SCM Essay – Flashcard

Arguably, globalization is the most frequently cited change factor by business leaders, and it has replaced the post-World War II Cold War as the dominant driving force in world economics. The concept of the global marketplace or global economy has taken on new meaning for all enterprises (profit and nonprofit; small, medium, and large; products or services) and for individual consumers during the last two decades. Overall, globalization has led to a more competitively intense economic and geopolitical environment. This environment manifests itself in opportunities and threats, both economic and political. Some individuals have implied that there is no "geography" in the current global environment (figuratively speaking) or, perhaps more aptly, that time and distance have been compressed. (Pages 7 - 8)

Supply chain management can be viewed as a pipeline or conduit for the efficient and effective flow of products, materials, services, information, and financials from the supplier's suppliers through the various intermediate organizations or companies out to the customer's customers, or a system of connected networks between the original vendors and the ultimate final consumer. The extended enterprise perspective of supply chain management represents a logical extension of the logistics concept, providing an opportunity to view the total system of interrelated companies for increased efficiency and effectiveness. (Page 17)

Globalization and consolidation in supply chains have caused an increased complexity for organizations in terms of SKUs, customer and supplier locations, transportation requirements, trade regulations, taxes, and so forth. Companies need to take steps to simplify, as much as possible, the various aspects of their supply chains. For example, the number of SKUs has expanded for many companies, which exacerbates problems for inventory management and order fulfillment. Consequently, companies have been rationalizing SKUs to eliminate the slow movers and items that do not contribute to profitability. Locations also need to be analyzed to eliminate high-cost or duplicative operations. Customer service levels need to be rationalized, as do vendors or supplier alternatives. Layers of complexity develop and may seem necessary, but organizations need to continually evaluate those areas of complexity by evaluating processes, training people, and exploiting technology. (Pages 24 - 25)

The challenge is to manage the entire logistics system in such a way that order fulfillment meets and perhaps exceeds customer expectations. At the same time, the competitive marketplace demands efficiency—controlling transportation, inventory, and other logistics-related costs. Cost and service tradeoffs must be considered when evaluating customer service levels and the associated total cost of logistics, but both goals—efficiency and effectiveness— are important to an organization in today's competitive environment. (Page 36)

The definition offered by the Council of Supply Chain Management Professionals is: "That part of the supply chain process that plans, implements and controls the efficient, effective flow and storage of goods, services and related information from point of origin to point of consumption in order to meet customer requirements." (Page 37)

Among the more significant product-related factors that affect the cost and importance of logistics are dollar value, density, susceptibility to damage, and the need for special handling. (Page 56)

The first is what may be termed vertical relationships, which refers to the traditional linkages between firms in the supply chain such as retailers, distributors, manufacturers, and parts and materials suppliers. These firms relate to one another in the ways that buyers and sellers do in all industries, and significant attention is directed toward making sure these relationships help to achieve individual firm and supply chain objectives. The second type of logistics relationship is horizontal in nature and includes those business agreements between firms that have "parallel" or cooperating positions in the logistics process. To be precise, a horizontal relationship may be thought of as a service agreement between two or more provider firms based on trust, cooperation, shared risk and investments, and following mutually agreeable goals. Each firm is expected to contribute to the specific logistics services in which it specializes, and each exercises control of those tasks while striving to integrate its services with those of the other logistics providers. (Page 109)

Most simply, collaboration occurs when companies work together for mutual benefit. Since it is difficult to imagine very many logistics or supply chain improvements that involve only one firm, the need for effective relationships is obvious. Collaboration goes well beyond vague expressions of partnership and aligned interests. It means that companies leverage each other on an operational basis so that together they perform better than they did separately. • Vertical collaboration refers to collaboration typically among buyers and sellers in the supply chain. This refers to the traditional linkages between firms in the supply chain such as retailers, distributors, manufacturers, and parts and materials suppliers. Transactions between buyers and sellers can be automated, and efficiencies can be significantly improved. Companies can share plans and provide mutual visibility that causes them to change behavior. A contemporary example of vertical collaboration is collaborative planning, forecasting, and replenishment, (CPFR),an approach that helps buyers and sellers to better align supply and demand by directly sharing critical information such as sales forecasts. • Horizontal collaboration refers to a relationship that is buyer to buyer and/or seller to seller, and in some cases even between competitors (including providers of logistics services). Essentially, this type of collaboration refers to business arrangements between firms that have parallel or cooperating positions in the logistics or supply chain process. Horizontal collaboration can help find and eliminate hidden costs in the supply chain that everyone pays for by allowing joint product design, sourcing, manufacturing, and logistics. • Full collaboration is the dynamic combination of both vertical and horizontal collaboration. Only with full collaboration do dramatic efficiency gains begin to occur. With full collaboration, it is intended that benefits accrue to all members of the collaboration. The development of agreed-upon methods for sharing gains and losses is essential to the success of the collaboration. (Pages 115-117)

