Summary of Managing the Global Supply Chain 4th edition

Term 1.2 2015-2016Based on the 2015 book and slides by Damien Power(Interpretation and explanation may be hairy at times)

Chapter 1The supply chain is a concept of closely coordinated, cooperative networks, competing with other networks. It encompasses all organizations and activities associated with the flow and transformation of goods from raw materials through to the end user, as well as the flow of information and money.

Traditionally seen the supply chain consists of material resources and the organization of processors, distributors and users. It also involves supporting enterprises to provide transport, communications and other specialized functions. Together, they become a single coordinated entity that transcends organizational boundaries. They however, were difficult to manage. The only solution was vertical integration; the direct ownership of supplier or customer organizations. New communications methods made it possible to reach across the borders of the owned organization, and enabled the supply chain.

Vertical integration is an individual organization in the supply chain integrating (for instance by taking over) its own upstream parts Horizontal integration is integration with other equal parts in the supply chain (for instance by taking over more production facilities)

The underlying framework for the supply chain is the value chain (Porter, 1985). The bottom activities add value to the firm. They are supported by the other, mentioned on top, external inputs. Differences among value chains become sources of competitive advantage. The value chain is embedded into a larger stream of activities; this is called the value system. This includes communication between value chains.

Integration means coordination across functional lines and legal corporate boundaries. Business processes are related to the production of products, services and information.

Bechtel and Jayaram (1997) define five different SCM schools of thought:1. Functional chain awareness, where a chain of functional activities provides a basis for materials flow.2. Linkage/logistics emphasizes the linkages between functional areas and with a focus on logistics.3. Information emphasizes information flow in both directions among chain members.4. Integration of processes across the supply chain towards an objective of customer satisfaction. 5. A future perspective describing a demand-driven seamless comprehensive pipeline emphasizing relations as well as transactions.

The supply chain as a whole deals with the full scope of activities; production, procurement and distribution. In such, it can be seen as a supra-organization, linking all operations of its members. Firms with a strong brand will ultimately direct the development of the chain.

The supply chain is both a network and a system. The network properties involve sequences of connections among organizational units. The system is the interdependence of these organizational units and concepts.

There are five operating processes that describe the supply chain: 1. Demand management – e.g. forecasting, customer service, sales support, etc. 2. Distribution – the link between production and the market, allocation of roles; influences logistics3. Production – processes that add the value to flow.4. Procurement – purchasing that links stages of manufacturing together.5. Returns – reuse and remanufacturing of products and components.

The global supply chain begins with the customer and walks through five successive stages.

See page 33.

There are roughly three parts of the supply chain: 1. Organizations (members – network structure);2. Processes (linkages between members – business structure) and ;3. Activities (deals with the level of linkages/integration – management components).

Chapter 2The functional activities are the building blocks of the supply chain. Because many of these activities are performed through organizations responsible for their own performance, the quest is in how these activities should be organized for optimal performance.

The general flow within the value chain is as follows: Inbound logistics operations outbound logistics sales and marketing service

Network structure Business processes Management issues1. What activities are necessary?2. Who should perform the activities in the SC?3. What are the structural dimensions in the network?4. What types of process links should be established?5. How should the business processes be managed across the supply chain?

A structured and measured set of activities designed to produce a specific output for a particular customer or market.

A collection of activities that takes one or more kinds of input and creates an output that is of value to the customer.

- physical elements- technical elements

- managerial issues- behavioural issues

The process of activities that shift together can enhance speed and reduce costs.

Which can be rearranged to the following sequence in which the customer is involved in the production process (like Dell does).

This approach is known as postponement, and mitigates the risk of demand uncertainty. There are three types of postponement known:1. Manufacturing postponement – the manufacturing doesn’t take place until the customer’s order is received. This reduces inventory, enables to meet customer requirements, extends products in different forms to new markets and achieves economies of scale, but results in time delays, risk of stock-outs and a potential loss of control in production.2. Logistics postponement – manufacturing based on speculation in which finished goods are stocked at a central location. It reduces inventory, but a larger warehouse is needed and it’s inflexible when considering longer distances.3. Full postponement – combines postponement of production and logistics. Manufacturing is done at a central point near the customer, which allows low inventory levels and complete flexibility to meet individual orders. It leads to higher production costs and longer time requirements to meet orders.

