Management of Outsourced Operations 11

8/10/2019 Management of Outsourced Operations 11

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Management of Outsourced

OperationsSCM


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What is SCM?

Supply Chain management deals with the control of materials,information, and financial flows in a network consisting ofsuppliers, manufacturers, distributors, and customers(Stanford Supply Chain Forum Website)

Call it distribution or logistics or supply chain management...In industry after industry . . . executives have plucked this oncedismal discipline off the loading dock and placed it near thetop of the corporate agenda. Hard-pressed to knock outcompetitors on quality or price, companies are trying to gainan edge through their ability to deliver the right stuff in theright amount of time ( Fortune Magazine , 1994)


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Growing Interest in SCM Why?

As manufacturing becomes more efficient (or isoutsourced), companies look for ways to reducecosts

Several significant success stories: Efficient SCM at Walmart, HP, Dell Computer

SCM considers the broad, integrated, view ofmaterials management from purchasing throughdistribution

The huge growth of interest in the web hasspawned web-based models for supply chains:from dot com retailers to B -2-B business models


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Mass Customization:Designing Final Choices into Supply Chains

Several companies have been able to cut costsand improve service by postponing the finalconfiguration of the product until the latestpossible point in the supply chain. Examples:

Hewlett Packard printer configuration Postponement of final programming of semiconductor

devices all routines loaded, only certain onesactivated

Assemble to order rather than assemble to stock (DellComputer)


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Design For Logistics: Many firms now consider SCM issues in the design

phase of product development One example is IKEA whose furniture comes in

simple to assemble kits that allows them to store thefurniture in the same warehouse-like locations wherethey are displayed and sold

Shipping container designs for FedEx and UPS airfreight


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Efficient Design of the Supplier Base

Part of streamlining the supply chain is reducing thenumber and variety of suppliers

The Japanese have been very successful in this arena(theyre an Island so getting materials there hasalways been a problem)

In the mid 1980s Xerox trimmed its number ofsuppliers from 5,000 to 400.

Overseas suppliers were chosen based on cost Local suppliers were chosen based on delivery speed

In 1996, Ford Motor reduced their supplier count bymore than 60%


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Dell Designs the Ultimate Supply Chain!

Dell Computer has been one of the mostsuccessful PC retailers. Why? To solve theproblem of inventory becoming obsolete, Dellssolution:

Dont keep any inventory! - All PCs are made to orderand parts shipped directly from manufacturers whenpossible.

Compare to the experience of Compaq Corporation

initial success selling through low cost retailwarehouses but they did not garner web-based sales


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Data Exchange A Critical Idea

EDI: Electronic Data Interchange Involves the Transmission of documents

electronically in a predetermined format fromcompany to company. (Not web based.)

The formats are complex and expensive. Itappears to be on the decline as web-based

systems grow.


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Data and Products E-Tailing

E-tailing : Direct to customer sales on the web the so-called Click & Mortor retail model

Perhaps best known e-tailer is Amazon.com, originallya web-based discount book seller

Today, Amazon.com sells a wide range of products (wecan think of many, many similar organizations)

Amazon and others spawned so called dot comstock explosion in the NASDAQ (1997 to April,2000)

Today, many traditional bricks and mortarretailers also offer sales over the web, often atlower prices


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Dealing with Data the modern way

B2B (business to business ) supply chainmanagement:

While not as visible and sexy as E -tailing, it appearsthat B2B supply chain management is the true growthindustry!

Web searches yield over 80 matches for supply chain

software providers. Some of the major players in thismarket segment include: Agile Software based in Silicon Valley. i2 Technologies based in Dallas. Ariba based in Silicon Valley


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Data Transfer in Supply Chains: Vendor ManagedInventory (the real solution?)

Walmart and P & G Target and Pepsi/Coke But Barilla SpA. An Italian pasta producer pioneered the use

of VMI (Vendor Managed Inventory) They obtained sales data directly from distributors and decide

on delivery sizes based on that information This is in opposition to allowing distributors (or even retailers)

to independently decide on order sizes!


