Daily PlanDay 1

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Daily Plan-Day 1
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Module Overview

• Supply Chain Processes
• Aligning SC Design with Business Strategies
• Supplier Selection -Supplier Development
• SCM Organization Models

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Supply Chain Processes
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Supply Chain Operations Reference Model - SCOR
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(No Transcript)
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Systems and ProcessesWhat systems and processes
should be in place to support Supplier
Management?
Supply Chain Strategy Development Supply Chain
Design and Program Management
Strategic
Strategic Sourcing Supplier Relationship
Management Supply Chain Capacity Planning /
Logistics Planning Replenishment
Planning Operations (Purchasing Transactions,
Contract Administration, Accounts Payable)
Operational
Performance Management, Quality Management Master
Data Management, Supply Risk Management, Continuou
s Improvement, Contract Management
Supporting

• Integrated Communication Architecture
• Integrated Transactional Architecture
• Integrated Forecasting and Planning Systems
• Integrated Intelligence Portals

Systems
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Business Strategy
SC Management Processes (Strategic)
SCS
SC Management Processes (operational)
SCD
SS
SRM
DM
Orders
APln
MRP
RP
PSR
Signal
CA
PT
AP
Core SC Processes
PM
CM
MDM
CI
RM
EN
QM
SC Supporting Processes
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Strategic

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

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Operational

• Strategic Sourcing (SS) the application of
  strategic actions to the supply network in
  support of the business goals. This process
  considers the market assessment of suppliers,
  internal user requirements forecasts, and
  planning execution of strategies. Example SS
  includes the gathering of future supply chain
  needs/requirements, the evaluation, selection,
  negotiation, and integration of new suppliers.
• Supplier Relationship Management (SRM) SRM
  aligns, provides structures, and manages the
  supplier relationships. As an example SRM
  provides strategic plans for suppliers and an
  escalation model for non resolved issues.

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Operational (Planning)

• Supply Chain Capacity (aggregate) Planning (APln)
  - this process consists of monitoring and
  totaling the resource demands from all the
  individual demands (jobs notifications) and
  matching this total against all the available
  sources of supply, internal or external, so as to
  balance demands with supply for both the short-
  (firm notifications) and long-term (forecast).
• Logistics (transportation) Planning, Scheduling
  and Coordination (LPSC) - this process consists
  of developing the plans for and the execution of
  the logistics and transportation resources and
  capabilities needed by internal customers.
• Replenishment Planning (RP) the process
  consists of developing, deploying, maintaining
  and directing the parameters and resources which
  control and regulate the replenishment process
  and system.

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Operational (Planning)

• Contract Administration (CA) a set of
  activities within an organization that supports
  administration of the terms of the contract and
  helps to manage changes in regards to terms such
  as prices, delivery, etc. It includes
  Interpreting the Terms of the Agreement,
  Monitoring Performance to Agreement, Identifying
  Improvements to the agreement, managing the
  changes to the Agreement, and initiating the
  Closing of the agreement. CA would also audit
  invoicing as per terms and conditions.
• Purchasing Transactions (PT) - involves all
  transaction elements associated establishing low
  risk, low complexity commercial agreements for
  the supply of goods and services. The scope of
  activities include soliciting pricing, managing
  purchase orders, releases form contract, and
  management of pricing.
• Accounts Payable (AP) facilitates the timely
  and accurate payment of suppliers in accordance
  with the purchase agreement with that supplier.

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Supporting

• Supply Risk Management (RM) assessment,
  evaluation and mitigation of the supply network
  disruption risk.
• Performance Management (PM) aligns, structures
  and manages the performance measurement and
  management system.
• Contract Management (CM) involves all
  activities associated with the creation of
  agreements for the supply of material and
  services between a company and suppliers.
• Master Data Management (MDM) a set of activities
  within an organization that create, modify,
  maintain and control Master Data (pricing
  structures, approved suppliers, controls,
  approved material, approved buying channels,
  usage data) for the Supply Chain processes
  according to standard naming conventions /
  required elements.