Essentially, a third-party logistics firm may be defined as an external supplier that performs all or part of a company's logistics functions. This definition is purposely broad and is intended to encompass suppliers of services such as transportation, warehousing, distribution, financial services, and so on. There are other desirable characteristics of a "true" 3PL. Among these, multiple logistics activities are included, those that are included are "integrated" or managed together, and they provide "solutions" to logistics/supply chain problems.

Included are transportation-based, warehouse/distribution-based, forwarder-based, financial-based, and information-based firms. (Pages 119-120)

The logistics services most frequently outsourced are those that are more operational, transactional, and repetitive in nature. Looking at the results over all of the regions studied, the most frequently outsourced services include domestic transportation (83%), international transportation, (75%), warehousing (74%), customs brokerage (58%), and forwarding (53%). The less frequently outsourced logistics services tend to be customer-related, involve the use of information technology, and are more strategic in nature. (Page 123)

Although the concept has been around for some time, the "fourth- party logistics" (4PL) provider is becoming more evident in the business world. Essentially a supply chain integrator, a 4PL may be thought of as a firm that "assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution." Some of the types of services that may be provided by a 4PL include managing multiple 3PLs (lead logistics provider), taking on more risk than 3PLs, providing advanced IT services, providing strategic consultancy, and "control tower" services (Page 130)

The S&OP Benchmarking Consortium in the Center for Supply Chain Research adopted a five-step process in arriving at this consensus forecast. Step 1 (Run sales forecast reports) requires the development of a statistical forecast of future sales. This would be done using one or more forecasting techniques. Step 2 (Demand planning phase) requires the sales and/or marketing departments to review the forecast and make adjustments based on promotions of existing products, the introductions of new products, or the elimination of products. This revised forecast is usually stated in terms of both units and dollars since operations are concerned with units and finance is concerned with dollars. Step 3 (Supply planning phase) requires operations (manufacturing, warehousing, and transportation) to analyze the sales forecast to determine if existing capacity is adequate to handle the forecasted volumes. This requires analyzing not only the total volumes but also the timing of those volumes. Step 4 (Pre-S&OP meeting) asks individuals from sales, marketing, operations, and finance to attend a meeting that reviews the initial forecast and any capacity issues that might have emerged during Step 3. Initial attempts will be made during this meeting to solve capacity issues by attempting to balance supply and demand. Alternative scenarios are usually developed to present at the executive S&OP meeting (Step 5) for consideration. These alternatives would identify potential lost sales and increased costs associated with balancing supply and demand. The sales forecast is also converted to dollars to see if the demand/supply plan meets the financial plan of the organization. Step 5 (Executive S&OP meeting) is where final decisions are made regarding sales forecasts and capacity issues. This is where the top executives from the various functional areas agree to the forecast and convert it into the operating plan for the organization. (Pages 234- 235)

A channel of distribution consists of one or more organizations or individuals who participate in the flow of goods, services, information, and finances from the production point to the final point of consumption. A channel of distribution can also be thought of as the physical structures and intermediaries through which these flows travel. These channels encompass a variety of intermediary firms, including those that can be classified as distributors, wholesalers, retailers, transportation providers, and brokers. Some of these intermediary firms take physical possession of the goods, some take title to the goods, and some take both. Thus, it is critical in the design of a distribution channel to take into consideration both the logistics channel and the marketing channel. The logistics channel refers to the means by which products flow physically from where they are available to where they are needed. The marketing channel refers to the means by which necessary transactional elements are managed (for example, customer orders, billing, accounts receivable). (Page 240)