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Order Growth The Bullwhip Effect AnImportant issue


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Principles of Supply Chain Management Principle 1: Segment Customers Based on Service Needs

segments customers based on logistics and supply chain needs

Principle 2: Customize the Logistics Network stresses the need to develop supply chain approaches that are responsive

to the needs of individual customer segments

Principle 3: Listen to Signals of Demand and Plan Accordingly see that demand planning is responsive to and aligned with market signals

such as point-of-sale information


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Principles of Supply Chain Management Principle 4: Differentiate Products Closer to the Customer

postponing product differentiation and gaining greater understanding andcontrol of cycle times, supply chain efficiency and effectiveness will bepositively impacted

Principle 5: Source Strategically excellent supply chain management requires customers and suppliers to

work together to meet overall supply chain objectives

Principle 6: Develop a Supply Chainwide Technology Strategy replace inflexible, poorly integrated transactional systems with enterprise-

wide systems


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Principles of Supply Chain Management Principle 7: Adopt Channel-Spanning Performance Measures

the realization of supply chain objectives will be essential to the long-termsuccess of the individual participants

The seven principles have survived the test of time

Still a long way to go on supply chain strategy implementation

Technology and data will be the major change agent going forward


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Focus of Supply Chain Management

Significant challenge to corporate leaders to appreciate the potentialimpact that effective supply chain management can have on theirbusinesses

To become contributing players to the growth agenda, three areas inwhich supply chain leaders need to focus :

(1) think strategic challenges and change for supply chains beyond cost

(2) develop world-class collaboration skills (3) aggressively grow your personal leadership capabilities


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Getting to Growth: Think Beyond Cost

CEOs view SCM as being primarily cost reduction, not top-line growth

Communicate the relationship between supply chain competency and

growth Move beyond a mindset focused primarily on delivering the 4

Rs(reduce, recycle, reuse & reclaim)

Modify traditional mindset from an inside -out perspective to anoutside -in approach


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Develop World-Class Collaboration Skills

Define the benefits of collaboration

Make the investment

Earn trust and create mutual ownership

Dedicate A players

Business people have been trained to maximize their self-interest; cannotdo if collaboration is to be successful


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Differentiation Strategies concept is that supply chain capabilities are viewed by customers as

being sufficiently effective and unique to distinguish an organizationin the marketplace

Time-Based Strategies effective strategy based on tradeoffs between transportation,

inventory, and warehousing costs as an example

Reducing Cycle Time three factors:

processes information decision making

Change from the traditional push approach to a pull approach


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Financial Strategies

the most compelling is the pursuit of operational efficiency

Inventory Productivity

Major strategies are in place at many firms to reduce inventory levelswithout diminishing levels of customer service

Facility Utilization more effectively utilize the capacity of various types of supply chain

facilities


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Financial Strategies

Equipment Utilization Strategies logistics-related equipment such as materials-handling equipment used in

warehouses and transportation equipment that is leased or owned by acompany

Outsourcing has grown in popularity and now has grown into areas that are both

strategic and customer focused

4PL providers provision of competencies relating to knowledge availability, information

technology, and skills in forming and sustaining successful supply chainrelationships


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Technology-Based Strategies

in the form of hardware, software, or connectivity, these technologieswill be the springboard for progress and innovation

supply chain management applications market in 2006 a $6 billion globally estimates of $7.9 billion in 2011.


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Collaboration

occurs when companies work together for mutual benefit

companies leverage each other on an operational basis so that

together they perform better than they did separately


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Elements of successful supply chain collaborations Well-Understood Goals and Objective

members need to understand their individual objectives and then bewilling to share these openly with each other

Trust and Commitment may be thought of as reliance on and trust in ones partner

Corporate Compatibility the relationship include a sharing of vision, goals, objectives, and cultures

Communication communication and sharing/use of information are central to an effective

collaborative relationship


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Elements of successful supply chain collaborations Shared Decision Making and Ability to Reach Consensus matters that are related to the success of the relationship should be

treated jointly by all involved organizations

Equitable Sharing of Gains, Losses, and Investments successful collaborations require the development of mechanisms to

share gains, losses, and investments

Overall Benefits Greater Than Could Be Obtained Alone successful collaborations need to create benefits for the involved parties

that exceed what those organizations


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Elements of successful supply chain collaborations Effective Measurements and Measurement Strategies

all involved participants agree to the development of measurementstrategies

Strategic Plan for Collaborative Relationship successful collaborations are not without their challenges and difficulties

3PLS firms might benefit from improved collaboration with 3PLs inventory management, customer order management, customer service,

and supplier order management


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Financial vs. Non-financial Benefits of Collaboration

Question of whether collaboration pays for itself

To be successful, all supply chain organizations must work with each

other in a manner that provides the greatest value for themselves, aswell as the end-use customer or consumer.


