Lecture 1: Introduction to Sourcing and Supply Management

Supply Chain

Types of Channel Relationships (Slide 10) -

Why Supply Chain Management Matters: Your organisation is only the top of the iceberg. The final product relies on multiple tiers going back to the raw material.

Definitions:

Supply Chain Management

Managing the Supply Side of a Supply Chain

Sourcing and Supply Management Strategies

The Past, Present and Future of Sourcing and Supply Management

Direct Supply Chain:
A direct sup-ply chain consists of a company, a supplier, and a customer involved in the upstream and/or down-stream flows of products, services, finances, and/or information
Source: Mentzer et al. (2001)

Extended Supply Chain:
An extended supply chain includes suppliers of the immediate supplier and customers of the immediate customer, all involved in the upstream and/or downstream flows of products, services, finances, and/or information
Source: Mentzer et al. (2001)

Ultimate Supply Chain:
An ultimate supply chain includes all the organisations involved in all the upstream and downstream flows of products, services, finances, and information from the ultimate supplier to the ultimate customer.
Source: Mentzer et al. (2001)

Supply chains are complex and dynamic networks - real supply chains are typically very complex and very dynamic networks

Supply Chain

“the network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services delivered to the ultimate consumer.” Christopher (1992)

“a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances, and/or information from a source to a customer.” Mentzer et al. (2001)

“the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers.” Harland (1996)

“the systemic, strategic coordination of the traditional business
functions and the tactics across these business functions within a
particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.”
Mentzer et al. (2001)

Supply Chain Management the Third Industrial Revolution (Slide 16): As the level of specialisation increases the production costs decreases as a consequence of division of labour and mass production. Moreover as the specialisation level increases the coordination costs increases. However the level of coordination costs have decreased as a consequence of Inter-organisational collaboration via SCM.

From “Company Thinking” to “Supply Chain Thinking”

“One of the most significant changes in the paradigm of
modern business management is that individual businesses
no longer compete as solely autonomous entities, but rather
as supply chains.” Lambert et al. (1998)

“Rising international cooperation, vertical disintegration,
along with a focus on core activities have led to the notion
that firms are links in a networked supply chain.”
Chen & Paulraj (2004)

The Smile of Value Creation

Firms combine the comparative advantages of geographic locations with their own resources and competencies to maximize their competitive advantage

The geographic realities associated with the smile of value creation are that the activities at the ends of the overall value constellation are largely located in advanced market economies, while those in the middle of the value chain are moving (or have
moved) to emerging market economies

Activities at the left or ‘input’ end are supported by R&D knowledge (basic and applied research and design), while activities at the right or ‘output’ end are supported by marketing knowledge (marketing, advertising and brand management, sales and after-sales service). The pattern of value-added along the value chain may, therefore, be represented by the ‘smiling curve’

Definition - Value Added:
“The value added by a firm; i.e. the value created by the activities of the firm and its employees, can be measured by the difference
between the market value of the goods that have been turned out by the firm and the cost of those goods and materials purchased from other producers. This measure will exclude the contribution made by other producers to the total value of this firm’s production, so that it is essentially equal to the market value created by this firm. The value added measure assesses the net contribution made by each firm to the total value of production; by adding up all these contributions. Therefore it is possible to arrive at a total for the whole economy.” Rutherford (1977)


No detailed prescription for the calculation of value added.
Statements of value added characterised by ambiguous terminology.

Supply Chain Governance

Linkage Mechanism (Ponte & Sturgeon (2014))

Hierarchy:
Complexity of transactions - high
Ability to codify transactions - low
Capabilities in the supply chain base - low

Captive:
Complexity of transactions - high
Ability to codify transactions - low
Capabilities in the supply chain base - high

Relational:
Complexity of transactions - high
Ability to codify transactions - high
Capabilities in the supply chain base - low

Modular:
Complexity of transactions - high
Ability to codify transactions - high
Capabilities in the supply chain base - high

Market:
Complexity of transactions - Low
Ability to codify transactions - high
Capabilities in the supply chain base - high

Supply Chain Governance Types

Hierarchy:
This governance form is characterized by vertical integration.
The dominant form of governance is managerial control, flowing from managers to subordinates, or from headquarters to subsidiaries and affiliates

Captive:
In these networks, small suppliers are transactionally
dependent on much larger buyers. Suppliers face significant switching costs and are, therefore, ‘captive’. Such networks are frequently characterised by a high degree of monitoring and control by lead firms.

