BA7051 LOGISTICS AND SUPPLY CHAIN MANAGEMENT LT P C V

UNIT I INTRODUCTION

Business logistics and supply chain importance, objectives and drivers. Strategy planning,
selecting proper channel, performance measurement. Outsourcing- Make vs buy approach
sourcing strategy.
UNIT II MANAGING FLOWS

Planning Networks Decision making under risk Decision trees Decision making under
uncertainty. Distribution Network Design Role - Factors Influencing Options, Value Addition.
Supply Chain Network optimization models. Logistics information system - Role of IT
Framework for IT adoption.
UNIT III INVENTORY AND WAREHOUSING

Inventoryobjectives, bullwhip effect, control - Probabilistic inventory models, Risk pooling,

Vendor managed inventory, Multi-echelon inventory. Warehousing Functions Types Site
Selection Decision Model Layout Design Costing Virtual Warehouse.
UNIT IV TRANSPORTATION AND PACKAGING

Transportation Drivers, Modes, Measures - Strategies for Transportation, 3PL and 4PL,
Vehicle Routing and Scheduling. Packaging- Design considerations, Material and Cost.
Packaging as Unitisation. Consumer and Industrial Packaging.
UNIT V ORGANISATION AND CONTROL

Organisation Structure need and development. Organizational Choices, Orientation and

Positioning. Interfunctional and interorganisational management alliances and partnerships.
Control Process framework, system details, information, measurement and interpretation.

[1]

UNIT-I

Logistics is the management of the flow of goods, information and other resources,
including energy and people, between the point of origin and the point of consumption
in order to meet the requirements of consumers (frequently, and originally, military
organizations). Logistics involve the integration of information, transportation,
inventory, warehousing, material-handling, and packaging.

Logistics Management is that part of Supply Chain Management that plans,

implements, and controls the efficient, effective, forward, and reverse flow and storage
of goods, services, and related information between the point of origin and the point of
consumption in order to meet customers requirements.

The term "logistics" originates from the ancient Greek "" ("logos""ratio, word,
calculation, reason, speech, oration").

The branch of military science having to do with procuring, maintaining and

transporting material, personnel and facilities.

Every company dreams of achieving the seven R's - delivering the right product in the
right quantity and the right condition, at the right place, at the right time, for the right
customer at the right cost. Effective logistics management alone can make this possible.

In the past, quality of products and services was the key differentiating factor for
companies operating in the same market. In due course, quality and low cost became the
winning combination.

Logistics is an organised process of managing the flow of merchandise from the source
of supply - the vendor, wholesaler or distributor - through internal processing functions
like warehousing and transportation, until the merchandise is sold and delivered to the
end customer.

Logistics management aims to reduce inventory-holding costs and improve profits,

while enhancing customer satisfaction.

Anything can be ordered online, but receiving a tangible product is impossible. The
difference between e-business success and failure lies in a company's ability to manage
the logistics.
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Logistics management

A professional working in the field of logistics management is called a logistician.

Business logistics

Logistics as a business concept evolved only in the 1950s.

In business, logistics may have either internal focus (inbound logistics), or external
focus (outbound logistics) covering the flow and storage of materials from point of
origin to point of consumption .

Production logistics

Machines are exchanged and new ones added, which gives the opportunity to improve
the production logistics system accordingly.

Production logistics is getting more and more important with the decreasing batch sizes.
In many industries (e.g. mobile phone) batch size one is the short term aim. This way
even a single customer demand can be fulfilled in an efficient way. Track and tracing,
which is an essential part of production logistics - is also gaining importance especially
in the automotive and the medical industry.

New vistas in logistics

Fleet management

Irrespective of the industry, a company's fleet of vehicles, own or hired, contributes to a

major share of the operational cost, which multiplies if poorly managed.

Thus effective fleet management results in substantial savings with increased earnings.

SCOPE
Transportation management

A major sub function of logistics, this creates time and space utility in goods. In fact, the
backbone of an entire supply chain is transportation management.

Warehouse management
Essentially involves efficient management of receiving, stocking and despatching products.
Inventory management

Every company should aim at simultaneously reducing inventory and maintain high
customer service. Therefore, the real challenge lies in building customer service without
increasing inventory.
[3]

Careers in logistics

Reliability is the most desired personality trait for a logistics or a warehouse manager. It
is critical because employees are expected to be on time, pick orders accurately and put
in extra efforts to beat the schedule.

High salaries, flexible timings, profit sharing and continuous training are some of the
competitive benefits for employees in the logistics industry.

Reliability is the most desired personality trait for a logistics or a warehouse manager. It
is critical because employees are expected to be on time, pick orders accurately and put
in extra efforts to beat the schedule.

High salaries, flexible timings, profit sharing and continuous

Definition of Supply Chain Management
Supply chain management (SCM) is the oversight of materials, information, and finances as
they move in a process from supplier to manufacturer to wholesaler to retailer to consumer.
Supply chain management involves coordinating and integrating these flows both within and
among companies. It is said that the ultimate goal of any effective supply chain management
system is to reduce inventory (with the assumption that products are available when needed). As
a solution for successful supply chain management, sophisticated software systems with Web
interfaces are competing with Web-based application service providers (ASP) who promise to
provide part or all of the SCM service for companies who rent their service.

Supply chain management (SCM) is the management of a network of interconnected

businesses involved in the provision of product and service packages required by the end
customers in a supply chain. Supply chain management spans all movement and storage of raw
materials, work-in-process inventory, and finished goods from point of origin to point of
consumption.
Another definition is provided by the APICS Dictionary when it defines SCM as the "design,
planning, execution, control, and monitoring of supply chain activities with the objective of
creating net value, building a competitive infrastructure, leveraging worldwide logistics,
[4]

synchronizing

supply

with

demand

and

measuring

performance

globally."

Origin of Supply Chain Management

The term "supply chain management" entered the public domain when Keith Oliver, a
consultant at Booz Allen Hamilton, used it in an interview for the Financial Times in 1982. The
term was slow to take hold and the lexicon was slow to change. It gained currency in the mid1990s, when a flurry of articles and books came out on the subject. In the late 1990s it rose to
prominence as a management buzzword, and operations managers began to use it in their titles
with increasing regularity.
Common and accepted definitions of supply chain management are:

Managing upstream and downstream value added flow of materials, final goods and
related information among suppliers; company; resellers; final consumers is supply
chain management.

Supply chain management is the systematic, strategic coordination of the traditional

business functions and the tactics across these business functions within a particular
company and across businesses within the supply chain, for the purposes of improving
the long-term performance of the individual companies and the supply chain as a whole

[5]

A customer focused definition is given by Hines "Supply chain strategies require a total
systems view of the linkages in the chain that work together efficiently to create
customer satisfaction at the end point of delivery to the consumer. As a consequence
costs must be lowered throughout the chain by driving out unnecessary costs and
focusing attention on adding value. Throughput efficiency must be increased,
bottlenecks removed and performance measurement must focus on total systems
efficiency and equitable reward distribution to those in the supply chain adding value.
The supply chain system must be responsive to customer requirements."

According to Lambert, Global supply chain forum - supply chain management is the
integration of key business processes across the supply chain for the purpose of creating
value for customers and stakeholders

According to the Council of Supply Chain Management Professionals (CSCMP), supply

chain management encompasses the planning and management of all activities involved
in sourcing, procurement, conversion, and logistics management. It also includes the
crucial components of coordination and collaboration with channel partners, which can
be suppliers, intermediaries, third-party service providers, and customers. In essence,
supply chain management integrates supply and demand management within and across
companies. More recently, the loosely coupled, self-organizing network of businesses
that cooperate to provide product and service offerings has been called the Extended
Enterprise.

A supply chain, as opposed to supply chain management, is a set of organizations

directly linked by one or more of the upstream and downstream flows of products,
services, finances, and information from a source to a customer. Managing a supply
chain is 'supply chain management'

Supply chain management software includes tools or modules used to execute supply
chain transactions, manage supplier relationships and control associated business
processes.

Supply chain event management (abbreviated as SCEM) is a consideration of all

possible events and factors that can disrupt a supply chain. With SCEM possible
scenarios can be created and solutions devised.

[6]

In many cases the supply chain includes the collection of goods after consumer use for
recycling. Including 3PL or other gathering agencies as part of the RM re-patriation
process is a way of illustrating the new end-game strategy.

[7]

Supply Chain Net Work

All organizations have or can purchase the components to build a supply chain network, it is the
collection of physical locations, transportation vehicles and supporting systems through which
the products and services your firm markets are managed and ultimately delivered.
Physical locations included in a Supply Chain Network can be manufacturing plants, storage
warehouses, carrier crossdocks, major distribution centres, ports, intermodal terminals whether
owned by your company, your suppliers, your transport carrier, a third-party logistics provider,
a retail store or your end customer.
Transportation modes that operate within a Supply Chain Network can include the many
different types of trucks, trains for boxcar or intermodal unit movement, container ships or
cargo planes.
The many systems which can be utilized to manage and improve a Supply Chain Network
include Order Management Systems, Warehouse Management System, Transportation
Management Systems, Strategic Logistics Modeling, Inventory Management Systems,
Replenishment Systems, Supply Chain Visibility, Optimization Tools and more.

[8]

Emerging technologies and standards such as the RFID and the GS1 Global Standards are now
making it possible to automate these Supply Chain Networks in a real time manner making
them more efficient than the simple supply chain of the past.

A Generic Supply Chain

A customer is a supplier for some other company. A supplier is a customer for some other
company. Not all pieces of a supply chain belongs to the same company.

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[10]

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Problems of Supply Chain Management

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Supply chain management must address the following problems:

Distribution Network Configuration: number, location and network missions of

suppliers, production facilities, distribution centers, warehouses, cross-docks and
customers.

Distribution Strategy: questions of operating control (centralized, decentralized or

shared); delivery scheme, e.g., direct shipment, pool point shipping, cross docking,
direct store delivery (DSD), closed loop shipping; mode of transportation, e.g., motor
carrier, including truckload, Less than truckload (LTL), parcel; railroad; intermodal
transport, including trailer on flatcar (TOFC) and container on flatcar (COFC); ocean
freight; airfreight; replenishment strategy (e.g., pull, push or hybrid); and transportation
control (e.g., owner-operated, private carrier, common carrier, contract carrier, or thirdparty logistics (3PL)).

Trade-Offs in Logistical Activities: The above activities must be well coordinated in

order to achieve the lowest total logistics cost. Trade-offs may increase the total cost if
only one of the activities is optimized. For example, full truckload (FTL) rates are more
economical on a cost per pallet basis than LTL shipments. If, however, a full truckload
of a product is ordered to reduce transportation costs, there will be an increase in
inventory holding costs which may increase total logistics costs. It is therefore
imperative to take a systems approach when planning logistical activities. These tradeoffs are key to developing the most efficient and effective Logistics and SCM strategy.

Information: Integration of processes through the supply chain to share valuable

information, including demand signals, forecasts, inventory, transportation, potential
collaboration, etc.

Inventory Management: Quantity and location of inventory, including raw materials,

work-in-process (WIP) and finished goods.

Cash-Flow: Arranging the payment terms and methodologies for exchanging funds
across entities within the supply chain.

Supply chain execution means managing and coordinating the movement of materials,
information and funds across the supply chain. The flow is bi-directional.

Difficulties in Supply Chain Management

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 Different organizations in the supply chain may have different, conflicting objectives
Manufacturers
long run production, high quality, high productivity, low production cost Distributors
low inventory, reduced transportation costs, quick replenishment capability Customers
shorter order lead time, high quality , large variety of products, low prices Supply chains
are dynamic and change over time

Various Issues in Supply Chain Management

How many warehouses do we need?
Where should these warehouses be located?
What should the production levels be at each of our plants?
Why are we holding inventory?
Uncertainty in customer demand?
Uncertainty in the supply process?
How can be reduced uncertainty ?
How forecast customer needs?
Which inventory level to be held in warehouses? Should information be shared with
supply chain partners?
What information should be shared?
With what partners should be shared?
What are the benefits to be gained?
Should products be redesigned to reduce logistics costs?
Should products be redesigned to reduce lead times?
What data should be shared ?
How should the data be analyzed and used?
What infrastructure is needed between supply chain members?
How is customer value created by the supply chain? What determines customer value?
How do we measure customer value?

[14]

 How is IT used to enhance customer value in the supply chain?

