Supply Chain Management

Chapter - 04
 Achieving the fit

Supply Chain


Strategy
Prof. Manoj K Srivastava
Operations Management Area
[email protected]
http://mks507.vistapanel.ne
Management Development Institute-
t Gurgaon
upply Chain Efficiency Curve
 Fitting the SC to the customer or vice versa?
Understand the customer Wishes

Understand the Capabilities of your SC

Match the Wishes with the Capabilities

Challenge: How to meet

extensive Wishes with
limited Capabilities?
 Matching the supply chain with market requirements
Nature of demand
Functional products Innovative products
Predictable Unpredictable
Few changes Many changes
Low variety High variety
Price stable Price markdowns
Long lead-times Short lead-times
Low margin High margin
Efficient
Supply chain objectives

Low throughput times

Deployed inventory

Lean
Flexible suppliers

Mismatch
High utilization

supply chain
management

Agile
Responsive

Mismatch
Minimum inventory
Low-cost suppliers

supply chain
High utilization

management
Low cost
ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS

Factor Efficient Supply Chains Responsive Supply Chains

Demand Predictable, low forecast errors Unpredictable, high forecast errors

Competitive Low cost Development speed, fast delivery times

priorities consistent quality Customization, volume flexibility
on-time delivery variety, top quality

New- Infrequent Frequent

service/product
introduction
Contribution Low High
margins
Product variety Low High
 Comparison of Efficient and Responsive Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense of Aggressively reduce even if costs
greater cost are significant

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

Transportation strategy Greater reliance on low cost modes Greater reliance on responsive
(fast) modes
 Achieving Strategic Fit
Uncertainty/Responsiveness Map
Responsive supply Companies try to move
chain Zone of Strategic fit High Cost

Responsiveness
e of it
spectrum n F
Zo egic
tr at
S

Efficient supply Low Cost

chain

Certain demand Implied uncertainty Uncertain demand

spectrum
SCM Impact on Strategic Thinking
 Supply Chain Typology: Order
Penetration Point/ Decoupling Point
Push-Pull Boundary of Supply Chains
Match Supply Chain Design with
Product Category
 Achieving Strategic Fit:
Consistent SCM and Competitive strategies

uFit SC to the customer

uUnderstanding the Customer
n Range of demand, pizza hut stable
n Production lot size, seasonal products
n Response time, organ transplantation
Implied (Demand)
n Service level, product availability Uncertainty for SC
n Product variety
Implied trouble
n Innovation for SC
n Accommodating poor quality
 Supply Chain Problems
Adding value along the chain is essential for competitiveness, however problems exist especially in
complex or long chains and in cases where many business partners are involved.
due to
•uncertainties
•need to coordinate several activities, internal units, and business partners.

•Demand forecasts are a major source of uncertainties

•Competition
•Prices
•Weather
Weather conditions
•Technological
Technological development
•Customer
Customer confidence
•Uncertainties exist in delivery times
•Machine failures
•Road conditions
•Shipments
•Quality problems may also create production delays
 No clear identification of owner and customers of measures
( joint determination is very essential )
Not evaluating consequences and outcomes
Fill The Gaps

( Efficacy is prerequisite to customer satisfaction )

Imbalance between efficiency and effectiveness
( key processes has to be identified and owned )
Lack of Process Orientation of measurement
( Physical Orientation alone is not a suitable indicator )

Lack of Measures of relationships

( economic , physical , psychological measures are equally
important )
Lack of real-time visibility
( every affected party must be informed )
Lack of Multi-firm optimization
( have to look beyond sub - optimization )

* Source: various authors

 Supply chain strategies
seven S's that deliver organizational strategies
Sustainability -must offer customers' consistent value. For example, based on their preferences for time, place, cost,
flexibility, dependability and quality. Must identify order qualifiers and order winners and compete managing complexity

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

Speedy response- developing responsive capabilities to deliver goods and services when they are required, e.g.
efficient consumer response, quick response
Suited to customer requirements -developing flexibility capabilities - e.g. agile, lean supply chains,
innovations and new product developments
Standards - developing supply chain strategies to assure customer quality standards are met effectively and co-operate
within supply chains to compete across supply chains
Systems focused on customer satisfaction -re-design business processes and develop enabling
strategies for all relevant parties including customers to view supply chain information relevant to them (e.g. collaborative,
co-operative rather than competitive strategies)

Structures and relationships - for example, develop digital supply chain strategies to replace unnecessary
inventory movements by moving and exchanging information instead of goods
Push Vs Pull
Strategy
Which Strategy ?
Push / Pull Boundary
Furniture SC
Grocery SC
Traditional PC Industry
Dell - the Pull-Push boundary
When is the use of pure market mechanisms
appropriate in buyer–supplier relationships?

FewNumber of supply alternativesMany

Market
mechanisms Leverage
appropriate market

Market dimension
uncertainty

Leverage
needs Market
uncertainty mechanisms
inappropriate

Resource dimension
Low Cost of changing suppliers High
Elements of process partnership relationships
Attitudes
Trust
Long-term Sharing
expectations success

Joint Multiple
learning points of
contact
Closeness of
relationship
Joint co- Few
ordination of relationships
activities

Joint problem Information

solving transparency
Dedicated
assets Actions
 Degrees of trust
Calculative …trusting you is likely to Based on
trust give me more benefits knowledge
than not trusting you...

Cumulative positive
Degree of closeness

experiences
…I believe I can trust
Cognitive you because I think I

Time
trust know you enough to be
confident you will behave
as I would wish...
…I trust you because I
know that you know that I
Bonding Based on
wouldn’t let you down and
trust feelings
you know that I know that
you wouldn’t either......
 Some factors influencing the nature of
network relationships
Economies of Market
scale position
Transaction Market
costs risks
Nature of REQUIREMENTS
OPERATIONS
network MARKET
RESOURCES
relationship
Learning Market
potential structure