The bullwhip effect is the result of a distortion of information about the customer’s final demand. This results in amplified demand forecasting further upstream, towards the purchasers. There are four major causes for the bullwhip effect:1. Demand forecast updating; if customers’ demand increases, the next player in the supply chain doesn’t just replenish, but may also increase safety stock.2. Order batching; in economies of scale, a small increase might mean having to order a whole pallet instead of box, resulting in more erratic ordering.3. Price fluctuations; sales promotions encourage to purchase larger quantities, resulting in an unrealistic reflection of the actual demand.4. Rationing and shortage gaming; in case of shortages, customers might adapt by ordering a whole lot in order to secure their own needs.

Activities take on a specific set of characteristics:- They should be related to each other and the objectives of the supply chain as a system.- They must be manageable as individual units, capable of standing alone or as part of other

organizational units - They must be economically significant; adding value and incurring costs- They must have economic characteristics that allow organizations to specialize in them

Core competencies should create unique and significant value to the final customer, provides access to a wide variety of markets and be hard to imitate.

Components in supply chain management.

Network structureThe network structure involves collaboration between the most important partners in a supply chain, as well as the relationships between these partners. Because you cannot include all partners, you distinguish between tiers of suppliers and customers.

Business processesBusiness processes encompass the activities and flows of information that are connected with conducting materials, products and services through the supply chain and on to customers, such as:

- Order to cash; all activities that are tied in with expediting customers’ orders. The total time elapsed between order placement and order receiving by the customer is referred to as the order cycle time.

- Customer service; a number of services before, during and after the actual sales transaction, like advising, track-and-trace and customer support.

- Time to market; activities connected with the development of new products to be launched on the market. This measures the speed at which a company is able to transform ideas into products.

- Procure to pay; all activities from procurements of goods and services, receiving the invoice and payment to the supplier.

Management issuesThere are roughly two major groups of managerial components:

Physical and technical systems Operational and behavioural systems1. Planning and control systems2. Process structure3. Organizational structure4. Information distribution5. Production flow

1. Management principles2. Power structure3. Incentives

Chapter 3Activities define the scope of an organization, but the relationships of organizations within this network define the supply chain. The key in this network is with inter-organizational connections.

Organizational relationships are embedded within a broader network of interdependent relationships. This is the:1. Industrial network, which provides an overall orientation and the;2. Social network, which describe the structure and behaviour of firms within inter-firm relationships.

Industrial relationships provide an overall perspective on relationships within the supply chain. It treats firms, their actions and resources as a set of linked networks. The network consists of three components and have mutual relationships, being: activities, actors and resources.

-Activities are the commercial, technical and administrative functions of individual firms that we discussed in the previous chapter. In the SC, they become tasks that must be linked together in order to create the supply chain.

- Exchange involves mutual transfer of goods, services and information.- Adaptation involves the processes that adjust things like administration for exchange.

-Actors include organizations and individuals. They hold decision power, but have a form of commitment as well.

- Technical bonds are attached to processes applied by the firms.- Social bonds are established through personal trust.- Administrative bonds result from administrative routines and systems.- Legal bonds form contracts between firms.

-Resources are tangible resources like manpower, equipment, financials, capacity but also intangible resources like knowledge, market image etc.

Social networks consider the power structure in which individual players have different relative strengths as a basis to act and influence actions of other players. They distinguish between formal and informal networks; formal is visible to the outside world, informal is based on trust through social exchange processes.

Networks tend to cluster, in which information may be restricted to small groups of decision makers, which is dangerous as new information is hence restricted. The solution is to loosen the network ties to allow connection to other networks. If key nodes in a clustered network fail, this might harm the whole network. Limit decisions; control the flow of information and separate operations from strategy.

Nature of contractsIn transactions, the principal-agent theory focuses on the optimal contract between principal and agent. They have different goals, however and the agent usually is more risk averse than the principal. There are two main aspects in this theory, namely moral hazard (the lack of effort on the agent’s side) and adverse selection (where the agent claims to have certain skills which cannot be verified when the agent is working).

Transaction cost analysisTCA presents an economic approach for determining the boundaries where activities should be insources and where activities should be outsourced. Transaction costs are the costs of running the economic system;

- Ex ante costs (external); searching and evaluation business partners, drafting and negotiating contracts.

- Ex post costs (internal); enforcing agreements, correcting misalignments and solving disputes.

Contracts can become legal and private. In case of violation of a legal contract, the court settles it. In case of a private contract, is mostly is solved by negotiations.

