to guide people through a comprehensive set of measures that represent the true resources, capabilities, and future potential of an organization.

Skandia, a Swedish insurance and financial services company, published a supplement to its 1994 annual report entitled "Visualizing Intellectual Capital in Skandia" (Skandia, 1995). Leif Edvinsson is the corporate director of intellectual capital for Skandia.

linking past, present, future

2nd Generation performance measurement Frameworks

Individual stock measures (Pike / Roos, 2001).

Strategy maps (Kaplan and Norton, 2000)

Success and risk maps (Andy Neely and colleagues, 2002)

IC-Navigator model (Roos et al., 1997; Chatzkel, 2002)

Strategic Linkage Model

Strategic Linkage ModelThe measurable strategic objectives organized in a cause and effect diagram to capture management thinking on the relationships of the medium term activities and outcomes

Success Map

Neely, A., Marr, B., Roos, G., Pike, S. and Gupta, O. (2003)‘Towards the third generation of performance measurement’, Controlling, Heft 3/4, März/April.

3rd Generation performance measurement Frameworks

1. Appropriateness and adequacy – the model must reflect reality.

2. Information adequacy – the right information must be provided.

3. Practicality and organizational alignment – the outcomes must be

practical insights that will enable action.

The third generation of performance measurement requires organizations to seek

greater clarity about the linkages between the non-financial and intangible dimensions

of organizational performance and the cash flow consequences of these. Before such

models can be developed it is essential that three fundamental criteria be satisfied

(Pike / Roos, 2001).

Pike, S. / Roos, G., Measuring and decision support in the knowledge society;The 4th World Congress on Intellectual Capital, Hamilton, 2001.

Second Generation Balanced Scorecardsdefined strategic objectives, linked together using a causal ‘strategy map’ to help identify the activities and results that needed to be measured

First Generation Balanced Scorecardsbroke new ground by combining financial and non-financial performance measures grouped into four perspectives

Third Generation Balanced Scorecardsuse the creation of a “Destination Statement” as the starting point for choosing Strategic Objectives, selecting measures and setting targets

Strategic Objectives developed directly

from a detailed “vision” of the

organization at a future date called a

Destination Statement

2016

Destination statement

Causality is shown by linkages

between the objectives selected

Strategic Linkage Model

Balanced scorecard measures and targets

To track whether objectives are being achievedTo drive the right management actions

BSC3 ideas build on these key performance management concepts:

Causality identify the

actions required to deliver key outcomes Learning

using feedback to identify ways of

improving performance

Ownershipusing consensus to ensure everyone is clear on what needs

to be done and is fully involved in the

process

Communicationproviding clear and

unambiguous information on goals

roles and performance

Destination Statement

A clearly articulated and quantified long-range description of the desired state of the business at a particular point in time; Typically this is focused on how the organization will look after 3-5 years

The document describes how things are at that time, rather than the things that were done between now and then to arrive at that end point.

To build management consensusTo articulate the intended results of implementing the chosen strategy

clearly articulated statement of ‘desired state’ or strategic destination

measurable medium-term strategic objectives broken down into activities and outcomesthen into the standard Kaplan & Norton perspectives if necessary

defined objectives

priority initiatives linked to strategic objectives

the measures themselves

BSC3 standard designs

comprise these

elements

Order Fill RateLine Item Fill RateQuantity Fill RateBackorders/stockoutsCustomer satisfaction% Resolution on first customer callCustomer returnsOrder track and trace performanceCustomer disputesOrder entry accuracyOrder entry times

Customer Service Measures

Forecast accuracyPercent perfect ordersNew product time-to-marketNew product time-to-first makePlanning process cycle timeSchedule changes

Process, Cross-Functional Measures

Total landed cost Point of consumption product

availability Total supply chain inventory Retail shelf display Channel inventories EDI transactions Percent of demand/supply on VMI/CRP Percent of customers sharing forecasts Percent of suppliers getting shared

forecast Supplier inventories Internet activity to suppliers/customers Percent automated tendering