Core Areas in Supply Chain Management

Distribution Network Planning
Demand Management
Manufacturing Planning & Scheduling
Material requirement Planning
Warehouse Management
Distribution Management
Shipment & Transport Management

Benefits supply chain management

Reliable Demand Management
High Customer Service levels
Reduced lead times
Optimum working capital costs
Optimum supply chain costs
Increased inventory turnover
Increased ROI

Pillars of supply chain management

Supplier management,
supplier evaluation,
supplier certification,
strategic partnerships
Operational Management
Demand management,
MRP, ERP, JIT , Lean, TQM , Six Sigma

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IMPORTANCE OF SUPPLY CHAIN

Supply chain is about creating value-value for customers and suppliers of the firm, and value for
the firms stakeholders. Value in supply chain is primarily in terms of time and place.
Productions and services have no value unless they are supplied to customers when (time) and
where (place) they wish to consume them. Good supply chain management
views each activity in the supply chain as contributing to the process of adding value. To
many firms throughout world, supply chain has become an increasingly important alueadding
process for a number of reasons. They are discussed below.
1. Costs are Significant:
Statistics show that average about 12% of worlds GDP accounts supply chain costs. About 7-9%
sales accounts physical distribution costs.Supply chain cost, substantial for most firms, rank
second only to the cost of goods sold. Value is added by minimizing these costs and by passing
the benefits on to customers and to the firms shareholders.
2. Increased expectations of the customers:
Awareness of customers has gone up. Customers expect rapid processing of their requests,
quick delivery and also expect a high degree of product availability. Supply chain assures less
error rates, lower order processing costs, reduced inventory, minimum cycle time and lowest
transportation costs. To meet the increased exceptions of the present day customer, it is essential
that every firm should implement supply chain management.
3. Supply and distributions lines are lengthening with greater complexity.
Todays trend is towards an integrated world economy. Firms are seeking, or have developed,
global strategies by designing their products for a world market and producing them wherever
the low-cost raw materials, components, and labour can be found, or they simply produce
locally and sell internationally. In either case, supply and distribution lines are stretched, as
compared with the producer who wishes to manufacture and sell only locally. As this happens,
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supply chain takes on increased importance with in the firm and can considerably reduce the
other costs.
4. Supply chain is important to strategy:
Firms spend a great deal of time finding ways to differentiate their product offerings from those
of their competitors. When management recognizes that supply chain affects a significant
portion of a firms costs and that the result of decisions made about the supply chain processes
yields different levels of customer service, it is in a position to use this effectively to penetrate
new markets, to increase market share, and to increase profits. That is, good supply chain
Management can generate sales, not just reduce costs.
5. Supply Chain adds Significant Customer Value:
Customers become unsatisfied, if the product/service is not delivered to him/her at the time and
place he/she wish to consume it. When a firm incurs the cost of moving the product toward the
customer or making inventory available in a timely manner, customer value has been created. It
is value as surely as that created through the production of a quality product or through a low
price. Supply chain controls two (time and place) out of four values creating variables.
6. Customers increasingly want QUICK customized Response:
Todays customers expect that products and services be delivered at very short time. In addition,
improved internet service, quick information systems, and flexible manufacturing systems have
led the market place toward customization. Rather than consumers having to accept the One
size fits all philosophy in their purchase, suppliers are increasingly offeringproducts that meet
individual customer needs.
7. Supply Chain in Service Industry:
Service sector of industrialized countries is large and growing. The size of this sector alone
forces us to use the supply chain concepts tountap the potentials so far not tapped
DECISION PHASE IN A SUPPLY CHAIN
Successful management of supply chain requires many important decisions, such as strategy,
planning and operations. They are very important because they affect the flow of information,
product and funds in the supply chain. Let us discuss each these decisions.
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Strategy or Design:
Strategy is a grand plan. Supply chain strategy involving decisions how to structure the supply
chain over next several years. It decides what the chains configuration will be, how resources
will be allocated, and what processes each stage will perform. Strategic decisions made by
companies include the location and capacities of production and warehouse facilities, the
products to be manufactured or stored at various locations, the modes of transportation to be
made available along different shipping legs, and the type of information system to be utilized.
A firm must ensure that the supply chain configuration supports its strategic objectives during
this decision phase. Supply chain design decisions are made for the long term and are very
expensive to alter on short notice. Consequently when companies make these decisions, they
must take into account uncertainty in anticipated market conditions over the next few years.
Planning:
The supply chains configuration determined in design phase is fixed for making planning
decisions. Companies start the planning phase with a forecast for the coming year of demand in
different markets. Planning includes decisions regarding which markets will be supplied from
which locations, the sub contracting of manufacturing, the inventory policies to be followed,
and the timing and size of marking promotions. Planning establishes parameters within which a
supply chain will function over a specified period of time. In the planning phase, companies
must include uncertainty in demand, exchange rates, and competition over this time horizon in
their decisions. Given a shorter time horizon and better forecast than the design phase,
companies in the planning phase try to incorporate any flexibility built into optimize
performance. As a result of the planning phase, companies define a set of operating polices that
govern short-term operations.
Operation:
During operation phase (weekly or daily) companies make decisions regarding individual
customer orders. At the operational level, supply chain configuration is considered fixed and
planning policies are already defined. The goal of supply chain operations is to handle incoming
customer orders in the best possible manner. During this phase, firms allocate inventory or
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production to individual orders, set a date that an order is to be filled, generate pick lists at a
warehouse, allocate an order to a particular shipping mode and shipment, set delivery schedules
of trunks and place replenishment orders. Because operational decisions are being made in the
short term, there is less uncertainty about demand information. Given the constraints established
by the operation phase is to exploit the reduction of uncertainty and optimize performance.

Activities/functions of Supply Chain Management

Supply chain management is a cross-function approach including managing the
movement of raw materials into an organization, certain aspects of the internal processing of
materials into finished goods, and the movement of finished goods out of the organization and
toward the end-consumer. As organizations strive to focus on core competencies and becoming
more flexible, they reduce their ownership of raw materials sources and distribution channels.
These functions are increasingly being outsourced to other entities that can perform the
activities better or more cost effectively. The effect is to increase the number of organizations
involved in satisfying customer demand, while reducing management control of daily logistics
operations. Less control and more supply chain partners led to the creation of supply chain
management concepts. The purpose of supply chain management is to improve trust and
collaboration among supply chain partners, thus improving inventory visibility and the velocity
of inventory movement.
Several models have been proposed for understanding the activities required to manage material
movements across organizational and functional boundaries. SCOR is a supply chain
management model promoted by the Supply Chain Council. Another model is the SCM Model
proposed by the Global Supply Chain Forum (GSCF). Supply chain activities can be grouped
into strategic, tactical, and operational levels. The CSCMP has adopted The American
Productivity & Quality Center (APQC) Process Classification Framework SM a high-level,
industry-neutral enterprise process model that allows organizations to see their business
processes from a cross-industry viewpoint.

Strategic level

Strategic network optimization, including the number, location, and size of warehousing,
distribution centers, and facilities.
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Strategic

partnerships

with

suppliers,

distributors,

and

customers,

creating

communication channels for critical information and operational improvements such as

cross docking, direct shipping, and third-party logistics.

Product life cycle management, so that new and existing products can be optimally
integrated into the supply chain and capacity management activities.

Segmentation of products and customers to guide alignment of corporate objectives with

manufacturing and distribution strategy.

Information technology chain operations.

Where-to-make and make-buy decisions.

Aligning overall organizational strategy with supply strategy.

It is for long term and needs resource commitment.

Tactical level

Sourcing contracts and other purchasing decisions.

Production decisions, including contracting, scheduling, and planning process definition.

Inventory decisions, including quantity, location, and quality of inventory.

Transportation strategy, including frequency, routes, and contracting.

Benchmarking of all operations against competitors and implementation of best

practices throughout the enterprise.

Milestone payments.

Focus on customer demand and Habits.

Operational level

Daily production and distribution planning, including all nodes in the supply chain.

Production scheduling for each manufacturing facility in the supply chain (minute by
minute).

Demand planning and forecasting, coordinating the demand forecast of all customers
and sharing the forecast with all suppliers.

Sourcing planning, including current inventory and forecast demand, in collaboration

with all suppliers.

Inbound operations, including transportation from suppliers and receiving inventory.

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Production operations, including the consumption of materials and flow of finished

goods.

Outbound operations, including all fulfillment activities, warehousing and transportation

to customers.

Order promising, accounting for all constraints in the supply chain, including all
suppliers, manufacturing facilities, distribution centers, and other customers.

From production level to supply level accounting all transit damage cases & arrange to
settlement at customer level by maintaining company loss through insurance company.

Managing non-moving, short-dated inventory and avoiding more products to go shortdated.

Importance of Supply Chain Management

Organizations increasingly find that they must rely on effective supply chains, or
networks, to compete in the global market and networked economy.[10] In Peter Drucker's (1998)
new management paradigms, this concept of business relationships extends beyond traditional
enterprise boundaries and seeks to organize entire business processes throughout a value chain
of multiple companies.
During the past decades, globalization, outsourcing and information technology have enabled
many organizations, such as Dell and Hewlett Packard, to successfully operate solid
collaborative supply networks in which each specialized business partner focuses on only a few
key strategic activities . This inter-organizational supply network can be acknowledged as a new
form of organization. However, with the complicated interactions among the players, the
network structure fits neither "market" nor "hierarchy" categories . It is not clear what kind of
performance impacts different supply network structures could have on firms, and little is
known about the coordination conditions and trade-offs that may exist among the players. From
a systems perspective, a complex network structure can be decomposed into individual
component firms .
Traditionally, companies in a supply network concentrate on the inputs and outputs of the
processes, with little concern for the internal management working of other individual players.

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Therefore, the choice of an internal management control structure is known to impact local firm
performance .
In the 21st century, changes in the business environment have contributed to the development of
supply chain networks. First, as an outcome of globalization and the proliferation of
multinational companies, joint ventures, strategic alliances and business partnerships,
significant success factors were identified, complementing the earlier "Just-In-Time", Lean
Manufacturing and Agile manufacturing practices.
Second, technological changes, particularly the dramatic fall in information communication
costs, which are a significant component of transaction costs, have led to changes in
coordination among the members of the supply chain network
The security management system for supply chains is described in ISO/IEC 28000 and ISO/IEC
28001 and related standards published jointly by ISO and IEC

To gain efficiencies from procurement, distribution and logistics

To make outsourcing more efficient
To reduce transportation costs of inventories
To meet competitive pressures from shorter development times, more new products, and
demand for more customization
To meet the challenge of globalization and longer supply chains
To meet the new challenges from e-commerce
To manage the complexities of supply chains
To manage the inventories needed across the supply chain

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Eliminating inefficiencies in supply chains can save millions of $.

Evolution / Historical developments

Six major movements can be observed in the evolution of supply chain management studies:
Creation, Integration, and Globalization and Specialization Phases One and Two, and SCM

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Creation era
The term supply chain management was first coined by Keith Oliver in 1982. However, the
concept of a supply chain in management was of great importance long before, in the early 20th
century, especially with the creation of the assembly line. The characteristics of this era of
supply chain management include the need for large-scale changes, re-engineering, downsizing
driven by cost reduction programs, and widespread attention to the Japanese practice of
management.

Integration era
This era of supply chain management studies was highlighted with the development of
Electronic Data Interchange (EDI) systems in the 1960s and developed through the 1990s by the
introduction of Enterprise Resource Planning (ERP) systems. This era has continued to develop
into the 21st century with the expansion of internet-based collaborative systems. This era of
supply chain evolution is characterized by both increasing value-adding and cost reductions
through integration.
In fact a supply chain can be classified as a Stage 1, 2 or 3 network. In stage 1 type supply
chain, various systems such as Make, Storage, Distribution, Material control, etc. are not linked
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and are independent of each other. In a stage 2 supply chain, these are integrated under one plan
and is ERP enabled. A stage 3 supply chain is one in which vertical integration with the
suppliers in upstream direction and customers in downstream direction is achieved. An example
of this kind of supply chain is Tesco.

Globalization era
The third movement of supply chain management development, the globalization era, can be
characterized by the attention given to global systems of supplier relationships and the
expansion of supply chains over national boundaries and into other continents. Although the use
of global sources in the supply chain of organizations can be traced back several decades (e.g.,
in the oil industry), it was not until the late 1980s that a considerable number of organizations
started to integrate global sources into their core business. This era is characterized by the
globalization of supply chain management in organizations with the goal of increasing their
competitive advantage, value-adding, and reducing costs through global sourcing.

Specialization era (phase I): outsourced manufacturing and distribution

In the 1990s, industries began to focus on core competencies and adopted a specialization
model. Companies abandoned vertical integration, sold off non-core operations, and outsourced
those functions to other companies. This changed management requirements by extending the
supply chain well beyond company walls and distributing management across specialized
supply chain partnerships.
This transition also re-focused the fundamental perspectives of each respective organization.
OEMs became brand owners that needed deep visibility into their supply base. They had to
control the entire supply chain from above instead of from within. Contract manufacturers had
to manage bills of material with different part numbering schemes from multiple OEMs and
support customer requests for work -in-process visibility and vendor-managed inventory (VMI).
The specialization model creates manufacturing and distribution networks composed of
multiple, individual supply chains specific to products, suppliers, and customers who work
together to design, manufacture, distribute, market, sell, and service a product. The set of
partners may change according to a given market, region, or channel, resulting in a proliferation
of trading partner environments, each with its own unique characteristics and demands.
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Specialization era (phase II): supply chain management as a service

Specialization within the supply chain began in the 1980s with the inception of transportation
brokerages, warehouse management, and non-asset-based carriers and has matured beyond
transportation and logistics into aspects of supply planning, collaboration, execution and
performance management.
At any given moment, market forces could demand changes from suppliers, logistics providers,
locations and customers, and from any number of these specialized participants as components
of supply chain networks. This variability has significant effects on the supply chain
infrastructure, from the foundation layers of establishing and managing the electronic
communication between the trading partners to more complex requirements including the
configuration of the processes and work flows that are essential to the management of the
network itself.
Supply chain specialization enables companies to improve their overall competencies in the
same way that outsourced manufacturing and distribution has done; it allows them to focus on
their core competencies and assemble networks of specific, best-in-class partners to contribute
to the overall value chain itself, thereby increasing overall performance and efficiency. The
ability to quickly obtain and deploy this domain-specific supply chain expertise without
developing and maintaining an entirely unique and complex competency in house is the leading
reason why supply chain specialization is gaining popularity.
Outsourced technology hosting for supply chain solutions debuted in the late 1990s and has
taken root primarily in transportation and collaboration categories. This has progressed from the
Application Service Provider (ASP) model from approximately 1998 through 2003 to the OnDemand model from approximately 2003-2006 to the Software as a Service (SaaS) model
currently in focus today.