Market governance is used in high frequent contracts with nonspecific assets. An example of a hybrid governance with safeguards is a long-term contract with a penalty clausule. An example of a hybrid governance without safguards is an informal collaboration relying on mutual trust.

TCA focuses on cost efficiency. This efficiency criterion should maximize the joint transaction value of a given transaction for the involved parties. The balance is between the initial costs of setting up a relationship followed by lower transactional costs.

Trust is often seen as one of the building blocks of a relationship. Trust is founded on an assumption that the other party acts from self-interest by not acting opportunistically. Sako (1992) identified three types of trust:1. Contractual trust (written promises) 2. Competence trust (confidence in a party’s ability and resources) 3. Goodwill trust (reflects the willingness to look beyond formal agreements)

The resource based view is an important framework to understand how competitive advantage within firms is achieved and how that advantage might be sustained in the long run. RBV encompasses the VRIN-framework (valuable, rare, inimitable and non-substitutional).

For an overview of the principal-agent theory, TCA, RBV and network perspective is given in table 3.2 on page 86.

The development of collaborative relationships is described as a three-phase iterative process (Ring van de Ven, 1994). Negotiation, commitment and execution.

Chapter 4The most important benefit of IT in SCM is that it enables visibility throughout the whole supply chain. Hence the most important factor is that it reduces inventory.

Logistics information Logistics information can be grouped according to its functionality:

- Transactional information (formalized, standardized and routine information that records individual logistics activities and functions)

- Management control information (information on performance measurements)- Decision analysis information (information that helps to identify, evaluate and to compare

strategic and tactical logistic alternatives)- Strategic planning information (information for wide-range business planning an decision-

making models). For a pyramid-wise overview of this concept, see page 98.

Information exchangeThe traditional information stream of a SC moves further upstream from each side. This often results in an amplification of demand patterns, known as the bullwhip effect. Today, this information is shared within the supply chain, known as the enabled model which contains EDI.

Information and operationsOptimizing the supply chain means inter-organizational integrated information systems. Complete orders can release advance shipping notices to customers, carriers and automated invoicing systems. This MRP system is now in place, but not always incorporated in the same supply chain.

The concept of a supply chain information systemThe essential role of the information system is to bind the entire chain together as a single integrated unit. It contains both an intra-firm dimension that is largely vertical and an inter-firm dimension that is horizontal, following the transaction flow. To link intra- and inter-firm information systems, interface optimization is needed.

Elements of the information systemThe information system contains three main parts:

- Hardware- Connecting links within the supply chain- Software

Software systemsThe collective term for all computer programs. In the SCM they bring different entitites together, but it has become a critical problem to make them intercompatible.

Enterprise resource planning (ERP)System that manages financial, human and material resource transactions within the boundaries of a single organization. It’s software distinguishes itself into supply chain design, network design, supply chain planning and supply chain execution.

Supply chain information systems can be applied to;- Distribution management (links customer orders)- Warehouse management (stock locations, inventory management, vehicle routing etc)- Order management (manages contact with customer, hub orders from different locations)- Demand planning ( sales planning, forecasting, delivery estimation)- Production planning (schedules when products have to be finished in stages etc)- Procurement (automatization of the purchasing process)- Transportation (track-tracing, dispatch management etc)- Collaboration (relationship management, forecasting, transportation)- Product life cycle management (quality management, environmental information etc)

Read p 122-125 for two examples of information systems concerning RFID.

Chapter 5Distribution refers to the steps taken to move and store a product from one supplier stage to a customer stage in the supply chain and occurs between all trading partners in a supply network.

Distribution is the final stage of supply chain management, as successful distribution makes the final products and services available to the ultimate customers. Distribution is related to the four marketing P’s: price, product, place and promotion. Place refers to:-Sales; refers to the legal, economic, informational and social relationships between distribution partners. This stage is closest to the customer, so interprets customer patterns and communicates this further upstream. -Logistics; refers to the design of the physical distribution, order processing and delivery. Logistics involves all decisions to be taken in order to organize the flow of finished goods and related information.

Changes in the market environment (not in terms of the product, but in terms of customer functionality) might influence the distribution. Think of low costs, responsiveness, or customer service.