Resource Competitive
deficiencies behaviour
 Other Issues Affecting Strategic Fit
uMultiple products and customer
segments
uProduct life cycle
uCompetitive changes over time
 Multiple Products and
Customer Segments
uFirms sell different products to different
customer segments (with different
implied demand uncertainty)
uThe supply chain has to be able to balance
efficiency and responsiveness given its
portfolio of products and customer
segments
uTwo approaches:
n Different supply chains
 Product Life Cycle
u The demand characteristics of a product and the
needs of a customer segment change as a
product goes through its life cycle
u Supply chain strategy must evolve throughout the
life cycle
u Early: uncertain demand, high margins (time is
important), product availability is most
important, cost is secondary
u Late: predictable demand, lower margins, price is
important
 Competitive Changes Over Time
uCompetitive pressures can change
over time
uMore competitors may result in an
increased emphasis on variety at a
reasonable price
uThe Internet makes it easier to offer a
wide variety of products
uThe supply chain must change to
meet these changing competitive
conditions
 Expanding Strategic Scope
uScope of strategic fit
n The functions and stages within a supply chain
that devise an integrated strategy with a
shared objective
n One extreme: each function at each stage
develops its own strategy
n Other extreme: all functions in all stages devise
a strategy jointly
uFive categories:
n Intracompany intraoperation scope
n Intracompany intrafunctional scope
 Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy
Product Intercompany
Development Interfunctional Intracompany
Strategy Intrafunctional
at Distributor
Supply Chain
Intracompany
Strategy Intracompany
Intraoperation
Interfunctional
at Distributor
Marketing at Distributor
Strategy
Bullwhip effect
What are the reasons for the channel
not being coordinated?
u Lack of information
n Information about the demand is not
transmitted up stream.
u Conflicting interest
n Retailers would like to have daily deliveries
n Daily deliveries are expensive for the
suppliers
n Manufacturers would like to have a stable
production environment.
n Buyers would like to have the flexibility to
adjust to the demand and change orders
 price fluctuation

poor demand forecasting

Bullwhip Effect
erratic shifts in orders up and down the supply chain

order batching

rationing within the chain

ecome magnified if each distinct entity on the chain, makes ordering and inventory de
Distorted information can lead to tremendous
inefficiencies

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

A common way to solve the bullwhip problem is by sharing information along the supply
chain through EDI, extranets, and groupware technologies. For example employing a vendor-
managed inventory (VMI) strategy, the vendor monitors inventory levels and when it falls
below the threshold for each product this automatically triggers an immediate shipment.
 Inaccurate information can cause minor
fluctuations in demand for a product to be
amplified as one moves further back in the
supply chain. Minor fluctuations in retail
sales for a product can create excess
inventory for distributors, manufacturers,
and suppliers.
 Bullwhip effect
u Bullwhip effect refers to the phenomenon where orders to the supplier tend
to have larger variance than sales to the buyer (i.e., information
distortion) and the distortion propagates upstream in an amplified form
(i.e., variance amplification).

u Examples

n At P&G, diaper orders issued by distributors have a degree of variability

that cannot be explained by consumer fluctuations alone

n At Hewlett-Packard, the orders placed to the printer division by resellers

have much bigger swings and variations that customer demands
 Consequences of bullwhip effect
u Increased safety stock

u Reduced service level

u Inefficient allocation of resources

u Increased transportation costs

u Bullwhip effect leads to higher variance in demands as observed by

the upstream members of the supply chain. This requires
n Higher safety stock
n A more flexible production system and/or higher smoothing
costs in production
n A more flexible transportation system and/or higher smoothing
costs in transportation
§Order synchronization Bullwhip effect: Causes
§Multiple retailers who tend to order around the same time period
§Manufacturers responding to an MRP system that place raw material orders at the beginning of the month

§Order batching
§In order to save on shipping or ordering costs, firms order a full pallet or full truck load
§Trade promotions and forward buying
§Supplier offers a discount on product ordered in a specific time period
§Supplier offers a quantity discount
§A retailer orders a large quantity intending to take advantage of a discount and sells excess product to a
second retailer (this strategy is called diversion)
§Reactive and over-reactive ordering
§A retailer who is not sure that demand is stable over time may act aggressively when faced with periods of
lower or higher than expected demand
§Shortage gaming
§A retailer who wants to insure product from an under-capacitated supplier may over order expecting to
only receive a portion of the ordered quantity
§Demand forecast updating / Inflated Orders
§IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over
Christmas
§Long cycle times
§Long lead times magnify this effect
 Bullwhip effect: Remedies
Centralizing demand information occurs when customer demand information is available to
all members of the supply chain.

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

Reducing variability. This can be accomplished by using a technique made popular by

WalMart and then Home Depot called everyday low pricing(EDLP). EDLP eliminates
promotions as well as the shifts in demand that accompany them.

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

Strategic partnerships. The use of strategic partnerships can change how information is
shared and how inventory is managed within the supply chain. These will be discussed later.
Cross-docking. This involves unloading goods arriving from a supplier and immediately loading these
goods onto outbound trucks bound for various retailer locations. This eliminates storage at the retailer’s
inbound warehouse, cuts the lead time, and has been used very successfully by WalMart and Xerox among
others.

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

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

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

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

Smoothing the flow of products: Supplier and the retailers coordinate the timing of orders so that
retailers do not place orders at the same time.
 Achieving Coordination in
Practice
u Quantify the bullwhip effect

u Get top management commitment for coordination

u Devote resources to coordination

u Focus on communication with other stages

u Try to achieve coordination in the entire supply chain

network

u Use technology to improve connectivity in the supply chain

u Share the benefits of coordination equitably

 Causes of bullwhip effect: Demand signal processing
u Reasons §Mitigating Strategies

n If the supply chain §Allow access to end customer

player updates the
order-up-to-level demand to all members in the
based on its new supply chain (share POS)
estimate of demand,
the variance in §Sell-thru data in contracts at HP,
orders it places Apple, IBM
exceeds the variance
in demand it
observes. §Single control of replenishment
§Make the manufacturer
n This gets amplified if responsible for replenishing
the supply chain the supply chain, i.e., Vendor
player does not Managed Inventory (VMI) for
observe the final companies like P&G and Wal-
demand (at the Mart
retailer), but
forecasts demand
based on the orders §Reduce the lead times
it received from
downstream §Quick response systems in
apparel industry, flexible
 Causes of bullwhip effect: Constrained Supply
Reasons