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Supporting

• Quality Management (QM) involves the testing
  and examination of materials for specification
  compliance as well as performance. This also
  includes a system for establishing traceability
  of material quality and supplier testing as well
  as the management of certification documentation
  and change.
• Continuous Improvement (CI) provides a
  structured and integrated process to identify and
  capture continuous improvement opportunities
  throughout the entire supply chain network
  including internal customers, tier-1 and tier-2
  suppliers (relationships), and cross-functional
  teams.
• Enablers defined as an infrastructure element
  technology, leadership or organization, that
  enables process or performance. Enabler maturity
  reflects the increasing capability offered by the
  enabler and the breadth of its offering (inter
  functional, cross functional, cross company).

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Aligning SC Design with Business Strategies
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Business Model Aligned with Change Conditions
Dynamic
Mass Customization
Invention
Product Change
Mass Production
Continuous Improvement
Stable
Stable
Dynamic
Process Change
Source Lufttman Ch. 4
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Business Model Aligned with Change Conditions
Invention
Mass Customization
Dynamic
Creation through intellect and skill High
differentiation Decentralized Broad Jobs, few
rules Small firms
Customers demand driven Flexibility Responsiveness
Dynamic Networks
Product Change
Continuous Improvement
Mass Production
Standardized, Centralize Routines Work Rules and
Procedure Driven Economies of Scale Cost
advantage Mechanistic Organization
Advantages in Process Q, C and S Process
Improvement Customer Satisfaction Through
PI Process Innovation Teams Horizontal Org
Stable
Stable
Dynamic
Process Change
Source Lufttman Ch. 4
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Business Model Aligned with Change Conditions
Dynamic
Mass Customization
Invention
Product Change
Mass Production
Continuous Improvement
Stable
Stable
Dynamic
Process Change
Source Lufttman Ch. 4
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IT Aligned with Business Model And Change
Conditions
Relationships
Dynamic
Mass Customization
Invention
Augment
Product Change
Automate
Mass Production
Continuous Improvement
Stable
Tasks
Stable
Dynamic
Process Change
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Supplier Selection -Supplier DevelopmentSupply
Base Optimization
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Selection Process
Step 1 Recognize that a need exists to evaluate
and select a supplier Step 2 Identify key
purchasing/sourcing requirements Step 3
Determine appropriate sourcing strategy Step 4
Identify potential supply sources Step 5
Limit suppliers in selection pool Step 6
Determine method of supplier evaluation Step 7
Make supplier selection decision Step 8
Negotiate and execute agreement
But its not that simple
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Commodity Portfolio
Example Category-Metals
Instructions Select a commodity category from
your company and locate several sub-categories of
it on the portfolio map below.
Sub- Categories- Titanium Stainless
Steel-tubes Stainless Steel- sheets Carbon Steel
Low Volume Purchases
High Volume Purchases

BOTTLENECK SUPPLIES
CRITICAL STRATEGIC SUPPLIES
High Opportunity Higher Risk Commodities
Stainless Steel-tubes
Titanium

• Substitution difficult
• Monopolistic markets
• High entry barriers
• Critical geographic/ political situation

• Strategically important
• Substitution/alternate supplier difficult
• Major importance for purchasing overall

LEVERAGE SUPPLIES
NON-CRITICAL SUPPLIES
Carbon Steel
Stainless Steel -sheets
Lower Opportunity Lower Risk Commodities

• Availability adequate
• Alternative suppliers
• Standard product specifications
• Substitution possible

• Availability adequate
• Standard specifications of goods/services
• Substitution possible

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Supply Base Portfolio Analysis
High
Strategic
Leverage
Value to Buyer
Acquisition
Multiple
Low
Few
Many
Number of Capable Suppliers
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Categorizing Suppliers
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Identify Candidates for Development
Instructions Select a 3 or 4 suppliers from your
company for a sub category, select a performance
measure (Quality, On time delivery, Cost, etc.)
and plot them on the portfolio map below.
SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED
SUPPLY BASE
TOP TEN LIST
High
Supplier Performance Defects/ Total Cost/ Late
Delivery/ Cycle Time/ Service/ Safety/ Environment
High Performance
Eliminate
Minimally acceptable performance driven by
customer requirements
Eliminate
Low
Sub Category
Sub Category
Sub Category
Titanium
Carbon Steel
Stainless Steel-tubes
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Supply Base Optimization