The marketing channel describes the path of the goods and services while they move from production to final consumption. Distribution is making the products available to be consumed. It’s the task of distribution to overcome differences related to time, quality, spatial differences and quantity through:

- Break bulk (the adaptation of the produced amount of products and services to the customer desired number of units)

- Spatial convenience (the linkage between the location of the production and the location of consumption)

- Assortment/variety (the adaptation of what kind of products and services are offered to the customers)

- Delivery/waiting time (time period a customer has to wait between ordering and delivery)

Sales management decisions mainly refer to;- Control (number of stages between production and final consumption)- Degree of differentiation (how many channels should serve customers)- Channel selection (universal and selective retailers)- Level of task sharing (centralized distribution versus decentralized distribution)- Geographic decisions (global or local setup)- Relational (horizontal or vertical integration)- Governance structure (who is responsible for the supply chain setup)

The following types of costs are encompassed in total distribution costs:- Transport costs- Inventory costs- Warehousing costs- Service costs

To measure the potential reduction in costs, a simple formula can be used that is the effect of pooling.

Retailing is a set of functions that adds value to products and services that are sold to end users, while retailing as a specific institution refers to the execution of specific retail functions. This definition leads to three core retailing processes:

- Marketing; all activities that provide a customized set of products and services as demanded by customers.

- Logistics; all activities that help to transfer the set of products and services to the market- Support; all activities that facilitate the purchase

Since the emerging e-commerce, a lot of changes have occurred. Normally distribution centers had to deal with pallets or case unit loads, but now often deal with individual product orders in a wide variety of items. The difficulty lies in the last-mile problem, of which different approaches might be taken. For an overview, see figure 5.5 on page 147. The following pictures gives an image as well.

Direct shipping and intransit merge

Carrier delivery

Distributor storage with Last mile delivery

Distributor storage with customer pickup

E-commerce has opened up international markets, which leads to distribution challenges. Pichard (1983) suggested four basic models of product movement, which can be seen in figure 5.6 on page 150. The four stages are:

- The classical system; exporter to DC which distributed to customers- The transit system; exporter to a transshipment point, which distribute to customers- The direct system; exporter to customers- The multicountry DC system; exporter to regional distribution center, which served different

customers in multiple regions or countries (EU, USA FTA)

Collaboration may be needed to offer the required service output levels, meeting customer needs. - Customer-oriented supply chain is a direct retail marketing and delivery system- Trade-related supply chain is a simple large-order handling supply chain

Collaboration becomes important for production and inventory planning.

The most prominent efforts in coordination are currently in the grocery industry, which lead to the Efficient Consumer Response (ECR). Two outcomes are VMI and collaborative planning forecasting and replenishment (CPFR).

- ECR; how partners in the supply chain can best synchronize the flow of products through the distribution pipeline from point of manufacture to the point of final sale. It builds up strategic partnerships in the distribution channel. It has reduces replenishment cycles by cross-docking, sort-and-shipping etc.

- VMI; continuous replenishment where the supplier is responsible for the stocks. - CBFR; eliminates all deficiencies that have been presented in other collaboration forms. For

an overview, see figure 5.7 on p. 156.

Chapter 8Traditionally seen, purchasing was achieving the cheapest price and ensuring a sufficient flow of materials for production. The new perspective, however, sees the processes and links within the supply chain. Purchasing involves relationships, utilizing suppliers’ resources, supplier development, cost management and logistics for connecting and processing.

There is divergence in computerized purchasing applications. One approach assumes a pre-existing relationship with major suppliers, emphasizing coordination of operations to ensure that products are delivered as needed. The other assumes procurement of standard items, open markets with an emphasis on search and selection, involving B2B markets.

There are three decision areas in the new strategic procurement context:- Make-or-buy decisions (whether to insource or to outsource)- Supply-base structure (number of suppliers, multi, dual or single sourcing)- Customer-supplier relationships (cost rationalization versus supplier development and

utilization)

The supplier-emphasis has gained increasing emphasis because of several factors;1. Increased outsourcing (60-80% in automotive and even more in fashion)2. Global sourcing3. JIT purchasing (high degree of mutual trust and openness, anticipable demands) 4. Green supply management5. Information technology (e-procurement through RFID, automatic replenishment)

RFQ, request for quotation (actual total costs)

There are four purchasing approaches;1. Private purchase; the purchasing department mainly adopts catalogues managed by their own e-procurement portals2. Supplier based; the purchasing department relies on their suppliers’ initiatives and goods are bought through electronic catalogues developed and managed by suppliers3. Specific based; uses vertical marketplaces to buy materials specific to the industry they belong to4. Source selection; the buyers focus on the sourcing process and the use of horizontal marketplaces to run reverse auctions or virtual exchanges

The drawback of online reverse auctions is that is only sees the unit savings, not considering the costs of switching to and from another supplier. More opportunism and suspicion may occur as well.