Step 1: Segment the Customer Base by Profitability. Most firms allocate direct materials, labor, and overhead costs to customers using a single allocation criterion, e.g., pounds of product purchased during a particular time period. However, firms today are beginning to use techniques such as activity- based costing to more accurately allocate costs to customers based on the specific costs of servicing a customer's orders based on how, how much, what, and when a customer orders. Normally, a cost-to-serve (CTS) model is developed for each customer. These CTS models are very much like an income statement for the customer. Step 2: Identify the Product/Service Package for Each Customer. This step presents one of the most challenging activities in the CRM process. The goal of this step is to determine what each customer segment values in its relationship with the supplier. This decision is usually based on feedback from customers and sales representatives. The challenge here is how to "package" the value-adding products and services for each customer segment. One solution is to offer the same product/service offering to each customer segment, while varying the product quality or service levels. Step 3: Develop and Execute the Best Processes. In Step 2, customer expectations were determined and set. Step 3 delivers on those expectations. Organizations many times go through elaborate processes to determine customer needs and set target performance levels, only to fail when it comes to executing on those customer promises. Step 4: Measure Performance and Continuously Improve. The goal of CRM is to better serve the different customer segments of the supplier organization, while at the same time improving the profitability of the supplier. Once the CRM program has been implemented, it must be evaluated to determine if (1) the different customer segments are satisfied and (2) the supplier's overall profitability has improved. (Pages 258-260)

Traditional cost accounting is well suited to situations where an output and an allocation process are highly correlated. On the other hand, traditional cost accounting is not very effective in situations where the output is not correlated with the allocations base. This is the more likely scenario in logistics. This is where we can see the effectiveness of activity-based costing (ABC), which can be defined as, "A methodology that measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use. ABC recognizes the causal relationships of cost drivers to activities." ABC assigns resources to an activity (for example, labor cost for picking product), identifies the cost drivers (for example, labor cost for picking a pallet versus picking an inner- pack), and then allocates those costs to products, customers, markets, or business units. ABC more accurately reflects the actual cost of performing an activity than does traditional cost accounting. (Page 261)

Many organizations are using Internet technology as a means to capture order information and transmit it to their "back end" systems for picking, packing, and shipping. What the Internet is now allowing is the faster collection of cash by the seller organizations. The traditional "buy-make-sell" business model used by many organizations that produce product to inventory makes them wait for an order. Obviously, the longer it takes the selling organization to complete the order management process, the longer it takes to collect its cash. Applying Internet technology to the order management process has allowed organizations to not only take time out of the process but also to increase the velocity of cash back to the selling organization. These two benefits have added strategic importance to the order management process. (Pages 273-274)

Customer service is often the key link between logistics and marketing within an organization. If the logistics system, particularly outbound logistics, is not functioning properly and a customer does not receive a delivery as promised, the organization could lose both current and future revenue. Manufacturing can produce a quality product at the right cost and marketing can sell it, but if logistics does not deliver it when and where promised, the customer will not be satisfied.

Time- The time factor is usually order to cash, particularly from the seller's perspective. On the other hand, the buyer usually refers to the time dimension as the order cycle time, lead time, or replenishment time. Dependability- To many buyers, dependability can be more important than the absolute length of lead time. The buyer can minimize its inventory levels if lead time is constant. Communications- Three types of communication exist between the buyer and the seller: (1) pre transaction, (2) transaction, and (3) post transaction. Pretransaction communication includes current product availability and the determination of delivery dates. Transaction information has both a buyer-seller component as well as what can be called a seller-seller component. Finally, post transaction communication involves repair, assembly, or returns. Convenience- is another way of saying that the logistics service level must be flexible. From the logistics operation perspective, having one or a few standard service levels that apply to all buyers would be ideal; but this assumes that all buyers' logistics requirements are alike. In reality, this is not the situation. (Pages 277-281)

(1) the buyer waits until the product is available; (2) the buyer back- orders the product; (3) the seller loses current revenue; or (4) the seller loses a buyer and future revenue. Buyer Waits Theoretically, if the customer waits it should cost nothing; this situation is more likely to occur where product substitutability is very low. Back Orders A back order occurs when a seller has only a portion of the products ordered by the buyer. The back order is created to secure the portion of the inventory that is currently not available. By placing the back order, the buyer is indicating that it is willing to wait for the additional inventory. However, after experiencing multiple back orders with a seller, a buyer might decide to switch to another seller. Lost Sales Most organizations find that although some customers might prefer a back order, others will turn to alternative supply sources. Much of the decision here is based on the level of substitutability for the product. In such a case, the buyer has decided that if the entire order cannot be delivered at the same time, it will cancel the order and place it with another seller. In the likely event that the seller will sustain lost sales with inventory stockouts, the seller will have to assign a cost to these stockouts. Then the seller should analyze the number of stockouts it could expect with different inventory levels. Lost Customer The last possible event that can occur because of a stockout is the loss of a customer; that is, the customer permanently switches to another supplier. A supplier who loses a customer loses a future stream of income. Estimating the profit (revenue) loss that stockouts can cause is difficult. (Pages 283-285)

