APICS Certified Supply Chain Professional” LEARNING SYSTEM module Version 2.1, 2010 EditionPreparing for the Certification Exam Studying the APICS CSCP Learning System combined with on-the-job knowledge, professional experience, and other APICS learning tools, such as the APICS Dictionary, is the most effective way to prepare for the APICS CSCP certification examination. The APICS CSCP Learning System is intended to cover the body of knowledge tested by the APICS CSCP certification examination; however, the APICS CSCP Learning System does not “teach the test.” The Learning System focuses on acquiring knowledge, whereas the exam tests the candidate’s ability to apply that knowledge in accordance with accepted industry standards. Content on the exam is based on real-world scenarios and requires candidates to apply the concepts in the APICS CSCP Learning System. While both the APICS CSCP Leaming System and the APICS CSCP certification examination are based on the APICS CSCP Exam Content Manual (which is available for a free download at www.LearnCSCP.com > Information Center > Certification Exam Resources), they are developed independently of one another. To preserve exam integrity, specific exam questions and their breadth are not shared with the APICS CSCP Learning System developers. Intellectual Property and Copyright Notice All printed materials in the APICS CSCP Learning System, and all material and information in the ‘companion online component are owned by APICS, and protected by United States Copyright Law, as well as international treaties and protocols, including the Berne Convention. The APICS CSCP Learning System and the companion Access Code for the CSCP online component are for your personal educational use only, and may not be copied, reproduced, reprinted, modified, displayed, published, transmitted (electronically or otherwise), transferred, sold, distributed, leased, licensed, adapted, uploaded, downloaded or reformatted. In addition to being illegal, distributing CSCP materials in violation of copyright laws will limit the program’s usefulness. APICS invests significant resources to create quality professional development ‘opportunities for its membership. Please do not violate APICS’ intellectual property rights or copyright laws. APICS Dictionary, 12" Edition Reference Definitions contained within the APICS CSCP Learning System are consistent with the APICS Dictionary, 12th edition. You may purchase the complete dictionary from the APICS bookstore. Module I Checklist: Supply Chain Management Fundamental Section Start Date Completion Date 1-A: Overview of supply chain management 1-B: Supply chain management strategy 1-C: Managing the supply chain 1-D: Improving the supply chain ‘Score for Module-Specific Test* Look for this test on the Web at www.LeamCSCP.com,Course Overview and Module 1: Supply Chain Management Fundamentals Table of Contents COURSE OVERVIEW. steven i MODULE 1: SUPPLY CHAIN MANAGEMENT FUNDAMENTALS Introduction... Section A: Overview of Supply Ch: Identifying Supply Chains Key Supply Chain Management Processes Management... Evolution of Supply Chain Management... Creating Value through Supply Chain Management... 129 ‘The Impact of Globalization on Supply Chain Management Las Section B: Supply Chain Management Strategy. Ls Corporate Strategy. = 1-52 Aligning Supply Chain Strategy with Corporate Strategy 1-75 Competitive Priorities and Future Direction 1-86 Using Enterprise Resources Planning (ERP) to Align Operations with Strategy 1-90 Supply Chain Risk Management Strategies Section C: Managing the Supply Chain... Using Corporate and Supply Chain Strategies to Set Priorities and Make Decisions 1-104 Elements of Supply Chain Management Supply Chain Performance Metries. Mane Managing and Leading People in the Supply Chain . Synchronization and Key Suecess Factors... Security and Compliance Issues... ing the Supply Chain for Financial Performance Section D: Improving the Supply Chain Continuous Improvement... Visibility and Analysis 2010 APICS, All rights reserved, Version 2.1, 2010 EditionGoals and Benchmarking Continuous Improvement Methods... Implementation and Change Management.... Exam Preparation Questions... Bibliography. Cumulative Course Index © 2010 aPics All rights reserved, Version 2.1, 2010 EditionAPICS Certified Supply Chain Professional™ (CSCP) Learning System This product is based on the APICS CSCP Exam Content Manual (ECM) developed by APICS. Although the text is based on the body of knowledge tested by the APICS CSCP exam, program developers do nat have access to the exam questions. Therefore, reading the text does not guarantee a passing score. ‘The references in this manual have been selected solely on the basis of their educational value to the APICS CSCP certification program and on the content of the material, APICS does not endorse any services or other materials that may be offered or recommended by the authors or publishers of books and publications listed in this module. Every effort has been made to ensure that all information is current and correct. However, laws and regulations are constantly changing, Therefore, this product is distributed with the understanding that the publisher and authors are not offering legal or professional services. ‘Acknowledgments ‘We would like to thank the following dedicated subject matter experts who shared their time, experience, and insights during the initial development and subsequent updates of the CSCP Learning System: Greg P. Allgair Rajesh Kamat, CSCP Kimber Rueff, CPIM, CIRM, Curtis Brewer, CFPIM, CIRM, Prakash Kanagalekar, CPIM, SCP, CPM cscr cscP Ignacio Sinehe7-Chiappe Jashobrata Bose, CSCP Jack Ker, CPIM, CSCP, C.PM. Carolya Sly, CPIM, CSCP, Al Bukey, CFPIM, CIRM, Jose Lara CPM. cscP Mike Loughman, CSCP Pam Somers, CPIM, CIRM, Luc Chalmet, Ph.D, CFPIM, Giuseppe Lovecehio, CFPIM, cscP cscP cscP Chad Stieklin Prashant Choudhary, CSCP Richard Merrit, CFPIM, CSCP, Shashank Tilak, CPIM, CSCP Prasanta K. Dash, CSCP, PMP C.P.M. ‘Huan-Jau (Arthur) Tseng, Sudripto De, CSCP. Thiagu Mathan, CSCP CFPIM, CSCP. ‘Alan Downs, CPIM, CSCP Alan L. Milliken, CFPIM, Dave Turbide, CFPIM, CIRM Janice M. Gullo, CPIM, CSCP CIRM, CSCP Sudeep Valmiki, CSCP “Amit Kumar Gupta, BE, CSCP Peter W. Murray, CIRM Rosemary Van Treeck, CPIM, Joni Holeman, CFPIM, CIRM, Mike Okrent, Ph.D., CIRM, CIRM, CSCP cscP scr Robert Vokurka, Ph.D., CFPIM, Eric , Jack, Ph.D., CFPIM, Kesthuri Rengan Ponnambalam, CIRM, CSCP, CPM. cscP cscP Eddie J. Whitfield, CPIM, Rajesh Kumar Jagadeeswaran, Gautam Chand Pradhan, CPIM, CIRM, CSCP PIM, CSCP cscP Vivek Wikhe, CSCP David Rivers, CFPIM, CIRM, Blair Williams, Jonah, CFPIM, I cscP scr Honey Johnson, CFPIM, CIRM, Maryanne Ross, CFPIM, CIRM, CPM, CSCP csp @® tre aries P Learning System is printed on 30% post-consumer waste recycled paper. © 2010 APICS. All sights reserved. Version 2.1, 2010 EditionCourse Overview Welcome to the APICS Certified Supply Chain Professional™ (CSCP) Learning System. Whether you are interested in professional development or are pursuing the APICS CSCP credential, you will find the program to be a complete, easy-to-use leaming and reference tool. + Getting Started Course materials This course allows you to work at your own pace to increase your understanding of supply chain and operations management and the APICS CSCP body of knowledge. It includes four printed textbooks (called modules), which correspond to the knowledge domains tested on the APICS CSCP exam. The course also includes online practice tests and learning reinforcement activities. Please check that you have received the four modules and your access code (provided to you via e-mail) for the online course components. If anything is missing or if you have not received your access code, please contact APICS CSCP Learning System Customer Support at 888-266-9079 or 651-905-2664. Enrolling inthe —_ Before you use the Web components of the course, you must enroll: course 1. Go to www.LearnCSCP.com, and, from the menu sideber, select Enroll. 2. Enter your access code EXACTLY AS SHOWN; it is case-sensitive, 3. Accept the default setting “I am a new user.” Click Enroll. Enter your first name and I eight characters long, Then click OK. st name, Create a user name and password between four and After enrollment, the access code is no longer needed. You will use your user name and password to log in, so write this information in the space below. APICS Certified Supply Chain Professional Learning System Note that your access code is valid for one year after your first enrollment, © 2010 APICS All rights reserved, i Version 2.1, 2010 EditionCourse Overview Accessing the program Exiting the program Online help Learn more Once you are enrolled, you can acc wish. To access the program: 1. Go to www.LearnCSCP.com. 3s and leave the program as often as you Enter your user name and password. Click Log In to enter the course Read the online overview, and then go to the course menu, from which you select course components. ‘You may exit the program from most screens by clicking Log Out, This, option allows you to leave the program and return at a later time to where you left off, All current scores and your current place in the tests are saved. ‘You may start any activity over at any time. If you start over in a test, your current score is erased. Upon completion of that test, your new score is saved and displayed on your report. ‘The Help option on the Enroll sereen is available to answer common questions related to enrollment and log-in. If you require additional assistance, please contact APICS CSCP Learning System Customer ‘Support at 888-266-9079 or 651-905-2664, Monday through Friday, 8 a.m. to 5 p.m., central time. For specific details regarding the certification exam, please visit www. APICS.orglesep. ‘The APICS CSCP Learning System combines printed material and online software plus an instructor-led option to enhance your learning effectiveness. Go to www.APICS.org/esep to learn more about the advantages of APICS membership, the power of certification, and the various learning options. + Completing the Course Increase your knowledge base with this enjoyable and complete program as you prepare for the APICS CSOP ‘examination and develop your professional expertise. © 2010 aPICS All rights reserved. ‘The APICS CSCP Leaming System is based on the APICS CSCP E Content Manual (ECM). Using a blend of printed text and online practice testing and learning reinforcement activities, the course provides an enjoyable and complete preparation method for the APICS CSCP certification exam. ‘You may complete the course in any order. The following describes the recommended, step-by-step method. ii Version 2.1, 2010 EditionThe pre-test allows you to evaluate your Understanding of supply chain concepts and focus your study. The entire program includes more than 750 pages of text reinforced by online practice testing and earning reinforce- ment activities. At the end of each module section is @ progress check. Progress check questions provide an opportunity for you to stop and think about what you have just studied. They include a page reference with the correct answer to guide further reviow. © 2010 aPIcs All ight reserved. Step 1: Complete the pre-test. ‘You begin the program and plan your own course of study by completing the online