Supply chain management 2.0 (SCM 2.0)

Building on globalization and specialization, the term SCM 2.0 has been coined to describe both
the changes within the supply chain itself as well as the evolution of the processes, methods and
tools that manage it in this new "era".
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Web 2.0 is defined as a trend in the use of the World Wide Web that is meant to increase
creativity, information sharing, and collaboration among users. At its core, the common attribute
that Web 2.0 brings is to help navigate the vast amount of information available on the Web in
order to find what is being sought. It is the notion of a usable pathway. SCM 2.0 follows this
notion into supply chain operations. It is the pathway to SCM results, a combination of the
processes, methodologies, tools and delivery options to guide companies to their results quickly
as the complexity and speed of the supply chain increase due to the effects of global
competition, rapid price fluctuations, surging oil prices, short product life cycles, expanded
specialization, near-/far- and off-shoring, and talent scarcity.

Business process integration

Successful SCM requires a change from managing individual functions to integrating activities
into key supply chain processes. An example scenario: the purchasing department places orders
as requirements become known. The marketing department, responding to customer demand,
communicates with several distributors and retailers as it attempts to determine ways to satisfy
this demand. Information shared between supply chain partners can only be fully leveraged
through process integration.
Supply chain business process integration involves collaborative work between buyers and
suppliers, joint product development, common systems and shared information. According to
Lambert and Cooper (2000), operating an integrated supply chain requires a continuous
information flow. However, in many companies, management has reached the conclusion that
optimizing the product flows cannot be accomplished without implementing a process approach
to the business. The key supply chain processes stated by Lambert (2004)[13] are:

Customer relationship management

Customer service management

Demand management style

Order fulfillment

Manufacturing flow management

Supplier relationship management

Product development and commercialization

Returns management
[27]

Much has been written about demand management. Best-in-Class companies have similar
characteristics, which include the following: a) Internal and external collaboration b) Lead time
reduction initiatives c) Tighter feedback from customer and market demand d) Customer level
forecasting
One could suggest other key critical supply business processes which combine these processes
stated by Lambert such as:
a. Customer service management
b. Procurement
c. Product development and commercialization
d. Manufacturing flow management/support
e. Physical distribution
f. Outsourcing/partnerships
g. Performance measurement
h. Warehousing management
a) Customer service management process
Customer Relationship Management concerns the relationship between the organization
and its customers. Customer service is the source of customer information. It also provides the
customer with real-time information on scheduling and product availability through interfaces
with the company's production and distribution operations. Successful organizations use the
following steps to build customer relationships:

determine mutually satisfying goals for organization and customers

establish and maintain customer rapport

produce positive feelings in the organization and the customers

b) Procurement process
Strategic plans are drawn up with suppliers to support the manufacturing flow
management process and the development of new products. In firms where operations extend
globally, sourcing should be managed on a global basis. The desired outcome is a win-win
relationship where both parties benefit, and a reduction in time required for the design cycle and
product development. Also, the purchasing function develops rapid communication systems,
[28]

such as electronic data interchange (EDI) and Internet linkage to convey possible requirements
more rapidly. Activities related to obtaining products and materials from outside suppliers
involve resource planning, supply sourcing, negotiation, order placement, inbound
transportation, storage, handling and quality assurance, many of which include the
responsibility to coordinate with suppliers on matters of scheduling, supply continuity, hedging,
and research into new sources or programs.
c) Product development and commercialization
Here, customers and suppliers must be integrated into the product development
process in order to reduce time to market. As product life cycles shorten, the appropriate
products must be developed and successfully launched with ever shorter time-schedules to
remain competitive. According to Lambert and Cooper (2000), managers of the product
development and commercialization process must:
1. coordinate with customer relationship management to identify customer-articulated
needs;
2. select materials and suppliers in conjunction with procurement, and
3. develop production technology in manufacturing flow to manufacture and integrate into
the best supply chain flow for the product/market combination.
d) Manufacturing flow management process
The manufacturing process produces and supplies products to the distribution
channels based on past forecasts. Manufacturing processes must be flexible to respond to
market changes and must accommodate mass customization. Orders are processes operating on
a just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow process
lead to shorter cycle times, meaning improved responsiveness and efficiency in meeting
customer demand. Activities related to planning, scheduling and supporting manufacturing
operations, such as work-in-process storage, handling, transportation, and time phasing of
components, inventory at manufacturing sites and maximum flexibility in the coordination of
geographic and final assemblies postponement of physical distribution operations.
e) Physical distribution
[29]

This concerns movement of a finished product/service to customers. In physical

distribution, the customer is the final destination of a marketing channel, and the availability of
the product/service is a vital part of each channel participant's marketing effort. It is also
through the physical distribution process that the time and space of customer service become an
integral part of marketing, thus it links a marketing channel with its customers (e.g., links
manufacturers, wholesalers, retailers).
f) Outsourcing/partnerships
This is not just outsourcing the procurement of materials and components, but also
outsourcing of services that traditionally have been provided in-house. The logic of this trend is
that the company will increasingly focus on those activities in the value chain where it has a
distinctive advantage, and outsource everything else. This movement has been particularly
evident in logistics where the provision of transport, warehousing and inventory control is
increasingly subcontracted to specialists or logistics partners. Also, managing and controlling
this network of partners and suppliers requires a blend of both central and local involvement.
Hence, strategic decisions need to be taken centrally, with the monitoring and control of
supplier performance and day-to-day liaison with logistics partners being best managed at a
local level.
g) Performance measurement
Experts found a strong relationship from the largest arcs of supplier and customer
integration to market share and profitability. Taking advantage of supplier capabilities and
emphasizing a long-term supply chain perspective in customer relationships can both be
correlated with firm performance. As logistics competency becomes a more critical factor in
creating and maintaining competitive advantage, logistics measurement becomes increasingly
important because the difference between profitable and unprofitable operations becomes more
narrow. A.T. Kearney Consultants (1985) noted that firms engaging in comprehensive
performance measurement realized improvements in overall productivity. According to experts,
internal measures are generally collected and analyzed by the firm including
1. Cost
2. Customer Service
[30]

3. Productivity measures
4. Asset measurement, and
5. Quality.
External performance measurement is examined through customer perception measures and
"best practice" benchmarking, and includes 1) customer perception measurement, and 2) best
practice benchmarking.
h) Warehousing management
As a case of reducing company cost & expenses, warehousing management is
carrying the valuable role against operations. In case of perfect storing & office with all
convenient facilities in company level, reducing manpower cost, dispatching authority with on
time delivery, loading & unloading facilities with proper area, area for service station, stock
management system etc.
Components of supply chain management are as follows: 1. Standardization 2. Postponement 3.
Customization

Theories of Supply Chain Management

Currently there is a gap in the literature available on supply chain management studies: there is
no theoretical support for explaining the existence and the boundaries of supply chain
management. These theories include:

Resource-based view (RBV)

Transaction Cost Analysis (TCA)

Knowledge-Based View (KBV)

Strategic Choice Theory (SCT)

Agency Theory (AT)

Institutional theory (InT)

Systems Theory (ST)

Network Perspective (NP)

Materials Logistics Management (MLM)

Just-in-Time (JIT)

Material Requirements Planning (MRP)

[31]

Theory of Constraints (TOC)

Performance Information Procurement Systems (PIPS)

Performance Information Risk Management System (PIRMS)

Total Quality Management (TQM)

Agile Manufacturing

Time Based Competition (TBC)

Quick Response Manufacturing (QRM)

Customer Relationship Management (CRM)

Requirements Chain Management (RCM)

Available-to-promise (ATP)

and many more

However, the unit of analysis of most of these theories is not the system supply chain, but
another system such as the firm or the supplier/buyer relationship. Among the few
exceptions is the relational view, which outlines a theory for considering dyads and networks of
firms as a key unit of analysis for explaining superior individual firm performance (Dyer and
Singh, 1998).[14]

Tax efficient supply chain management

Tax efficient supply chain management is a business model which considers the effect of tax
in design and implementation of supply chain management. As the consequence of
globalization, businesses which are cross-national should pay different tax rates in different
countries. Due to the differences, global players have the opportunity to calculate and optimize
supply chain based on tax efficiency[16] legally. It is used as a method of gaining more profit for
company which owns global supply chain.

Supply chain sustainability

Supply chain sustainability is a business issue affecting an organizations supply chain or
logistics network and is frequently quantified by comparison with SECH ratings. SECH ratings
are defined as social, ethical, cultural and health footprints. Consumers have become more
[32]

aware of the environmental impact of their purchases and companies SECH ratings and, along
with non-governmental organizations(NGOs), are setting the agenda for transitions to
organically-grown foods, anti-sweatshop labor codes and locally-produced goods that support
independent and small businesses. Because supply chains frequently account for over 75% of a
companys carbon footprint many organizations are exploring how they can reduce this and thus
improve their SECH rating.
For example, in July, 2009 the U.S. based Wal-Mart corporation announced its intentions to
create a global sustainability index that would rate products according to the environmental and
social impact made while the products were manufactured and distributed. The sustainability
rating index is intended to create environmental accountability in Wal-Mart's supply chain, and
provide the motivation and infrastructure for other retail industry companies to do the same.[17]
More recently, the US Dodd-Frank Wall Street Reform and Consumer Protection Act signed
into law by President Obama in July 2010, contained a supply chain sustainability provision in
the form of the Conflict Minerals law. This law requires SEC-regulated companies to conduct
third party audits of the company supply chains, determine whether any tin, tantalum, tungsten
or gold (together referred to as conflict minerals) is made of ore mined/sourced from the
Democratic Republic of the Congo (DRC), and create a report (available to the general public
and SEC) detailing the supply chain due diligence efforts undertaken and the results of the
audit.[18] Of course, the chain of suppliers/vendors to these reporting companies will be expected
to provide appropriate supporting information.

Components
Management components
The SCM components are the third element of the four-square circulation framework. The level
of integration and management of a business process link is a function of the number and level,
ranging from low to high, of components added to the link. Consequently, adding more
management components or increasing the level of each component can increase the level of
integration of the business process link. The literature on business process re-engineering, [19]
buyer-supplier relationships, and SCM suggests various possible components that must receive

[33]

managerial attention when managing supply relationships. Lambert and Cooper identified the
following components:

Planning and control

Work structure

Organization structure

Product flow facility structure

Information flow facility structure

Management methods

Power and leadership structure

Risk and reward structure

Culture and attitude

Supply Chain Management Today

If we take the view that Supply Chain Management is what Supply Chain Management people
do, then in 1997 Supply Chain Management has a firm hand on all aspects of physical
distribution and materials management. Seventy-five percent or more of respondents included
the following activities as part of their company's Supply Chain
Management department functions:
Inventory management
Transportation service procurement
Materials handling
Inbound transportation
Transportation operations management
Warehousing management
Moreover, the Supply Chain Management department is expected to increase its range of
responsibilities, most often in line with the thinking that sees the order fulfilment process as one
co-ordinated set of activities. Thus the functions most often cited as planning to formally
include in the Supply Chain Management department are:
Customer service performance monitoring
Order processing/customer service
[34]

Supply Chain Management budget forecasting

On the other hand, there are certain functions which some of us might feel logically belong to
Supply Chain Management which companies feel are the proper domain of other departments.
Most difficult to bring under the umbrella of Supply Chain Management are:
Third party invoice payment/audit
Sales forecasting
Master production planning
Write-in responses reveal the leading edge of what some Supply Chain Management
departments are doing. These include engineering change control for packaging; custom design
packaging; drafting national Supply Chain Management standards; and
implementing
Today Supply Chain Management includes services such as:
Operational Analysis and Design Materials Handling
Distribution Strategy
Operational Improvements, Distribution Management
Computer Systems
Warehouse Design Project Management
Operational Commissioning
Computer Simulation
Technical seminars

SCM software
Supply Chain Management Tomorrow
The future for Supply Chain Management looks very bright. This year, as well as last
year, two major trends are benefiting Supply Chain Management operations. These are
Customer service focus
Information technology
Successful organisations must be excellent in both of these areas, so the importance of
Supply Chain Management and the tools available to do the job right will continue to
[35]

expand.
The Supply Chain Management Pipeline
The freight transportation industry has undergone a revolutionary change during the last decade. As
deregulation spread to all modes of transport, the number of surviving companies declined. Carriers
unprotected by regulation discovered they could not differentiate themselves from the competition on
price alone. Successful transportation companies must provide prompt pickup, excellent customer
service, and swift, complete and damage-free delivery.
The motor carrier industry forges a critical link in a multimodal Supply Chain Management system
and must compete against time and service to stay in business. Shippers move cargo over whatever mode
provides the best service. Less-than-truckload (LTL) motor carriers find their competition particularly
stiff. Parcel carriers constantly increase their maximum shipment weight while truck load carriers now
accept partial trailer loads as small as 10,000 pounds. Shorter cycle times mean better service.
Customers' needs have also changed. The growth of Just-in-Time and Quick Response
Inventory management and third-party Supply Chain Management requires all
Participants in the Supply Chain Management chain to consider shorter cycle time a
Competitive advantage. Manufacturers, distributors, and some carriers effectively use
Information technology to reduce cycle times and improve the quality of freight handling.
Package handlers use the technology to great competitive advantage.
LTL
carriers

are beginning to adapt their information systems to provide on-line, real-time

data on the movement of freight through their systems. To successfully use information technology to
speed the movement of freight, these carriers must have low-cost
methods to accurately gather and disseminate data. Bar code and radio frequency
technologies provide the tools for LTL carriers to survive and thrive.
Traditional bar codes uniquely identify every package in the pipeline. Scanning the
packages positively confirms custody transfer from shipper to carrier to consignee. Twodimensional
bar codes on shipping documents record the entire bill of lading (BOL).
Scanners in drivers' hands provide error-free entry of the BOL in less than a second.
Radio communication from the truck cab to central operations immediately informs
dispatchers of incoming freight. Similar scanning during delivery shortens the billing
cycle and provides positive confirmation of delivery.
Information technology speeds cargo through every phase of LTL operations.

