1 Chapter 5 Designing Organizations for Performance Excellence.
Designing supply chain Processes and Organizations
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Daily Plan-Day 1
Supply Chain Management for Competitive Advantage Reference study: SCM Overview -2
Background of Supply Chain Management The supply chain network – a new business model? Competitive advantage from the supply chain SCM Maturity and Business Performance Supply Chain Visibility and its impacts Developing Supply Chain Management Key Performance Indicators mapped to business strategy. (SCOR Card)
1
Case Study or in class exercise 1
Form groups and complete a team exercise
Day 1 - AM
Designing Supply Chain Process and Organizations Reference study: Supply Chain Planning-14
The SCOR Model – Class Exercise Aligning the SC design with business strategies. Supplier Selection – A Strategic Decision Supplier Development – Building Capabilities SCM Organization Models and how they align to the supply chain strategy
Day 1 - PM
2
Review the Maturity Assessment
Team Exercises in Supply Chain Management Maturity. A review of the assessment results.
End of the day
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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
Supplier
Plan
Customer Customer’sCustomer
Suppliers’Supplier
Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver
Internal or External Internal or External
Your Company
Source
Return Return ReturnReturn Return Return Return Return
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Systems and ProcessesWhat systems and processes should be in place to support Supplier Management?
Integrated Communication Architecture
Integrated Transactional Architecture
Integrated Forecasting and Planning Systems
Integrated Intelligence Portals
Supply Chain Strategy DevelopmentSupply Chain Design and Program Management
Strategic SourcingSupplier Relationship Management
Supply Chain Capacity Planning / Logistics PlanningReplenishment Planning
Operations (Purchasing Transactions, Contract Administration, Accounts Payable)
Performance Management, Quality ManagementMaster Data Management, Supply Risk Management,
Continuous Improvement, Contract Management
Strategic
Operational
Supporting
System
s
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SCS
SCDSS
PM
SRM
Business Strategy
DM
Core SC Processes
SC ManagementProcesses (operational)
CM
PSRMRP
Orders
RP
MDM
Signal
APln
CI RM
PTCA
SC Supporting Processes
ENQM
AP
SC ManagementProcesses (Strategic)
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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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• 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.
Operational (Planning)
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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.
Operational (Planning)
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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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Mass Customization Invention
Mass Production Continuous Improvement
Pro
duct
Cha
nge
Process Change
Stable Dynamic
Sta
ble
Dyn
amic
Business Model Aligned withChange Conditions
Source: Lufttman Ch. 4
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Mass Customization Invention
Mass Production Continuous ImprovementPro
duct
Cha
nge
Process Change
Stable Dynamic
Sta
ble
Dyn
amic
Business Model Aligned withChange Conditions
Source: Lufttman Ch. 4
Creation through intellect and skillHigh differentiationDecentralizedBroad Jobs, few rulesSmall firms
Standardized, CentralizeRoutines WorkRules and Procedure DrivenEconomies of ScaleCost advantageMechanistic Organization
Advantages in Process Q, C and SProcess ImprovementCustomer Satisfaction Through PIProcess InnovationTeams – Horizontal Org
Customers demand drivenFlexibilityResponsivenessDynamic Networks
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Mass Customization Invention
Mass Production Continuous Improvement
Pro
duct
Cha
nge
Process Change
Stable Dynamic
Sta
ble
Dyn
amic
Business Model Aligned withChange Conditions
Source: Lufttman Ch. 4
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Mass Customization Invention
Mass Production Continuous Improvement
Pro
duct
Cha
nge
Process Change
Stable Dynamic
Sta
ble
Dyn
amic
Automate Augment
Relationships
Tasks
IT Aligned withBusiness ModelAnd Change Conditions
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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 requirementsStep 3: Determine appropriate sourcing strategyStep 4: Identify potential supply sources Step 5: Limit suppliers in selection poolStep 6: Determine method of supplier evaluationStep 7: Make supplier selection decisionStep 8: Negotiate and execute agreement
But it’s not that simple…
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High OpportunityHigher RiskCommodities
Low Volume Purchases
Substitution difficult Monopolistic markets High entry barriers Critical geographic/
political situation
Lower OpportunityLower RiskCommodities
High Volume Purchases
BOTTLENECK SUPPLIES
Strategically important Substitution/alternate
supplier difficult Major importance for
purchasing overall
CRITICAL STRATEGICSUPPLIES
Availability adequate Standard specifications
of goods/services Substitution possible
NON-CRITICAL SUPPLIES
Availability adequate Alternative suppliers Standard product
specifications Substitution possible
LEVERAGE SUPPLIES
Instructions: Select a commodity category from your company and locate several sub-categories of it on the portfolio map below.
