Delivering Customer Value Through Procurement And Strategic Sourcing Chapter 2 Pdf
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Not a MyNAP member yet? Register for a free account to start saving and receiving special member only perks. Most OEMs no longer compete solely as autonomous corporations. They also compete as participants in integrated supply chains.
This revolution, which is changing the ways products are designed, produced, and delivered, has the potential to alter the manufacturing landscape as dramatically as the industrial revolution or the advent of mass production. This chapter describes the changing nature of supply chains and efforts to optimize their performance. In the past, OEMs typically drove down the cost of purchased materials through aggressive negotiations, imposing terms and conditions that minimized supplier profitability and often left suppliers in a weakened condition.
More recently, OEMs have begun to adopt a strategic partnership approach, which recognizes that increased, sustainable benefits can accrue from long-term relationships between participants in the supply chain a win-win situation. This approach considers total life-cycle costs over multiple iterations of a product, with the goal of increasing mutual benefits for all participants in the long run.
In this era of competition among supply chains, the success of a corporation is increasingly dependent on management's ability to integrate the company's networks of business relationships. Supply chain management see Figure has been defined as the integration of key business processes, from raw-material suppliers through end users, that. Figure Supply chain management: integrating and managing business processes among participants throughout the supply chain.
Source: Adapted from Lambert et al. Supply chain management makes use of a growing body of tools, techniques, and skills for coordinating and optimizing key processes, functions, and relationships, both within the OEM and among its suppliers and customers, to enable and capture opportunities for synergy.
An OEM's competitive advantage is highly dependent on this integrated management function. Supply chain management attempts to combine the best of both worlds, the scale and coordination of large companies with the low costs, flexibility, and creativity of small companies. The focus of supply chain management must evolve in response to changing business environments and evolving product life cycles. Different interactions among participants are required during each phase of the product life cycle, from inception through recycling.
The supply chains for products in new markets must be flexible to respond to wide fluctuations in demand both in quantity and product mix. Products in mature, stable markets require supply chains that can reliably deliver products at low cost. Thus, effective supply chain management must be responsive to these changing conditions to ensure that the supply chain evolves accordingly. Traditional marketing strategies involving in-store sales and price promotions created great variations in product demand.
Working both internally and with suppliers and customers, the company created a heralded partnership with Wal-Mart, virtually eliminated price promotions, and streamlined its logistics and continuous replenishment programs. These initiatives reduced variations and uncertainties in demand, thereby reducing the need for surge production capacities and large inventories.
An integrated supply chain can be defined as an association of customers and suppliers who, using management techniques, work together to optimize their collective performance in the creation, distribution, and support of an end product. It may be helpful to think of the participants as the divisions of a large, vertically integrated corporation, although the independent companies in the chain are bound together only by trust, shared objectives, and contracts entered into on a voluntary basis.
Unlike captive suppliers divisions of a large corporation that typically serve primarily the parent corporation , independent suppliers are often faced with the conflicting demands of multiple customers.
The technological and investment problems faced by SMEs in attempting to deal with these conflicting demands are discussed in Chapter 9. All supply chains are integrated to some extent. One objective of increasing integration is focusing and coordinating the relevant resources of each participant on the needs of the supply chain to optimize the overall performance of the chain. The integration process requires the disciplined application of management skills, processes, and technologies to couple key functions and capabilities of the chain and take advantage of the available business opportunities.
Goals typically include higher profits and reduced risks for all participants. Traditional unmanaged or minimally managed supply chains are characterized by 1 adversarial relationships between customers and suppliers, including win-lose negotiations; 2 little regard for sharing benefits and risks; 3 short-term focus, with little concern for mutual long-term success; 4 primary emphasis on cost and delivery, with little concern for added value; 5 limited communications; and 6 little interaction between the OEM and suppliers more than one or two tiers away.
Integrated supply chains tend to recognize that all parties should benefit from the relationship on a sustainable, long-term basis and are characterized by partnerships with extensive and open communications. A well integrated system of independent participants can be visualized as a flock of redwing black birds flying over a marsh.
Without any apparent signal, every bird in the flock climbs, dives, or turns at virtually the same instant. That is an integrated system! Supply chain members, in a similar manner, must react coherently to changes in the business environment to remain competitive. Supply chain integration is a continuous process that can be optimized only when OEMs, customers, and suppliers work together to improve their relationships and when all participants are aware of key activities at all levels in the chain.