[36]

Dock management systems speed cross docking operations. A combination of radio communication and
bar code scanning immediately delivers control information to people who need it. From dispatchers to
fork operators, every member of the dock team receives immediate information where they work. The
system efficiently tracks all packages from inbound docks through staging to outbound docks. No
package waits for information.
Yard management systems ensure the delivery of the right equipment to the right location at the right
time. Radio communication to yard tractors keeps shuttle drivers working on the highest priority tasks.
Real-time communication between yard drivers, hub managers, and information support systems
provides positive control of all moving stock. Optimizing personnel and rolling stock results in
shortened stripping and loading time at the doors.
Consistent application of appropriate information technology throughout the Supply Chain
Management pipeline results in shortened cycle times and lowered effort. Immediate, reliable
information allows managers to optimize their physical and human resources. While maximum benefit
comes to those carriers who implement a consistent information strategy throughout their operations,
segmentation of the problem allows carriers to phase in their transformation. Each phase provides
immediate economic benefits, while improving the strategic position of the carrier.

SUPPLY-CHAIN PRINCIPLES
Supply-Chain Principles
If supply-chain management has become top management's new "religion," then it needs a doctrine.
Andersen Consulting has stepped forward to provide the needed guidance, espousing what it calls the
"Seven Principles" of supply-chain management. When consistently and comprehensively followed, the
consulting firm says, these seven
principles bring a host of competitive advantages.
1. Segment customers based on service needs. Companies traditionally have grouped customers by
industry, product, or trade channel and then provided the same level of service to everyone within a
segment. Effective supply-chain management, by contrast, groups customers by distinct service needs-regardless of industry--and then tailors services to those particular segments.
2. Customise the Supply Chain Management network. In designing their Supply Chain Management
network, companies need to focus intensely on the service requirements and profitability of the customer

[37]

segments identified. The conventional approach of creating a "monolithic" Supply Chain Management
network runs counter to successful supply-chain management.
3. Listen to signals of market demand and plan accordingly. Sales and operations planning must span
the entire chain to detect early warning signals of changing demand in ordering patterns, customer
promotions, and so forth. This demand-intensive approach leads to more consistent forecasts and optimal
resource allocation.
4. Differentiate product closer to the customer. Companies today no longer can afford to stockpile
inventory to compensate for possible forecasting errors. Instead, they need to postpone product
differentiation in the manufacturing process closer to actual consumer demand.
5. Strategically manage the sources of supply. By working closely with their key suppliers to reduce
the overall costs of owning materials and services, supply-chain management leaders enhance margins
both for themselves and their suppliers. Beating multiple suppliers over the head for the lowest price is
out, Andersen advises. "Gain sharing" is in.
6. Develop a supply-chain-wide technology strategy. As one of the cornerstones of successful supplychain management, information technology must support multiple levels of decision making. It also
should afford a clear view of the flow of products, services, and information.
7. Adopt channel-spanning performance measures. Excellent supply-chain measurement systems do
more than just monitor internal functions. They adopt measures that apply to every link in the supply
chain. Importantly, these measurement systems embrace both service and financial metrics, such as each
account's true profitability. The principles are not easy to implement, the Andersen consultants say,
because they run counter to ingrained functionally oriented thinking about how companies organise,
operate, and serve customers. The organisations that do persevere and build a successful supply chain
have proved convincingly that you can please customers and enjoy growth by doing so.

FLOWS OF SCM
Supply chain management flows can be divided into three main flows:
[38]

The product flow

The information flow

The finances flow

The product flow includes the movement of goods from a supplier to a customer, as well as any
customer returns or service needs. The information flow involves transmitting orders and
updating the status of delivery. The financial flow consists of credit terms, payment schedules,
and consignment and title ownership arrangements. There are two main types of SCM software:
planning applications and execution applications. Planning applications use advanced
algorithms to determine the best way to fill an order. Execution applications track the physical
status of goods, the management of materials, and financialinformation involving all parties.
Some SCM applications are based on open data models that support the sharing of data both
inside and outside the enterprise (this is called the extended enterprise, and includes key
suppliers, manufacturers, and end customers of a specific company). This shared data may
reside in diverse database systems, or data warehouses, at several different sites and companies.

[39]

By sharing this data "upstream" (with a company's suppliers) and "downstream" (with a
company's clients), SCM applications have the potential to improve the time-to-market of
products, reduce costs, and allow all parties in the supply chain to better manage current
resources

and

plan

for

future

needs.

Increasing numbers of companies are turning to Web sites and Web-based applications as part of
the SCM solution. A number of major Web sites offer e-procurement marketplaces where
manufacturers can trade and even make auction bids with suppliers.
ELEMENTS OF SCM
A supply chain is the stream of processes of moving goods from the customer order through the
raw materials stage, supply, production, and distribution of products to the customer. All
organizations have supply chains of varying degrees, depending upon the size of the
organization and the type of product manufactured. These networks obtain supplies and
components, change these materials into finished products and then distribute them to the
customer.
Managing the chain of events in this process is what is known as supply chain management.
Effective management must take into account coordinating all the different pieces of this chain
as quickly as possible without losing any of the quality or customer satisfaction, while still
keeping costs down.
The first step is obtaining a customer order, followed by production, storage and distribution of
products and supplies to the customer site. Customer satisfaction is paramount. Included in this
supply chain process are customer orders, order processing, inventory, scheduling,
transportation, storage, and customer service. A necessity in coordinating all these activities is
the information service network.
In addition, key to the success of a supply chain is the speed in which these activities can be
accomplished and the realization that customer needs and customer satisfaction are the very
reasons for the network. Reduced inventories, lower operating costs, product availability and
customer satisfaction are all benefits which grow out of effective supply chain management.
[40]

The decisions associated with supply chain management cover both the long-term and shortterm. Strategic decisions deal with corporate policies, and look at overall design and supply
chain structure. Operational decisions are those dealing with every day activities and problems
of an organization. These decisions must take into account the strategic decisions already in
place. Therefore, an organization must structure the supply chain through long-term analysis
and at the same time focus on the day-to-day activities.
Further more, market demands, customer service, transport considerations, and pricing
constraints all must be understood in order to structure the supply chain effectively. These are
all factors, which change constantly and sometimes unexpectedly, and an organization must
realize this fact and be prepared to structure the supply chain accordingly.
Structuring the supply chain requires an understanding of the demand patterns, service level
requirements, distance considerations, cost elements and other related factors. It is easy to see
that these factors are highly variable in nature and this variability needs to be considered during
the supply chain analysis process. Moreover, the interplay of these complex considerations
could have a significant bearing on the outcome of the supply chain analysis process.
There are six key elements to a supply chain:

Production

Supply

Inventory

Location

Transportation, and

Information

The following describes each of the elements:

1.Production
Strategic decisions regarding production focus on what customers want and the market
demands. This first stage in developing supply chain agility takes into consideration what and
how many products to produce, and what, if any, parts or components should be produced at
[41]

which plants or outsourced to capable suppliers. These strategic decisions regarding production
must also focus on capacity, quality and volume of goods, keeping in mind that customer
demand and satisfaction must be met. Operational decisions, on the other hand, focus on
scheduling workloads, maintenance of equipment and meeting immediate client/market
demands. Quality control and workload balancing are issues which need to be considered when
making these decisions.
2.Supply
Next, an organization must determine what their facility or facilities are able to produce, both
economically and efficiently, while keeping the quality high. But most companies cannot
provide excellent performance with the manufacture of all components. Outsourcing is an
excellent alternative to be considered for those products and components that cannot be
produced effectively by an organizations facilities. Companies must carefully select suppliers
for raw materials. When choosing a supplier, focus should be on developing velocity, quality
and flexibility while at the same time reducing costs or maintaining low cost levels. In short,
strategic decisions should be made to determine the core capabilities of a facility and
outsourcing partnerships should grow from these decisions.
3.Inventory
Further strategic decisions focus on inventory and how much product should be in-house. A
delicate balance exists between too much inventory, which can cost anywhere between 20 and
40 percent of their value, and not enough inventory to meet market demands. This is a critical
issue in effective supply chain management. Operational inventory decisions revolved around
optimal levels of stock at each location to ensure customer satisfaction as the market demands
fluctuate. Control policies must be looked at to determine correct levels of supplies at order and
reorder points. These levels are critical to the day to day operation of organizations and to keep
customer satisfaction levels high.
4.Location
Location decisions depend on market demands and determination of customer satisfaction.
Strategic decisions must focus on the placement of production plants, distribution and stocking
facilities, and placing them in prime locations to the market served. Once customer markets are
[42]

determined, long-term commitment must be made to locate production and stocking facilities as
close to the consumer as is practical. In industries where components are lightweight and market
driven, facilities should be located close to the end-user. In heavier industries, careful
consideration must be made to determine where plants should be located so as to be close to the
raw material source. Decisions concerning location should also take into consideration tax and
tariff issues, especially in inter-state and worldwide distribution.
5.Transportation
Strategic transportation decisions are closely related to inventory decisions as well as meeting
customer demands. Using air transport obviously gets the product out quicker and to the
customer expediently, but the costs are high as opposed to shipping by boat or rail. Yet using sea
or rail often times means having higher levels of inventory in-house to meet quick demands by
the customer. It is wise to keep in mind that since 30% of the cost of a product is encompassed
by transportation, using the correct transport mode is a critical strategic decision. Above all,
customer service levels must be met, and this often times determines the mode of transport
used. Often times this may be an operational decision, but strategically, an organization must
have transport modes in place to ensure a smooth distribution of goods.
6.Information
Effective supply chain management requires obtaining information from the point of end-use,
and linking information resources throughout the chain for speed of exchange. Overwhelming
paper flow and disparate computer systems are unacceptable in today's competitive world.
Fostering innovation requires good organization of information. Linking computers through
networks and the internet, and streamlining the information flow, consolidates knowledge and
facilitates velocity of products. Account management software, product configurators, enterprise
resource planning systems, and global communications are key components of effective supply
chain management strategy

Decision Phases of a Supply Chain

Supply chain strategy or design
Supply chain planning
Supply chain operation
[43]

Supply Chain Strategy or Design:

Decisions about the structure of the supply chain and what processes each stage will
perform

Strategic supply chain decisions

Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems

Supply chain design must support strategic objectives

Supply chain design decisions are long-term and expensive to reverse must take into
account market uncertainty

Supply Chain Planning

Planning decisions:
Which markets will be supplied from which locations
Planned buildup of inventories
Subcontracting, backup locations
Inventory policies
Timing and size of market promotions

Must consider in planning decisions demand uncertainty, exchange rates, competition

over the time horizon

Supply Chain Operation

Time horizon is weekly or daily

Decisions regarding individual customer orders.

Supply chain configuration is fixed and operating policies are determined.