Extended Enterprise Measures

Product qualityWIP inventoriesAdherence-to-scheduleYieldsCost per unit producedSetups/ChangeoversSetup/Changeover costsUnplanned stockroom issuesBill-of-materials accuracyRouting accuracyPlant space utilizationLine breakdownsPlant utilizationWarranty costsSource-to-make cycle timePercent scrap/reworkMaterial usage varianceOvertime usageProduction cycle timeManufacturing productivityMaster schedule stability

Manufacturing Related Measures Finished goods inventory turns Finished goods inventory days of supply On-time delivery Lines picked/hour Damaged shipments Inventory accuracy Pick accuracy Logistics cost Shipment accuracy On-time shipment Delivery times Warehouse space utilization End-of-life inventory Obsolete inventory Inventory shrinkage Cost of carrying inventory Documentation accuracy Transportation costs Warehousing costs Container utilization Truck cube utilization In-transit inventories Premium freight charges Warehouse receipts

Logistics Related Measures

Cash flow Income Revenues Return on capital employed Cash-to-cash cycle Return on investment Revenue per employee Invoice errors Return on assets

Administration/Financial Measures

Material inventories Supplier delivery performance Material/component quality Material stockouts Unit purchase costs Material acquisition costs Expediting activities

Purchasing Related Measures

Market share Percent of sales from new products-

to-market Percent of products representing

80% of sales Repeat versus new customer sales

Marketing Related Measures

APICS trained personnelPatents awardedEmployee turnoverNumber of employee suggestions

Other Measures

– On-time delivery 90%

– Quality of goods/services 83%

– Service capability/performance 69%

– Price competitiveness 55%

– Compliance with contract terms 51%

– Response 50%

– Lead time 44%

– Technical capability 34%

– Environmental, health, and safety performance 30%

– Innovation 29%

What Supplier Performance Metrics Do Companies Use?

Lapide (2000)

CustomerPerspectives

Customer satisfaction, Customer returns, Customer disputes, Market share, % Resolution on first customer call, Order track and trace performance, Order entry accuracy, Order entry times, Repeat versus new customer sales, Order fill rate, Line item fill rate, Quantity fill rate 

ProcessPerspectives

Forecast accuracy, Percent perfect orders, Schedule changes, Supplier delivery performance, Material/component quality, Material stockout, Expediting activities, Product quality, Adherence-to-schedule, Yields, Setups/changeovers, Unplanned stockroom issues, Bill-of-material accuracy, Routing accuracy, Plant space utilization, Line breakdowns, Percent scrap/rework, Overtime usage, Manufacturing productivity, Master schedule stability, Total supply chain inventory, Channel inventories, Material inventories, WIP inventories, Finished goods inventory turns, Finished goods inventory days of supply, On-time delivery, Lines picked/hour, Damaged shipments, Inventory accuracy, Pick accuracy, Shipment accuracy, Warehouse space utilization, End-of-life inventory, Obsolete inventory, Inventory shrinkage, Documentation accuracy, Container utilization, Truck cube utilization, In-transit inventories, Premium freight charges, Warehouse receipts, New product time-to-market, New product time-to-first make, Planning process cycle time, Retail shelf display, Source-to-make cycle time, Production cycle time, On-time shipment, Delivery times, Material usage variance, Unit purchase cost, Material acquisition cost, Cost per unit produced, Setup/changeover costs, Warranty costs, Logistics cost, Cost of carrying inventory, Transportation costs, Warehousing costs 

Innovationand LearningPerspectives

APICS trained personnel, Patents awarded, Time-to-market, Number of employee suggestions, Percent of sales from new product, Percent if demand/supply on VMI/CRP, Percent of customer sharing forecast, Percent of suppliers getting shared forecast, Supplier inventories, EDI transactions, Internet activity to suppliers/customers, Percent automated tendering 

FinancialPerspectives

Income, Total landed cost, Cash flow, Cash-to-cycle time, Revenues, Revenue per employee, Return on capital employed, Return on investment, Return on assets 

What latest? in supply chain performance measures…

SAP has commissioned this study with management consultancy Pittiglio Rabin Todd & McGrath (PRTM) and The Performance Measurement Group (PMG), a subsidiary of PRTM.