§Mitigating Strategies
u When the demand downstream (e.g. §Allocate supply based on the final
retailers) exceeds the capacity demand not based on orders
upstream (e.g. manufacturer)
received
u The typical practice for the upstream §GM, HP and TI
(manufacturer) is to allocate the
supply to different downstream allocating based on
entities (retailers) in proportion sales history
to their orders.
§Remove the perceptions that the
u This leads to retailers ordering more supply will be short
than they need in order to get
more share from the supply §Share the production
and inventory
u In theory, the order quantity
(equilibrium order quantity) information with
where retailers are competing in downstream
such a setting exceeds the order
quantity (standard newsboy §Reduce the buyer’s flexibility
order quantity) where the
retailers assume infinite capacity §Construct contracts
at the manufacturing level that will restrict the
u Note also these inefficiencies may
order quantities
occur even though there is no §Eliminate constraints on the supply
 Causes of bullwhip effect: Order batching
Reasons

§Mitigating Strategies
n Retailers do not order every time
they face a demand as a result of
§Reduce order costs
§Reduce paperwork,
n Periodic review process implement EDI for
n Setup costs associated ordering
with ordering
§Reduce transportation costs
n As a result, the retailers batch their §Reduce the desire for full
orders which leads to distortion in
demand information truck loads
§Allow mixed truckloads
n This distortion is magnified when
there are multiple retailers and (P&G)
their ordering is not synchronized
§Use third party logistics
n Distortion is highest (3PL) companies for
when ordering is efficient transportation
correlated
§Synchronize ordering
n Distortion is smallest
when ordering is §Move away from
balanced
correlated ordering to
 Causes of bullwhip effect: Price variations
 Reasons Mitigating Strategies
§Stop manufacturer’s trade promotions
n If the manufacturers are
offering promotions, §Everyday Low Pricing (EDLP) by
retailers may act by P&G, etc
procuring more than they
currently need in §Savings through forward buying may be illusive
anticipation of future §Justify forward buying by also
demand (i.e., forward buy)
considering inventory carrying
n In theory, the order-up-to- costs
level in one period changes §Implement purchase contracts (synchronize
with the procurement cost purchase and delivery schedules)
in that period
§Still offer promotions and/or
n This leads to further quantity discounts but allow
distortion in the demand multiple shipments over time
information communicated
to the manufacturer at the same price
n The result is higher inventory
costs at both ends
n Since the retailers need
to keep inventory
 Cause 1: Demand Forecast Updating
(Demand Signal Processing)

Orders from downstream

in the past p time periods
Order Q t goes to upstream D t-p , D t-p +1 , …, D t- 1

Lead time L
Mfctr. Retailers Customers
• Retailers forecast customers demand
and then place orders with manufacturer
• Manufacturer receives orders from retailers

nd variability gets amplified from downstream to upstream !

only, the variability of Q is 2 to 15 times the variability of D
 Cause 2: Rationing and Shortage Gaming
§When product demand exceeds supply, a manufacturer often rations its
product to customers. Example:
Dealer 1 Order = 100 Received = 67

Car Manufacturer Dealer 2 Order = 200 Received = 133

Available = 200 Only 2/3 of the order can be fulfilled
• Knowing the manufacturer policy, customers exaggerate their real
needs when they order (game the system). Example:
Dealer 1 Need = 120 Order = 180 Received = 180

Car Manufacturer Dealer 2 Need = 180 Order = 270Received = 270

Available = 500 Order more than needed so that if
only 2/3 of the order is filled you
still
• As a result, customers’ orders give the get little
supplier whatinformation
you actually
on a need
product’s real demand, a particularly vexing problem for new products
 Coping with the Bullwhip Effect in Leading Companies

u Reduce uncertainty
n POS
n Sharing information
n Sharing forecasts and policies
u Reduce variability
n Eliminate promotions
n Year-round low pricing
u Reduce lead times
n EDI
n Cross docking
u Strategic partnerships
n Vendor managed inventory
 Conflicting Objectives in Supply Chain
1. Decentralized supply chain: each member has his own interest and act
independently
2. Self-interested decision makers: every member of the supply chain optimizes his
own objective.
3. These self-interested members’ decisions may not align with the optimal decisions
for the overall performance of the supply chain.
4. Inefficiencies across supply chain lead to decentralization cost
5. Solution: to coordinate the members to act as if they are a centralized supply chain
(i.e., one decision-maker makes decisions in behalf of the whole supply chain)
Our goal: to attain performance of centralized supply chain with decentralized
decision making
How do we do that?
1.A contract is agreed by and announced to all members before they make
decisions
2.Each member independently decides and acts
3.The contract is executed
We say a decentralized SC is coordinated by a contract, if
The total profit of decentralized SC equals the total profit of centralized SC, and
All members are better off under this contract, compared to the case without such a
contract (uncoordinated case)
 Coordinating S.C. Inventory
q Consider a simple demand driven supply chain: a buyer and a
supplier
q Supplier Buyer Customers
q
q The buyer produces D= 10,000 units/year of a product at a constant
rate. Each time the buyer places an order for a certain
component, the ordering cost is Sb= $100. The buyer’s inventory
2 DS b 2(10,000)(100)
EOQand
holding cost is H = $10/yr b = =
optimal =
ordering quantity: 447
H 10
q
q The supplier produces an order whenever one is received from the
buyer.
q Each time the seller sets up to produce a batch of
components, the production setup cost is Ss = $300.

q The supplier’s total (setup) cost = Ss(D/EOQb) =

300(10,000/447) = 6711
2 D( S b +S s) 2(10,000)(100 +
300)
q EOQ SC = = = 894
H 10
TC = 894 x 10 / 2 + ( 10000 / 894 ) x
100
= $ 5 , 589

$ 11,184
Supplier’s cost (at Q=447)
= Ss (D/EOQb) = 300(10,000/447)
= $6,711
$ 8,944 Buyer’s cost (at Q=447)
=  (2 x D x H x Sb)
=  (2 x 10000 x 10 x 100)
$ 6,711 = $ 4,472
$ 5,589
Supplier’s cost (at Q=894)
$ 4,472 = Ss (D/EOQb) = 300(10,000/894)
= $3,356
$ 3,356 SC overall cost (at Q=894)
=  (2 x D x H x (S b + Ss))
=  (2 x 10000 x 10 x 400)
= $ 8,944
 Buyer's optimal Centralized supply chain's
quantity optimal quantity Cost saving
Q=447 Q=894
Supplier cost $6,711 $3,356 $3,356
Buyer cost $4,472 $5,589 -$1,116
Supply chain cost $11,184 $8,944 $2,239

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

is reduced
q But, buyer incurs a higher cost, and will not
order Q=894
The SC is NOT coordinated without a compensation
qFor any order quantity Q, the buyer always bears a fraction of  of the total cost of the supply ch
for buyer
qSupplier promises to pay buyer = (1–)  (buy’s total holding and setup cost)
qThe buyer promises to pay the supplier = ()  (supplier’s total setup cost)
q
qBuy’s optimal quantity = SC’s optimal quantity = centralized SC’s optimal quantity = 894
q
qThere exist a  such that buyer and suppliers are both better off than ordering Q = 447
 Example: Quick Response at Benetton

u Benetton, the Italian sportswear manufacturer, was founded

in 1964. In 1975 Benetton had 200 stores across Italy.