There is no one type of relationship that fits all business transactions. Because of the importance of relationships, firms can one have a close relationship with a limited number of supplier relationships. There are two patterns of contractual relationships;1. Arm’s length; single specific, discrete economic transaction. Changing trading partners is easy.2. Obligational; embedded in social relationships between trading partners and based on trust.

Cox (1996) proposes a typology of supplier relationships:

1. Adversarial relationships focus on price comparisons between different suppliers, keeping relationships out of the door.2. Preferred suppliers can be considered complementary to the core competencies of the buying firm. The products have relatively low strategic value for the buying firm. Contract period is normally longer.3. Single sourcing means that the buyer is supplied by a single source for a specified period of time. It can be distinguished in multiple sourcing and parallel sourcing.

Single sourcing Multiple sourcingAdvantages Scale economies

Better qualityBetter communicationEtcEtc

Wide sources of knowledge and expertisePurchaser can drive price downPurchaser can switch sourcesEtcEtc

Disadvantages Vulnerable to disruptionSupplier affected by volume fluctuationsSupplier is in power to drive prices

Difficult to encourage commitmentLess easy to develop SQADifficult to obtain economies of scale

4. Network sourcing means cross exchanges in suppliers and staff with different tiers of suppliers. 5. Strategic alliances are voluntary arrangements between firms involving exchange, sharing or co-development of products, services and technology.

Portfolio management is to support resource allocated decisions. Is has several advantages and several disadvantages;Advantages:

- Provides systematic analysis of the relationships or projects- Relative strengths and weaknesses of the relationships of projects are revealed- Consensus among different functions is created- Selection criteria are evaluated with respect to business level performances- Clear gaps and future development opportunities are highlighted

Disadvantages:- Orthogonal issues seem to be an inherent challenge- Interdependencies among relationships are not so apparent, hence difficult to assess- A good understanding of the purchasing situation is needed, a task difficult for non-

purchasers- Identification of measurement indicators is difficult

Three portfolio models will be elaborated;- Olsen and Ellram- Moller, Johansen and Boer- Bensaou

Olsen and Ellram have based their model on the Kraljic matrix:

Moller et al bases their model on knowledge contribution:See p 227

Bensaou base their model on specific investments made on the buyer and on the suppliers’ side.

For more detailed strategic information, see pages 223 – 230

Critique on portfolio models arise from the following issues:- Dimension selection- Suppliers’ side is often disregarded- The subjective and equal weighting of factors on the two dimensions- The simplicity on the recommendations based on just two dimensions-

Chapter 9Service industries are recognized as increasingly important within the global economy. A large part of the service supply chain management industry is transportation and logistics. The service design problem is to develop a system that enables customer’s demand to be met in an effective way.

The main issue with service systems is the variability from the customer perspective, which can result in amplifying behaviour and quality erosion. There are five types of variability which requires different responses;

- Arrival variability- Request variability- Capability variability- Effort variability- Subjective preference variability

Since the early 1990’s, the 3PL emerged. This includes value adding services like final assembly, packaging, quality control and information services. They include multiple logistical activities that are integrated or managed together and provide solutions to logistics or supply chain problems.

The four stages of 3PL relationships are;- Market transactions; no specific assets or integrations between parties. The transactions

usually involve single or continuing services. Price is a strong element here.- Customized logistics solutions; usually included transport and warehousing. Shipper

maintains management and control internally, outsourcing operational activities. - Joint logistics solution; integration of operations of both parties, with interfaces between

information systems and inter-organizational teams. Cooperation is based on mutual trust.

- In house logistics solutions; broad range of management and logistical services, which does not only cover operations, but management and consultancy as well. This is often casted in the form of a joint venture.