pre-test. This 50-question test checks your basic understanding of supply chain concepts. As you answer each pre-test question, you will know immediately if your answer is correct or incorrect and you are given a reference to the module from which the question was drawn, If you leave the test, you can reenter it and will have the option to either continue or restart the test. You may also print any page by using your browser’s print funetion. The test is timed to enable you to determine whether you are answering questions at the pace needed to complete the APICS CSCP certification examination within the time allotted, If you are interested in timing your test, allow yourself an uninterrupted block of time. When you have completed the pre-test, you see a chart that shows your module- by-module score. You may use this chart to develop a study plan to help focus, ‘your efforts on the modules you need to examine most thoroughly. Use the print function on your browser if you want to print a copy of your pre-test results. Step 2: Study the print modules. Based upon your individual study profile, study each of the four modules at your own pace, The modules include the following topics, which correspond to those that constitute the APICS CSCP Exam Content Manual. The APICS CSCP certification exam questions are distributed among the four modules. Module 1: Supply Chain Management Fundamentals (30%) ‘© Overview of Supply Chain Management © Supply Chain Management Strategy © Managing the Supply Chain * Improving the Supply Chain Module 2: Building Competitive Operations, Planning, and Logistics (20%) © Demand Planning * Product Design Considerations * Operations Planning and Control * Logistics iti Version 2.1, 2010 Edition© Course Overview Each module includes a bibliography referencing the books used in the development of that module, Module-specific tests check your understanding of each module. These eFlashcards provide an ‘opportunity to review terms and definitions by module. eFlasheards can also be chosen and printed to review terms and definitions across modules. 2010 APICS All sights reserved, Module 3: Managing Customer and Supplier Relationships (30%) ‘* Relationship Management in SCM © Customer Relationship Management (CRM) ‘Supplier Relationship Management (SRM) * Integrated Customer/Supplier Relationship Management Module 4: Using Information Technology to Enable Supply Chain Management (20%) * Role of Information Technology in the Supply Chain ‘+ ERP in Supply Chain Management ‘+ Innovative Technologies and Their Uses ‘© Using IT to Enhance Supply Chain Performance © e-Business a Step 3: Complete the module-specific test. Module-specific tests contain 20 questions. You may take as many tests as you like, as often as you like, After you answer each question, you will know immediately if your answer is correct or incorrect along with the reasoning for the correct answer. If you leave the test, you can reenter it and will have the option to either continue or restart the test, You may also print any screen by using your browser’s print function, The testis timed to enable you to determine whether you are answering questions at the pace needed to complete the APICS CSCP examination within the time allotted, = Step 4: Complete the module-specific eFlashcards. After you have studied each module and taken the module-specific test, complete the eFlashcards for that module, The eFlashcards are drawn from the glossary and represent the terms identified as key or supplemental by the APICS Exam Content Manual. The eFlasheards present a definition of a term, and you supply the term, ‘You may visit the Information Center to download a printable version of the module-specific eFlashcards. Ss Step 5: Complete the eFlashcards across modules. After you have studied all of the modules, taken the module-specific tests, and reviewed the module-specific eFlashcards, complete the eFlashcards across modules. You may visit the Information Center to download a printable version of these eFlasheards, wv Version 2.1, 2010 EditionPost-test questions will be new. If you don't pass the post- test, the program helps redirect your study efforts, and then you can take the test again. Or use the post-test as a refresher to help you stay current, Review your report to measure your progress through the course at any time. Help us improve our product offerings and request your Letter of Recognition. © 2010 APICS All rights reserved. = BZ Step 6: Complete the post-test, When you reach this point, you've studied all the components of the program and are ready to measure your learning gain. The 50-question post-test draws from a different bank than you saw in the pre-test, so all the questions are new. After you answer each question, you will know immediately whether your answer is correct or incorrect and will see the reasoning for the correct answer to help clarify your understanding, The timing feature allows you to determine if 1m in the time allotted. If you leave the test, you can reenter it and will have the option to either continue or you are on track to complete the certification e restart the test. After you finish the post-test, you may view your report, which compares your pre-test and post-test scores and your scores on questions related to each of the four modules. You may take the post-test as many times as you wish until you are satisfied with your results. Each time you retake the post-test, your last score is erased and your new score is saved. Your most recent score is available to you on the report Step 7: Review your report. At any time, you may view an online report of your progress by clicking the Report link. The report shows the dates you have completed tests as well as your most recent pre-test, module-specific test, and post-test scores. You can use this report to determine where you may have areas of strength or weakness to direct further studying of the course. = Step 8: Complete the Program Evaluation. Upon completion of the course, we would appreciate your feedback, Select Program Evaluation and Certificate of Achievement from the menu and complete the online form. Upon successful completion of the course (a post-test score of at least 80 percent), you can request a Certificate of Achievement (recognizing completion of the leaming system) from the Program Evaluation form. v Version 2.1, 2010 EditionCourse Overview ‘The following is a graphic representation of the APICS CSCP Leaming System. APICS CSCP Learning System Mode Mod Specie Test Specie Test Module Specie Test =, Module Moule Mole Module Speste Sotsfie Specific Specie Flescarés eFnsbeards——cFsheands Flashers Fishers E Progam Evaluation and Centnea of Achievement 2010 aPICS All rights reserved, vi Version 2.1, 2010 EditionModule 1: Supply Chain Management FundamentalsIntroduction © 2010APICs All rights reserved. There have been supply chains as long as there have been suppliers and customers, but the evolving discipline of managing those chains for competitive advantage belongs to recent decades, Even the term “supply chain” came into ‘common usage only toward the end of the 20th century. As with many other phenomena occurring in that period of time, supply chains and their management reflect the revolution in electronic communication and the shrinking of the world into one global community—what author Tom Friedman calls the flattening of the globe. There were supply chains when primitive hunters brought back skins for transformation into garments for use or trade, Marco Polo went east in search of trade routes to bring raw materials from “the Orient” to Europe. But the scope, scale, and speed of supply chain processes have all gathered revolutionary momentum —and businesses around the world hasten to catch up or, in the case of leaders like Toyota, Wal-Mart, and Zara, to stay ahead, Their opportunities result from the flattening of the global playing field and advances in technology; their discoveries contribute to globalization and revolutionary technology. Supply chain management may be a young discipline, but like those other young disciplines, rocket science and brain surgery, it isn’t a simple one. It also resembles other youngsters in its rapid rate of development. Staying abreast of the theoretical and practical aspects of supply chain management —even keeping up with the voeabulary—requires constant attention. This first module in the APICS CSCP Learning System, Supply Chain Management Fundamentals, provides basic information that forms a foundation. both for the following modules in the course and for the continuous learning you will do later to stay current with new developments © Section A introduces essential concepts and vocabulary, including definitions and illustrations of the terms “supply chain” and “supply chain management.” It also traces the continuing evolution of supply chain ‘management, identifies business processes that are specific to supply chains, and deseribes ways in which supply chain management can create value for customers and investors. * Section B explores supply chain strategies, including their alignment with corporate strategy, how to change strategy when conditions require change, and how to manage risk 1 Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals ‘+ Section C explains the principles of supply chain management, from the setting of supply chain objectives through decision making, management of human resources, risk management, metrics, and financial performance. ‘* Section D explores the methods of assessing, measuring, and improving supply chain performance. © 2010 aPICs All rights reserve. 12 Version 2.1, 2010 EditionSection A: Overview of Supply Chain Management ‘This section is designed to Define and illustrate the supply chain as a concept Define supply chain management as a concept and provide examples Describe the evolution of supply chain management globally and within companies Identify and describe key supply chain processes Identify specific ways in which supply chain management creates value for customers and investors (customer value and financial value) Define globalization and illustrate its impact on supply chain management, 0 + Identifying Supply Chains Basic supply According to the APICS Dictionary, 12th edition, a supply chain is a “global chain © 2010 aPIcs network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.” A supply chain, in this view, comprises a network of both entities and processes (the engineered flow). A supply chain doesn't have to be global, but the massive chains that interest us in this course—the ones that run through corporations such as Wal-Mart, Mitsubishi, Dell, and the clothing chain Zara— are decidedly global in scope. Exhibit 1-1 illustrates a very basic supply chain (one that isn’t necessarily global) with three entities—a producer with one supplier and one customer. Exhibit 1-1: The Basic Supply Chain << __@§- Reverse product flow —— Supptier | Producer Customer J Primary Primary AF product product flow flow MS Primary cash fow Customer Jf Tier 1 materials I supplier > Customer Tier _| “supper 4 L. > Customer Primary yg Primary product flow payment ow In the case of our lemonade stand, services most obviously include utilities, transportation, warehousing, carpentry, and cleanup, among others. Utilities, which are suppliers to all manufacturers, are erucial considerations when locating plants and warehouses. If water and electricity (or natural ga8, of both) are not available at a proposed site, they cannot be readily made available ‘The exhibit also shows that Tier 1 suppliers have their own suppliers in Tier 2. The grocery store that supplies the lemons and sugar for the lemonade has its material and service suppliers—and they have their suppliers, and so forth. The sugar is not a raw material but « product with its own supply chain that begins in a cane field (probably in a different country) and is processed in a plant, shipped to a wholesaler, and distributed to the comer store, No matter how far you travel toward the left, you will never run out of new tiers of suppliers. Even a raw material extractor, such as a coal mine, has its own suppliers of extraction machinery and services. In fact, the coal mine may ship coal toa generating plant that supplies power to the manufacturer that produces a machine that is shipped to a distributor that sells mining equipment to the same mine that began the process; supply chains can double back on themselves. (Note: The APICS Dictionary, 12th edition, defines a distributor as “a business that does not manufacture its own products but purchases and resells these products.”) 