• Supply base optimization or rationalization is
  the process of determining the right mix and
  number of suppliers to maintain
• A continuous process that strives for the ideal
  number and mix of capable suppliers
• Optimization does not only mean adding or
  reducing suppliers. It can mean switching
  suppliers, also
• Optimization does not mean supply base reduction,
  although historically North American firms have
  too many tier one suppliers
• As companies continue to rely on fewer total
  suppliers, the selection process takes on even
  greater importance

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Supply Base Optimization

• Why is optimization critical?
• The costs associated with multiple suppliers for
  each purchased good or service usually outweigh
  any perceived reduction in supply risk
• Optimization is a critical prerequisite to the
  development of a world-class supply base
• Some leading-edge activities and strategies are
  simply not feasible with too large a supply
  base--
• Supplier integration
• Collaborative agreements
• Supplier development
• Joint total quality/cost reduction efforts

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Supply Base Optimization

• Adjustment activity over the last five years --
• 74 of firms surveyed decreased their total
  number of tier one suppliers
• Average reduction was in the 21-30 range
• 7 said the size of their supply base remained
  the same
• 19 increased the size of their supply base
• Average increase was 10 (Trent and Monczka
  1998)

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Supply Base Optimization

• Adjustment activity expected over the next
  several years --
• 84 of firms surveyed expect to decrease their
  total number of tier one suppliers
• Average reduction expected to be in the 21-30
  range
• 7 expect the size of their supply base to remain
  the same
• 9 expect to increase the size of their supply
  base
• Average increase expected to be less than 10
  (Trent and Monczka 1999)

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Supply Base Optimization

• Expected benefits of an optimized supply base --
• Opportunity to work with world-class suppliers,
  which leads to improved value-chain performance
• Lower transactions costs--many suppliers creates
  overhead
• Leverage leading to lower purchase costs
• Ability to pursue value-added activities
• Reduced supply base risk (how can that be?)

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Supply Base Optimization

• Formal Approaches to Supply Base Optimization
• Requires an analysis to identify the 20 of
  suppliers receiving the majority of purchase
  dollars
• A firm can also identify the minority of
  suppliers causing the majority of problems
• This approach often assumes the best suppliers
  receive the majority of purchase dollars--is this
  really the case?

20/80 rule
These approaches adapted from Monczka, Trent, and
Handfield, Purchasing and Supply Chain
Management, and K.R. Bhote, Strategic Supply
Management
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Supply Base Optimization

• Formal Approaches to Supply Base Optimization
• All suppliers, regardless of history, have a
  chance to remain in the supply base
• Suppliers have a specified period to meet
  stringent performance requirements in cost,
  quality, delivery, etc.
• Suppliers who fall short may soon become
  ex-suppliers
• Suppliers may perceive this approach as heavy
  handed

Improve or Else Approach
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Supply Base Optimization

• Formal Approaches to Supply Base Optimization
• Requires careful evaluation of the performance
  record of each supplier to place suppliers into
  one of three categories
• First category (and likely the largest) includes
  those suppliers incapable of meeting current or
  future performance requirements
• Second category includes suppliers falling short
  but demonstrating performance potential
• Third category includes near-perfect suppliers
  requiring no improvement assistance

Triage Approach
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Supply Base Optimization

• Formal Approaches to Supply Base Optimization
• Requires suppliers to pass a successive series of
  cuts to remain in the supply base
• Suppliers must pass a series of hurdles similar
  to climbing a staircase
• Purchaser defines the hurdles--possible areas
  include quality, delivery, technical capability,
  willingness to share information, supplier size

Competency Staircase Approach
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Supply Base Optimization