Allocate orders to inventory or production, set order due dates, generate pick lists at a
warehouse, allocate an order to a particular shipment, set delivery schedules, place
replenishment orders

[44]

Cycle View of Supply Chains

Cycle view: processes in a supply chain are divided into a series of cycles, each
performed at the interfaces between two successive supply chain stages

Push/pull view: processes in a supply chain are divided into two categories depending
on whether they are executed in response to a customer order (pull) or in anticipation of
a customer order (push)

Cycle view clearly defines processes involved and the owners of each process. Specifies the
roles and responsibilities of each member and the desired outcome of each process

Each cycle occurs at the interface between two successive stages

Procurement cycle (manufacturer-supplier)

Manufacturing cycle (distributor-manufacturer)

Replenishment cycle (retailer-distributor)

Customer order cycle (customer-retailer)

Each cycle occurs at the interface between two successive stages

[45]

Cycle view consists of four process cycles, namely customer order cycle, replishment cycle,
Manufacturing cycle and Procurement cycle. Each cycle occurs at the interface between two
successive stages of the supply chain. It is pointed out here that, not every supply chain will
have all four cycles clearly separated. A cycle view clearly specifies the role and responsibilities
of each member of the supply chain. The detailed process description of a supply chain in the
cycle view forces a supply chain design to consider the infrastructure required to support these
processes. When we want set up an information systems to support supply chain operations, the
cycle view is very useful, as process ownership and objectives are clearly defined in cycle view.
Customer order cycle:
All processes directly involved in receiving and filling the customer orders at the customer /
retailer interface consist of customer order cycle. Customer initiates this cycle at a retailer site
and the cycle primarily involves filling customer demand.
Replenishment Cycle:
The replenishment cycle includes all processes involved in replenishing retailer inventories to
meet future demand. It occurs at the retailer / distributor interface. A replenishment cycle may
be triggered at a firm when it is running out of stock.
Manufacturing Cycle:
The manufacturing cycle occurs at the distributor / manufacturer (or retailer, manufacturer)
interface and includes all processes involved in replenishing distributor (or retailer) inventory.
Based on the customer orders, or by the forecast the replenishment order is placed on the
manufacturer. Manufacturing cycle starts immediately after the receipt of the order.
Procurement Cycle:
The procurement cycle occurs at the manufacturer / supplier interface and includes all processes
necessary to ensure that materials are available for manufacturing to occur according to
schedule. Suppliers supply the necessary components
.

[46]

Push/Pull View of Supply Chains

All process in a supply chain fall into one of two categories depending on the timing of their
execution relative to end customer demand. Execution is initiated in response to a customer
order in pull process. With push process, execution is initiated in anticipation of customer
orders. therefore, at the time of execution of a pull process, customer demand is known with
certainty whereas at the time of execution of a push process, demand is uncertain and must be
forecast. Pull process is referred as reactive processes because they react to customer demand.
Push processes is referred as speculative processes because they respond to speculated (or
forecasted) rather than actual demand. The push / pull boundary in a supply chain separates
push process from pull process. A push / pull view is useful when considering strategic
decisions relating to supply chain design. This view forces a more global consideration of
supply chain process as they relate to a customer order. Such as view may, for instance, result in
responsibility for certain process being passed on to a different stage of the supply chain of
making this transfer allows a push process to become a pull process

Supply Chain Macro Processes in a Firm

Supply chain processes discussed in the two process views

Customer Relationship Management (CRM)

[47]

Internal Supply Chain Management (ISCM)

Supplier Relationship Management (SRM)

Integration among the above three macro processes is critical for effective and successful
supply chain management

Supply chain macro processes

SRM

ISCM

CRM

Source

strategic planning

market

Negotiate

demand planning

price

Buy

supply planning

sell

Design collaboration

fulfillment

call center

Supply collaboration

field service

order mgt

Drivers of Supply Chain Performance

Facilities
Inventory
Transportation
Information
Sourcing
Pricing

Facilities
places where inventory is stored, assembled, or fabricated
production sites and storage sites
Role in the supply chain
Role in the competitive strategy
Components of inventory decisions
Role in the supply chain
the where of the supply chain
[48]

 manufacturing or storage (warehouses)

Role in the competitive strategy
economies of scale (efficiency priority)
larger number of smaller facilities (responsiveness priority)
Example : Toyota and Honda
Components of Facilities Decisions

Location
centralization (efficiency) vs. decentralization (responsiveness)
other factors to consider (e.g., proximity to customers)

Capacity (flexibility versus efficiency)

Manufacturing methodology (product focused versus process focused)

Warehousing methodology (SKU storage, job lot storage, cross-docking)

Overall trade-off: Responsiveness versus efficiency

Inventory
raw materials, WIP, finished goods within a supply chain
inventory policies
Role in the supply chain
Role in the competitive strategy
Components of inventory decisions
Role in the supply chain

Inventory exists because of a mismatch between supply and demand

Source of cost and influence on responsiveness

Impact on
material flow time: time elapsed between when material enters the supply chain
to when it exits the supply chain

Role in the competitive strategy

[49]

If responsiveness is a strategic competitive priority, a firm can locate larger amounts of

inventory closer to customers

If cost is more important, inventory can be reduced to make the firm more efficient

Trade-off

Components of inventory decisions

Cycle inventory
Average amount of inventory used to satisfy demand between shipments
Depends on lot size

Safety inventory
inventory held in case demand exceeds expectations
costs of carrying too much inventory versus cost of losing sales

Seasonal inventory
inventory built up to counter predictable variability in demand
cost of carrying additional inventory versus cost of flexible production

Overall trade-off: Responsiveness versus efficiency

more inventory: greater responsiveness but greater cost
less inventory: lower cost but lower responsiveness

Transportation
moving inventory from point to point in a supply chain
combinations of transportation modes and routes
Role in the supply chain
Role in the competitive strategy
Components of transportation decisions
Role in the supply chain

Moves the product between stages in the supply chain

Impact on responsiveness and efficiency

Faster transportation allows greater responsiveness but lower efficiency

[50]

Also affects inventory and facilities

Role in the competitive strategy

If responsiveness is a strategic competitive priority, then faster transportation modes can

provide greater responsiveness to customers who are willing to pay for it

Can also use slower transportation modes for customers whose priority is price (cost)

Can also consider both inventory and transportation to find the right balance

Components of transportation decisions

Mode of transportation:
air, truck, rail, ship, pipeline, electronic transportation
vary in cost, speed, size of shipment, flexibility

Route and network selection

route: path along which a product is shipped
network: collection of locations and routes

In-house or outsource

Overall trade-off: Responsiveness versus efficiency

Information
data and analysis regarding inventory, transportation, facilities throughout the
supply chain
potentially the biggest driver of supply chain performance
Role in the supply chain
Role in the competitive strategy
Components of information decisions
Role in the supply chain

[51]

The connection between the various stages in the supply chain allows coordination
between stages

Crucial to daily operation of each stage in a supply chain e.g., production scheduling,
inventory levels

Role in the competitive strategy

Allows supply chain to become more efficient and more responsive at the same time
(reduces the need for a trade-off)

Information technology

Components of information decisions

Push (MRP) versus pull (demand information transmitted quickly throughout the supply
chain)

Coordination and information sharing

Forecasting and aggregate planning

Enabling technologies
Internet
ERP systems
Supply Chain Management software

Overall trade-off: Responsiveness versus efficiency

Sourcing
functions a firm performs and functions that are outsourced
Role in the supply chain
Role in the competitive strategy
Components of sourcing decisions
Role in the supply chain

Set of business processes required to purchase goods and services in a supply chain

Supplier selection, single vs. multiple suppliers, contract negotiation

[52]

Role in the competitive strategy

Role in the competitive strategy

Sourcing decisions are crucial because they affect the level of efficiency and
responsiveness in a supply chain

In-house vs. outsource decisions- improving efficiency and responsiveness

Example Cisco

Components of sourcing decisions

In-house versus outsource decisions

Supplier evaluation and selection

Procurement process

Overall trade-off: Increase the supply chain profits

Pricing
Price associated with goods and services provided by a firm to the supply chain
Role in the supply chain
Role in the competitive strategy
Components of pricing decisions
Role in the supply chain

Pricing determines the amount to charge customers in a supply chain

Pricing strategies can be used to match demand and supply

Role in the competitive strategy

Firms can utilize optimal pricing strategies to improve efficiency and responsiveness

Low price and low product availability; vary prices by response times

Example Amazon

[53]

Components of pricing decisions

Pricing and economies of scale

Everyday low pricing versus high-low pricing

Fixed price versus menu pricing

Overall trade-off: Increase the firm profits

A Frame work For Structuring Drivers

SCM Strategy
Johnson and Scholes define strategy as follows:
"Strategy is the direction and scope of an organisation over the long-term which
achieves advantage for the organisation through its configuration of resources within
a

challenging

environment,

to

fulfil stakeholder expectations".

[54]

meet

the

needs

of markets and

to

In other words, strategy is about:

*Where is the business trying to get to in the long-term (direction)
*Which markets should a business compete in and what kind of activities are involved in
such markets? (markets, scope)
* How can the business perform better than the competition in those markets?
(advantage)
What resources (skills, assets, finance, relationships, technical competence, facilities)
are required in order to be able to compete? (resources)?
*What external, environmental factors affect the businesses' ability to compete?
(environment)
*What are the values and expectations of those who have power in and around the
business? (stakeholders)

Mission, Mission statement

The reason for existence of an organization

Strategy

A plan for achieving organizational goals

Tactics

The actions taken to accomplish strategies

Operational decisions

Day to day decisions to support tactics

Strategy at Different Levels of a Business

Strategies exist at several levels in any organisation - ranging from the overall business (or
group of businesses) through to individuals working in it.

Corporate level Strategy

- is concerned with the overall purpose and scope of the business to meet stakeholder

expectations. This is a crucial level since it is heavily influenced by investors in the business
and acts to guide strategic decision-making throughout the business. Corporate strategy is often
stated explicitly in a "mission statement".
[55]

Business level Strategy

- is concerned more with how a business competes successfully in a particular

market. It concerns strategic decisions about choice of products, meeting needs of customers,
gaining advantage over competitors, exploiting or creating new opportunities etc.
Operational Strategy
- is concerned with how each part of the business is organised to deliver the corporate
and business level strategic direction. Operational strategy therefore focuses on issues of
resources, processes, people etc.

Developing a Supply Chain Strategy

Understand the Business Strategy

The first step is for supply chain executives to clearly understand how the enterprise chooses to
compete. This is important not only for the obvious reason of working off the same play book,
but also for the reason that it forces the supply chain operation to see itself as a customer facing
entity serving the competitive goals of the enterprisenot merely an operational department.
Supply chain strategy is not simply a linear derivative of the business strategy.
At best, supply chain strategy can be the enabler of the business strategy. If the business strategy
is to be the low cost provider, the supply chain strategy should support this. And just like when
developing a business strategy, look to your core competencies, focus, and means of
differentiation when developing a supply chain strategy. Being able to strategically source parts
at an attractive price may supportc both your supply chain strategy and business strategy, but
only if you have the capabilities to do so effectively. Look the supply chain competencies and
leverage what you do well. You may want to focus on a particular market or segment in which
to gain supply chain efficiencies. Or you may want to differentiate your organization
operationally by providing lower costs to customers or providing services that other industry
players are unable to do.
Assess the Extended Supply Chain
The next step is to conduct a detailed, realistic assessment of the capabilities that exist within
the organization and even the extended supply chain. Begin by closely scrutinizing your
[56]

organizations assets and evaluate how well they support the strategy. Old machinery and
disparate systems may mean high operational overhead and costly process inefficiencies and
redundancies clearly not supportive of a low cost provider strategy. A formal supply chain
assessment by

anon-biased outside party may assist you in better understanding your

operational strengths and opportunities for improvement. Look for a firm that can provide you
with operational benchmarks both inside and outside of your industry inorder to gauge core
competencies. Once the assessment is complete, assemble a team to review and prioritize
recommendations, validate the opportunities, define the risks, and the requirements for
implementation. Ultimately, if there is a disparity between the supply chain strategy and the
operational assets, you may have to make capital investments. Of course, the other alternative is
to change your assumptions and alter your strategy all together!
Develop an Implementation Plan
From this critical work emerges the go forward supply chain strategy directly tied to the
business strategy, highly specific as to enablers and metrics, and with a defined set of
implementation requirements and contingencies. The development of an implementation plan
should include activities and tasks, roles ,responsibilities, a corresponding timeline, and
performance metrics. Establish a sub-team to shepherd the execution and provide project
management responsibility to resolve issues and track status.
Development Considerations
Cooperate and Collaborate with Your Partners Throughout the development process
remember to include your supply chain partners. While you dont necessary need to divulge the
full details of your strategy, you can certainly communicate how you would like to do business.
Ideally, seek out mutual goals that both organizations can execute on. Not only will you be one
step closer to realizing your supply chain strategy, you will learn more about the companies that
you do business with. For example, collaboration in product design may meet your need to stem
R&D costs and also alert you to new product concepts that you wouldnt discover without
working with your customer.
Outsource Where Appropriate Part of developing a supply chain strategy includes

[57]

Evaluating opportunities to outsource areas that are not your core competency. If someone else
can do it cheaper, it may be worth outsourcing not only to driv e down costs, but also to focus
more resources on the core competencies your organization does well. but also to focus
more resources on the core competencies your