CUSTOMER PERSPECTIVE

GoalsCustomer view of ProductOf timelinessOf flexibilityCustomer value

MeasuresNo. of customer contact pointsRelative Customer order response timeCustomer perception of flexible responseCustomer value ratio

INTERNAL BUSINESS PERSPECTIVE

GoalsWaste ReductionTime CompressionFlexible Response

Unit cost reduction

MeasuresSC cost of OwnershipSC cycle efficiencyNo. of Choices / Av response time% of SC target costs Achieved

INNOVATION AND LEARNING PERSPECTIVE

GoalsProduct InnovationPartnership Mgmt.

Information FlowsThreats and Subsitutes

MeasuresProduct Finalization pointProduct category commitment ratioShared data set/total data setPerformance trajectories of Competing technologies

FINANCIAL PERSPECTIVE

GoalsProfit MarginsCash FlowRevenue GrowthReturn on assets

MeasuresProfit margin by Supply chain partnersCash to cash cycleCustomer Growth and profitabilityReturn on SC assets

Customer Benefits

SCM Goals

SCM Improvements

Financial Benefits

Purchasing and Strategic Sourcing

Sourcing decisions – High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners

Purchasing – The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance

Sourcing decisions and purchasing activities serve to link a company with its upstream supply chain partners

Focus

The Role of Purchasing in an Organization

The primary goals of purchasing are:1. Ensure uninterrupted flows of raw materials at the lowest total cost,

2. Improve quality of the finished goods produced, and

3. Optimize customer satisfaction.

Purchasing contributes to these objectives by: 4. Actively seeking better materials and reliable suppliers,

5. Work closely with strategic suppliers to improve quality materials, and

6. Involving suppliers and purchasing personnel in new product design and development efforts.

- To perform specialised tasks

- To achieve an output

- With production and warehousing

- Internal and external focus

- Knowledge based

- Demonstrable skills and knowledge

As a function

As a process

As a link in the supply chain

As a relationship

As a discipline

As a profession

What is Purchasing?

Perspectives on Purchasing

1

2

3

4

5

6

To buy materials of the right quality , in the right quantityfrom the right source delivered to the right place at theright time at the right price.

The process undertaken by the organisational unit that, either as afunction or as part of an integrated supply chain, is responsible forprocuring or assisting users to procure in the most efficient manner therequired supplies at the right time, quality, quantity and price andthe management of suppliers, thereby contributing to the competitiveadvantage of the enterprise and the achievement of its corporate strategy.

The Classic Definition

Modern Definition

What is Purchasing?

Definitions

To be Contrasted with

What is Purchasing?

The Evolution of Purchasing

The Reck and Long Model

Stage Characteristics

1. Product centered

2. Process centered

3. Relational

4. Performance centered

Focused on best product management methods. Employs an integrated methodology to manage relationships, processes and outcomes.

Process and relationally focused, expanded to includepurchaser-supplier relationships.

Moves beyond a concern with outcomes and begins tomeasure the process through which the outcome isdelivered.

Concerned with the five rights that concentrateexclusively upon the purchasing of tangible products and outcome dimensions.

What is Purchasing?

Purchasing and Change

Globalisation ImpactInformationTechnology

Impact

Chasing Production &Management

Philosophies Impact

• Transgression of national boundaries

• Advantage of cost

• Specialised labour skills

• Emerging economies

• Slicker transactions

• Quality of management data

• Strategic link with suppliers

• Paperless environment

• Competitive advantage

• Outsourcing

• Supply chain management

What is Purchasing?

Increase in strategic importance

Automated tactical activities

Master contracts

Electronic purchasing

Strategic purchasing competency centres

Shared supply chain resources

Profit contribution

Changed emphasis on individual skills

Purchasing in the Future

What is Purchasing?

World-class Purchasing

TQM

JIT

Total cycle time reduction

Long-range planning

Supplier relationship engineering

Strategic cost management

Performance accountability

Professional flexibility and development

Service excellence

Corporate social responsibility

Must Accommodate

• Power of purchasing to enhance profitability

Status Influenced by:

• Is it transactional, commercial or strategic?

What is Purchasing?