• Supply base optimization critical success factors
• Time
• Cross-functional teams
• A supplier measurement system and data warehouse
• A strategy development process that considers
  optimization goals
• Overall supply base vision with management support

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Buyer-Supplier Relationships

• Developing closer relationships with suppliers is
  often an objective of the supplier evaluation and
  selection process
• The traditional supply model featuring multiple
  suppliers, short-term contracts, and mutual
  mistrust can create undesirable consequences--
• Supplier profit maximization
• No incentive to invest in assets to support the
  relationship
• Limited joint innovation and improvement efforts
• Higher transaction and maintenance costs
• Limited opportunity to pursue value-creating
  activities with suppliers

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Buyer-Supplier Relationships
Spectrum of Buyer-Supplier Relationships
Collaborative
Adversarial
Cooperative
Antagonistic

• Parties work actively against the needs of the
  other
• Neither party takes responsibility for anything
  that happens in the relationship

• Parties are engaged in competitive struggle
• Parties attempt to capture the maximum value for
  their side

• Parties realize the benefit of working together
• Closer relations are a result of mutual goals
• Supplier input and involvement begins to increase

• Congruence of goals exists
• Parties work together to satisfy the needs of
  each other and create new value
• Parties search for creative solutions jointly

Lose/Lose
Win/Lose
Win/Win
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Financial Ratio Analysis
Supplier Financial Analysis

• For new suppliers
• For purchase requirements involving significant
  dollars
• For critical items
• When pursuing longer-term agreements
• To manage business risk
• To eliminate marginal suppliers early in the
  evaluation process

Do it when?
Why do it?
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Financial Ratio Analysis
Sources of Supplier Financial Information
Company-published annual reports
Company-supplied 10-K and 10-Q reports
Dun and Bradstreet reports
TRW credit reports
Trade and business journals
Supplier provided data
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Financial Ratio Analysis

• How capable is the supplier of meeting short-term
  cash needs?
• Current ratio
• Quick ratio

Liquidity Ratios

• Is the supplier over-leveraged and capable of
  paying long-term obligations?
• Debt to assets
• Time interest earned
• Fixed charge coverage

Leverage Ratios

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

Activity Ratios

• How profitable is the supplier? What rate of
  return is the supplier earning?
• Gross and net profit margin
• Return on equity
• Return on investment

Profitability Ratios
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Supplier Development Activities
Specific techniques/tools/activities that firms
employ in supplier development vary. The
following framework organizes supplier
development
PRODUCT FOCUS PROCESS FOCUS

• Supplier awareness
• Supply base reduction
• Cost savings programs
• Supplier suggestion programs
• New product development information sharing
• Technology sharing
• Part level qualification databases

• Supplier Quality Assurance programs
• Supplier Councils
• Quality audits
• ISO 9000
• Information system developments
• EDI/planning systems

Supply Base Management Activities
Provides for Overall Supply Base Improvement

• Buyer-supplier alignment
• Process mapping
• Quality engineering work teams
• Joint cost savings sharing projects
• Supplier training
• Supplier certification
• Supplier continuous improvement
• Joint improvement efforts

• New product development teams
• Sharing forecasts with suppliers
• Value analysis teams
• Cost savings projects
• Developing full service supplier capabilities
• Co-location