16 Version 2.1, 2010 EditionSection A: Overview of Supply Chain Management Services also Although the traditional supply chain model was developed in manufacturing, the have supply service industry, too, has supply chains, According to the APICS Dictionary, 12th chains 2010 APICS, All rights reserved. [Bleci backup power | _ Electric transformers Facility maintenance Programming se edition, a firm in the service industry is “in its narrowest sense, an organization that provides an intangible product (¢.g., medical or legal advice).” More generally, the Dictionary defines service industries as “all organizations except farming, mining, and manufacturing [including] retail trade; wholesale trade; transportation and utilities; finance, insurance, and real estate; construction; professional, personal, and social services; and local, state, and federal governments.” Service-oriented supply chains also require sophisticated management, Exhibit 1- 3 illustrates, in simple form, the supply chain of an electric utility. It receives products, services, and supplies of its own and dispenses its services into three distribution channels: home customers, commercial customers, and other utilities. Exhibit 1-3: Electric Uti y Supply Chain Fuel supplies | The flows in our lemonade stand example aren’t quite as simple as might be supposed, either. The “products” that move through the chain could include materials, supplies, and the components used in the production of the lemonade. Information flows may be fairly rudimentary: orders submitted by end users of the product, by the distributor to the manufacturer, and by the manufacturer to the supplier. There will be recipes and shopping lists, discussions of potential demand, perhaps records of last year’s results. The flows of cash may be based upon information contained in cash register or credit card receipts at the corner store, mailed (or e-mailed) utility bills, and, of course, the mortgage payments, made on the manufacturing center/warehouse/residence. Quite possibly the utility bills are paid electronically—a significant improvement in the velocity of that part 17 Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals © 2010 APIcs Al sights reserved, of the supply chain and a time saver for the accounting department (the mother, when she pays the bills). Cash travels in several separate flows from the ‘manufacturer to suppliers of products and services and, of course, to the mortgage company. There are also logistics concerns: transportation from one entity to the cother—perhaps drawing upon the private fleet of two cars—as well as the ‘warehousing decisions, which are more likely thought of as kitchen design in this, case, And, finally, the reverse supply chain—you’ll read more about that later in this module and in Module 2—exists to return any unacceptable lemons (or any overstock), to recycle the peels into a composter, to reuse glasses and other supplies after sterile cleansing, and to dispose responsibly of any packaging Our lemonade busin wvoids many complexities that confiont a profit-making enterprise. There are no competitors, for one thing, although competition is not ‘out of the question. Other children in the neighborhood might set up a business to distribute store-bought lemonade, thus cutting out the manufacturer in the kitchen and putting the supplier in charge of product design, Another stand ‘might be set up with “make-to-order” (the product is made after receipt of the order) lemonade squeezed and sweetened to each customer's taste, There are also no taxes, no regulations (at least none that the family takes into account), and no labor contracts. All those complications might loom down the road, however, Many global tn basement with the glimmering of an idea for, let us say, a computer operating system or a new idea for consumer-to-consumer e-commerce. Perhaps Mom comes up with a new twist on the old recipe for lemonade; a customer is nesses began in someone’s home office, garage, or impressed and asks the girls to cater a party; someone at the party owns a neighborhood store or restaurant...and before long the family has purchased a processing facility to supply fruit-based drinks to franchised “Thirst-Ade™ stands in three time zones and has direct links to farms around the world for fresh fruit in all seasons. It’s surprising how many challenges and opportunities confronting the largest corporations and supply networks are anticipated—and can be seen most easily—in a very simple model. Notice one last aspect of this lemonade stand supply chain. Unlike many traditional supply chains involving corporations, this one quite likely included a good deal of collaborative planning (a process where supply chain partners Jointly plan key supply chain activities) in regard to demand forecasts (predicting customer demand) and replenishment (replacing material in the supply chain), at least involving the manufacturer and distributors. Finance may also have contributed to the plans. Some of the problems that supply chain management strives to overcome are implicit in a simple model—because the problems have arisen as a direct result of the massive scale of modern supply chains, 18 Version 2.1, 2010 EditionSumming up © 2010 APICS All rights reserved. Section A: Overview of Supply Chain Management There are many variations on the basic supply chain models presented so far. Here are some basic points to keep in mind as the discussion continues and grows more complex. + A supply chain involves, directly or indirectly, everyone and everything required to extract materials, transform them into a product, and sell the product to a user. ‘© Supply chains include various entities, such as raw material extractors, service and component suppliers, a material product manufacturer or a producer of services, distributors, and end customers. © Supply chains can be viewed in terms of processes, such as the gathering ‘and processing of marketing data, distribution and payment of invoices, processing and shipping of materials, scheduling, fulfillment of orders, and so forth. Such functions cut actoss entities. ‘+ Supply chains include various flows as well as various entities. Materials and services flow from suppliers toward customers; payment flows from customers toward suppliers; information flows both ways, Supply chains also run in reverse, starting with the customer who sends back such items ‘as components for replacement or repair, retuned goods for remanufacture, and obsolete goods for recycling or disposal. The reverse chain, like the forward chain, also comprises information flows and cash or credits * There are stakeholders outside the basic supply chain model that can. significantly affect its functioning for good or ill. These include, most significantly, govemments that may build infrastructure, enforce regulations, levy (or forgive) taxes, and in various ways create a climate in which businesses either thrive or stagnate. Other stakeholders include the public at large and providers of knowledge, such as universities and trade associations. (Information flows into a supply chain from such sources as well as flowing back and forward among entities in the chain.) Finally, competitors also affect the functioning of a supply chain in more ways than one. Competition can not only threaten a chain; it can energize it as well. And sometimes competing businesses directly foster each other’s growth by participation in trade associations and joint ventures. Whenever a competitor creates an improved product or business process, the entire marketplace is enriched by the new ideas. 19 Version 2.1, 2010 Edition‘Module 1: Supply Chain Management Fundamentals +* Key Supply Chain Management Processes Supply chain processes Beware of conflicting definitions Value chain primary activities and the supply chain © 2010 APIcs All sights reserved The definition of supply chain seems fairly solid when you consider the chain as linked organizations—supplier, producer, and customer connected by product, information, and payment flows. But the supply chain is more accurately viewed as a set of linked processes that take place in the extraction of materials for transformation into products (or perhaps services) for distribution to customers. Those processes are carried out by the various functional areas within the organizations that constitute the supply chain. When considered as a set of processes rather than a succession of companies little more difficult to identify —let alone manage. , the supply chain becomes just a In this discussion of key processes, we'll outline one of the more widely known process-oriented models: the Supply-Chain Operations Reference model. This, ‘model was developed and is maintained by the Supply-Chain Council (SCC), a nonprofit membership organization open to all interested corporations, nonprofit organizations, government and military agencies, consultants, and academicians. We'll also apply a version of the process model to service supply chains, which have received much less attention than manufacturing chains. But before we look at the model, we'll analyze several definitions of supply chain management, Not all authors agree on the definition of supply chain, and that can be a source of confusion. In addition, you may see references to the supply chain that include only the suppliers. In this view, supply chain management is restricted to supply management, The rest of the chain (possibly excepting production) is called the distribution chain and is subject to distribution management, For this course, definitions of supply chain management (SCM) and related references integrate the three functions—supply, distribution, and production—linked in a relationship. from the sometimes Another source of confusion about definitions comes interchangeable use of “value chain” and “supply chain.” Although many would assume that a supply chain is, in fact, a value chain—at least itis if well ‘managed—others draw a distinction between the two. A