Executing Supply Chain Strategy

Performance Management
Execution involves closely following your implementation plan and applying good project
governance. You can improve your chances for success by managing performance throughout
implementation and beyond. Tracking performance allows an organization to measure how
successful it is in realizing the goals of a strategy. It also makes people understand their
contribution and responsibilities, creating a more cohesive, in tune, organization. Performance
management works best when people are rewarded for their performance and reporting is
conducted on a regular basis. Moreover, performance goals should be used to communicate
business expectations to outside entities as well. The more the extended supply chain is
involved, the more the supply chain strategy is supported and reinforced.
Iterate the Cost Benefit Evaluation Process
On a periodic basis (e.g., annually) you should formally revisit your supply chain strategy. Did
you meet the goals of the business strategy? Have the needs of your supply chain partners
changed? How has the industry changed i.e., new competitors, business practices, products,
technology? At this time, you may even want to reassess your supply chain organization, if the
changes are significant enough to warrant it. Also, use this effort to look for new opportunities
to further position your organization for success.
Keep Communicating with Your Partners
Executing a supply chain strategy means dealing with many different entities, both internally
and externally. Just as it is crucial to align the supply chain strategy with the business strategy, it
is equally important to execute in a manner consistent with these different groups or
stakeholders. The goals of your supply chain components and those that you deal with must be
similar and conducted at the same speed. Your organization may be able to move at speeds other
supply
[58]

chain entities are unable to maintain, resulting in misalignment and poor

efficiencies. And some of your supply chain partners may not have the resources to commit to
realizing these goals. Good communication can keep the extended supply chain in sync. Rising
from humble beginnings, a leading medical device company, has seen itself grow to become a
$300 million dollar company with its stock value increasing almost 200% over the last year. The
company is credited with a clear business strategy of growth through acquisition and new
product innovations. Anticipating continued growth and business success, needed a supply
chain strategy consistent with an expanding organization. Faced with such challenging supply
chain questions as what is our optimal distribution network?; should we outsource some
supply chain activities? and how can costs be better managed and contained? the company
conducted a global supply chain assessment to identify supply chain costs and opportunities. In
addition to offering supply chain strategy recommendations, the study provided a total picture
of supply chain costs and compared them to industry and non-industry benchmarks. Over $4
million in process improvements and cost saving opportunities were identified. Now armed with
a supply chain strategy, Inamed is in the process of implementing these changes.
Avoiding Potential Pitfalls
Even before the well-publicized dot com collapes, business failures due to poorly implemented
strategy were very frequent. Fortune Magazine reported in a study that CEO strategy failures
occurred primarily (est. 70%) because of failure in execution, not with the vision and strategy
development. The real problem isnt the high-concept boners the boffins love to talk about. Its
bad execution. As simple as that: not getting things done, being indecisive, not delivering on
commitments.
Align the Supply Chain Strategy with the Business Strategy
Most companies develop a supply chain strategy after the business strategy has been defined.
While this approach can deliver some value, it does not support the infusion into the business
strategy development of very powerful supply chain model options, which could significantly
improve the business strategy. A supply chain strategy should always support the intent of the
business strategy
[59]

and it is precisely because of these different levels of the enterprise at which strategies
necessarily must be developed, that companies so often have major gaps between their highest
level business strategy and their supply chain strategy. There are some additional risks
associated with developing these separately, which include:
Developing a supply chain strategy without a true understanding of the business case and
value propositions the costs and benefits are not known
Utilizing different or new resources in the operational model development that werent
exposed to the original business strategy thinking, thereby diluting and weakening the supply
chain strategy.
Confusing or conflicting communications to the organization where objectives
may be contradictory
Organization Challenges
The company and its organizational culture play a key role in developing and executing a
supply chain strategy. The following are some common organizational challenges found in
many companies:
Lack of ownership many supply chain processes and value levers do not have an owner in
the traditional sense
Tower of Babel problem most organizations across the enterprise do not speak a common
supply chain language
Organizational focus some managers are functional or process oriented and do not
understand the value levers multiple drivers model
Extending the Supply Chain most supply chain initiatives involve external parties (trading
partners) which makes strong collaboration a requirement

[60]

[61]

[62]

[63]

Developing purchasing Strategy

Defining Strategy
Conceptualization of: Long-term objectives and purposes of the organization.
Broad constraints and policies that restrict activities. Current set of action plans and near-term
goals expected to help achieve an organizations objectives
Strategy Goals and Objectives
What are the differences between objectives and goals?

Time frame

Measurement

Specificity

Focus
[64]

 Strategy Linkages
Corporate Strategy
Business Unit Strategy
purchasing Strategy
Commodity Strategy
STEPS IN DEVELOPING PURCHASINGSTARTEGY
1 Define Requirements
2 Portfolio Analysis
3 Market Research
4 Set Goals and Gap Analysis
5 Sourcing
6 Execute
7 Monitor and Review Performance
STEP 1 DEFINE REQUIREMENTS
Business unit
Objectives
Purchasing
Goals
Business units may be
Manufacturing, Logistics,
Engineering
STEP 2 Classification of Purchase
Requirement - Portfolio Analysis
Strategic
Leverage
Multiple
[65]

 Few
Many
Number of Capable Suppliers
High
Low
Value to Buyer
Acquisition
Low dollar value.
Standardized commercial items.
Limited Purchase Supervision.
Use of Purchase cards,
electronic catalogs,
automated transaction systems.
Acquisition
STEP 3 MARKET RESEARCH
Current Purchasing expenditures [also look at other business units and their expenses]
Current and potential Suppliers
Identify strategies of market leaders
Determine current and future volumes
Sources of Information Supplier literatures, government reports, trade magazines,
Thomas register, databases search
STEP 4 SET GOALS
Evaluate the progress of strategy development by setting goals.
Characteristics of Goals:
Measurable and action oriented.
Evaluate overtime and compare with competitors
Look at the overall picture beyond price
[66]

 Evaluate quality, availability, response etc.

Involve supplier when setting goals.
Example of Goal Setting
Increase volume and market share through pricing reduction.
Reduce cost of goods by 20%.
Reduce purchase prices (with redesign) by 25% in 12 months.
Develop lower cost production processes or modify design resulting in 25% lower
prices.
Business Goals (SBU)
Product Goals
Commodity strategy Goals
System / Component Goals
STEP 5 DEVELOP SOURCING STRATEGY
Number of Suppliers and share of business.
Recommended Supplier(s).
Length and type of contract.
Supplier involvement in Product design.
Local or global Suppliers.
Distributor v.s. OEM.
STEP 6 EXECUTE THE STRATEGY
Document the tasks and timing.
Assign responsibilities and authority.
Involve all users and stakeholders.
Contingency Plan.
STEP 7 MONITOR RESULTS & REVIEW PERFORMANCE

[67]

 Final Step
Review Meetings
Share results with top management
Feedback from customer and supplier
TYPES OF PURCHASING STRATEGIES
Supply Base Optimization
[Number and mix] [Supplier performance]
TQM of Suppliers
[Zero Defect / Continuous improvement] [SPC] [DOE] [Quality Audits]
Global Sourcing
[World Market and Source of Supply] [Exposure] [competition] [increase supplier
pool]
Long-Term Supplier Relationships
[qualified supplier] [depending on portfolio analysis]
Early Supplier Design Involvement
[new product development] [concurrent engineering]
Supplier Development
Total Cost of Ownership
[beyond up-front price] [effects of non conformance and associated prices]
IMPLEMENTATAION
PHASE 1:
Basic Beginning
Ensure Supply Capacity
Limited control over change/improvement
Supply base consolidation
Supplier quality focus

[68]

PHASE 2:
Moderate Development
Ad hoc supplier alliances
Cross-functional sourcing teams
Supply base optimization
International sourcing
PHASE 3:
Limited Integration
Strategic supplier alliances
Supplier TQM development
Total cost of ownership
Early supplier involvement
Dock to stock pull systems
PHASE 4:
Fully Integrated Supply Chains
Automated purchasing procedures [ Internal and External]
Insourcing/ outsourcing to maximize core competencies of
firms throughout the supply chain

purchasing strategies
Scope of purchasing
Creating Profit in a Business
Processes Examined
Place of purchasing
Financial Impact of Functions
Purchasing as a Strategic Process
[69]

Purchasing Strategy & Strategic purchasing

Building Purchasing Strategy

Contribution & Influence
Purchasing & Audit Framework
Organisation
Relationships
Systems
Staffing & Training
Enabling Foundation

Strategic Purchasing - Understanding & Influencing the Supply Market

Current Problems
Upstream & Downstream Management
Supply Planning
Special Requirements Identification
Contract Strategy
Supplier Selection
Contract Finalization
Understanding the Basics of Purchasing
Anyone Can Buy
Price & Cost
Price & Volume
Buyer Power Increases with Size of Organisation
Price Lists
Competitive Bidding
Negotiation & Service/Quality
[70]

 Sealed Bidding & Security

Multiple Sourcing
Price Formulae
Buyer Power & Monopoly
Payment
Supply Positioning
Pareto Analysis
Setting Up a Supply Positioning Analysis
Supply-Market Segmentation
Purchasing Goals
Purchasing Action Scenarios
Other Applications
Conglomerates' Purchasing
Supplier Preferences
Key Account Management
Customer Segmentation by Suppliers
Matching Supply Positioning with Customer Segmentation
Vulnerability Management
Identifying Vulnerabilities
Assessing the Risk
Managing the Risk
Vulnerability Analysis
Cost Reduction
Other Issues

[71]

Influencing the Supply Market

Procurement Marketing
Reverse Marketing
Affirmative Vendor Improvement
Buyer-Supplier Interface
Specific Requirements Identification
Getting Early Involvement
Supplier-Buyer Conditioning
Conditioning the Buyer
Keeping the Seller Selling
Conditioning the Seller
Purchasing strategies
Options for Supplier Relationships
Make v Buy
Market Analysis
Supplier Relationships
Changes in Supply Market
Buyers Response to Changing Market
Dependency Dilemma
Supply Market Orientated Role for Purchasing
Assessing Competitive Advantage
Monopolies
Determining the Extent of the Supply Monopoly
Strategies to Redress the Balance

[72]

 Cartels
Organising for Impact
Parking Wheel
External Environment
Role
Relationships
Systems & Structures
Resources
Measurement, Audit & Benchmarking

Why Measure

Operational or Strategic

Use of Indicators

Overall Indicators

Indicators Related to Supply Positioning

Limitations of Indicators

Management by Objectives

Measurement Summary

Benchmarking

Supplier Management and Development: Creating a World-Class Supply Base

Organizations must manage their supply base to maintain a competitive edge.
The important relationship between supplier measurement and effective supplier
management

[73]

 Supplier development as a strategy for improvement is explored, as well as the barriers

organizations faces with this strategy.
Supplier Performance Measurement
Supplier performance measurement is critical to the supplier management process.
The measurement system serves as the suppliers report card .
Supplier Measurement Decisions
Issues critical to the final design and implementation of a measurement system.
What to Measure:

Delivery Performance

Quality Performance

Supplier Cost Reduction

Issues critical to the final design and implementation of a measurement system.

Measurement and Reporting Frequency

Uses of Measurement Data

Types of Supplier Measurement Techniques

1. Categorical
Advantages:

Easy to implement

Requires minimal data

Different personnel contribute

Good for firms with limited resources

Low cost system

Disadvantages:
[74]

Least reliable

Less frequent generation of evaluations

Most subjective

Usually manual

2. Weighted-Point
Advantages:

Flexible system

Supplier ranking allowed

Moderate implementation costs

Quantitative and qualitative factors combined into a single system

Disadvantages:

Tends to focus on unit price

Requires some computer support

3. Cost-Based
Advantages:

Total cost approach

Specific areas of supplier nonperformance identified

Objective supplier ranking

Greatest potential for long-range improvement

Disadvantages:

Cost accounting system required

Most complex so implementation costs high

Computer resources required.

Supply base optimization or rationalization

The process of determining the right mix and number of suppliers to maintain.
A continuous process that strives for the ideal number and mix of capable suppliers
Optimization does not only mean adding or reducing suppliers. It can mean switching
suppliers, also
Optimization does not mean supply base reduction, although historically North
American firms have too many tier one suppliers
[75]

 As companies continue to rely on fewer total suppliers, the selection process takes on
even greater importance
Why is optimization critical?
The costs associated with multiple suppliers for each purchased good or service
usually outweigh any perceived reduction in supply risk.
Optimization is a critical prerequisite to the development of a world-class supply
base
Optimization results in improved costs, quality, delivery, and information
sharing.
The remaining suppliers are generally the best suppliers.
Advantages of an Optimized Supply Base
Optimization results in:
Buying from World-class suppliers.
Use of Full-Service Suppliers.
Reduction of Supply Base risk.
Lower Supply Base maintenance costs.
Lower Total Product costs.
Ability to pursue Complex Purchasing Strategies.
Risks of Maintaining Fewer Suppliers
Optimizing the supply base can be beneficially, yet potential risks exist in relying on a
smaller supply base:
Supplier Dependency
Absence of Competition
Supply Disruption
[76]

 Overaggressive Supply Reduction

PERFORMANCE MEASUREMENT
Business organizations need to capitalize on Supply Chain (SC) capabilities and resources to
bring products and services to the market faster, at the lowest possible cost, with the appropriate
product and service features and the best overall value . Performance measures are important to
the effectiveness of SC. Companies can no longer focus on optimizing their own operations to
the exclusion of their suppliers' and customers' operations. Supply Chain Performance Measures
(SCPM) serve as an indicator of how well the SC system is functioning. Measuring SC
performance can facilitate a greater understanding of the SC and improve its overall
performance
SC and improve its overall performance There is an emerging requirement to focus on the
performance measurement of the SC in which company is a partner . Interest on performance
measurement has notably increased in the last 20 years Companies have understood that for
competing in continuously changing environment, it is necessary to monitor and understand
firm performances. Measurement has been recognized as a crucial element to improve business
performance Various performance metrics are in place for measuring effectiveness of SC.
Different perspectives of Supply Chain Performance Measures (SCPM) are cost and non-cost
perspective; strategic, tactical or operational focus business process perspective and financial
perspective (Beamon, 1999). The earlier focus of performance measurement was on financial
perspective which is gradually changing to non-financial perspectives.
A firm's performance measures should:
Be simple and easy to use.
Have a clear purpose.
Provide fast feedback.
Relate to performance improvement, not just monitoring.
Reinforce the firm's strategy.
Relate to both long-term and short-term objectives of the organization.
Match the firm's organization culture.
[77]

 Not conflict with one another.