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

u Many attribute Benetton’s success to successful use of

communication and information technologies.

u Benetton uses an effective strategy, referred to as Quick

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

u Using this strategy, Benetton is capable of shipping a new

order in only four weeks, several week earlier than most of
its competitors.
 How Does Benetton Cope with the Bullwhip Effect?

1. Integrated Information Systems



 • Global EDI network that links agents with production and

inventory information

 • EDI order transmission to HQ

 • EDI linkage with air carriers

 • Data linked to manufacturing

2. Coordinated Planning


 • Frequent review allows fast reaction

 • Integrated distribution strategy

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

u Successful VMI initiatives have been trumpeted by other companies in the

United States, including Campbell Soup and Johnson & Johnson, and by
European firms like Barilla (the pasta manufacturer).

u The supplier—usually the manufacturer but sometimes a reseller or

distributor—makes the main inventory replenishment decisions for the
consuming organization.

n The supplier monitors the buyer’s inventory levels (physically or

via electronic messaging) and makes periodic resupply
decisions regarding order quantities, shipping, and timing.

n Transactions customarily initiated by the buyer (like purchase

orders) are initiated by the supplier instead.

n The purchase order acknowledgment from the supplier may be the

first indication that a transaction is taking place; an advance
shipping notice informs the buyer of materials in transit.
 Solutions for Battling Bullwhip Effect
uVendor Managed Inventory (VMI)
n Vendors take control of inventory
management at the retailers


uQuick Response (QR)

n Vendors receive POS data from
retailers, and use this information to
synchronize their production and
inventory activities.
 Vendor Managed Inventory (VMI)
u How does it work?
n The vendor (supplier) receives inventory and
point-of-sales (POS) data from the retailers
and calculates how much to ship to retailers.
n The vendor places orders for supply.


u VMI projects
n Dillard Department Stores, JCPenney and Wal-
Mart
n Sales increases of 20 to 25%
n 30% inventory turnover improvements
 Quick Response
uThe supplier receives POS data from
retailers, and use this information
to synchronize their production and
inventory activities.
u
uThe retailer prepares individual
orders, but the POS data is used by
the supplier to improve forecasting
and scheduling.
 Quick Response vs. VMI
u Sales information passed back to the
supplier.
u Bullwhip effect is reduced.
u What’s the difference?
n Who chooses the order quantity?
n VMI: Supplier
n QR: Retailer
n Who chooses when to order?
n VMI: Supplier
n QR: Retailer
 Two Types of Products
Functional Products Innovative Products
(Soup) (Fashion clothing)
Demand Uncertainty Low (forecast error) High (forecast error)

Life Cycle Long Short

Risk of Obsolescence Low High

Profit Margin Low High

Variety Low High

Demand volume High Low

Tow Main Functions of Supply Chains
uPhysical function
n Transformation process – converting
raw materials to finished goods and
moving them along SC
n

uMarket mediation
n Ensuring that the right variety of
products are available at the right
place, at the right time, in the right
quantities
 Supply Chain Management

Chapter-09
 Information Visibility

introducing


EPC
Prof. Manoj K Srivastava
Operations Management Area
Management Development Institute-
Gurgaon
[email protected]
http://mks507.vistapanel.net
 What is EPC?
The Electronic Product Code (EPC) is an identification scheme for universally identifying
physical objects via Radio Frequency Identification (RFID) tags and other means.
Extremely long barcodes, this greater data capacity affects the business process because it in
turn allows a greater degree of unique identification.
The Key Difference
UPC – contains just enough information to identify the class of a product
EPC – contains more information to identify the product uniquely
It is not necessary for UPC to be “universal”
A typical example would be an automotive tyre
Universal Product Code (UPC) will say “this is a class-x tyre”
The Electronic Product Code (EPC) will say “this is a class-x tyre with a serial #35686975.”
 RFID: UPC vs. EPC
UPC EPC
-Requires line-of-sight readers -Tags can be read from many ranges
-Only one product can be scanned at -Many products can be scanned
a time simultaneously
-Tags can store large amounts of data
-Uniquely identifies products
 Research says worldwide RFID spending will jump
from $300 million in 2004 to $2.8 billion by 2009,
and that most will centre on the global supply chain
(EPC Global the Source January 2005)

An AMR Research study found early EPC/RFID adopters in the retail and consumer
packaged goods (CPG) industries have lowered their supply chain costs between
three and five percent.

UPC= A class of product EPC= specific instance of a product

Beyond Barcode
268 million companies can each categorize 16 million different products and each
product category may contain over 687 billion individual items.
ts
bi
6
)9
P C
(E
de
o
t C
duc
o
Pr
nic
t ro
lec
E
How It works.
 Types of Tags
n Passive
n Operational power scavenged
 from reader radiated power
• Require no internal power source or
maintenance


n Semi-passive
n Operational power provided by battery
n

n Active
n Operational power provided by battery -
 Difference
Active RFID Passive RFID
Tag Power Source Internal to tag Energy transferred using RF
u from reader

u Tag Battery Yes No

Availability of power Continuous Only in field of reader

Required signal Very Low Very High

strength to Tag

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

Multi-tag reading 1000’s of tags recognized Few hundred within 3m of reader

Data Storage Up to 128Kb or read/write with 128 bytes of read/write

sophisticated search and access
 LF MF HF VHF UF MICROWAVE

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

Low MediumF HighFreq Ultra High Microwave
Freq. req. . Freq. Freq.