The Status of Purchasing and Supply Management

Leverage

Focus

Professionalism • Perception of influencers• Academic activity• Depth of knowledge and skill• Future focus

Introduction

Purchasing- Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.

Merchant Buyers-wholesalers and retailers who purchase for resale.

Industrial Buyers- purchase raw materials for conversion, services, capital equipment, & MRO supplies.

Sourcing policy - determining dependency on suppliers and designing plans to reduce this dependency.

Direct versus indirect buying - determining the (possible) cost benefits of buying from importers and distributors, or buying directly from the manufacturer.

Make-or-buy analysis - analysis of savings opportunities by eliminating particular production activities and buying the required products from third parties; buy or lease may be considered as an alternative.

Integration between purchasing and other functional areas - plans aimed at removing interface problems between purchasing and materials management, pure engineering, and between purchasing and financial administration or treasury

Setting up a purchasing information and control system - analysis of purchasing information needs and design of an automation plan; possibilities of linking this system with existing information systems in other functional areas.

Centralized or decentralized purchasing - balancing cost benefits and strategic considerations related to a centralized or decentralized organization of purchasing

Standardization - determining possibilities to achieve standardization in order to reduce product and supplier variety; balancing savings and risks.

Sourcing policy - determining dependency on suppliers and designing plans to reduce this dependency.

Direct versus indirect buying - determining the (possible) cost benefits of buying from importers and distributors, or buying directly from the manufacturer.

Make-or-buy analysis - analysis of savings opportunities by eliminating particular production activities and buying the required products from third parties; buy or lease may be considered as an alternative.

Integration between purchasing and other functional areas - plans aimed at removing interface problems between purchasing and materials management, pure engineering, and between purchasing and financial administration or treasury

Setting up a purchasing information and control system - analysis of purchasing information needs and design of an automation plan; possibilities of linking this system with existing information systems in other functional areas.

Centralized or decentralized purchasing - balancing cost benefits and strategic considerations related to a centralized or decentralized organization of purchasing

Standardization - determining possibilities to achieve standardization in order to reduce product and supplier variety; balancing savings and risks.

Strategic Sourcing

Strategic sourcing methodology: Step 1: Project Planning and Kickoff, which suggests that a formal start to the strategic sourcing process is

warranted.

Step 2: Profile Spend, to develop an accurate understanding of requirements. Identify or reevaluate needs Define and evaluate user requirements Decide whether to make or buy

Step 3: Assess Supply Market very critical step in the strategic sourcing process all potential sources of supply are identified a thorough assessment of a supply market identify all possible suppliers prescreen all possible sources

Step 4: Develop Sourcing Strategy develop a sourcing strategy establish whether a supplier has the capabilities RFP provides specific information as to what the buying company

Step 5: Execute Sourcing Strategy begins with an evaluation of the suppliers that remain following the RFI and RFP processes and

culminates in the award of a contract. Step 6: Transition and Integrate

Important elements of this step are the finalization of the contractual agreement, planning the transition process, and receipt or delivery of the product or service.

Step 7: Measure and Improve Performance very important, involves making a post purchase performance evaluation.

E-Sourcing

The Purchasing Process

Manual Purchasing- Older system, prone to duplication of effort and error

Step 1-Material Requisition/Purchase Requisition- stating product, quantity, and delivery due date are clearly.

Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers & issues a request for quotation (RFQ). Step 3- The Purchase Order (PO)- The purchase order is the buyer’s offer & becomes a binding contract when accepted by supplier.

The e-Purchasing Process

Electronic Procurement (e-Procurement)

Step 1- Material user inputs a materials requisition- relevant information such as quantity and date needed.

Step 2- Materials requisition submitted to buyer- at purchasing department (hardcopy or electronically).

Step 3- Buyer assigns qualified suppliers to bid- Product description, closing date, & conditions are given.