First-tier suppliers can play a key role in. The following worldwide trends and forces are driving supply chains toward increased integration:. Increased cost competitiveness. Having substantially improved the efficiencies of internal operations, OEMs are seeking further cost reductions by improving efficiency and synergy within their supply chains.
Shorter product life cycles. The Model-T Ford, for example, was competitive for many years. A personal computer PC is state of the art for less than a year, and the trend toward shorter product life cycles continues.
Faster product development cycles. Companies must reduce the development cycle times of their products to remain competitive. Early introduction of a new product is often rewarded with a large market share and sufficient unit volumes to drive costs down rapidly. Globalization and customization of product offerings. Customers the world over can increasingly afford and are demanding a greater variety of products that address their specific needs.
Mass customization has become the new marketing mantra. Higher overall quality. Increasing customer affluence and tougher competition to supply their needs have led to demands for higher overall quality. These increased demands on OEMs for improvements in product design, manufacturing, cost, distribution, and support are being imposed, in turn, on their supply chains. Dell Computer Corporation's success in the past few years and its growth relative to the rest of the PC industry made daily headlines throughout the s.
Based on the premise that bypassing resellers, building products to order, and reducing inventories would result in a lower cost, more responsive business, Dell has grown into one of the. Nevertheless, it is squeezed into such a narrow business niche that, from some perspectives, its very survival seems tenuous. Dell competes with many capable and, in some cases, lower cost competitors, has virtually no proprietary technology, and must deal with exceedingly robust suppliers, including Intel and Microsoft.
The heart of Dell's success is its integrated supply chain, which has enabled rapid product design, fabrication, and assembly, as well as direct shipment to customers.
Inventories have been dramatically reduced through extensive sharing of information, a prudent choice given the risk of technological obsolescence and reductions in the cost of materials that can exceed 50 percent a month. Even with reduced inventories, Dell's strategic use of information has made possible a dramatic reduction in the elapsed time from order to delivery, giving Dell a significant competitive advantage. Component inventories are monitored weekly throughout the supply chain and, when there are deviations from plan, the sales force steers customers, by means of discounts, if necessary, toward configurations for which there are adequate supplies.
Thus, abundant, timely information is used to work the front and back ends of the supply chain simultaneously. Speed is a critical factor in the computer industry, especially in the area of inventory.
In the late s, Dell measured component inventories in weeks. In , they were measured in days. They may soon be further reduced through real-time deliveries so that, as components are used, they are automatically and immediately replaced. The reduction in inventory not only lowers requirements for capital, it also enables rapid changeovers to new product configurations because no old parts must be used up.
Faster time to market for new products translates into increased revenues and profits. The change in emphasis from inventory levels to inventory velocity throughout the supply chain has been made possible, in part, by the Internet.
In Dell's new virtual corporation, inventories are reduced by use of timely information; emphasis on physical assets is being replaced by emphasis on intellectual capabilities; and proprietary business knowledge is being increasingly shared in open, collaborative relationships. This extensive integration of the supply chain can be viewed as a shift from vertical corporate integration to a virtually integrated corporation Magretta, Vertical integration was essential in the early years of computer manufacturing when the supplier base was not well established and assemblers had little choice but to design and build components and assemble the entire end product in house.
Proprietary component technologies were a main source of competitive advantage, although in some cases they had little to do with creating value for the customer.
As the industry matured, multitudes of component suppliers became eager to. Leveraging investments by these suppliers has freed Dell to focus on delivering complete solutions to its customers.
However, because these components are available to all PC assemblers, it has become harder to compete in terms of end-product differentiation. Thus, a high premium has been placed on speed and process efficiency, blurring the traditional boundaries between supplier, manufacturer, and customer. For instance, peripherals, such as monitors, keyboards, speakers, and mice, need not be gathered in one location prior to shipment to the customer.
Manufactured by separate suppliers and labeled with the Dell logo, shippers gather them from all over North America, match them overnight merge-in-transit , and deliver them as complete hardware sets to customers as if they had come from the same location.
This enables Dell to be highly selective in its capital investments and to focus on activities that create the most value for customers and shareholders. By using a highly integrated supply chain, Dell has enjoyed many of the advantages of vertical integration while simultaneously benefiting from the investments, innovation, efficiencies, and specialization of highly focused suppliers.
Although the Dell model does not fit every situation,. By , the success of the Dell model, as might be expected, was causing problems for competitors, including Fujitsu America, which had large inventories and high shipping costs Washington Post , May 2, Customers had to wait 10 days for laptops, while competitors were delivering in five.