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Procurement Chain Management

A Strategic Implementation Process


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Product supply management is nothing but ProcurementStrategy, which is integral to corporate strategy. A corporations corporate strategy and procurement

strategy must fit with each other or otherwise, both willfail.

We will discuss the strategic decision making issues ofprocurement and also how managers make decisionsrelated to both corporate and procurement strategy.

The discussions should facilitate understanding of the

issues of strategic implementation.


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Cost impact of managing inventory

It is estimated that the grocery industry couldsave $30 billion (10% of its operating cost) byusing effective logistics strategies.

Compaq computer estimates it lost $500million to $1 billion in sales because itslaptops and desktops were not available when

and where customers were ready to buy them(Compaq does not exist anymore).


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Managing costs in the supply arena JIT, TQM, lean mfg. techniques have reduced

manufacturing costs as much as they could. One area that yet requires improvement:

Inventory Procurement. See the followingexamples: It takes a typical box of cereals more than 3

months to get from factory to supermarket. It takes a new car, on average, 15 days to

travel from factory to dealership.


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The Success Stories

In 10 years, Wal-Mart transformed itself bychanging its logistics system. It has the highestsales per square foot, inventory turnover andoperating profit of any discount retailer.

Dell Computer has outperformed thecompetition in terms of shareholder valuegrowth over the eight years period, 1988-1996,

by over 3,000%


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What exactly is procurement? All stages and parties involved, directly or indirectly,

in fulfilling a customer request Internally, the procurement process includes all

functions involved in fulfilling a customer request(product development, marketing, operations,distribution, finance, customer service).

Externally, it includes the suppliers, vendors,manufacturers, transportation, and distributors, thatexist to transform raw materials to final products andsupply those products to customers.


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Let us briefly go over how selling a simple box of

detergent through a retail store involves so manyparties and contractual arrangements and why each onemust function effectively to make the process efficient.

A procurement or a supply example


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Buying Cereals from Wal-Mart

TennecoPackaging

PaperManufacturer

TimberCompany

P&G or otherManufacturer

Cornmanufacturer

Wal- Mart

PlasticProducer

Customer


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The Objectives of a Procurement Chain

Primary purpose is satisfying customer needs. Maximizing the overall value created Value, measured monetarily, refers to: the difference between

what the final product is worth to the customer (price thecustomer is willing to pay) and the effort, collectively, theprocurement chain expends in filling the customers request(the collective costs)

Therefore, procurement profitability would be: the differencebetween revenue generated from the customer and theoverall cost across the entire Procurement chain.


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While managing procurement process is important for

managing costs and profits and delivering value to thecustomer, it is not easy to do.

It requires understanding, cooperation, coordination, andinformation sharing among several trading partners both

internal and internal.

And, given that there are so many parties, it is indeed aformidable task to make all of them work towards a commonobjective.


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f


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Conflicting Objectivesin the Procurement Chain

1. Purchasing wants Stable volume requirements Flexible delivery time Little variation in mix

Large quantities2. Manufacturing wants

Long run production High quality High productivity Low production cost

Tell me why some of these objectives are conflicting .

fl b


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Conflicting Objectivesin the Procurement Chain

3. Warehousing wants Low inventory Reduced transportation costs Quick replenishment capability

4. Customers want Short order lead time High in stock Enormous variety of products Low prices

Tell me why some of these objectives are conflicting.


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While we agree on the importance of

procurement, how does it translateinto a corporate strategy?