Berglund (1999) identified three waves of entrants into the magical world of the 3PL:1. Asset-based logistics providers (offered 3PL by means of operational assets, like trucks and ships)2. Network logistics providers (parcel companies to deliver faster and more reliable, track n trace)3. Skill-based logistics providers (typically do now own assets, but focus on consultancy, IT and financial services)

3PL has benefits, disadvantages and issues:Advantages Disadvantages Issues in setting up-conversion of fixed costs to variable costs-economies of scale and scope-creating a leaner and more flexible organization-faster access to new markets and distribution channels-reconfiguration of European logistics systems

-loss of control over the flow of products and materials-the 3PL might go out of business-lack of hard cost data may prevent a thorough evaluation-conflicting objectives can create resistance-incompatibility with data systems

-establishing objectives-evaluating and selecting a 3PL-making a contract between partners-implementing the partnership-making continuous improvements-renegotiating the contract

Since the later 90s, increasing mergers and acquisitions have led to a few dominant players. Through this wave of M&A, the following objectives were in reach;

- Wider geographic coverage and control of major traffic flows through the creation of efficient transport chains

- Economies of scope to improve operating margins through commercial entry into new market segments

- Economies of scale to cope with the high investment in physical infrastructure and information and communication systems

- Strategic and operational synergies, especially in higher value-added services

In the future, it is likely for four 3PL’s to emerge;1. Lead logistics providers; intermediary between shipper and more specialized service providers2. Pan-European logistics providers; groupage of networks covering the most important regions of EU3. Niche logistics service providers; for specific regions or specific products (e.g. hazardous products)4. E-commerce logistics providers; self-evident from our own experience, I guess

For an overview in possible tiering structures, see p. 265

Chapter 10An ever increasing proportion of the products are returning to the manufacturers or the importers. Some industries have to do so because of the law, others do it as a means of service or because they can recover value in used products.

Reverse logistics encompasses a broad range of activities within and outside of logistics, including product returns, source reduction, recycling, and material substitution, reuse of material, waste disposal and refurbishing, repair and remanufacturing.

The closed-loop supply chain consists of a forward and reverse chain, whereby the recovered product either re-enters the primary forward chain or is shunted to a secondary market.Green logistics are efforts to measure and minimize the environmental impact of logistics activities.

Product returns can be categorized in three major groups; 1. End-of-life returns;2. End-of-use returns (lease) and;3. Commercial returns.

There are five ways identified how reverse logistics can contribute to profitability:1. Increased revenues realized from secondary sales2. Offering new products in place of unsold or slow-selling stock3. Shareholder goodwill from acting with social and environmental responsibility4. Reduced operating costs from reuse of recovered products and components5. Higher asset turnover due to better management of returns inventory

Reverse flows have challenges that differ from those of forward flows of materials and products;- Large variations in timing, quality and quantity of product returns- Lack of formal product returns procedures- Delayed product returns reducing their market value- Lack of local competence in inspection, evaluation and disposition of returns- Risk of cannibalizing new product markets- Lack of performance measurement for return process efficiency

Because no one takes overall responsibility of the reverse supply chain, two extreme configurations are presented. 1. Centralized reverse supply chain

One organization is responsible for collecting, sorting and redistributing returned items (see p. 275). A 3PL may be contracted in return supply chains as well.

2. Decentralized supply chain Multiple organizations are involved in collecting, sorting and distributing returned items (see p. 277). The evaluation of the state of the product is done at the first tier, the retailers and resellers. This may require specific guidelines.

Though the reverse supply chain is often represented as containing a lot of value, a lot of value is lost because of a lack of an efficient return system.

- Controllable returns are caused by errors or problems causes by the company or another member of the firm. These types of returns can often be mitigated with elimination of picking-and-packing errors, improved forecasting, product handling, quality control and better communication with the customer. - Uncontrollable returns are returns which companies can do little about in the short term. A basic strategy would be to attempt to eliminate the root causes of controllable returns while simultaneously developing optimal processes for handling uncontrollable product returns.

The triple bottom line (people, planet and profit) has gained increasing attention. A sustainable supply chain and its elements is depicted on page 283.

Chapter 11In order for companies to succeed in the complex global environment, measuring supply chain performance has gained increasing importance. Existing performance measurement systems for the global supply chain lack a system perspective.

Performance measurement is the process of quantifying the efficiency and effectiveness of actions. A performance measurement system is the concrete tool designed to quantify performance.

The following model illustrates a categorization of supply chain performance measurement maturity:

- Ad hoc mainly considers financial reporting to top management.- On the second level, companies still do not acknowledge that activities outside the

companies’ borders should be included inside the scope of performance measurement practice.