In response, Fujitsu moved its distribution center from Portland, Oregon, to Memphis, Tennessee, and turned distribution over to FedEx Corporation, the parent company of Federal Express. In direct response to orders, FedEx coordinates the shipment of components from worldwide suppliers, oversees the assembly of PCs, and ships them out, all in three or four days. By early , the cycle time on the ground was eight to twelve hours, and the goal was to reduce it to four hours.
Fujitsu has essentially eliminated geographic proximity as an issue and has made maximum use of the benefits of globalization, including low cost. Even with the premium price of express shipping, this modification of the Fujitsu supply chain saved the company millions of dollars, slashed inventories by about 90 percent, and increased profits by 25 percent.
Most important, these changes have enabled Fujitsu to compete effectively with Dell for Internet sales directly to consumers. However, as is evident from these examples, these innovations in supply chain integration can also impose large burdens on suppliers in terms of responsiveness, inventories, and management of their own supply chains.
The costs, complexities, and risks of fully integrating and managing a highly integrated supply chain can be as substantial as the costs of integrating and operating a corporation of comparable size.
Thus, most supply chain integration efforts to date have been very limited in scope. Some of the major costs are listed below:. Opportunity costs i. Because the extent of interconnectedness and interdependency makes highly integrated chains increasingly vulnerable to disruptions, the risk. A highly integrated, interdependent supply chain that consists primarily of sole-source suppliers practicing just-in-time manufacturing with minimal inventories is highly reliant on the timely delivery of quality components and services.
Coronavirus Is Proving We Need More Resilient Supply Chains
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The GAO has assessed strategic sourcing and its potential value for the past decade and strongly recommends its implementation in procurement strategies.
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For details on it including licensing , click here. This book is licensed under a Creative Commons by-nc-sa 3. See the license for more details, but that basically means you can share this book as long as you credit the author but see below , don't make money from it, and do make it available to everyone else under the same terms.
Not a MyNAP member yet? Register for a free account to start saving and receiving special member only perks. Competitive quality, cost, service, and delivery have always been fundamental requirements of suppliers. They are still the cornerstones of integrated supply chain requirements for SME participation, although some aspects of these requirements are changing as integration levels increase. Customer expectations are rising, and to remain competitive, OEMs are demanding higher quality from their suppliers.
This chapter has a sort of circular nature to it.
Role of Procurement within an Organization: Procurement : A Tutorial
To understand how this role is changing, we must understand what purchasing is all about, starting with the primary objectives of a world-class purchasing organization. To manage the procurement process and supply base efficiently and effectively procurement must follow the following key steps:. Read Case Study 1 and consider the following questions:.
Product and service reviews are conducted independently by our editorial team, but we sometimes make money when you click on links. Learn more. As competition increases for high-quality products, low costs and excellent customer service, businesses must continually assess the value they create. One of the most valuable tools, the value chain analysis, breaks down each process of a business and creates opportunities for innovation. Value chain analysis can help companies in various ways. It can create change within a business, the products and services it offers, and its connections with other businesses and their customers or clients. The United States Postal Service USPS explains that the purpose of value chain analysis is "to create value that exceeds the cost of providing the product or service and generates a profit margin.
Market strategy and the price-value model
Despite the impact of disasters like the earthquake and tsunami in Fukushima, Japan, many multinationals still have not built resilient supply chains. That lesson is being brought home by the coronavirus epidemic, which has disrupted supplies from China and is now spreading to other parts of the world. This article offers advice on how to build supply chains in ways that minimize or avoid risk when disasters occur. Unfortunately, many are facing a supply crisis that stems from weaknesses in their sourcing strategies that could have been corrected years ago. Just how extensive the crisis is can be seen in data released by Resilinc, a supply-chain-mapping and risk-monitoring company, which shows the number of sites of industries located in the quarantined areas of China, South Korea, and Italy, and the number of items sourced from the quarantined regions of China. After the March earthquake and tsunami in Fukushima, Japan, many multinationals learned painful lessons about the hidden weaknesses in their supply chains — weaknesses that resulted in loss of revenue, and in some cases, market cap.
Supplier relationship management SRM , in simplest terms, refers to interacting with and managing third-party vendors that provide goods, materials, and services to your organization. It sounds easy enough—you choose suppliers that are cost-efficient and easy to work with to maximize the value of the relationship. Supplier management has gone through a major transition over the last few years because of growth in technology and the global scale of the economy. This is essential to understanding of SRM. Relationships need to be strategic, they need to be growth-focused.
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