Commodity Portfolio Example: Category-MetalsSub- Categories-TitaniumStainless Steel-tubesStainless Steel- sheetsCarbon Steel
TitaniumStainless Steel-tubes
Carbon Steel Stainless Steel -sheets
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Supply Base Portfolio Analysis
Value to
Buyer
Number of Capable Suppliers
Low
High
Few Many
Strategic Leverage
Acquisition Multiple
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Categorizing Suppliers
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Supplier PerformanceDefects/Total Cost/Late Delivery/Cycle Time/Service/Safety/Environment
Sub Category
TOP TENLIST
TOP TENLIST
SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED SUPPLY BASE
SUPPLIERS REQUIRING DEVELOPMENT FROM OPTIMIZED SUPPLY BASE
High Performance
Minimally acceptable performance driven by customer requirements
High
Low
Eliminate
Eliminate
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.
Carbon Steel
Sub Category Sub Category
TitaniumStainless 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?
20/80rule
20/80rule
These approaches adapted from Monczka, Trent, and Handfield, “Purchasing andSupply 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
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
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
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
Antagonistic CollaborativeAdversarial Cooperative
Lose/Lose Win/Lose Win/Win
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
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Financial Ratio 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
Supplier Financial Analysis
Do it when?
Why do it?
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Financial Ratio Analysis
Sources of Supplier Financial Information
Company-published annual reportsCompany-published annual reports
Company-supplied 10-K and 10-Q reportsCompany-supplied 10-K and 10-Q reports
Dun and Bradstreet reportsDun and Bradstreet reports
TRW credit reportsTRW credit reports
Trade and business journalsTrade and business journals
Supplier provided dataSupplier provided data
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Financial Ratio Analysis
Liquidity Ratios
Leverage Ratios
Activity Ratios
Profitability Ratios
How capable is the supplier of meeting short-term cash needs?
Current ratio Quick ratio
Is the supplier over-leveraged and capable of paying long-term obligations?
Debt to assets Time interest earned Fixed charge coverage
How effectively is the supplier managing assets? Inventory turnover Average collection period Return on net assets
How profitable is the supplier? What rate of return is the supplier earning?
Gross and net profit margin Return on equity Return on investment
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Specific techniques/tools/activities that firms employ in supplier development vary. The following framework organizes supplier development:
PRODUCT FOCUS PROCESS FOCUS
Supply BaseManagement
Activities
SupplierDevelopment
Activities
Provides for Overall Supply
Base Improvement
Provides forSpecific
Buyer/Supplier Improvement
New product development teams
Sharing forecasts with suppliers
Value analysis teams Cost savings projects Developing full service
supplier capabilities Co-location
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
Buyer-supplier alignment Process mapping Quality engineering work
teams Joint cost savings sharing
projects Supplier training Supplier certification Supplier continuous
improvement Joint improvement efforts
Supplier Development Activities
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SCM Organization Models
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Mass Customization Invention
Mass Production Continuous ImprovementPro
duct
Cha
nge
Process Change
Stable Dynamic
Sta
ble
Dyn
amic
Source: Lufttman Ch. 4
Creation through intellect and skillHigh differentiationDecentralizedBroad Jobs, few rulesSmall firms
Standardized, CentralizeRoutines WorkRules and Procedure DrivenEconomies of ScaleCost advantageMechanistic Organization
Advantages in Process Q, C and SProcess ImprovementCustomer Satisfaction Through PIProcess InnovationTeams – Horizontal Org
Customers demand drivenFlexibilityResponsivenessDynamic Networks
Margin
Volume
High Margin
Low Volume
Low Margin
High Volume
AugmentAutomate
Relationships
Tasks
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ChevronTexaco Procurement
Chief Procurement Officer
Administrative Specialist
Gen. Mgr.CTOP
Gen. Mgr.CTNAU Gen. Mgr.