Be integrated both horizontally and vertically in the corporate structure.
Be consistent with the firm's existing recognition and reward system.
Focus on what is important to customers.
Focus on what the competition is doing.
Lead to identification and elimination of waste.
Help accelerate organizational learning.
Evaluate groups not individuals for performance to schedule.
Establish specific numeric standards for most goals.
It must reflect relevant non-financial information based on key success factors of each
business.
It must make a link to reward systems
The financial and non-financial measures must be aligned and fit within a strategic framework.
Minimum deviations should exist between the organizational goals and measurement goals;
Evolution of SCPMS
Performance measurement has its roots in early accounting systems. According to Gomes et al.
(2004), performance
measurement evolved through two phases. The first phase was started in the late 1880s, while
the second phase in the late 1980s. The first phase was characterized by its cost accounting
orientation. This orientation aimed at aiding managers in evaluating the relevant costs of
operating their firms. It incorporated financial measures such as profit and return on investment.
A study has indicated that by 1941 about half of US companies were using budgetary control in
one form or other and by 1958, over 95 % of the companies, budgets were used for overall
control of company performance (Bourne et al., 2003). These accounting based performance
measures were financially based, internally focused, backward looking and more concerned
with local departmental performance than with the overall health or performance of the business
(Bourne et al., 2003). These traditional financially-based performance measurement systems
failed to measure and integrate all the relevant factors critical to business success. By the

[78]

1980s, traditional accounting measures were being criticized as inappropriate for managing
businesses of the day. The mid-1980was a turning point in the performance measurement
literature, as it marked the beginning of the second phase. This phase was associated with the
growth of global business activities and the changes brought about by such growth. In the late
1980s, some frameworks, which attempted to present a broader view of performance
measurement started to appear (Gomes et al., 2004). They underscored the need for the
alignment of financial and non-financial measures in order to be in accordance with business
strategy. The emphasis was on the development of better integrated performance measurement
systems. The structure of the business organization also evolved during this period. The early
19th century saw the birth of systematic large organizations. During the 1980s the business
organizations became global and 1990s were significant with automation of business processes.
The 2000s saw the emergence of e-commerce and boarder less business activities. PMS also
changed with this evolution of business organization from cost accounting system (before
1980s), mixed financial and non financial systems (1990s) to balance integrated approach
(2000s).
Evolution of PMS in an organizational context
.
Period
Before 1980

Characteristics of
business
organisation
Systematic large
organizations

1980 - 1990,

Business
organizations
became global

1990 2000

Automation of
business processes

Characteristics of PMS
(i). Cost Accounting orientation.
(ii).Retroactive approach and results used to promote
organizational efficiency,
facilitate budgeting and attract capital from external
entities
(iii).Performance measurement dominated by
transaction costs and profit
determination
(i). Cost Accounting orientation
(ii).Retroactive approach and results used to promote
organizational efficiency.
(iii).Enhanced to include operations and value adding
perspectives.
(i).A mixed financial and non financial orientation.
(ii).A mixed retroactive and proactive approach.
(iii).Results are used to manage the entire
organization.
(iv).PMS enhanced to include process, quality &
[79]

customer focus
2000 - 2010

e-Commerce and
borderless
business
activities

(i).A balanced and integrated orientation.

(ii).A more proactive approach.
(iii).Results are used to enhance organizational
responsiveness.
(iv).Performance measurement enhanced to give a
balanced view of the organization and included the SC
& inter-process activities.

Performance Measures and Metrics in SCPMS

Fundamental processes of performance measurement according to Neely (2004) are the

following.
Measurement system design.
Implementation.
Managing through measurement and
Refreshing the measurement system.
In Measurement system design, the challenge lies in choosing the right measures; it is
identifying what you need to measure so as to concentrate on what is absolutely vital.
Implementation involves ensuring access to the right data, and the political and cultural issues,
notably peoples fear of measurement and the games they consequently play to try to manipulate
target-setting to ensure targets are achievable and no blame can be attributed. To combat this,
people inside organizations need to be educated to understand the purpose and use of the
measurement system. The challenge in managing through measures requires a cultural shift
in many organizations. Refreshing is to ensure that, as the organization changes the
measurement system keeps pace. Sambasivan (2009) defines measure as a more objective or
concrete attribute that is observed and measured and metric as an abstract, higher-level latent
attribute that can have many measures. Because SC is a network of firms that includes material
suppliers, production facilities, distribution services and customers linked together via the flows
of materials, information and funds the measures have been classified as follows: fund flow
(cost and profitability), internal process flow (production level flexibility, order fulfillment and
quality), material flow (inventory and internal time performance), sales and

[80]

services flow (delivery performance, customer responsiveness and customer satisfaction),

information flow and partner relationship process flow (supplier evaluation and sharing of
information with suppliers and customers).
Output measures (generally customer responsiveness); and
Flexibility measures (Ability to respond to a changing environment). Each of these three types
of performance measures has different goals and purpose. Resource measures include: inventory
levels, personnel requirements, equipment utilization, energy usage, and cost.
Output measures include: customer responsiveness, quality, and the quantity of final product
produced.
Flexibility measure systems ability to accommodate volume and schedule fluctuations from
suppliers, manufacturers, and customers.

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A basic classification offered by Cagnazzo et al. (2010) consists of grouping PMS

models into:
Balanced models;
Quality models;
Questionnaire-based models;
Hierarchical models; and
Support models.

Balanced Model:
Balanced models consider the presence of both financial and non-financial indicators. In these
models several separate performance measures which correspond to diverse perspectives
(financial, customer, etc.) are considered independently. Some of the important existing models
are (i). Performance Measurement Matrix; (ii). Balanced Scorecard (BSC); and (iii).
Performance Prism.
Quality Models: These are frameworks in which a great importance is attributed to Quality. An
example of quality model is the Business Excellence Model (EFQM-Model) (EFQM, 1999).
Questionnaire-based Models:
These are frameworks based on questionnaire. The Performance Measurement Questionnaire
(PMQ) and TOPP System (a research program studying productivity issues in Norwegian
manufacturing industry)
Hierarchical Models:
SCPM models that are strictly hierarchical (or strictly vertical), characterised by cost and noncost performance on different levels of aggregation are classified as hierarchical models.
Frameworks where there is a clear hierarchy of indicators are:

Performance Pyramid;
Advanced Manufacturing Business Implementation Tool for Europe (AMBITE);
The European Network for Advanced Performance Study (ENAPS) approach; and
Integrated Dynamic Performance Measurement System (IDPMS).

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Support Models: Frameworks that do not build a performance measurement system but help in
the identification of the factors that influence performance indicator are classified as support
models. These models are: (i). Quantitative Model for Performance Measurement System
(QMPMS); and (ii). Model for Predictive Performance Measurement System (MPPMS)

Common Frameworks and Models for Performance Measurement

A number of frameworks and models for performance measurement have been developed, since
1980s These frameworks all have their relative benefits and limitations.
Balanced Score Card (BSC): BSC proposes that a company should use a balanced set of
measures that allows top managers totake a quick but comprehensive view of the business from
four important perspectives (Figure 2). These perspectives provide answers to four fundamental
questions

How do we look to our shareholders (financial perspective)?

What must we excel at (internal business perspective)? (iii). How do our customers see
us (the customer perspective)?
How can we continue to improve and create value (innovation and learning
perspective)?

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The BSC includes financial performance measures giving the results of actions already taken. It
also complements the financial performance measures with more operational non-financial
performance measures, which are considered as drivers of future financial performance. By
giving information from four perspectives, the BSC minimizes information overload by limiting
the number of measures used. It also forces managers to focus on the handful of measures that
are most critical. Further, the use of several perspectives also guards against sub-optimization
by compelling senior managers to consider all measures and evaluate whether improvement in
one area may have been achieved at the expense of another.
Performance Prism: The performance prism framework suggests that a PMS should be
organised around five distinct but linked perspectives of performance
Stakeholder satisfaction (Who are the stakeholders and what do they want and need?);
Strategies (What are the strategies we require to ensure the wants and needs of our
stakeholders?);
Processes (What are the processes we have to put in place in order to allow our
strategies to be delivered?);
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 Capabilities (The combination of people, practices, technology and infrastructure that

together enable execution of theorganisations business processes, both now and in the
future, and what are the capabilities we require to operate our processes?)
Stakeholder contributions (What do we want and need from stakeholders to maintain
and develop those capabilities?)

The Performance Pyramid: The purpose of the performance pyramid (refer Figure 4) is to link
an organisations strategy with its operations by translating objectives from the top down (based
on customer priorities) and measures from the bottom up. ThisPMS includes four levels of
objectives that address the organisations external effectiveness (left side of the pyramid) and its
internal efficiency (right side of the pyramid). The development of a companys performance
pyramid starts with defining an overall corporate vision at the first level, which is then
translated into individual business unit objectives. The second-level business units are shortterm targets of cash flow and profitability and long-term goals of growth and market position
(e.g. market, financial). The business operating system bridges the gap between top-level and
day-to-day operational measures (e.g. customer satisfaction, flexibility, productivity). Finally,
four key performance measures (quality, delivery, and cycle time, waste) are used at
Departments and work centres on a daily basis. Ghalayini et al. (1996) suggest that the main
strength of the performance pyramid is its attempt to integrate corporate objectives with
operational performance indicators. However, this approach does not provide any mechanism to
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identify key performance indicators, nor does it explicitly integrate the concept of continuous
improvement.

Strategic Worldwide Sourcing

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As a Horizon customer can take full advantage our global network of customers and
suppliers to meet company's short and long term needs. The strength of our relationships enable
us to source large quantities of highly allocated & end-of-life product without direct exposure to
the open market. Our line card is not limited to a few manufacturers; we can provide all major
brands. We provide the best sourcing solution by combining our own stringent quality assurance
procedures with ISO 9001:2000 procedures and thorough product inspection & testing.
Consider the following strengths our Strategic Worldwide Sourcing service offers:
Proactive and Reactive Part Match Sourcing
All Major Brands, No Brand Limitations
Allocated, End-Of-Life, & Obsolete Sourcing
24 Hour Operations
International Offices
Multi-Lingual Staff
Expedited Shipments
Worldwide Logistics Network
Strong Capitalization
ISO 9001:2000 Certified
Comprehensive Product Testing & Inspection
Full Warranty Coverage From Horizon
Confidential treatment of sensitive & proprietary customer information
Best Practices in Supplier Quality Management
Supplier quality management has emerged as one of the leading business practices
in the past few years. World-class manufacturers are making significant investments in systems
and processes to improve supplier quality. This white paper briefly outlines some of the best
practices implemented by such manufacturers in supplier quality management.

Why Supplier Quality is critical?

With companies outsourcing their manufacturing to strategic partners across the globe,
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the supply chains have become very long. Many consumer products are manufactured in
Mexico or the Far East and then shipped to North American markets using multiple logistics
providers via ocean, air and trucks. It can take weeks for a finished product to reach the store
shelves from a supplier in the Far East. In addition, many of these manufacturers have
streamlined their supply chain and implemented lean inventory techniques. As a result, any
issue in supplier quality can quickly result in stock outs.
Companies that sell industrial products need to preserve their preferred supplier
status to continue to be considered for future business. As a result they are under pressure to
ensure that their products continue to meet or exceed acceptable PPM and Corrective Action
thresholds set by their customers. Hence managing their own suppliers quality is very high on
the agenda for these companies.
The following best practices enable these companies to improve their own quality by
improving their suppliers product and delivery quality.
Supplier quality management has emerged as one of the leading business practices in
the past few years. World-class manufacturers are making significant investments in systems
and processes to improve supplier quality. This white paper briefly outlines some of the best
practices implemented by such manufacturers in supplier quality management.
Best

Practice

#1:

Measuring

&

tracking

cost

of

poor

supplier

quality

Most organizations do not track and measure the cost of poor supplier quality (COPQ)
attributed to their suppliers. Such COPQ may add up to over 10% of the organizations revenue.
Some companies only track supplier COPQ by measuring scrap and increase in MRB inventory.
Results have shown that materials account for less than 50% of the total COPQ. The following
should be taken into account to calculate the actual COPQ.