Step 4- Buyer reviews closed bids & selects a supplier

Advantages for the e-Procurement System

Time savings Cost savings Accuracy Real time Mobility Trackability Management Benefits to the suppliers

Six stage purchasing developmental model:

Six stage purchasing developmental model:

1. ‘Transaction orientation; serve the factory’;

2. ‘Commercial orientation; lowest unit price’;

3. ‘Coordinated purchasing’

4. ‘Internal integration: cross-functional purchasing’;

5. ‘External integration; supply-chain management’;

6. ‘Value chain integration’

Effectiveness/Cumulative

savings

Transactional orientation

Commercialorientation

Purchasingco-ordination

Internalintegration

ExternalIntegration

Value chainintegration

Publicutilities

FinancialServices

Pharma

Food andbeverages

telecommu-nication

Retailers

automotive

Computer/PC’s

Consumerelectronics

time

focus

Activities

Dilemmas

‘serve the factory’

• Clerical• Order processing

• Initial purchasing• Control of purchasing• expenditure

‘Reduce cost’

• Commercial• Tendering• Negotiating• Apr supplier lists

• Supplier base management

‘Savings through synergy’

• Commercial• Contracting• Global sourcing

• Contract management• Ethics

‘Total Cost of ownership’

• Cross functional buying teams• Systems integration• Vendor rating etc.• Communication and information infrastructure

‘Supply chain optimization’

• Outsourcing• EDI/Internet• E-Commerce• Cost models• Social

resistance

‘Total Customer Satisfaction’

• Customer driven activities• Contact manufacturing• Supplier development• Global supplier network• Internationalization• HRM

CROSS-FUNCTIONAL FOCUSDECENTREALIZED

FUNCTIONAL FOCUS

CENTRE-LED

Supplier Development Through Procurement

The Procurement Viewpoint

Supplier PurchaserProcurement Initiative

Marketing Response

Supplier PurchaserMarketing Initiative

Purchasing Response

The Marketing Viewpoint

Procurement Process

Procurement Process

Invoice clearance & payments

Records maintenance

Receipt and inspection

Follow up and expediting

Purchase order preparation

Supplier selection

Supplier identification and evaluation

Description

Needs identification

Is there a preferred supplier?No

Yes

The Purchasing Process

Ordercycle

The Purchasing ProcessNeeds Identification

Needs identification

Purchase requisition – An internal document completed by a user that informs purchasing of a specific need

Reorder point system – A method used to initiate the purchase of routine items. Typically, each item has a predetermined order point and order quantity

The Purchasing ProcessDescription

Description by market grade/industry standard Description by brand Description by specification Description by performance characteristics Description by prototypes or samples

DescriptionThe communication of a user’s needs to potential suppliers in the most efficient and accurate way possible

The Purchasing ProcessSupplier Identification and Evaluation - I

Supplier identification and evaluation The complexity of the product

or service increasesThe amount of money that is

committed increasesThe length of the proposed

buyer-supplier relationship increases

The amount of effort increases as:

Supplier identification and evaluation Process and design capabilities

Management capabilityFinancial condition and cost structuresPlanning and control systemsEnvironmental regulation complianceLonger-term relationship potential

Criteria for supplier assessment:

The Purchasing ProcessSupplier Identification and Evaluation - II

Supplier Portfolio Screening Process

Supplier selection

Preferred supplierCompetitive biddingNegotiation

The Purchasing ProcessSupplier Selection - I

Supplier selection

Preferred supplierA supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process

The Purchasing ProcessSupplier Selection - II

Supplier selection The buying firm can provide qualified suppliers with clear descriptions of the items or services

Volume is high enough to justify the cost and effort

The firm does not have a preferred supplier

Competitive bidding is most effective when:

The Purchasing ProcessSupplier Selection - III

Supplier selection

The item is new or technically complex with only vague specifications

The purchase requires agreement about a wide range of performance factors

The supplier must participate in the development effort

The supplier cannot determine risks and costs without input from the buyer

Negotiation is most effective when:

The Purchasing ProcessSupplier Selection - IV

Purchase order preparation

Records maintenance

Invoice clearing and payment

Receipt and inspection

Follow-up and expediting

Purchase order preparation74% of firms currently have electronic data interchange (EDI) with some part of their supply base

Follow-up and expediting Receipt and inspection Invoice clearance and payment Records maintenance

The Purchasing ProcessThe Order Cycle