Demand for a given inventory item is termed independent when such demand is unrelated to the demand for other items. Conversely, demand is defined as dependent when it is directly related to, or derives from, the demand for another inventory item or product. For example, the demand for a laptop computer is independent, while the demand for its computer chip is dependent. This dependency can be vertical (the laptop needs the chip for assembly) or horizontal (the laptop needs an instruction manual for final delivery to customer). So, for many manufacturing processes, basic demand for raw materials, component parts, and subassemblies depends on the demand for the finished product. In contrast, the demand for the end-use items, which are typically sold to a customer, is independent of the demand for any other higher-order manufactured item. An important point to remember is that developing inventory policies for items exhibiting independent demand requires that forecasts be developed for these items. Alternatively, forecasting is less relevant for items having dependent demand, since the required quantities for these items depend entirely on the demand for the end-use product. So, once the difficult task of forecasting demand for end-use items is completed, determining the demand for dependent items requires simple calculations based on the bill of materials for that item. (Pages 337-338)

The "pull" approach relies on customer orders to move product through a logistics system, while the "push" approach uses inventory replenishment techniques in anticipation of demand to move products. A principal attribute of pull systems is that they can respond quickly to sudden or abrupt changes in demand because they produce to an order and have very little, if any, finished goods inventory. This is especially true for products where the final addition of value can be postponed. Alternatively, push systems produce to inventory in anticipation of demand, thus making their ability to adapt to changing demand volumes and preferences limited. Pull systems usually run on short-term forecasts, allowing them the flexibility to adapt to swings in demand. On the other hand, push systems use longer-term forecasts that allow for scale economies in manufacturing but result in high finished goods inventories. These high levels of finished goods inventories can make shelf life a problem in push systems, while this is not an issue for pull systems. Characteristically, JIT is a pull system since organizations place orders for more inventory only when the amount on hand reaches a certain minimum level, thus "pulling" inventory through the logistics system as needed. Having established a master production schedule, MRP develops a time-phased approach to inventory scheduling receipt. Because they generate a list of required materials in order to assemble or manufacture a specific amount of finished products, MRP and MRP II approaches are push based. (Page 338)

Generally, JIT systems are designed to manage lead times and to eliminate waste. Ideally, product should arrive exactly when an organization needs it, with no tolerance for late or early deliveries. Many JIT systems place a high priority on short, consistent lead times. However, in a true JIT system, the length of the lead time is not as important as the reliability of the lead time. The JIT concept is an Americanized version of the Kanban system, which the Toyota Motor Company developed in Japan. Kanban refers to the cards attached to carts delivering small amounts of needed components and other materials to locations within manufacturing facilities. Each card precisely details the necessary replenishment quantities and the exact time when the replenishment activity must take place. Production cards (kan cards) establish and authorize the amount of product to be manufactured; requisition cards (ban cards) authorize the withdrawal of needed materials from the supply operation. Given knowledge of daily output volumes, these activities can be accomplished manually, without the need for computer assistance. Experience indicates that effectively implementing the JIT concept can dramatically reduce parts and materials inventories, work-in-process inventories, and finished product. In addition, the Kanban and JIT concepts rely heavily on the quality of the manufactured product and components and on a capable and precise logistics system to manage materials and physical distribution. Four major elements underlie the JIT concept: zero inventories; short, consistent lead times; small, frequent replenishment quantities; and high quality, or zero defects. JIT is an operating concept based on delivering materials in exact amounts and at the precise times that organizations need them—thus minimizing inventory costs. JIT can improve quality and minimize waste and completely change the way an organization performs its logistics activities. JIT, as practiced by many organizations, is more comprehensive than an inventory management system. It includes a comprehensive culture of quality, supplier partnerships, and employee teams. By adhering to extremely small lot sizes and very short lead times, the JIT approach can dramatically reduce lead times. (Page 359)