value chain is a string of collaborating players who work together to satisfy market demands for specific products or services. According to the APICS Dictionary, 12th edition, the value chain is made up of “the functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment.” Value chains integrate a variety of supply chain activities throughout the product/service life cycle, from determination of customer needs through productserviee development, 110 Version 2.1, 2010 Edition© 2010 aPIcs Al rights reserved. Section A: Overview of Supply Chain Management production/operations, and distribution. The intent of a value chain is to increase the value ofa product or service as it passes through stages of development and distribution before reaching the end user. A value chain seeks to achieve the highest levels of customer satisfaction and value while effectively exploiting the competencies of all parties in the supply chain Not all value chain activities are technically part of the supply chain, and those engaged in them may not understand their role in supporting the supply chain. For example, managers from outside the supply chain often don’t understand the requirements of supply chain management, can’t distinguish value chain from supply chain, and consequently don’t provide the SCM support required from their areas, Among these areas are engineering, marketing, finance, accounting, information technology, human resources, and legal. Each of these areas has specific responsibilities in relation to effective management of the supply chain. Later in this course we'll look specifically at the role of marketing (Module 2) and information technology (Module 4), and we'll see more about people ‘management in Sections B and C of this module. It’s possible to disagree about which support responsibilities belong to value chain management and not to supply chain management; the important point is that they have to be carried out, in such a way as to support the supply chain. Another closely related term is “value stream.” A value stream encompasses all the primary actions required to bring a product or service from concept to placing tin the hands of the end user. As defined in the APICS Dictionary, 12th edition, a value stream is: The processes of creating, producing, and delivering a good or service to the market. For a good, the value stream encompasses the raw material supplier, the manufacture and assembly of the good, and the distribution network, For a service, the value stream consists of suppliers, support personnel and technology, the service “producer,” and the distribution channel, The value stream may be controlled by a single business or a network of several businesses. ition, as in many discussions of supply chains, value chains, and value streams, itis difficult to maintain a clear separation It’s worth noting that in this det between processes —such #s manufacture and assembly on the one hand—and entities, such as raw material supplier and distribution network on the other. While “stream” implies flow and, therefore, processes, “chain” implies physical entities. Since both entities and processes are crucial in supply chain management, it seems best to assume that the term “supply chain” includes both, rl Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals APICS definition of supply chain management © 2010 aPics Allrights reserved. And, finally, the APICS Dictionary, 12th edition, defines supply chain management as “the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.” (Globally, in this, , can mean either worldwide or applying to the chain as a whole rather than to a particular entity within the chain.) There is really nothing in this definition incompatible with others we've explored, except for possible differences in opinion about what functions are and are not technically part of the supply chain. Moreover, the APICS definition provides guidance on the activities and objectives of supply chain management, and the course follows that guidance, Explaining all the parts of the APICS definition requires more than a sentence ora paragraph. (In fact, it takes the four modules of this course to do so in depth.) But there are a few things to note right away. Supply chain management is about creating net value; early efforts at managing chains often focused only on cost reduction—on making the chain leaner. Unfortunately, these efforts sometimes reduced the ability to create value more than they reduced costs, for a net negative effect. As we'll see, there’s more to creating value through intelligent management than simply squeezing costs out of one of another activity in the chain. The definition also assumes value-creating activities that transcend the activities of particular entities in the chain—activities, for example, that are planned and coordinated between two or more entities in the chain. This of ‘course raises the question of who will manage those activities, since a supply cchain isn’t an entity like a corporation with its own management structure. Supply chains are generally organized by one strong firm called a channel master or nucleus firm—often a manufacturing firm, sometimes a powerful retailer. Nevertheless, the chain has to produce value for more than one stakeholder in addition to generating value for the consumers or investors. Given the nature of groups, one would expect this to be a challenging task, especially in “worldwide” chains; think of the rivalries that arise among the 50 United States, the 25 nations in the European Union, the three nations in the North American Free Trade Agreement (Mexico, Canada, and the United States), the various sects of any world religion, or the divergent personalities in an extended family. As in all these other complicated enterprises, managing supply chains requires a balancing act among competing interests Le Version 2.1, 2010 EditionSection A: Overview of Supply Chain Management SCOR® supply The Supply-Chain Operations Reference (SCOR®) model is “a proces chain process model SCOR Model 9.0 assumptions © 2010 APICS All rights reserved, reference model developed and endorsed by the Supply-Chain Council as the cross-industry standard diagnostic tool for supply chain management” (APICS Dictionary, 12th edition). The SCOR model presents the Supply-Chain Couneil’s consensus view of supply chain management and reflects the collective wisdom of years of field-based practices. The model provides a unique framework that links business processes, metries, best practices, and technology features in a unified structure, The Supply-Chain Council (SCC) intends the SCOR model for use by its members, and associated processes and to improve their supply chain performance. The SCC carefully defines the boundaries within which the SCOR process model applies. Specifically, it does not apply to all business processes, only to those involved in the supply chain as the chain extends two tiers in both directions from the company at the core (“Your Company” shown in Exhibit 1-4 on the next page). to enhance their understanding of their supply chait SCOR Version 9.0 does apply to the following activities: ‘+ All customer interactions from order entry through paid invoice ‘All product transactions (defined as physical materials and services), including equipment, spare parts, bulk product, and software, among others ‘+ All market interactions from understanding aggregate demand through order fulfillment SCOR Version 9.0 does not apply to the following processes: ‘© Sales and marketing (defined as demand generation) ‘* Research and technology development ‘+ Product development ‘+ Some elements of post-delivery customer support (but it does include returns as a fundamental process) (SCOR does note some of the many links that can be drawn from processes in the model to processes outside the model, such as product development. The product flows from supplier toward customer in the basic model shown in previous illustrations; that representation assumes that the product has already been designed and tested for production, Nevertheless, the design of a product may significantly influence the functioning of the chain, so supply chain representatives should play a role in the design process, as you'll see in Module 2.) Because all business activities are related throughout an organization, the Supply- Chain Council is hosting efforts to build models of sales, design, and marketing using the same logic as the model featured here. 1-13 Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals SCOR does not address the following but assumes that they exist: + Training = Quality Information technology (IT) ‘* Administration (other than SCM administration) As shown at the bottom of Exhibit 1-4, the SCOR model refers to the members of the supply chain pictured in our earlier exhibits, with slight modifications. At the center is “Your Company.” To the immediate right is the first tier of customers, which can be either internal or external; to the left is the first tier of suppliers, which, again, can be either intemal or external. The model goes out two tiers in both directions; the second-tier suppliers and customers are assumed to be extemal. But the main focus of the model is on the chain’s five management processes: plan, source, make, deliver, and return. These processes—which are not traditional functional areas or departments —exist within the member firms of the chain, According to the SCOR 9.0 model, all five process the central triad of chain members (which, after all, may be under the same are carried out by ‘ownership and upper management). The members at each end of the chain (a raw ‘material supplier and a retail outlet, for example) perform only two processes (the supplier's supplier handles only delivery and returns, while the customer's customer manages only sourcing and returns). While the model focuses on “Your and two tiers of suppliers and customers, it can be applied to supply chains containing many linked firms. Company” Exhi 1-4: SCOR Supply-Chain Operations Reference Model @ Suppliers | Supplier Sapa | Anernal or ——$——__ '/Gastomer=— Customer Your Company || Limterna or Eater ‘Source: Adapted from Supply-Chain Council SCOR Model 9.0 There is more to the SCOR model than the five process descriptions and their applicability relationships as illustrated in Exhibit 1-4. Later in this module we'll look more © 2010 aPIc All sights reserved. 