134 kHz 13.56 MHz 915 MHz 2.45 GHz

T1-RFID T1-RFID UHF T1-RFID1 Hyper X

ITEM PACKAGING TRANSPORT UNIT UNIT LOAD CONTAINER MOVEMENT VEHICLE

Bar Code
Passive RFID
125 kHz & 13.56 MHz ISO 15693 & ISO 14443-3

868 MHz EPCglobal Gen 2 ISO 18000-6

Active RFID
ISO 18000-7

GPRS
Frequencies of operation
Frequency Range Tag cost Applications

Low-frequency 3 feet $1+ Pet and ranch animal identification



125 - 148 KHz Car key locks



Tags need to be closer to the reader

Poor discrimination

High-frequency 3 feet $0.50 Library book identification

13.56 MHz
Clothing identification
smart cards
Tags can be read from relatively greater
distances
Tags can hold more information
Ultra-high freq 25 feet $0.50 Supply chain tracking:


915 MHz Box, pallet, container, trailer tracking



n ge nce
t ra fere
s ter
Microwave: nge i100
n feet $25+ Highway toll collection


2.45GHz Lo ore Vehicle fleet identification



M
2003

Source: http://www.symbol.com/products/rfid/rfid_next_generation.html
Comprehensiveness
 Applications
u Keyless entry Animal and human implantation
–Avid
u EPC –Pet - ID
u Proximity cards –VeriChip
u Libraries RFID - privacy legislation
u Security device –REAL ID Act
n Bookstores
Balanced Supply Chain Scorecard
formulating 3rd Generation BSC for supply chain

manoj kumar srivastava

 The
Importance- performance
matrix
Performance Measurement

Categories of Performance Measurement

 Total revenue
Measures of Supply Chain Performance
Increase sales through
better customer service

Cost of goods sold Net income

Reduce costs of Improve profits with
transportation and greater revenue and
purchased materials lower costs

Operating expenses How Supply Chain Decisions Can

Reduce fixed expenses by
reducing overhead
Affect ROA Return on assets
(ROA)
associated with supply
chain operations Increase ROA with
higher net income and
Working capital fewer total assets
Reduce working capital
Net cash flows by reducing inventory
investment, lead times,
Improve positive cash flows and backlogs
by reducing lead times and Total assets
backlogs
Achieve the same or
better performance
with fewer assets
Fixed assets
Inventory Reduce the number of
warehouses through
Increase inventory turnover improved supply chain
design
 Supply exceeds demand

Established market, supply and

demand are balanced

New market and new products

supply and demand are low Demand exceeds supply

Four measurement categories :

1 . Customer Service
2 . Internal Efficiency
3 . Demand Flexibility
4 . Product Development
Measuring Supply Chain Performance
1. Assets committed to inventory
Measuring Supply Chain Performance
2. Inventory turnover

Inventor Cost of goods sold

y = Inventory investment
turnover
Inventory turnover

Measuring Supply Chain

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

$425, 000, 000

Inventory turns = = 12.3
$34,416,000

$34,416,000
Days of supply = = 29.6
($425,000,000)/(365)
 SCOR: Customer Facing

Performance Performance Definition

Attribute Metric
Supply Chain Delivery Percentage of orders delivered on time
Delivery performance and in full to the customer
Reliability Fill rate Percentage of orders shipped within24
hours of order receipt
Perfect order Percentage of orders delivered on time
fulfillment and in full, perfectly matched with order
with no errors
Supply Chain Order fulfillment Number of days from order receipt to
Responsivenes lead time customer delivery
s
Supply Chain Supply chain Number of days for supply chain to
Flexibility response time respond to an unplanned significant
change in demand without a cost penalty
Production Number of days to achieve an unplanned
flexibility 20% change in orders without a cost
penalty
 SCOR: Internal Facing

Performance Performance Definition

Attribute Metric
Supply Chain Supply chain Direct and indirect cost to plan, source and deliver
management cost products and services
Cost Cost of goods Direct cost of material and labor to produce a
sold product or service
Value-added Direct material cost subtracted from revenue and
productivity divided by the number of employees, similar to
sales per employee
Warranty/returns Direct and indirect costs associated with returns
processing cost including defective, planned maintenance and
excess inventory
Supply Chain Cash-to-cash Number of days that cash is tied up as working
cycle time capital
Asset Inventory days of Number of days that cash is tied up as inventory
Management supply
Efficiency Asset turns Revenue divided by total assets including working
capital and fixed assets
 PART-I
Performance Measurement Systems
 Balanced Scorecard Approach:
A brief Introduction
vrecommends the use of executive information systems (EIS)
vlimited number of balanced metrics, closely aligned to strategic objectives
vexpected to be used by 40% of Fortune 1000 companies

When applied to supply chain context a small number of balanced supply chain measures be
tracked based on four perspectives:
1.Financial perspective (e.g., cost of manufacturing and cost of warehousing )
2.Customer perspective (e.g., on-time delivery and order fill rate)
3.Internal business perspective (e.g., manufacturing adherence-to-plan and forecast errors)
4.Innovative and learning perspective (e.g., APICS-certified employees and new product
development cycle time)
aligning activities with strategy

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

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

Customer
To
To achieve
achieve our
our financial
financial goals,
goals, what
what Results
customer needs must we satisfy?
customer needs must we satisfy?
Cause
Internal Business Process
To
To satisfy
satisfy our
our customers,
customers, in
in which
which internal
internal
business processes must we excel?
business processes must we excel?

Innovation, Learning & Growth Actions

To
To achieve
achieve and
and maintain
maintain aa competitive
competitive position,
position, how
how
must the organization learn and improve?
must the organization learn and improve?
 What Questions Does a Scorecard System Answer?
O Financia
bj
ec l
Measu Targ Initiati To succeed
re et ve
tiv financially, how
e
should we appear to
our owners?
O
Obj Customer Vision bj
Internal Business
Measu
Process
Targ Initiati
Targe
ecti Measure Initiative ec re et ve
ve
t Mission tiv
Strategy e

To achieve our Ob To satisfy our

Learning & Growth
vision, how should
jec
tiv
Measur
e
Targ
et
Initiativ
e
customers, at
we appear to our
e what business
customers? processes must
To achieve our vision, how we excel?
will we sustain our ability
to learn and improve?
 The
Performance Prism

1.Stakeholder Satisfaction – who are the key stakeholders and what do they want and need?
2.Strategies – what strategies do we have to put in place to satisfy the wants and needs of these key
stakeholders?
3.Processes – what critical processes do we require if we are to execute these strategies?
4.Capabilities – what capabilities do we need to operate and enhance these processes?
5.Stakeholder Contribution – what contributions do we require from our stakeholders if we are to maintain
and develop these capabilities?