Scrap, rework, sorting and processing costs due to poor quality

MRB inventory and processing costs due to inspection failure

Line shutdown attributed to poor quality

Using equipment that is capacity constrained for rework due to poor quality, reducing
the overall utilization of the production line
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Freight costs due to expedited shipment to customers/downstream plants

Warranty expenses due to poor quality

Recall expenses due to poor quality of products shipped to customers

Quality Management Systems (QMS) or manufacturing systems can track whenever

any of the above costs are incurred due to supplier quality issues. World-class manufacturers are
using all of the above factors to track actual supplier-related COPQ.
Best

Practice

#2:

Cost

recovery

The total COPQ is equal to the COPQ of OEM plus inherited COPQ of suppliers. As a
result, companies need to proactively work with their suppliers to improve their quality, so that
they can reduce their own COPQ. Hence a cost-recovery system, where suppliers are charged
back for providing poor quality of components, is an effective way to introduce business
discipline and accountability into the supply chain.
However, based on our findings, less than 50% of companies pursue cost recovery with
their suppliers. And majority of these companies only recover material costs from their
suppliers. According to a recent report by AMR, an industry analyst group, about 65% of the
costs attributed to the poor supplier quality are non-material related see an example in the
picture below. If a company institutes a quality management system to aggregate such costs and
use it for charge-backs, not only would they be able to fully recover the costs of poor quality
from their suppliers, they would be able to institute a discipline that forces the suppliers to
quickly improve their quality of products shipped.

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Best
Practice

#3:

Supplier

Audit

Supplier Audits are one of the best ways to ensure that supplier is following the processes and
procedures that you agreed to during the selection processes. The supplier audit identifies nonconformances in manufacturing process, shipment process, engineering change process,
invoicing process and quality process at the supplier. After the audit, the supplier and
manufacturer jointly identify corrective actions which must be implemented by the supplier
within an agreed-upon timeframe. A future audit ensures that these corrective actions have been
successfully implemented.
In our research, over 50% of the manufacturers do not follow the best practices in audit, while
engaging with their suppliers. By implementing best practices, manufacturers ensure that the
audit process is effective and efficient and allows them to audit their entire supplier base at least
once a year while maintaining a lean staff of auditors. The following picture shows the best
practices process for internal auditing.

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IN SOURCING
In sourcing is the opposite of outsourcing.
Definition
Insourcing can be defined as the delegation of operations or jobs from production within a
business to an internal entity that specializes in that operation Insourcing is the utilization of
professional from another company employed as a turnkey global extension of a companys
work place and workforce, without transferring the project management and decision-making
control to an outside provider.
What is in sourcing?
When an organization delegates its work to another entity, which is internally yet not a part of
the organization, it is termed as insourcing. The internal entity will usually have a specialized
team who will be proficiency in providing the required services. In sourcing enables
organization to maintain a better control of what they outsource. In sourcing can also be defined
as transferring work from one organization to another organization, which is located within the
same country. In sourcing can also mean an organization building a new business center or
facility which would specialize in a particular activity, usually opt for insourcing in order to cut
down the cost of labour and taxes amongst others. The trend towards insourcing has increased
since the year 2006. Organizations who have been dissatisfied with outsourcing have moved
towards insourcing. Some organization feels that they can have better customer support and
better control over the work outsourcing by insourcing their work rather than outsourcing it. U.S
and U.K are currently the largest outsourcing in the world. The U.S and U.K outsourcing and
insourcing work equally.
What is best for your organization?
If the work involves production, it is ideal for the organization to opt for insourcing, as
reduction in transportation costs and exercise a better control over the project. If the
organization has a number of non-core processes, which are taking plenty of time, effort and
resources to perform in house, it would be wise to outsource these noncore functions.

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Salient features
Insourcing is also referred to as contracting in.
Contracting is often defined as the delegation of operations or jobs from production
with in a business to an internal (but stand-alone) entity (such as a sub contractor)
that specifies in that operation.
It is a business decision that is often made to maintain control of certain productions
or competencies
An alternate use of the term implies transferring jobs to within the country where
the term is used, either by hiring local sub contractors or building a facility.
Insourcing is widely used in an area such as production to reduce costs of taxes,
labour, transportation, etc.,
Insourcing is a business model that requires multi-dimensional expertise and
adequate know-how of technology, trends and business practices.
Insourcing offers benefits over outsourcing
Greater control over resources because they are direct employees.
Better control over intellectual property
Higher acceptance of insourcing. Insourcing can work well for companies looking to use
offshore resources for long periods of time working on strategic activities such as
product engineering and customer facing strategies.
Advantages
1. Higher degree of control over inputs
2. Increases visibility over the process
3. Economies of scale / Scope uses integration
Disadvantages
1. Require high volume
2. High investment
3. Dedicated equipment has limited
4. Problem with supply chain
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OUTSOURCING
Outsourcing is subcontracting a process, such as product design or manufacturing, to a thirdparty company. The decision to outsource is often made in the interest of lowering firm costs,
redirecting or conserving energy directed at the competencies of a particular business, or to
make more efficient use of labour, capital, technology and resources. Outsourcing became part
of the business lexicon during the 1980s. .The strategic use of outside service provides to
perform non-revenue generating activities so that an organization may focus on its core
competencies. Outsourcing is a business model for leveraging the capability and capacity
externally. Outsourcing is a long-term result oriented business in an external service provider
for services traditionally performed with in a company. Outsourcing means taking out a specific
area of the business and giving it to someone who is an expert and having assumed end-to-end
deliveries. Outsourcing involves the transfer of the management and / or day-to-day execution
of an entire business function to an external service provider. The client organization and the
supplier enter into a contractual agreement that defines the transferred services. Under the
agreement the supplier acquires the means of production in the form of a transfer of people,
assets and other resources from the client. The client agrees to procure the services from the
supplier for the term of the contract. Business segments typically outsourced include formation
technology, human resources, facilities and real estate management, and accounting. Many
companies also outsource customer support and call center functions like telemarketing,
customer services, market research, manufacturing and engineering.
Outsourcing and offshoring are used interchangeably in public discourse despite important
technical differences. Outsourcing involves contracting with a supplier, which may or may not
involve some degree of offshoring. Offshoring is the transfer of an organizational function to
another country, regardless of whether the work is outsourced or stays within the same
corporation. With increasing globalization of outsourcing companies, the distinction between
outsourcing and offshoring will become less clear over time. This is evident in the increasing
presence of Indian outsourcing companies in the US and UK. The globalization of outsourcing
operating models has resulted in new terms such as near shoring and right shoring that reflect

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the changing mix of locations. This is seen in the opening of offices and operations centers by
Indian companies in the US and UK.
Multisourcing refers to large (predominantly IT) outsourcing agreements. Multisourcing
is a framework to enable different parts of the client business to be sourced from different
suppliers. This requires a governance model that communicates strategy, clearly defines
responsibility and has end-to-end integration.
Process of outsourcing
Deciding to outsource
The decision to outsource is taken at a strategic level and normally requires board approval.
Outsourcing is the divestiture of a business function involving the transfer of people and the
sale of assets to the supplier. The process begins with the client identifying what is to be
outsourced and building a business case to justify the decision. Only once a high-level business
case has been established for the scope of services will a search begin to choose an outsourcing
partner. A request for proposal (RFP) is issued to the shortlist suppliers requesting a proposal
and a price. A competition is held where the client marks and scores the supplier proposals. This
may involve a number of face-to-face meetings to clarify the client requirements and the
supplier response. The supplier will be qualified out until only a few remain. This is known as
down select in the industry. It is normal to go into the due diligence stage with two suppliers to
maintain the competition. Following due diligence the supplier submit a best and final offer
(BAFO) for the client to make the final down select decision to one suppliers to go into
competitive negotiations.
Negotiations and Finalization
The negotiation takes the original RFP, the supplier proposals, BAFO submissions and converts
these into the contractual agreement between the client and the supplier. This stage finalizes the
documentation and the final pricing structure. At the heart of every outsourcing deal is a
contractual agreement that defines how the client and the supplier will work together. This is a
legally binding document and is core to the governance of the relationship. There are three

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terms become active and a service commencement date when the supplier will take over the
services.
Execution
The transition will begin from the effective date and normally run until four months after
service commencement date. This is the process for the staff transfer and take on of services.
The transformation is the execution of a set of projects to implement the Service Level
Agreement (SLA), to reduce the Total Cost of Ownership (TCO) or to implement new services.
Emphasis is on standardization and centralization. This is the execution of the agreement and
lasts for the term of the contract. Near the end of the contract term a decision will be made to
terminate or renew the contract. Termination may involve taking back services (insourcing) or
the transfer of services to another supplier.
Reasons for outsourcing
Organization that outsource are seeking to realize benefits or address the following
issues:
Cost savings: The lowering of the overall cost of the service to the business. This will
involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost restructuring. Access to lower cost economies through offshoring called labor arbitrage
generated by the wage gap between industrialized and developing nations.

Cost restructuring: Operating leverage is a measure that compares fixed costs to

variable costs. Outsourcing changes the balance of this ratio by offering a move from
fixed to variable cost and also by making variable costs more predictable.
Improve quality: Achieve a step change in quality through contracting out the
service with a new service level agreement.

Knowledge: Access to intellectual property and wider experience and knowledge.

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 Contract: Services will be provided to a legally binding contract with financial

penalties and legal redress. This is not the case with internal services.
Operational expertise: Access to operational best practice that would be too difficult or
time consuming to develop in-house.
Staffing issues: Access to a larger talent pool and a sustainable source of skills.
Capacity management: an improved method of capacity management of services and
technology where the risk in providing the excess capacity is borne by the supplier

Catalyst for change: An organization can use an outsourcing agreement as a catalyst

for major step change that cannot be achieved alone. The outsourcer becomes a change
agent in the process.

Reduce time to market: The acceleration of the development or production of a

product through the additional capability brought by the supplier.

Commoditization: The trend of standardizing business processes, IT services and

application services enabling businesses to intelligently buy at the right price. Allows a
wide range of businesses access to services previously only available to large
corporations.
Risk Management: An approach to risk management for some types of risks is to
partner with an outsourcer who is better able to provide the mitigation.

Time zone: A sequential task can be done during normal day shift in different time
zones to make it seamlessly available 24X7. Same/similar can be done on a longer
term between earths hemispheres of summer/winter.

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 Customer Pressure: Customer may see benefits in dealing with your company, but are
not happy with the performance of certain elements of the business, which they may not
see a solution to except through outsourcing.
Outsourcing objectives
Focus core activity
Reduced costs
Improved operational quality
Achieve high productivity
De-risk the business
Quality of service in outsourcing
Quality of service is measured through a Service Level Agreement (SLA) in the outsourcing
contract. In poorly defined contracts there is no measure of quality or SLA defined. Even when
an SLA exists it may not be to the same level as previously enjoyed. This may be due to the
process of implementing proper objective measurement and reporting which is being done for
the first time. It may also be lower quality through design to match the lower price. There are a
number of stakeholders who are affected and there is no single view of quality. The CEO may
view the lower quality acceptable to meet the business needs at the right price. The retained
management team may view quality as slipping compared to what they previously achieved.
The end consumer of the service may also receive a change in service that is within agreed
SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the
defined SLAs regardless of perception or ability to do better. Quality in terms of end-userexperience is best measured through customer satisfaction questionnaires, which are
professionally designed to capture an unbiased view of quality. Surveys can be one of research.
This allows quality to be tracked over time and also for corrective action to be identified and
taken. A Mek insey study shows that when processes are outsourced to India, companies not
only get the advantage of low cost but also experience improvement and quality.
Impact of outsourcing
Offshore outsourcing for the purpose of saving cost can often have a negative influence on the
real productivity of a company. Rather than investing in technology to improve productivity,
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companies gain non-real productivity by hiring fewer people locally and outsourcing work to
less productivity facilities offshore that appear to be more productive simply because the
workers are paid less. In contrast, increases in real productivity are the result of more productive
tools or methods of operating that make it possible for a worker to do more work. Non-real
productivity gains are the shifting work to lower paid workers, often without regards to real
productivity. The net result of choosing non-real over real productivity gain is that the company
falls behind and obsoletes itself overtime rather than making real investments in productivity.
From the standpoint of labor within countries on the negative end of outsourcing this may
represent a new threat, contributing to rampant worker insecurity, and reflective of the general
process of globalization. While the outsourcing process may provide benefits to less
developed countries or global society as a whole, in some form and to some degree include
rising wages or increasing standards of living these benefits are not secure. Further, the term
outsourcing is also used to describe a process by which an internal department, equipment as
well as personal, is sold to a service provider, who may retain the workforce on worse
conditions or discharge them in the short term. The affected workers thus often feel they are
being sold down the river.
Advantages
1) Greater flexibility suppliers
2) Lower investment risk
3) Improved cash flow
4) Lower potential labour costs shortage
Disadvantages
1) Possibility of choosing wrong
2) Loss of control over process
3) Potential for guard banding
4) Long lead times / capacity
5) Hollowing out of the corporation

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