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Achieving strategic Fit

Matching multiple strategies


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Business strategies change over time

In the 1990s, outsourcing was the focus of manymanufacturers.Example: Nike Shoes

Nikes strategy: R and D on one hand and

marketing, sales, and distribution on the other.Example 2: CISCO CISCOs strategy: Focus on Internet sales;

increased productivity and save on businessexpenses.Example 3: Apple Computers

Apple computers: outsourced most of its mfg.


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What went wrong?

In the examples, the difficulties reflect problems withprocurement chain strategies. Nike, CISCO, Apple have short product life cycles. When technologies changed, uncertainties related to customer

demand increased. Procurement landscape changed significantly with the

introduction of independent, private, and consortium-based e-market places.

With changes in procurement landscape, both problems and

opportunities also changed. But, Nike, CISCO, and Apple were not able to react to these

changes and formulate a new corporate and procurementstrategy.


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The need for a good strategy

The most important requirement for sustainabilityis a well-formulated corporate strategy;

A corporate strategy, in turn, requires forming sub

strategies such as product strategy, procurementstrategy, marketing strategy, and so on. And,

A firm should continually evaluate its corporatestrategy and its sub strategies and ensure thatthey are appropriate for a changing environment.

C titi St t l t


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Competitive Strategy let managersanswer questions such as

Relative to competitors, how should my firmsatisfy customers?

What products and services should we offer? Should we focus on cost or should we focus

more on service and quick response? How much customization should we allow on

our products? Compare the competitive strategies of: Lands

End and a local retailer.


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Competitive Strategy and procurement Strategy The relationship

Competitive strategy

New ProductDevelopment

Marketing &Sales

Operations Distribution Service

procurement Strategy

SupplierStrategy

OperationsStrategy

LogisticsStrategy


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See the Dell example Matching competitive andprocurement strategies

Suppose Dells competitive strategy is to deliver a productwithin 72 hours of receiving an order but is product suppliers,on average take 7 days to resupply inventory, then, Dell is notgoing to be able to accomplish its competitive strategy.

There is a lack of strategic fit. Also, look at Dells competitive strategy.

Th D ll titi d


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The Dells competitive andprocurement strategies

Competitive strategy : provide a large variety of customizablecomputer-related products at a reasonable price and to letcustomers select from thousands of configurations.

procurement strategy: Two possible options: 1. Efficientprocurement limiting variety and exploiting economies ofscale or 2. High flexibility and responsiveness producing alarge variety of products.

Dells procurement Strategy is No. 2 Consequently, Dell focuses on designing easily customizable

products, common platforms and components that can beassembled quickly.

A hi i g St t gi Fit A hi d


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Achieving Strategic Fit Achieved The steps involved

Step 1: Understanding the customer andprocurement uncertainty

Step 2: Understanding the procurementcapabilities

Step 3: Achieve strategic fit


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First, take a look at two types of uncertainties DemandUncertainty and procurement chain uncertainty

Demand uncertainty: arises because of changingcustomer needs predicting demand for a product orservice absolutely is impossible. This is an externalfactor controlled by the customer.

Procurement chain uncertainty, in contrast, arisesbecause of uncertainties within a procurementprocess.

While a firm would like to meet 100% of customer

demand, it may not be able to do so because itsprocurement is unable to because of multiple reasonsthat were listed under procurement uncertainty.

Demand uncertainty


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Demand uncertainty(customer-induced)

Usually products that are less mature(electronics, computers) have greater demanduncertainty (unlike Salt or milk).

Forecasting demand for such products is verydifficult and usually not very accurate.

With forecasting difficulties, matching demandagainst product and services supply is difficult.

For uncertain demand products, prices are notsteady and varies depending on demand levels.

At the same time, a firm could earn greatermargin from uncertain demand products.


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Procurement chain uncertainty, on the contrary, arisesdue to constraints within a procurement

procurement uncertainty: The portion ofuncertainty introduced by procurementattributes such as: production breakdowns, lowproduct yields, poor quality and rework,

procurement capacity is limited (because oflimited production facilities, availability of rawmaterials, labor, and numerous other factors);

Supply capability is inflexible and cannot increase

with increased product demand; Also, changes in production process could lead tobottlenecks.