Neely, A.; Adams, C. (2001) “Perspectives on Performance: The Performance Prism”, Journal of Cost Management, Vol. 15, issue 1, p7-15
Know your stakeholders and their want
Delivering Stakeholder Value
 Skandia Navigator™
Edvinsson and Malone (1997)
Intellectual capital is measured through the analysis of up to 164
metric measures (91 intellectually based and 73 traditional
metrics) that cover five components: (1) financial; (2) customer;
(3) process; (4) renewal and development; and (5) human

The philosophy behind the report was that traditional financial

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

linking past, present, future intended to guide people through a comprehensive set of
measures that represent the true resources, capabilities, and
future potential of an organization.

Skandia, a Swedish insurance and financial services company, published a supplement to its 1994 annual report entitled "Visualizing Intellectual
Capital in Skandia" (Skandia, 1995). Leif Edvinsson is the corporate director of intellectual capital for Skandia.
 2nd Generation performance measurement
Frameworks
qIndividual stock measures (Pike / Roos, 2001).
qStrategy maps (Kaplan and Norton, 2000)
qSuccess and risk maps (Andy Neely and colleagues, 2002)
qIC-Navigator model (Roos et al., 1997; Chatzkel, 2002)
 Strategic Linkage Model

Strategic Linkage Model

The measurable strategic objectives
organized in a cause and effect diagram to
capture management thinking on the
relationships of the medium term activities
and outcomes
Success Map
 Neely, A., Marr, B., Roos, G., Pike, S. and Gupta, O. (2003)
‘Towards the third generation of performance measurement’, Controlling, Heft 3/4, März/April.
3rd Generation performance
measurement Frameworks
The third generation of performance measurement requires organizations to seek
greater clarity about the linkages between the non-financial and intangible dimensions
of organizational performance and the cash flow consequences of these. Before such
models can be developed it is essential that three fundamental criteria be satisfied
(Pike / Roos, 2001).

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

2.Information adequacy – the right information must be provided.
3.Practicality and organizational alignment – the outcomes must be
practical insights that will enable action.

Pike, S. / Roos, G.,

G., Measuring and decision support in the knowledge society;
The 4th World Congress on Intellectual Capital, Hamilton, 2001.
First Generation Balanced Scorecards
broke new ground by combining financial and non-financial performance
measures grouped into four perspectives

Second Generation Balanced Scorecards

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

Third Generation Balanced Scorecards

use the creation of a “Destination Statement” as the starting point for
choosing Strategic Objectives, selecting measures and setting targets
 Strategic Objectives
Destination statement developed directly
from a detailed
“vision” of the
organization at a
future date called a
Destination
Statement

2016
 Causality is
shown by
linkages
between the
objectives
selected

Strategic Linkage Model

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

Balanced scorecard measures and targets

 BSC3 ideas build on these key performance management concepts:

Ownership
is clear on what needs to be done and is fully involved in the process
Causality
identify the actions required to deliver key outcomes

Communication Learning
using feedback to identify ways of improving performance
d unambiguous information on goals roles and performance
A clearly articulated and quantified long-range description of the desired state of the
business at a particular point in time; Typically this is focused on how the organization
will look after 3-5 years

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

Destination
Statement

To build management consensus

To articulate the intended results of implementing the chosen
strategy
early articulated statement of ‘desired state’ or strategic
estination

edium-term strategic objectives broken down into activities and

BSC3 standard designs com
these elements
an & Norton perspectives if necessary

defined objectives
priority initiatives linked to strategic
objectives
the measures themselves
Customer Service Measures Extended Enterprise Measures
qOrder Fill Rate qTotal landed cost
qLine Item Fill Rate qPoint of consumption product availability
qQuantity Fill Rate qTotal supply chain inventory
qBackorders/stockouts qRetail shelf display
qCustomer satisfaction qChannel inventories
q% Resolution on first customer call qEDI transactions
qCustomer returns qPercent of demand/supply on VMI/CRP
qOrder track and trace performance qPercent of customers sharing forecasts
qCustomer disputes qPercent of suppliers getting shared
forecast
qOrder entry accuracy
qSupplier inventories
qOrder entry times qInternet activity to suppliers/customers
Process, Cross-Functional Measures
qPercent automated tendering
qForecast accuracy
qPercent perfect orders
qNew product time-to-market
qNew product time-to-first make
qPlanning process cycle time
qSchedule changes
Manufacturing Related Measures Logistics Related Measures
qProduct quality qFinished goods inventory turns
qWIP inventories qFinished goods inventory days of supply
qAdherence-to-schedule qOn-time delivery
qYields qLines picked/hour
qDamaged shipments
qCost per unit produced
qInventory accuracy
qSetups/Changeovers qPick accuracy
qSetup/Changeover costs qLogistics cost
qUnplanned stockroom issues qShipment accuracy
qBill-of-materials accuracy qOn-time shipment
qRouting accuracy qDelivery times
qPlant space utilization qWarehouse space utilization
qLine breakdowns qEnd-of-life inventory
qPlant utilization qObsolete inventory
qWarranty costs qInventory shrinkage
qSource-to-make cycle time qCost of carrying inventory
qDocumentation accuracy
qPercent scrap/rework qTransportation costs
qMaterial usage variance qWarehousing costs
qOvertime usage qContainer utilization
qProduction cycle time qTruck cube utilization
qManufacturing productivity qIn-transit inventories
qMaster schedule stability qPremium freight charges
qWarehouse receipts
Administration/Financial Measures Marketing Related Measures
qCash flow qMarket share
qIncome qPercent of sales from new products-to-
qRevenues market
qReturn on capital employed qPercent of products representing 80%
qCash-to-cash cycle of sales
qReturn on investment qRepeat versus new customer sales
qRevenue per employee
qInvoice errors
qReturn on assets
Purchasing Related Measures
qMaterial inventories
qSupplier delivery performance
qMaterial/component quality Other Measures
qMaterial stockouts qAPICS trained personnel
qUnit purchase costs qPatents awarded
qMaterial acquisition costs qEmployee turnover
qExpediting activities qNumber of employee suggestions
 What Supplier Performance Metrics Do Companies Use?