Provides for Specific Buyer/Supplier Improvement
Supplier Development Activities
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SCM Organization Models
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Relationships
Invention
Mass Customization
Dynamic
Creation through intellect and skill High
differentiation Decentralized Broad Jobs, few
rules Small firms
Customers demand driven Flexibility Responsiveness
Dynamic Networks
High Margin
Low Volume
Margin
Product Change
Augment
Automate
Volume
Continuous Improvement
Mass Production
High Volume
Standardized, Centralize Routines Work Rules and
Procedure Driven Economies of Scale Cost
advantage Mechanistic Organization
Advantages in Process Q, C and S Process
Improvement Customer Satisfaction Through
PI Process Innovation Teams Horizontal Org
Low Margin
Stable
Tasks
Stable
Dynamic
Process Change
Source Lufttman Ch. 4
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ChevronTexaco Procurement
Chief Procurement Officer
Administrative Specialist
Gen. Mgr. Supplier Management Integration
Gen. Mgr. Strategic Sourcing and Capital Projects
Gen. Mgr. Procurement Mgmnt Technologies (eProcure
ment)
Business Manager
Gen. Mgr. CTOP
Gen. Mgr. CTNAU
Gen. Mgr. Midstream/Corp. Staffs
Senior Legal Counsel
Vice Pres. Global Downstream
HR Business Partner
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Supply Chain Organizations in Duke Energy
Global Sourcing Logistics
Pres. And COO Duke Energy Business Services
VP Global Sourcing Logistics Chief
Procurement Officer
Manager Strategic Sourcing
Manager Strategic Sourcing
Note Duke Energy has a matrixed, decentralized
organization that works together through the
Enterprise Procurement Council. Ultimately,
everyone reports up to the Company president.
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General Manager F/H Supply Chain
Judy Neal
Judy Neal
Admv Spc
Admv Spc
Belews
Creek/Dan River
Jerry Moore
Manager
Inventory Support
Contract Administration/Hydro
Merchant Operations
Inventory Support
Contract Administration/Hydro

Harold
Dellinger
Jack Shelton
Material Handling
On-Site Procurement
California C.T.Facilities
6 Positions
2 Positions
8CC 4SC
20 22
Marshall/Buck
Marshall/Buck
Jimmy Brown

Inventory Analysis
Tools
Hydro
Contract
Adm
Manager

Data Base
6 positions
Equip
Region

• Supply Chain Services

Management
2 positions
3 positions
provided at site

Inventory Process

Stock Reorders

• Material Handling Storage

(Carolinas)
Material Handling
On-Site Procurement
3
Positions
6 Positions
2 Positions

• Invoice Processing

• Inventory Management

Allen /
Riverbend
/ Lark
Kay
Coursey
Manager

• Tools Equipment

• Contract Administration

• Procurement

Material Handling
On-Site Procurement
8 Positions
2 Positions
Cliffside/Lee
Cliffside / Lee
Randy Bennett
Manager
Material Handling
On-Site Procurement
7
6 Positions
2 Positions
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Duke Energy Field ServicesSupply Chain
Organization
Director Materials Management
Regional Materials Manager
Centralized Fleet Coordinator
Regional Materials Manager
Regional Materials Manager
Regional Materials Manager
Strategic Sourcing Manager
Regional Materials Manager
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Shell Oil

• Decentralised worldwide procurement organisation
  about 2100 professional procurement staff across
  the globe. 
• Shell's total 3rd party spend is about 30
  Billion per year across all the Businesses in
  Shell
• One senior executive charged with looking
  after Procurement for the Royal Dutch Shell Group
  of Companies (Group Director of Contracting
  Procurement). 
• The Group Director of Contracting
  Procurement reports to Vice Chairman of our
  Committee of Managing Directors (CMD). 
• Heads of Procurement from Business report dotted
  line to Group Director
• Heads report directly to the Business Executive
  Committee and usually the CFO of that Business. 
• The CMD is headed by the Chairman and the CMD
  operates much like an office of the CEO. 
• In turn, the CMD is accountable to the
  Supervisory Board of Shell

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Organization Principle

• Any organization requires both strong parts and a
  strong center. The term Decentralization is
  actually misleadingthough far too common by now
  to be discarded. Federal decentralization
  requires strong guidance from the center through
  the setting of clear, meaningful and high
  objectives for the whole. The objectives must
  demand both a high degree of business performance
  and a high standard of conduct throughout the
  enterprise.1
• 1 Drucker, Peter, The Practice of Management,
  1956, p. 214.

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Conceptualized Supply Chain Organization
CEO
This is the ideal structure to enable this vision
of a decentralized business process with a strong
centralized vision, which captures elements of
best-in-class organizational designs identified
in the research.
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Team ExercisePick a supply chain for your group
and..1. Describe the organization in terms of
centralized v decentralized.2. Access the
maturity of your SCD processes. Build a one year
plan to improve it.