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Step 1: Therefore, understand both demand and procurement chainuncertainties

Identify the needs of the customer segmentbeing served (retail, wholesale, discount, high-end customers)

Quantity of product needed in each lot (large,small)

Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product

Step 2: Evaluate procurement


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Step 2: Evaluate procurementcapabilities

A procurement can rarely meet all demands ofall of its customers. Why?

How many of the following demands ofcustomers can we meet?

Responding to wide range of product demands Meeting short lead times Handling a large variety of products Meeting high service level possible

Where do we compromise?

Gi li i i di


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Given procurement limitations, responding tocustomer demand would require a compromise

How responsive should a procurement be? Quicker response implies increased costs

(responsiveness). Delayed response implies lower costs (efficient).

Therefore, a firm must compromise betweenquicker response and lower costs and strike a

balance that suits its objectives. See the graph.


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A comparison of cost and responsiveness

High Low

Low

High

Responsiveness

Cost

Efficient and Responsive procurement chains A Comparison


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Efficient and Responsive procurement chains A Comparison

Efficient Responsive

Primary goal Supply demand at the lowest

cost

Respond quickly to demand

Product design strategy Min. product cost Modularity to allowpostponement

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 ofgreater cost

Aggressively reduce even ifcosts are significant

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

Transportation strategy Greater reliance on low costmodes

Greater reliance on responsive(fast) modes


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3. Achieving Strategic Fit Now that a firm has assessed customer needs,

demand uncertainties, and procurement chainconstraints and uncertainties, it is time to makethe two fit with each other.

How? In most cases, by offering high responsiveness to

products with high demand uncertainties and Striving towards more cost efficiencies for

products with low demand uncertainties. Compare these two products: computers and

cheese.


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Let us revisit Dells strategy

Dell proposed a competitive strategy that itwill ship ordered consumer products within 72hours; a relatively high response rate.

What are the factors that Dell must consider?


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Dell Achieving Strategic Fit Decide whether its procurement chain from manufacturers to

trucking companies to warehouses would be able to meet itsgoal of 72 hours shipment.

Decide how much inventory Dell should carry and how muchshould its procurement chain partners carry.

How soon can Dell inform manufacturers of changing fashionsand demands?

Ascertain the flexibility (in procurement of raw materials, mfg.capacity, labor, etc.) that its procurement chain partners have (or

do not have)? Consider the cost of all of these factors and decide on the

responsiveness spectrum or the zone of fit.

Remember the following about


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Remember the following aboutStrategic Fit

Two key points there is no right procurement chain strategy

independent of competitive strategy there is only a right procurement chain strategy

for a given competitive strategy


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What did we learn Formulating corporate strategy is easier than

implementing strategy. Strategy implementation requires the cooperation of

both internal and external parties and

In turn, that requires common objectives and commonbenefits. Strategy is not an one time implementation but

something that requires constant redesign. Procurement or supply management is one of the

largest assets in an organization and The implication of managing it well has significant

consequences to an organization.


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Summary

Several principles of supply chain management are able to retain theirrelevance over time.

It is essential to expect that effective supply chain management will be able tohelp grow revenues as well as contain costs. Among the skills needed forsuccess in this endeavor are supply chain leadership skills.

Several types of strategy are imperative to the success of supply chainmanagement including differentiation, financial, technology-based,relationship-based, and global strategies.

The strategy of differentiation is needed to establish a particular company andits supply chain as being different and unique.

Financial strategies not only help improve the efficiency of supply chainoperations, but they also help managers understand and document thefinancial value created by supply chain management. Included as an exampleis financial strategy ( which is also an operational strategy), which isoutsourcing of logistics and supply chain activities.


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Summary (cont.)

The emergence of new and innovative technology-based strategies will resultin dramatic changes to the ways we manage logistics and supply chainactivities.

Achieving supply chain goals and objectives will be facilitated by collaborationbetween supply chain participants.

Supply chain success will be facilitated by the development of effective,collaborative relationships between supply chain participants.

The ability of organizations to develop and implement effective global supplychain strategies will be of great importance. Also, a growing number oforganizations have achieved excellence in this area.

Perhaps the most important area is that of supply chain transformation howan organization can transform itself into one that meets and exceeds futuregoals and objectives.

Management of Outsourced Operations 11

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