Relational: In these networks there is complex interactions between buyers and sellers, which often creates mutual dependence and high levels of asset specificity. This may be managed through reputation, or family and ethnic ties. Many authors have highlighted the role of spatial proximity in supporting relational value chain linkages, but trust and reputation might well function in spatially dispersed networks where relationships are built-up over time or are based on dispersed family and social groups

Modular:
Typically, suppliers in modular value chains
make products to a customer’s specifications, which may be more or less detailed. However, when providing ‘turn-key services’ suppliers take full responsibility for competencies surrounding process technology, use generic machinery that limits transaction-specific investments, and make capital outlays for components and materials on behalf of customers.
Gereffi, Humphrey & Sturgeon (2005)

Market:
Market linkages do not have to be completely transitory, as is
typical of spot markets; they can persist over time, with repeat transactions. The essential point is that the costs of switching to new partners are low for both parties.
Gereffi, Humphrey & Sturgeon (2005)

Network Characteristics (Ponte & Sturgeon (2014))

Requirement for explicit coordination (Low to High)

Network form

Tolerance for distance (Low to High)

Supplier switching costs/ asset specificity (Low to High)

The Profit is in the Purchase: (Slide 41)

  • In 2007, VW generated a turnover of €108.9 billion and a profit of €4.1 billion.
  • At the same time, VW’s procurement volume was €72.0 billion.
  • Supply side value creation accounted for 66% of VW’s overall value creation!
  • To increase profits by 10%, a 10% increase in turnover is needed.
  • This increase typically corresponds to a
    1–3% decrease in procurement costs!
    (Eßig et al. (2013))

Functional Clusters of Indirect Purchases

Marketing and Advertising

Information Technology

Overhead

Human Resources

Business Specific

From Purchasing to
Supply Management (Eßig et al. (2013))

Supply Side:

  • Traditionally, purchasing/procurement


    was not seen as strategically important


    – unlike production and sales.


    “ensure material supply!”


  • Strategic procurement and supply


    management gained in importance in


    the late 1970s and late 1980s, resp.


    “gain control over supply side!”

Demand side:

  • Traditionally, the sales market (or buyer
    market) was considered as the bottleneck for a focal firm.
  • Therefore, sales dominated all other functional areas of a company.
  • Marketing and customer orientation gained in importance in the 1950s

Supply Management Deals with the Supplier–Buyer Dyad:
In this course, we are focusing on the relationships with suppliers, i.e. the supplier–buyer dyad. Note that in today’s business sourcing and supply management is highly integrated with other business functions within and across organizations, e.g. manufacturing of a supplier.

Implications of a Focus on the Supplier–Buyer Dyad:

  • ...acknowledges the role of core competencies and the division of labor.
  • …replaces own production.
  • …requires internal and external coordiation (transaction costs!)
  • …turns management of information flows into a core competency.

Key Elements of Supply Management (Handfield et al. (2011))

Strategic Orientation

  • Strategic responsibilities are required, which relate to task that
    have a major impact on longer-term performance of the organization.
  • Strategies should be aligned with the overall mission and strategies of the organization.

Cross-Functional Groups

  • Supply management is cross-functional,
    meaning it involves purchasing, engineering, supplier
    quality assurance, the supplier, and other related functions working together as one team, early on, to further mutual goals.

Process-Driven Approach

  • Supply management often takes a process approach to obtaining required goods and services.
  • It can be described as the process of identifying, evaluating, selecting, managing and developing suppliers to realize better SC performance.

Supply Base Management

  • Supply management is broader than purchasing, i.e. it is a progressive approach to managing the supply base that differs from a traditional arm’s-length or adversarial approach with sellers.

Supply Management vs. Supply Chain Management

“[SCM] is different from supply management. [SCM] emphasizes all aspects of delivering products to customers, whereas supply
management emphasizes only the buyer–supplier relationship.”
Leenders et al. (2002), p. 11

“SCM […] says that in order to be able to manage cost throughout the supply chain, effective and co-operative supplier relationships are required. Hence, purchasing and supply management (including the supplier management) can be seen as an integrated part of SCM.” van Weele (2010), p. 255

“We use the term Supply Management […] to describe the
management efforts or philosophy necessary for creating an
operating environment where the buyer and supplier interact in a
coordinated fashion.” Shin et al. (2000), p. 318

Separating Strategic and
Operational Buying Activities

Strategic Activities (Sourcing):

  • Manage relationships with crucial suppliers
  • Develop electronic purchasing systems
  • Implement companywide best practices
  • Negotiate companywide supply contracts
  • Manage critical commodities

Operational Activities (Purchasing)

  • Manage transactions with suppliers
  • Use e-system to obtain standard or indirect items through catalogs
  • Source items that are unique to the operating unit
  • Generate and forward material releases
  • Provide supplier performance feedback

Decision Phases in a Supply Chain (Source: Chopra & Meindl (2016), p. 18–19)

Supply Chain Strategy, Design

  • In this phase, the company decides how to structure the supply chain over the next several years.
  • What will be the chain’s configuration? How will resources be allocated? What processes will be performed at each stage?
  • Outsourcing vs. in-house? Location/capacities of production/ warehousing facilities? Type of information system? …

Supply Chain Planning:

  • For decisions made during this phase, the time frame considered is a quarter to a year.
  • The supply chain’s configuration (determined before!) establishes constraints within which planning must be done.
  • Forecast (demand, cost, …) for the coming year? Which market will be supplied from which location? Inventory policies? …

Supply Chain Operation

  • For supply chain decisions made during the operational phase, the time horizon is weekly or daily.
  • SC configuration is considered fixed and planning policies are already defined. Decision regarding Individual customer orders.
  • Allocate inventory or production to individual orders. Set a date
    by which an order is to be filled. Generate pick list. …

Interdependencies among Manufacturing Strategy,
Competitive Strategy, Structure and Environment

  • Performance depends on the relationship between environment , organisational structure, the organisations competitive strategy, and manufacturing strategy
    Ward, Bickford & Leong (1996)

Levels of abstraction Perez-Franco et al. (2016)

Procurement’s Development from a Transactional to a Strategic Role

  • In the 1980s, procurement divisions started becoming more common in organizations. Manufacturing industries were at the forefront of this change.
  • Increasingly structured and professional procurement in the
    1990s/2000s. It steered away from its “cost-cutting” image through the emergence of strategic sourcing.
  • Today, organizations understood that procurement plays a central role in transforming the value chain and
    that it cannot limit itself to being an independently operated entity.

Disruptive Innovation:
A disruptive innovation is an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products and alliances.

Future of Sourcing and Supply Management (KPMG (2016), slide 65)


Algorithms and artificial intelligence

  • The procurement process is currently undergoing increasing and continuous standardization and automation.
  • The development of AI is making such rapid progress, that algorithms will soon take over more procurement tasks.
  • AI-generated reports could provide significant relief when it
    comes to documentation requirements and auditing.

Digital Transformation:

  • Operational functions of R&D and production are increasingly shifting planning and design processes to virtual spaces.
  • Buyers must possess the virtual competence necessary to properly manage suppliers in these virtual spaces.
  • Procurement will need to cooperate much more intensively with other internal functions such as HR, engineering, and R&D.

The Revolution of Added Value

  • New technologies, such as 3D printing, promote a retroactive integration of processes within the value-added chain.
  • In the future, anything a company can print by themselves on a 3D printer must no longer be physically externally procured.
  • Buyers of the future would not be responsible for procuring spare parts, but bulk goods and 3D data for printing systems.

Changes in the working environment

  • It is likely that job descriptions will be broken down into special areas, e.g. supplier coach, data strategist, e-proc. specialist.
  • In the future, the number of prominent CPOs successfully
    landing a CEO position might be further growing.

The Age of Conflict

  • The more widespread global conflicts occur, the higher the regional and national risk to the supply chain becomes.
  • A conflict initiator is the increasing demand for raw materials, e.g. rare earth, water, energy resources, or precious metals.

An era of volatility, disruption and instability

  • Volatility, uncertainty, complexity and ambiguity are no longer states of emergency, but increasingly frequent occurrences.
  • Supplementary foresight methods will be needed, e.g., wild card analyses, business war gaming, and risk simulations.

The accountability mission

  • Nowadays, purchasing departments are subject to calculations and evaluations pertaining to ecological and social sustainability.
  • A special aspect of accountability is the trend toward end-to-end procurement solutions (“cradle-to-grave” lifecycle).

The innovation mission

  • Under the same conditions, procurement can achieve more with innovations than sales can (known as purchasing multiplier).
  • When it comes to innovations, a procurer also knows which
    suppliers can and should be involved in development processes.
  • To achieve open innovation, a transition is required from a
    classical, hierarchical buyer–supplier relationship to partnership.

Changes in the procurement market

  • In some cases, numerous factors fuel radical change in procurement markets, e.g. progressive industrialization in China.
  • Alternative destinations in Africa (e.g. Ethiopia, Kenya) and Asia
    (e.g. Myanmar, Indonesia, Vietnam) are gaining in importance.
  • The trend toward collaborative consumption (shareconomy) can decisively change procurement, e.g., car sharing.

The security issue

  • Purchasers represent a special risk group due to their decision making power over big budgets, e.g., more than 50% of sales.
  • As a result of digital transformation, the risk of supply chain disruption is also rapidly growing.
  • Cyber security will increasingly become a top spend for all other functions of a company.

3D Printing
3D Printing Could Revolutionize Supply Chain Management (Slide 69)

Possible Future Advantages of a Supply Chain Based on 3D Printing Technology

  1. Reduces costs for managing a global logistics network, i.e., costs for transportation and warehousing.
  2. By stationing manufacturing close to strategic markets, 3D printing reduces the length of the supply chain.
  3. Regional manufacturing centers can tackle inventory concerns, e.g., for industrial spare parts, customized products.
  4. 3D printing enables manufacturers to easily produce goods to order, helping save money and minimize waste.
  5. 3D printing makes it possible for businesses to consistently deliver goods in tighter timescales.
  6. 3D printing helps to meet customers’ growing demands for personalized products.