- On the third level, the company, and especially the boundary spanning managers, recognize the impact of activities and processes located outside the company borders.

- The highest level of measurement maturity, companies adopt a comprehensive system approach to performance measurement in the supply chain.

The underlying assumption in SC performance management is that the goal of SCM is to support the creation of customer value. Supply chains can be assessed in three dimensions; effectiveness, efficiency and flexibility.

Efficiency is an input-oriented performance dimension, and it refers to how economically supply chain resources are utilized when providing customer service.Effectiveness is an output-oriented performance dimension and is a measure quantifying the extent to which goals related to values are met.

Flexibility quantifies how able the supply chain is to adjust capacity, speed and output to fit different external demands and changing situations.

Performance measurement has at least eight different functions;1. Translate supply chain strategy into operational objectives. 2. Provide supply chain managers with information and hereby giving them the opportunity to react on identified performance gaps.3. Communicate performance expectations across company borders.4. Clarify responsibilities and objectives between supply chain partners.5. Support strategic decision making and prioritization in the supply chain.6. Align objectives across the supply chain.7. Motivate suppliers.8. Improve understanding of supply chain processes and how these are connected in a complex network of activities.

The balanced scorecard. Cause and Effect

- How do we link short term budgets to strategic measures of performance (e.g. ROCE)?Lead Indicators (Performance Drivers)

- Indicators of how outcomes will be achieved- These indicators can inform the budgeting process

Lag Indicators (Outcome Measures)- Links performance drivers to bottom line outcomes

TCO framework.

Comparing Suppliers - Total Cost- Replenishment lead time

As lead time increases safety inventory increases- On-time performance

Relationship between on-time performance and lead time – lead time variability = safety inventory

- Supplier flexibilityTolerance for order quantity variability

- Delivery frequency / minimum lot sizeAs lot size grows cycle inventory grows increasing inventory holding costs etc.

- Supply quality- Inbound transportation cost

Distance, mode of transport, frequency etc.- Trading terms- Information coordination capability- Design collaboration capability- -Exchange rates / taxes / duties- Supplier viability

Frameworks can be cost-oriented and process-oriented. There are six different supply chain performance measurement models in the book, seen on p 298-316.

Chapter 12The concept of strategy for the supply chain is considered a paradox: on the one hand, it’s organized around a local firm serving the customer. On the other hand, it’s the central product providing elements that give customer value.

Strategies in the supply chain have to play roles in the organization. By providing a vision for the future, they establish a focus for partners in the supply chain. Focus provides motivation. A second role is organizing the supply chain, providing direction for all subordinate decisions, acting to coordinate decisions.

Strategies may be active and reactive.Active strategy; serves and protects the core of the organization, enhances revenues and reduces costs. The focus is to maintain the position in the market.Reactive strategy; aims to respond to changing conditions in the market or supply. The focus is providing stability and protection.

This can be visualized using the following matrix:

The supply chain consist of three layers:1. Directed system (the supply chain itself)2. Larger system (competitors)3. Environment

The supply chain as a system can become dynamic because of changes. A large disruptive change, known as a strange attractor, can throw the system off balance. Management occurs at the edge between stability and chaos.

There are two characteristics of supply chains that determine the design of the supply chain;1. Amplification of demand volatility; increasing demand the further we move upstream, such as the variation in demand through internal order disciplines and the industry demand cycle.2. Amplification of time volatility; increases when products move towards the market, such as the rate of change of products as when they move from material through final product to customer.

Mapping the chain based on these two premised combined with clockspeed (range of exchange) and profitability determines the actual look of the supply chain (see p.324).

The double helix model (Fine, 1998) shows how a supply chain oscillates between vertical integration (integrated architecture) and horizontal disintegration (modular architecture). The forces of change propelling the supply chain between these two systems stem from;1. Increasing competition2. Products becoming almost undifferentiated commodities3. The entry of niche competitors4. The inability of large corporations to respond to change

For an explanation of each determinant, see pages 325-326.

The balance between efficiency and responsiveness is defined by Fisher (1997, page 327). See picture below for his founded differences. Note that his model only deals with demand characteristics of the products.