–On-time delivery 90%

–Quality of goods/services 83%
–Service capability/performance 69%
–Price competitiveness 55%
–Compliance with contract terms 51%
–Response 50%
–Lead time 44%
–Technical capability 34%
–Environmental, health, and safety performance 30%
–Innovation 29%
 Lapide (2000)
Customer Customer satisfaction, Customer returns, Customer disputes, Market share, % Resolution on first customer call,
Perspectives Order track and trace performance, Order entry accuracy, Order entry times, Repeat versus new customer sales, Order
fill rate, Line item fill rate, Quantity fill rate

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

Innovation APICS trained personnel, Patents awarded, Time-to-market, Number of employee suggestions, Percent of sales from
and Learning new product, Percent if demand/supply on VMI/CRP, Percent of customer sharing forecast, Percent of suppliers
Perspectives getting shared forecast, Supplier inventories, EDI transactions, Internet activity to suppliers/customers, Percent
automated tendering
Financial Income, Total landed cost, Cash flow, Cash-to-cycle time, Revenues, Revenue per employee, Return on
Perspectives capital employed, Return on investment, Return on assets
 What latest? in supply chain performance measures…

SAP has commissioned this study with management consultancy Pittiglio Rabin Todd & McGrath (PRTM) and The
Performance Measurement Group (PMG), a subsidiary of PRTM.
FINANCIAL PERSPECTIVE
Goals Measures
Profit Margins Profit margin by Supply chain partners
Cash Flow
Revenue Growth
Cash to cash cycle
Customer Growth and profitability Financial
Return on assets Return on SC assets
Benefits
CUSTOMER PERSPECTIVE
Goals Measures
Customer view of Product No. of customer contact points
Customer Of timeliness
Of flexibility
Relative Customer order response time
Customer perception of flexible response

Benefits Customer value Customer value ratio

INNOVATION AND LEARNING PERSPECTIVE

Goals Measures
Product Innovation Product Finalization point
Partnership Mgmt. Product category commitment ratio
Shared data set/total data set
Information Flows Performance trajectories of Competing
INTERNAL BUSINESS PERSPECTIVE Threats and Subsitutes technologies
Goals Measures
Waste Reduction SC cost of Ownership
Time Compression SC cycle efficiency
Flexible Response No. of Choices / Av response time

Unit cost reduction

% of SC target costs Achieved SCM
Improvements
SCM Goals
Purchasing and Strategic Sourcing
 Focus
Sourcing decisions and purchasing activities serve to link a company with
its upstream supply chain partners
u Sourcing decisions –
High level, often strategic decisions regarding which products or services
will be provided internally and which will be provided by external supply-
chain partners
u Purchasing –
The activities associated with identifying needs, locating and selecting
suppliers, negotiating terms, and following up to ensure supplier
performance
 The primary goals of purchasing are:
1. Ensure uninterrupted flows of raw materials at the lowest total
cost,
2. Improve quality of the finished goods produced, and
3. Optimize customer satisfaction.


 Purchasing contributes to these objectives by:

1. Actively seeking better materials and reliable suppliers,
2. Work closely with strategic suppliers to improve quality materials,
and
3. Involving suppliers and purchasing personnel in new product
design and development efforts.
The Role of Purchasing in an Organization
 What is Purchasing?
Perspectives on Purchasing
1 As a function - To perform specialised tasks

2 As a process - To achieve an output

3 As a link in the supply chain - With production and warehousing

4 As a relationship - Internal and external focus

5 As a discipline - Knowledge based

6 As a profession - Demonstrable skills and knowledge

 What is Purchasing?
Definitions
The Classic Definition
To buy materials of the right quality , in the right quantity
from the right source delivered to the right place at the
right time at the right price.
To be Contrasted with
TheModern Definition
process undertaken by the organisational unit that, either as a
function or as part of an integrated supply chain, is responsible for
procuring or assisting users to procure in the most efficient manner the
required supplies at the right time, quality, quantity and price and
the management of suppliers, thereby contributing to the competitive
advantage of the enterprise and the achievement of its corporate
strategy.
 What is Purchasing?
The Evolution of Purchasing
The Reck and Long Model
Stage Characteristics
Concerned with the five rights that concentrate
1. Product centered exclusively upon the purchasing of tangible products
and outcome
Moves beyonddimensions.
a concern with outcomes and begins to
2. Process centered measure the process through which the outcome is
delivered.
3. Relational Process and relationally focused, expanded to include
purchaser-supplier relationships.
4. Performance Focused on best product management methods.
centered Employs an integrated methodology to manage
relationships, processes and outcomes.
 What is Purchasing?
Purchasing and Change
Information Chasing Production &
Globalisation Impact Technology Management
Impact Philosophies Impact

•Transgression of •Slicker transactions •Competitive advantage

national boundaries • •
• •Quality of management •Outsourcing
•Advantage of cost data •
• • •Supply chain
•Specialised labour skills •Strategic link with management
• suppliers
•Emerging economies •
•Paperless environment
 What is Purchasing?
Purchasing in the Future
Increase in strategic importance
Automated tactical activities
Master contracts
Electronic purchasing
Strategic purchasing competency centres
Shared supply chain resources
Profit contribution
Changed emphasis on individual skills
 What is Purchasing?
Must Accommodate World-class Purchasing
TQM
JIT
Total cycle time reduction
Long-range planning
Supplier relationship engineering
Strategic cost management
Performance accountability
Professional flexibility and development
Service excellence
Corporate social responsibility
 What is Purchasing?
The Status of Purchasing and Supply Management
Status Influenced by:

Leverage •Power of purchasing to enhance profitability

Focus •Is it transactional, commercial or strategic?

Professionalism •Perception of influencers

•Academic activity
•Depth of knowledge and skill
•Future focus
 Purchasing-
 Obtaining merchandise, capital equipment; raw materials,
services, or maintenance, repair, and operating (MRO) supplies
in exchange for money or its equivalent.

 Merchant Buyers-
 wholesalers and retailers who purchase for resale.