14 Version 2.1, 2010 EditionFive SCOR processes © 2010 APICS All rights reserved, ‘Section A: Overview of Supply Chain Management closely at the way the model can be used to describe, measure, and improve the performance of supply chain processes in “Your Company.” Membership in the SCC is open to all types of global organizations. Many case studies are available for download from the SCC Web site, including SCOR initiatives at Charoen Pokphand, Daikin Europe, KPMG, Siemens, the U.S, Department of Defense, and the University of New Zealand, As you can see in Exhibit 1-5 on the next page, the more detailed descriptions of the five main processes refer to such matters as product engineering, ‘warehousing, product inventories, and return of defective products, We'll look at the SCOR model again in Section C, “Managing the Supply Chain,” to show how it can be used in assessing a supply chain and measuring progress toward achieving supply chain objectives. For now, take a look at the descriptions of each of the five management processes in Exhibit 1-5. The SCOR process model is not static, For example, the fifth process, Return, was added after the first iterations of the model to recognize the growing importance of the reverse supply chain, which accommodates the flow of products back from the end user for replacement, warranty repairs, recycling, or disposal. What we say in this course applies specifically to Version 9.0 of the SCOR model. We'll come back to SCOR later when looking at supply chain management practices in more detail, The most important point to remember from this introduction to the model is the Focus on processes, Once you orient your strategic planning toward improving processes rather than functional silos, everything changes. In organizations, the los prevalent throughout ‘American agricultural communities. The use of the term generally implies a lack term “silo” is a metaphor drawn from the large storage of communication and common goals and suggests that each department in an organizational chart is an individual silo that stands alone, without interacting with any of the other departmental silos. A simple example of a process focus (not functional silo) is applying SCOR in planning, You might ask a question such as “How do we improve the way we make the product?” or “How do we bring delivery more into line with customer demands?” Some answers will logically come from traditional supply chain funetions. The logistics manager may very ‘well have an answer to the question about delivery based on either traditional or innovative thinking about transportation modes and schedules. But an engineer ‘might have an idea for changing the way the product is manufactured or assembled to provide more consumer choice for the same cost; a component supplier, if brought into the design process, might offer a suggestion about ‘materials that better suit the features that someone in marketing has identified. 1s Version 2.1, 2010 Edition‘Module 1: Supply Chain Management Fundamentals Exhibit 1-5: SCOR Processes Defined Demand/Supply Planning and Management + Balance resources with requirements and establish/communieate plans for the whole supply chain, including Return, and the execution processes of Source, Make, and Deliver. + Management of business rules, supply chain performance, data collection, inventory, capital assets, transportation, planning configuration, and regulatory requirements and compliance. + Align the supply chain unit plan with the financial plan. Sourcing Stocked, Make-to-Order, and Engineer-to-Order Product + Schedule deliveries, receive, verify, and transfer product, and authorize supplier payments. ‘+ Identify and select supply sources when not predetermined, as for engineet-to-order product, + Manage business rules, assess supplier performance, and maintain data, + Manage inventory, capital assets, incoming product, supplier network, import/export requirements, supplier agreements, and supply chain source risk. ‘Make-to-Stock, Make-to-Order, and Engincer-to-Order Production Execution + Schedule production activities, issue product, produce and test, package, stage product, and release product to deliver. With the addition of Green to SCOR, there are now processes specifically for waste disposal in Make. + Finalize engineering for engineer-to-order product. + Manage rules, performance, data, in-process products (WIP), equipment and facilities, ‘transportation, production network, regulatory compliance for production, and supply chain make risk, Order, Warehouse, Transportation, and Installation Managem« Order, and Engineer-to-Order Product + All order management steps from processing inquities and quotes to routing shipments and selecting carriers + Warehouse management from receiving and picking produet to load and ship product + Receive and verify product at customer site and install, ifnecessary, + Invoicing customer. + Manage Deliver business rules, performance, information, finished produet inventories, capital assets, transportation, product life cycle, importfexport requitements, and supply chain deliver risk, Return of Raw Materials and Receipt of Returns of Finished Goods + All Return Defective Product steps from source—identify product condition, disposition product, request product return authorization, schedule product shipment, and return defeetive product—and deliver—authorized product return, schedule return receipt, receive product, and transfer defective product + All Return Maintenance, Repair, and Overhaul product steps from source—identify product condition, disposition product, request product return authorization, schedule product shipment, and return MRO produet—and deliver~ authorize produet return, schedule return receipt, receive product, and transfer MRO product. + All Retutn Excess Product steps from source—identify product condition, disposition product, request product return authorization, schedule product shipment, and return exeess product and deliver—authorize product return, schedule return receipt, receive product, and transfer excess product. + Manage Return business rules, performance, data collection, return inventory, capital assets, transportation, network configuration, regulatory requirements and complianee, and supply chain return risk, for Stocked, Make-to- yVyyy Source: SCOR 9.0 Overview Booklet, Supply-Chain Council, © 2010 aPIcs All rights reserved, 1-16 Version 2.1, 2010 BaitionSection A: Overview of Supply Chain Management ‘A real-world example of supplier-aided design occurred, in fact, at BMW. One of the automaker's top suppliers proposed adding fiber optic-enabled light rings to the headlights, a distinctive feature that drivers in front of the BMW would recognize as a signal to move aside and let the oncoming “Ultimate Driving Machine” pass—a particularly useful feature on Germany's Autobahn with its provision for extremely fast driving, BMW and the supplier jointly developed the idea under a contract that ensures exclusive rights for the automaker. This is 4 particularly rich example of creative supply chain management, demonstrating partnership across company boundaries and the reliance on a supply chain unit for outside-the-box (or outside-the-silo) contributions. The supplier partnership created here transcended silos and the traditional transaction-based selection of the low bid on a project exhaustively designed by the manufacturer. Managing a process requires skill in bringing people and ideas together in new configurations, whereas managing silos tends to focus attention on increasing speed and cost efficiency in one area of the company without regard to other ‘We've looked at the five processes in the SCOR model developed by the Supply-Chain Counci cross-functional, cros ‘This model provides useful guidance in developing. to managing supply chain processes. Next we'll look at the evolution of supply chain management as ompany approach leading companies have evolved techniques and technologies to make these processes more efficient and effective in creating value for customers and other key supply chain stakeholders, For additional information about the Supply-Chain Council and the SCOR 9.0 model, visit www.supply-chain.org or contact the couneil’s headquarters (info@supply-chain.org) + Evolution of Supply Chain Management Two types of supply chain management 2010 APICS All rights reserved, Firms have generally pursued one of two types of supply chain management, called vertical and lateral (or horizontal) integration. Vertical integration, or vertical supply chain management, refers to the practice of bringing the supply chain inside one organization. Henry Ford often receives mention as aan especially successful avatar of this approach. In the early days of the automotive industry, Ford pursued a strategy of owning and controlling as ‘many links in the automobile supply chain as possible. While this structure still persists in some companies, it gencrally went out of fashion as corporations became vaster in scale and global supply chains became longer. It’s difficult for one corporation to garner the expertise needed to excel in all 17 Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals é Vertical integration 2010 APIcS, All ights reserved. elements of the supply chain, so corporations in Europe and North America, especially, have turned instead to outsourcing those aspects of theit business in which they judge themselves to be least effective. Ford Motor Company is no exception to this trend, Like the other two major U.S. automakers, Ford divested itself of the production of many components, as Chrysler Corporation shed its Mopar (motor parts) division and General Motors turned loose its component supplier to become Delphi Corporation. Lateral supply chain management has replaced vertical integration as the favored approach to managing the myriad activities in the supply chain. The lateral, or horizontal, approach is assumed in most supply chain illustrations, including the ones featured so far in this text, We usually assume that the ccustomer-producer-supplier illustrations refer to three separate companies. This is, of course, not necessarily the case; the entities could be departmen within one company—a supplier of tires in one department, an assembler of finished automobiles in another (the assembly line), and a wholly owned dealership at the customer end. But, in point of fact, horizontal chains are now the way of the world and, therefore, the major focus of supply chain theory and application. In this discussion of supply chain evolution, we will look first at vertical integration and then at the stages of evolution in the management of lateral supply chains. Vertical integration—the ownership of many or all parts of a supply chain—is ‘one method of supply chain management that has been around longer than the term “supply chain.” By bringing many supply chain activities in-house and. putting them under corporate management, vertical integration solves the problem of who will design, plan, execute, monitor, and control supply chain activities. A vertically integrated enterprise may grow from an entrepreneurial base by adding departments and layers of management to accommodate expansion, or it may be built through mergers and acquisitions. One often-cited example of vertical integration is the automobile company built by the first Henry Ford. In an attempt to create a self-sufficient enterprise, Ford owned iron ore mines, steel mills, and a fleet of ships as well as the manufacturing plants and showrooms that built and distributed the cars bearing his name (and, eventually, Lincolns and Mereurys as well) Exhibit 1-6 illustrates, roughly, the vertical integration of a supply chain as practiced by Henry Ford. Las Version 2.1, 2010 EditionSection A: Overview of Supply Chain Management Exhibit 1-6: Vertical Integration/Supply Chain Management a la Henry Ford © 2010 APICS All ights reserved, Ownership Management Marketing/Sales Finance —————_—____. _ Showroom L-# _ Ford eustomer Distribution | Conrrot + Plant Primary materiots/ product flow ‘Component production Ly pwmaterats | CAVA ICS Vertical integration persists as one method of managing a supply ain; wireless phone