Therefore Lee (2002) made a model himself with a stable, unchanging and high quality side, and an evolving, with rapid changes and limited supply choice, side. Stable Evolving-lean breakdowns-stable and higher yields-less quality problems-more supply sources-reliable suppliers-less process changes-less capacity constrains-easier to changeover-flexible-dependable lead time

-vulnerable to breakdowns-variable and lower yields-potential quality problems-limited supply sources-unreliable suppliers-more process changes-potential capacity constrained-difficult to changeover-inflexible-variable lead time

Supply chain integration is the quality of the state of collaboration that exists among departments that are required to achieve unity of effort by the demands of the environment. There are four stages of integration, as defined by Sevens (1989). 1. The fragmented operations within the individual company2. The limited integration between adjacent functions3. Internal integration of the end-to-end planning4. True supply chain integration both upstream and downstream

- Information integration permits management to make decisions for the operations of the organization as a whole, and not as isolated functions.

For a tabular overview of information integration and organizational integration, see pages 332-333

Chapter 14There are three elements that make the global supply chain possible:1. Changes in global economic policy2. Technological revolutions in transport3. TelecommunicationDifferences between global and domestic supply chains lie in Environmental complexity; political and foreign risks, cultural and geographical differences, differences in legal systems, differences in infrastructureStructural complexity; the number of distinct businesses , functions, organizational forms, markets, products and their variety that the firm must manage and control

Environmental complexity-Political; protectionism, liberalization, unification-Social; human rights, labor practices, environmental support-Cultural; institutions, contractual practices, education levels, attitudes, values and relationships-Information technology; coordination, driver behind globalization, networks and links

Structural complexity(internationalizing; simple extension across national boundaries, no major changes)(globalizing; functional integration, transformation of business, connected to the world)-Options; different forms of investment and alliances, licensing and characteristics-International companies; export from home base, products are intended to cover entire market-Multinational companies; products adapted to local markets, local affiliates (Unilever)-Global companies; treat the world as one integrated market, identical to parent company (Nike)-Transnational companies; integrated network of different organizational forms, knowledge-generative-Global production; global market pressures place specific requirements on production networks (Arla)

For an overview of global production, see p. 382 with five types of geographical organization graphically explained.

Ferdows (2000) identified six roles for foreign factories under the umbrella of one global organization:1. Offshore – oriented to low cost for export2. Source – same as offshort + more responsibility towards local procurement3. Server – supplies local or regional markets4. Contributor – supplies local markets + responsibility for product and process development5. Outpost – collecting information from a locally advances environment6. Lead factory – creates new technologies, products and processes for the entire company

The global networkA firm will engage in international production if it has(OLI-framework):1. Ownership-specific advantages2. Location-specific advantages to an overseas site3. Internalizing these advantages rather than to sell products in open markets or license them to others is more profitable

Following the slides, globalization has the following advantages:1. Standardised Products2. Economies of Scale

- Production, management, distribution, marketing etc.3 Lower Costs

- More potential sources of raw materials, labour, outsourcing, manufacturing options etc.4. Increased Access to New Markets

- Through increasing the size and scope of the supply chain5. Flexibility

- Provide (potentially) the flexibility to cope with the uncertainty of international markets

And the following risks/disadvantages: 1. Substantial geographic distances

- Logistics networks stretched- Lead time implications

2. Added forecasting difficulties- Aggregation can become more difficult- Qualitative knowledge of local markets limited

3. Infrastructural Inadequacies- Worker skill, performance expectations- Supplier availability, reliability, contracts- Lack of local technologies- Inadequacies in transportation, communications infrastructure

4. Exchange rate uncertainties- Can affect selling price, costs of inputs, relative cost of inputs vs outputs

e.g. pay for inputs in Euros and sell finished goods in local currency Are exchange rate fluctuations reflecting changes in inflation rates?

5. Cultural differences- Local rules- Attitudes to work

6. Political Issues- Tariffs and tax rates- Levels of government control- Stability of political systems and processes

7. Added competition “at home”- Focus is offshore- Entry into other markets can attract competition at home

In the slides, three strategies are mentioned to manage the unknown:1. Invest in redundancy

-Respond to unforeseen events-Careful analysis of supply chain trade-offs

2. Increase velocity in sensing and responding-Speed in sensing and responding can help the firm overcome unexpected supply problems-Failure to sense could lead to: failure to respond to changes in the supply chain, can force a company to exit a specific market

3. Create an adaptive supply chain community-Requires all supply chain elements to share the same culture, work towards the same objectives and benefit from financial gains. -Need a community of supply chain partners that morph and reorganize to better react to sudden crisis

Thank you for reading and sharing my summary, good luck with the preparations!