Purchasing, procurement, and strategic sourcing are receiving considerable attention as organizations try to improve the overall efficiency and effectiveness of their supply chains. • Purchasing: The transactional function of buying products and services. In a business setting, this commonly involves the placement and processing of a purchase order. • Procurement: Refers to the process of managing a broad range of processes that are associated with a company's need to procure goods and services that are required to manufacture a product (direct) or to operate the organization (indirect). • Strategic sourcing: Essentially, the strategic sourcing process is broader and more comprehensive than the procurement process. Strategic sourcing takes the process further, focuses more on supply chain impacts of procurement and purchasing decisions, and works cross-functionally within the business to help achieve the organization's overall business goals. (Pages 550-551)

Generics are low-risk, low-value items and services that typically do not enter the final product. Items such as office supplies and maintenance, repair, and operating items (MRO) are examples of generics. The administrative and acquisition processing costs are more significant than the purchase price of generics, and, for some generics, the administration and processing costs may exceed the price paid for the item or service. Commodities are items or services that are low in risk but high in value. Basic production materials (bolts), basic packaging (exterior box), and transportation services are examples of commodities that enhance the profitability of the company but pose a low risk. Distinctives are high-risk, low-value items and services such as engineered items, parts that are available from only a limited number of suppliers, or items that have a long lead time. The company's customers are unaware of or do not care about the uniqueness of distinctives, but these products pose a threat to continued operation and/or high procurement cost. Criticals are high-risk, high-value items that give the final product a competitive advantage in the marketplace. The procurement strategy for criticals is to strengthen their value through use of new technologies, simplification, close supplier relations, and/or value-added alterations. (Pages 552-554)

Step 1: Project Planning and Kickoff Included here are the formation of a steering committee to guide and oversee the overall strategic sourcing process, and a sourcing team to have direct involvement with all elements relating to the development and execution of the chosen sourcing strategy or strategies. Step 2: Profile Spend The purposes of this step are to develop an accurate understanding of requirements and specifications for needed products and services and to assess opportunities for improvement of purchasing and procurement processes. Activities to be included in this step: • Identify or reevaluate needs • Define and evaluate user requirements • Decide whether to make or buy Step 3: Assess Supply Market This critical step involves making sure that all potential sources of supply are identified and that useful mechanisms are in place for meaningful comparisons of alternative supply sources. Step 4: Develop Sourcing Strategy Prior to embarking on the step of supplier selection, it is important to fully develop a sourcing strategy that defines the parameters of the process and the steps to be followed. Of particular interest in this process are the steps related to initial supplier research and screening, development of a responsive request for information (RFI) and request for proposal (RFP), site visits with follow-up discussions, and supplier selection. Step 5: Execute Sourcing Strategy This step begins with an evaluation of the suppliers that remain following the RFI and RFP processes and culminates in the award of a contract. Step 6: Transition and Integrate Important elements of this step are the finalization of the contractual agreement, planning the transition process, and receipt or delivery of the product or service. This activity occurs with the first attempt by the supplier or suppliers to satisfy the user's needs. The completion of this activity also begins the generation of performance data to be used for the next step in the strategic sourcing process. Step 7: Measure and Improve Performance A very important step in the strategic sourcing process is the measurement and improvement of supplier performance. This involves making a post-purchase performance evaluation. (Pages 556-560)

• Total Quality Management—Arising in the 1980s in response to Japanese competition and the teachings of Dr. W. Edwards Deming, TQM represented a strategy in which entire organizations were focused on an examination of process variability and continuous improvement. This approach, which was very popular into the mid-1990s, included a goal of improving a company's quality to only three defects per million through systematic incremental change in processes and careful statistical measurement of outcomes. • Six Sigma—Is similar to TQM in its focus on techniques for solving problems and using statistical methods to improve processes. But whereas TQM emphasizes employee involvement for the total organization, the Six Sigma approach involves training experts (known as green belts and black belts) who work on solving important problems while they teach others in the company. • ISO 9000—A program started in 1987 by the International Organization for Standardization. It has an objective of making sure that companies have standard processes in place that they follow: "Document what you do and do what you document." ISO 9000 involves a third-party registration program certifying that companies are following documented processes.