companies, for example, may purchase the phones, stock them at retail outlets, sell them, provide coverage, and handle warranty service. Nevertheless, many of the multi tional corporations that once were vertically integrated have chosen to eliminate non-core functions stead on outside supply chain partners. The complexity and expense of managing all those diverse activities drives top within the company and rely i management to sell off assets not directly contributing to the core business. In today’s global economy, many companies have divested themselves of their in-house component suppliers. Rather than bringing all the functions inside the walls of one corporation, large manufacturers and service providers are now more likely to adopt a lateral supply chain strategy. In a lateral chain, separately owned firms focus on core competencies such as extraction or production and deal with each other through discrete transactions or by longer-term contracts, The primary benefit of ver ‘wholly owned subsidiary with no independent presence in the marketplace can’t deal with competitors to sell its components or services at a higher integration is control, A department or price. Its operations are completely visible to the parent company (at least in theory) and can be synchronized with other company functions by directives from the top, Its schedules, workforce policies, locations, Lio Version 2.1, 2010 Edition‘Module 1: Supply Chain Management Fundamentals Lateral integration © 200 AICS All rights reserved, ‘amounts produced—all aspects of its business—are controlled by the overarching management. Once corporate ownership abandons the idea of vertical integration and turns instead to outsourcing various activities, it loses control of these aspects of the supply chain and has to deal with separately owned companies as suppliers or customers. Nevertheless, that’s been the dominant trend in the evolution of supply chain management during recent decades in North America and elsewhere. Some Japanese companies, on the other hand, favor an intermediate form of integration called “keiretsu.” The APICS Dictionary, 12th edition, defines keiretsu as follows’ A form of cooperative relationship among companies in which the companies largely remain legally and economically independent, even though they work closely in various ways such as sole sourcing and financial backing. A member generally owns a limited amount of stock in other member companies. ‘Among the reasons for relying on a lateral supply chain, the following three stand out: ‘© To achieve economies of scale and scope No matter how large the corporation, its internal supply chain functions lack economies of scale when compared with the potential capacity of an independent pro’ ‘course, that the independent provider supplies all the needs of the original {der of the same product or service. This assumes, of corporation and other customers as well. In that case, the supplier is most likely dealing directly with companies that compete with one another for the same business. The gain in scale may come at a price in confidentiality — though lack of confidentiality cuts both ways, To improve business focus and expertise Vertical integration, in a globally competitive market, multiplies the complexity of managing disparate businesses spread across international borders, time zones, and oceans. The independent company that focuses entirely on its particular business can develop more expertise than an in- house department, leading to more attractive pricing, higher quality, or both. Both the function spun off and the parent firm benefit from a cleaner focus on what they do best after they part company. 1-20 Version 2.1, 2010 EditionSection A: Overview of Supply Chain Management ‘+ Because it’s possible With the advent of advanced communication technology, many of the barriers to doing business at a distance have been falling away. Nearly instantaneous communication means, for example, that information can be shared simultaneously by videoconference or in chat rooms around the globe. As the entire globe becomes a marketplace, it makes sense to deal with already established companies that know their local markets. Many apparel companies in Europe, for example, work through Dutch logistics centers to take advantage of Holland's central location and because a number of specialized firms have sprung up there with well-developed capabilities in handling both the distribution and the return of clothing. Despite the attractions of the lateral chain, however, the fact remains that synchronizing the activities of a network of independent firms can be enormously challenging. What each firm gains in scale, scope, and focus, it may lose in ability to see and understand the larger supply chain processes—or care about them. Exhibit 1-7 hints at the complexity of a multitiered chain—but only hints at it. As you can see, “horizontal” doesn’t quite capture the complexity of the global supply network with multiple connections around the world and information shared on networks connected all along the chain. Exhibit 1-7: ateral (Horizontal) Supply Chain oO Rew Ne 7 aterits Cammpoments YX Plant YC Primary Primary product flows ———> — aasnitows Stages of In biology there used to be a saying, “Ontogeny recapitulates phylogeny”; the supply chain individual develops through the stages of species evolution. It was thought that management __ the fetus developed gills to represent evolution through the fish stage, for evolution instance. It’s a little like that with supply chains. The advances made over the past few decades in supply chain management are generally reproduced in each supply chain's development. Some authors divide this evolution into three stages, some into four, and some five. There’s no important quarrel about the © 2010 APICcS Al rights reserve. 121 Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals Supple) © 2010 aPICS All rights reserve. <> Cooesis") eC C neo “0 >) et”) Csonon) These initiatives will generally not be coordinated with one another, however, and will therefore fall short of their potential for reducing costs, improving ‘margins, expanding markets, or delivering better products and services to end 1-9 provides an illustration of Stage 2 supply chain evolution, the semifunctional enterprise, Information flow has been improved and functional users. Exhil areas have been defined—but they tend to perform their functions one after the other without collaborating on the most effective ways of creating value. There are as yet no partnerships with customers and suppliers. Exhibit 1-9: Semifunctional Enterprise <— information ——> | CCanomer Cosme) control_) CRAP) sales 7 a) Materials! productsserices >> Sn When the nucleus firm concentrates only on improvements within its separate departments, it may find its efforts wasted through lack of communication, For example, market researchers and well-trained sales representatives may uncover market opportunities among current and potential customers without being. provided an opportunity to share this information in a structured collaboration with product designers. Warehousing may improve cost effectiveness by closing inefficient facilities but fail to consider the impact of transportation costs. Instead, transportation (ot “traffic”) is merely instructed to find carriers to travel the new routes. Or they may add new machines only to find that the current workforce is unable to use them properly or they aren’t well adapted to the layout or size of current facilities. Inventory management may reduce the amount of warehoused stock to bring down costs but fail to consider the consequences for order fulfillment, resulting in stockouts that drive away customers. In any case, department managers are likely to continue competing with one another for shares of the corporate budget without looking for ways to interact more effectively to bring greater value to the customer and higher retums to investors. In Stage 2, some functions may be automated—MRP software, for instance, may put the bill of material in the computer to streamline workflow. But new software in one department may be incompatible with current software in other areas. Finally, if savings are achieved by any of these intrafunctional efforts, management may pass them along entirely in reduced prices for customers or retums to investors without reserving a portion for continued improvement of products and processes, 124 Version 2.1, 2010 EditionStage 3: integrated enterprise ‘Sepp 2010 APICS All rights reserved, Section A: Overview of Supply Chain Management In the third stage of supply chain evolution, the individual firm begins to focus on business processes rather than compartmentalized functions. Historically, this, shift in supply chain strategy is associated with the late 1980s and early 1990s— the same time that personal computers were becoming more powerful, reliable, and affordable. In any firm, however, integration of intemal processes through cross-functional collaboration is an absolute necessity as a prelude to developing end-to-end supply chain management, Exhibit 1-10 provides a visual representation of a linked internal supply chain with collaboration between funetions and sharing of information through companywide enterprise resources planning (ERP) software. Exhibit 1-10: Integrated Enterprise ininaon) | Grom) Materials! productlservices Although the focus on business processes rather than isolated departmental functions doesn’t, as a concept, depend upon technology, it certainly becomes more practical with the increased availability of e-mail, file transfers, powerful databases, and enterprisewide software applications. Cross-functional cooperation becomes much faster and easier when communication takes place almost instantaneously across functions—and not only across functions but also across time zones and international boundaries. Through the 1990s companies aggressively moved the information once stored in file folders and communicated by mail or fax into databases available on companywide servers. Slide presentations once delivered in meetings or seminars could be put up on the corporate intranet for simultaneous access anywhere in the world. Most significantly, technology firms have been steadily developing enterprisewide software applications that allow all company departments simultaneous ac to the same data. The first step in this process was the development of MRP software in the 1950s to automate the bill of material Later, MRP was upgraded to MRP Il, a breakthrough development that allowed cross-functional communication between manufacturing and finance. ERP extended that process by adding modules for each functional area until the most advanced versions tied together entire companies. Further advances have reached through the corporate wall to tie supply chain partners together. Along with the new focus on cross-functional collaboration, companies have been developing new training programs and knowledge bases that include both “hard” Las Version 2.1, 2010 Edition© Module 1: Supply Chain Management Fundamentals Stage 4: extended enterprise 2010 APICS, All sights reserve. and “soft” skills, such as needs-based selling, coaching, career development, effective communication skills, and cross-functional team