Midstream/Corp. StaffsSenior Legal Counsel
Gen. Mgr.Supplier
Management& Integration
Gen. Mgr.Strategic Sourcing
and Capital Projects
Gen. Mgr.Procurement Mgmnt
Technologies(eProcurement)
Business Manager
Vice Pres.Global Downstream
HR Business Partner
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Supply Chain Organizations in Duke Energy
Global Sourcing & Logistics
VP Global Sourcing & Logistics& Chief Procurement Officer
ManagerStrategic Sourcing
ManagerStrategic Sourcing
General MgrPlng, Govern., etc.
ManagerStrategic Sourcing
Pres. And COODuke Energy Business Services
Note: Duke Energy has a matrixed, decentralized organization that works together throughthe Enterprise Procurement Council. Ultimately, everyone reports up to the Company president.
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Inventory SupportHarold Dellinger
Inventory Support Contract Administration/HydroJack Shelton
Contract Administration/Hydro
Judy NealAdmv SpcJudy NealAdmv Spc
• Inventory Analysis• Data Base Management• Inventory Process• Stock Reorders (Carolinas) 3 Positions
Merchant Operations
Supply Chain Services provided at site
Material Handling & Storage
Invoice Processing
Inventory Management
Tools & Equipment
Contract Administration
Procurement
California C.T.Facilities 8CC & 4SC [20] [22]
General Manager F/H Supply Chain
Contract Adm6 positions
Tools &Equip
2 positions
HydroRegion
3 positions
Jerry MooreBelews Creek/Dan RiverManager
Material Handling6 Positions
On-Site Procurement2 Positions
Marshall/BuckJimmy BrownMarshall/Buck
Manager
Material Handling6 Positions
On-Site Procurement2 Positions
Kay CourseyAllen / Riverbend / Lark
Material Handling8 Positions
On-Site Procurement2 Positions
Cliffside/LeeRandy BennettCliffside / Lee
Manager
Material Handling6 Positions
On-Site Procurement2 Positions
Manager
7
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Duke Energy Field ServicesSupply Chain Organization
DirectorMaterials Management
RegionalMaterials Manager
RegionalMaterials Manager
CentralizedFleet Coordinator
RegionalMaterials Manager
RegionalMaterials Manager
Strategic Sourcing Manager
RegionalMaterials 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 misleading—though 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
A d m in R e so u rce
M a na g erA c cou n ts P aya b le
S C M an a g erO il S a n ds
S C M an a g erN a tu ra l G as
S C M an a g erS a rn ia
S C M an a g erD e n v er
S C M an a g erP ip e lin es
S C M an a g erM a jo r P ro je c ts
S C M an a g erT o ro n to
D ire c to rS u p p ly C h a in
O p e ra tio ns
M a na g erM a s te r D a ta
5 R ep o rts
M a rke t In te llige n ce
M a rke t In te llige n ce
A u d itV e nd o r P e rfo rm a n ce
T ra in ing
S p e nd A na lys isS a v in g s M e a su re m e nt
D ire c to rS u p p ly C h a in
B u s In te llig en ce /In teg ra tion
A d m in R e so u rce
S C M an a g erR e la tion sh ip M g m t
1 0 R ep o rts
S C M an a g erC o n tra c ting S tra te gy
1 2 R ep o rts
D ire c to rS u p p ly C h a in
S tra te gy
V ice P re sid e n tS u p p ly C h a in M a na g e m e nt
S u p p ly C h a in C o u n c il
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 Exercise
Pick 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.