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

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

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

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

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

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

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

Standardization
Standardization -- determining
determining possibilities
possibilities to
to achieve
achieve standardization
standardization in
in order
order to
to reduce
reduce product
product and
and
supplier
supplier variety;
variety; balancing
balancing savings
savings and
and risks.
risks.
Strategic Sourcing

Strategic sourcing methodology:
u Step 1: Project Planning and Kickoff, which suggests that a formal start to the strategic sourcing process is
warranted.


u Step 2: Profile Spend, to develop an accurate understanding of requirements.

n Identify or reevaluate needs
n Define and evaluate user requirements
n Decide whether to make or buy
u Step 3: Assess Supply Market
n very critical step in the strategic sourcing process
n all potential sources of supply are identified
n a thorough assessment of a supply market
n identify all possible suppliers
n prescreen all possible sources
u Step 4: Develop Sourcing Strategy
n develop a sourcing strategy
n establish whether a supplier has the capabilities
n RFP provides specific information as to what the buying company
u Step 5: Execute Sourcing Strategy
n begins with an evaluation of the suppliers that remain following the RFI and RFP processes and
E - Sourcing
 Manual Purchasing- Older system, prone to duplication
of effort and error

Step 1-Material Requisition/Purchase Requisition- stating



product, quantity, and delivery due date are clearly.

Step 2- The Request for Quotation (RFQ)- Buyer identifies



suppliers & issues a request for quotation (RFQ).

Step 3- The Purchase Order (PO)- The purchase order is the

buyer’s offer & becomes a binding contract when accepted by
supplier.

The Purchasing Process

 Electronic Procurement (e-Procurement)
u
Step 1- Material user inputs a materials requisition- relevant

information such as quantity and date needed.

Step 2- Materials requisition submitted to buyer- at purchasing



department (hardcopy or electronically).

Step 3- Buyer assigns qualified suppliers to bid- Product



description, closing date, & conditions are given.

 Step 4- Buyer reviews closed bids & selects a supplier

The e-Purchasing Process
Advantages for the e-Procurement System


n Time savings
n Cost savings
n Accuracy
n Real time
n Mobility
n Trackability
n Management
n Benefits to the suppliers
Six stage purchasing developmental
model :
 Six stage purchasing developmental model:


1. ‘Transaction orientation; serve the factory’;

2. ‘Commercial orientation; lowest unit price’;

3. ‘Coordinated purchasing’

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

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

6. ‘Value chain integration’

 CENTRE-LED
Effectiveness/
Cumulative DECENTREALIZED
savings CROSS-FUNCTIONAL FOCUS

FUNCTIONAL FOCUS Retailer

Consu automot s
mer ive
telecom electron
Food and mu- ics Comput
Financia beverage nication er/
l s PC’s
Public Services Pharm
utilities a
Transactional Commercial Purchasing Internal External Value chain time
orientation orientation co-ordination integration Integration integration

focus ‘serve the ‘Reduce cost’ ‘Savings through ‘Total Cost of ‘Supply chain ‘Total Customer
factory’ synergy’ ownership’ optimization’ Satisfaction’
•
Activities Clerical •Commercial
Commercial •Commercial
Commercial •Cross
Cross functional •Outsourcing
Outsourcing •Customer
Customer driven activities
•Order
Order processing•Tendering
Tendering •Contracting
Contracting buying teams •EDI/Internet
EDI/Internet •Contact
Contact manufacturing
•Negotiating •Global
Global sourcing •Systems integration
•E-Commerce •Supplier
Supplier development
•Apr
Apr supplier lists •Vendor
Vendor rating etc.•Cost
Cost models •Global
Global supplier network
Dilemmas •Initial
Initial purchasing
•Supplier
Supplier base •Contract
Contract Communication •Social
•Communication Social •Internationalization
Internationalization
•Control
Control of management management and information •resistance •HRM
HRM
purchasing •Ethics
Ethics infrastructure
•expenditure
 Supplier Development Through Procurement

The Marketing Viewpoint

Marketing Initiative
Supplier Purchaser
Purchasing Response

The Procurement Viewpoint

Procurement Initiative
Supplier Purchaser
Marketing Response
Procurement Process
Procurement Process
The Purchasing Process

Needs identification

Description
No
Is there a preferred supplier?
Supplier identification Yes
and evaluation
Supplier selection

Purchase order preparation

Follow up and expediting

Order
Receipt and inspection cycle

Invoice clearance & payments

Records maintenance
 The Purchasing Process
Needs Identification

Needs identification
Purchase requisition –
An internal document completed by a user
that informs purchasing of a specific need


Reorder point system –
A method used to initiate the purchase of
routine items . Typically , each item has a
predetermined order point and order
quantity
The Purchasing Process
Description

The communication of a user’s needs to

Description
potential suppliers in the most efficient and
accurate way possible

Description by market grade / industry standard

Description by brand
Description by specification
Description by performance characteristics
Description by prototypes or samples
The Purchasing Process
Supplier Identification and Evaluation - I

Supplier identification The amount of effort increases as:

and evaluation
The complexity of the
product
or service increases
The amount of money that
is
committed increases
The length of the
proposed
buyer - supplier
relationship
The Purchasing Process
Supplier Identification and Evaluation - II

Criteria for supplier

Supplier identification assessment:
and evaluation Process and design
capabilities
Management capability
Financial condition and cost
structures
Planning and control systems
Environmental regulation
compliance
Longer - term relationship
potential
Supplier Portfolio Screening Process
The Purchasing Process
Supplier Selection - I

Preferred supplier
Competitive bidding
Supplier selection
Negotiation
The Purchasing Process
Supplier Selection - II

Preferred supplier
A supplier that has demonstrated its
Supplier selection performance capabilities through previous
purchase contracts and therefore receives
preference during the supplier selection
process

The Purchasing Process
Supplier Selection - III

Competitive bidding is most

effective when:
Supplier selection The buying firm can provide qualified suppliers
with clear descriptions of the items or services
Volume is high enough to justify the cost and
effort
The firm does not have a preferred supplier
The Purchasing Process
Supplier Selection - IV

Negotiation is most effective when:

The item is new or technically complex
Supplier selection with only vague specifications
The purchase requires agreement about a
wide range of performance factors
The supplier must participate in the
development effort
The supplier cannot determine risks
and costs without input from the buyer
The Purchasing Process
The Order Cycle

Purchase order preparation

74 % of firms currently have electronic
data interchange ( EDI ) with some part of
Purchase order preparation
their supply base
Follow-up and expediting
Follow-up and expediting
Receipt and inspection
Receipt and inspection Invoice clearance and payment
Invoice clearing and payment Records maintenance
Records maintenance