building. Collaboration across departmental lines may be tentative and experimental at first, as it was historically, but pioneering corporations have developed cross-functional approaches to certain processes such as CPER (collaborative planning, forecasting, and replenishment). In place of traditional produetion planning, in which sales and marketing develop demand forecasts and production develops schedules, corporations at the forefront of supply chain development have instituted periodic sales and operations planning (S&OP) meetings in which representatives of sales and marketing, production (or operations), and other functions meet to coordinate demand planning and production scheduling, Product design in some firms is now a team effort in which production engineers and other stakeholders, such as marketing and purchasing, collaborate with design engineers to “design for marketing,” “design for logistics,” “or design for the environment.” By bringing their expertise to bear, repre more than an engineering marvel but is also on target for customer desires and is, ready to be manufactured without making costly modifications in processes, equipment, or staffing ntatives from diverse functions can help develop a design that is Other advances in Stage 3 include improvements in customer service arising from ‘more astute segmentation of markets and the development of more ont replenishment policies suited to each segment. Inventory receives more strategic treatment in Stage 3 as Just-in-Time procedures, more accurate demand planning, and improved logistics work together to make fulfillment more efficient and reliable. Warehouse management benefits from more advanced equipment and automation. Moreover, warehousing and transportation decisions are carried out in tandem to achieve the optimal balance of cost effectiveness and customer service. At this point, the nucleus firm may begin to take a step toward integration with the external members of the chain by contracting with a logisties supplier, such as UPS, to “insource” by using its expertise to help optimize logistics decisions. ‘Some authorities identify discrete steps between internal supply chain integration and a fully networked supply chain, This presentation has no quarrel with that approach but chooses for simplicity’s sake to combine those steps into @ continuous process. This approach assumes that the most significant breakthrough at this evolutionary juncture is the decision to extend at least one business process beyond the boundary of the individual corporation, When the nucleus firm d to collaborate on planning, design, replenishment, logistics, or another business process with one of its suppliers or customers, the barrier to developing the extended enterprise from end to end of the supply chain integration has been cides 1-26 Version 2.1, 2010 Edition2010 APICS| All rights reserved, Section A: Overview of Supply Chain Management breached. Of course, the process can stop there and progress no further toward the fully integrated, end-to-end supply chain; without question, real-world supply chains exist with various degrees of connectivity. Nevertheless, that first step, because it involves a leap over the reassuring confines of the four corporate walls, seems like the starting point for a process that can continue all the way toward a completely integrated supply chain—as illustrated in Exhibit 1-11 Exhibit 1-11: Extended Enterprise (Supplies Toes Sy Cistomers™>) Gihtes YY Customers J svenion "Sn Lcosomen J comes Macias! iy Payments — produtsservices The process that may lead to an extended enterprise typically begins with an exploratory collaboration between a channel master and one or several partners in the chain—often a manufacturer and one component supplier or a retailer and one supplier of finished goods. It may involve only one component or product: the famous collaboration between Procter & Gamble and Wal-Mart began (as, ‘we'll see later) with diapers. If this first collaboration succeeds, it can lead to a ‘more fully networked relationship between the first two partners—more products might be involved, more complete sharing of information across integrated electronic networks, more formal team building and planning across corporate boundaries, and so on. And that relationship can become the model for other partnerships and, eventually, to multifirm collaborations that stretch from retailer through manufacturer into one or more tiers of suppliers. On the other hand, the first collaboration can also be the last one if the arrangement fails to produce positive results for the weaker partner as well as for the channel master. Early manufacturer-supplier linkages, for example, were ult of coercion by the dominant partner, who was looking for guaranteed on-time delivery of quality items at a relatively low price. Powerful too often the retailers, as well as channel-dominating manufacturers, can also exert considerable leverage over their suppliers, gaining agreement on difficult-to- keep promises in exchange for access to enormous global markets. The more powerful firm may, for example, rid itself of inventory holding costs by ure that requiring the suppliers to keep the inventory in its warehouse to e ‘200ds will be available for regular orders and for unexpectedly large orders, ‘True partnership requires a contract that benefits all stakeholders, including the end customer, investors, and the immediate partners to the agreement. 1.27 Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals 2010 APICS All rights reserved As in Stage 3, the new links forged in Stage 4 depend first ofall on a conceptual breakthrough, not on technology—with the exception of e-commerce. But in Stage 4, technology enables the extended enterprise to reach farther, to add new partners, to move faster in response to market changes, and to operate with broader extended enterprise, it has been a presence in all phases of supply chain evolution, In Stage 2, MRP software put the bill of material on the computer, making it possible to automate some aspects of planning. As software, hardware, and users all grew more sophisticated, MRP matured into MRP Il and broke through the funetional wall between finance and operations—thus contributing to cross-functional developments in Stage 3 of supply chain evolution, Building on that progress, MRP II merged with other functional applications and transformed into ERP, enterprisewide planning software with cope than in Stage 3. Although technology is deeply embedded in the the potential to link the entire internal supply chain together on one platform, After the pioneering work in such business-to-consumer enterprises as Amazon.com, e-commerce has become a necessary part of all business planning. In this and other ways the extended enterprise is inherently electronic—networked, in other words, in every sense of the word. Networking, as a concept, refers to any kind of links between people or entities; a network of supply chain managers could meet once a month in a coffee shop to discuss business records scrawled on memo pads. But in Stage 4, the networked enterpris to-peer networks, the Internet, or a combination of those platforms. Partners begin to synchronize their ERP systems across corporate boundaries (as noted earlier in is built on intranets, extranets, peer- regard to Stage 3) so they can share data as necessary for their efficient collaboration. A retailer may, for example, send information from the point of sale (POS) to suppliers each time a customer purchases an item to trigger production of a replacement, Dell Computer is able to fill orders taken on the Internet without keeping its own inventory of machines because customers’ specifications are sent immediately through to component suppliers so the computer can be assembled to order. ‘The progression in e-commerce advances predictably (and with increasing rapidity) from static Web sites describing a firm’s business all the way to interactive sites, that allow end customers to order products such as books and services such as plane tickets and travel packages, to pay online, to track the shipping of their goods, to communicate by e-mail with customer service in real time, and to perform other functions related to their purchases. In these Stage 4 e-commerce channels, electronic communication not only generates new possibilities, new types of jobs, and advanced skill raining; it can wipe out entire echelons of the supply chain, As airlines began to sell their tickets directly online, for example, the need 1.28 Version 2.1, 2010 EaitionSection A: Overview of Supply Chain Management for intermediaries such as travel agents and business travel departments rapidly ‘waned—until there was no need for an intermediary agent or even for a printed ticket, (At roughly the same time, however, new jobs were generated for security personnel to check passengers into terminals, and new machines were required to x-ray luggage. As we'll see, planning for security is as inescapable a part of global supply chain design as planning for e-commerce.) Behind the scenes of such consumer-to-business commerce, there is also increasing business-to-business e- commerce taking place on wired and wireless networks, In the global arena, competition no longer takes place only among individual companies; whole supply chains are now battling one another for customers, for workers, and for capital in multiple countries across the globe. Cooperation among companies is integral, in other words, to competition among supply chains, It just might be a revolutionary development. + Creating Value through Supply Chain Management Supply chi values © 2010 APICS All rights reserved, Supply chain management, like any other type of business management, aims to create value. That is easy to say, of course, but not so easy to do. In fact, it’s not even easy to define. “Value” is a concept that has fueled debate for centuries. The APICS Dictionary, (24h edition, defines value broadly as “the worth of an item, good, or service.” While this merely shifts the discussion from the meaning of “value” to the meaning of “worth,” it usefully includes both goods and services. A related concept, which is fundamentally important to supply chain management, is vice is the r “value added.” Adding value to a good or ponsibility of each entity and process in the supply chain. The 12th edition of the APICS Dictionary offers two meanings for the term “value added,” the second of which is more relevant to this course: 1) In accounting, the addition of direct labor, direct material, and allocated overhead assigned at an operation. Itis the cost roll-up as a part goes through a manufacturing process to finished inventory. 2) In current manufacturing terms, the actual increase of utility from the viewpoint of the customer as a part is transformed from raw material to finished inventory. It is the contribution made by an operation or a plant to the final usefulness and value of a product, as seen by the customer. The objective is to eliminate all non-value-added activities in producing and providing a good or service. Putting this second meaning of “value added” together with the definition of “value,” we can assume that value can be added at each step in a service-oriented value chain as well as in a manufacturing-oriented supply chain, Note that “utility” may not be the only value, or worth, of a good or service from a customer's point of view. Price, availability, and attractiveness are also values to consider. 1.29 Version 2.1, 2010 Edition‘Module 1: Supply Chain Management Fundamentals Not all profits are justified Measuring value ‘one stakeholder group ata time © 2010 aPics All rights reserved, Everyone might agree, at least in a capitalist context, that businesses exist 10 eam a profit. Making money definitely constitutes a measure of suecess. In technical terms, profit is money remaining from revenues after deduction of certain expenses. The profit margin that measures the degree of financial success for a business is “the difference between the sales and cost of goods sold...sometimes expressed as a percentage of sales” (APICS Dictionary, 12th edition), The greater the margin, the greater the financial success. There are various levels of profit, depending upon which expenses are deducted. The gtoss profit margin measures “the difference between total revenue and the cost of goods sold” (APICS Dictionary, 12th edition). Net profit, by contrast, is figured by deducting all expenses, not only cost of goods sold, from revenues, 3s of supply chain nted that money is a necessary measure of the su ‘management, is it also a sufficient measure? Are other values involved? Are there limits on the ways money can be generated? The answer to those questions has to be yes. There are, for one thing, methods of making money that may be forbidden for social or ethical reasons. Many societies forbid certain activities because the value they create for consumers or business owners does not justify the harm they cause the community (which, after all, often includes the owners and consumers). And this points out the fact that businesses have many stakeholders—not only consumers and investors but also employees, the community members at large, and the government as the people's, representative, In the case of global supply chains, multiple communities and govemments may have a stake in the way the business is conducted, Supply chain activities can be beneficial to one “stakeholder” group while being harmful to another. When planning any new supply chain activity or monitoring continuing practices, it is important to identify all the stakeholder groups and determine the impact the activity will have on each one. ‘The primary stakeholder in any business activity is the business itself. A business must be profitable to survive and create value for any other stakeholder group. A supply chain, however, may touch many businesses, not just one, And each business will have its own view of the potential value of any particular activity. As a simple example, a supplier may decide to increase profits by raising the price of goods purchased by its downstream supply chain partners. But the resulting negative impact on those partners and on the end et may make a price increase unwise. tomer 130 Version 2.1, 2010 EditionBalancing varied stakeholder values 2010.APIC All rights reserved. Section A: Overview of Supply Chain Management As the preceding example shows, customers are also significant stakeholders in supply chains. And there are many customers in a supply chain, not only the consumer of the ultimate good or service delivered through the chain. Each business must create value for its customers as well as profits for itself. Moreover, the end result of each partner’s activities must optimize value for the supply chain as a whole. Within each supply chain partner are groups of stakeholders, including owners, managers, and workers. These groups may experience very different impacts from supply chain decisions. When business is profitable, should those profits counts? Should they be delivered instead to investors as dividends? Should they be reinvestes plant upgrades that improve working conditions? Any of these choices will have differential impact on internal company stakeholders. be passed through to customers as price dis equipment or ‘There are also stakeholders external to the supply chain’s business partners and the end customers. These include public or private investors, lenders, and communities and governments, To investors and lenders, supply chain value may be defined as capital growth, dividend income, or interest payments and eventual return of invested capital. Value as defined by these external partners must be considered when making business decisions. Communities and governments may also feel the impact of supply chain operations. The location of a retail outlet, warehouse, or other supply chain facility will have an impact on the community where itis built and maintained, The community, and its political leadership, may judge this impact to be a positive value or a detriment. These reactions, as well as the overall impact on supply chain profitability, must also be taken into account. Stakeholders may—usually do, in fact—have different views of what value a supply chain should create. So managing a supply chain successfully sometimes requires balancing increases in value for one stakeholder with decreases for another. Everyone must be satisfied enough to continue participating (customers have to keep buying, investors have to keep investing, workers have to keep showing up and giving their best, communities must be satisfied with each supply chain partner's impact on social and environmental values, and so on). Exhibit 1-12 lists some typical supply chain stakeholders and various values they may realize from supply chain management, 131 Version 2.1, 2010 FaitionModule 1: Supply Chain Management Fundamentals Exhibit 1-12: Supply Chain Stakeholder Values ‘Supply Chain ‘Stakeholder Stakeholders Values ‘Supply chain firms Profit margin, market share, revenues, expenses, image and reputation End customers Affordable, safe, attractive, useful products; affordable, timely, secure easy, pleasant service Investors Return on investment (capital growth, dividend income), ‘comprehensive and comprehensible communications Lenders Interest rate, long-term stability, return of principal Communities ‘Tax base enhancement, environmental impact (safety, esthetics, convenience), growth of attractive jobs Governments Legality, regulation, overall impact on community members and environment Employees Job security, wages and benefits, opportunity, good working conditions Green supply chai management 2010 APICS, All rights reserved. The terms “green,” “going green,” and “design for green” all refer to another stakeholder value that has assumed increasing significance in recent years. What exactly does “green” entail? Green supply chain management (GSCM) has generally been described as an expansion of the traditional supply chain focus of cost, quality, and service to include environmental performance. Other, more formal definitions describe it as integrating environmental thinking (innovative environmental technologies that provide practical solutions to the environmental problems facing the global community) into supply chain management and note how it relates to a wide range of activities from cradle to grave of a product. The APICS Dictionary, 2th edition, defines a green supply chain as follows: A supply chain that considers environmental impacts on its operations and takes action along the supply chain to comply with environmental safety regulations and communicate this to customers and partners. No one would dispute that all businesses have some impact on the environment, To varying degrees, they use resources, produce waste, and emit pollution. And while supply chains are not necessarily in business to solve global environmental problems, “green” or “environmental” considerations have become prominent in supply chain management decisions due to the following. © Government and regulatory pressures—myriad laws, regulations, and treaties related to pollution prevention and control to prevent the dissipation of harmful ‘materials into the environment ‘© Good environmental management and sustainability concerns—organizational efforts to conserve energy, reduce waste and carbon footprints, and recycle 1.32 Version 2.1, 2010 Ealtion© 2010 APICS All rights reserved, Section A: Overview of Supply Chain Management ‘+ Public opinion and the power of consumer choiec—heightened consumer awareness about protecting the environment and preserving the earth’s finite natural resources and increasing demand for green products ‘© Potential for competitive advantage—increased resource efficiency and reduced costs that can improve the financial bottom line across multiple supply chain partners, build a reputation for eco-friendliness, attract talented employees, and inspire loyalty in customers Green supply chain management makes good business sense. Green can be used to do the following. © Drive growth. Worldwide, there are increasing expectations for organizations to meet broader social obligations. Organizations must answer questions about how green their manufacturing processes and supply chain are, what their earbon footprint is, and how they recycle. Annual surveys of global chief operating officers conducted by the international consulting firm McKinsey & Company confirm that companies expect the focus on environmental performance to continue to grow. Fulfilling such public responsibilities can increase customer loyalty, sustain market share, and strengthen brand awareness (whereas ignoring them may lead to market decline) + Reduce costs. Organizations are realizing cost savings by reducing the environmental impact of their business processes. When a supply chain is reevaluated, from purchasing, planning, and managing the use of materials to shipping and distributing final products for environmental performance, savings are often found by implementing green policies. An obvious example is reduced energy bills from energy efficiencies. But there are more subtle, less tangible benefits ¢ tumover because of staff pride and loyalty. Close working relationships with suppliers on green initiatives can lead to increased knowledge, integration, and cooperation and, ch as reduced employes in turn, greater efficiencies and integration in the supply chain. + Increase profits. Business opportunities abound in green supply chain practices. Eco-friendly supply chain practices can increase profits with savings in per-unit and transportation costs and reduce the amount of waste sent to landfills. A. European hardware chain has provided a testimonial about the profits it has realized from green. Replacing polystyrene trays and plastic packaging for an item with a slim cardboard box not only provided sufficient protection for the and took les allowing more units to fit into a shipping container in transport from China, product but cost less, was easy to recycl space than the tray, 133 Version 2.1, 2010 EditionModule 1: Suppl Chain Management Fundamentals Global financial investment managers have noted that robust analyses of businesses now often include assessments of environmental initiatives. Without forward- looking environmental policies and supply chain practices, an organization's reputation may suffer. While interest in the green supply chain movement has been mounting in the past few years, supply chain environmental issues are not a new phenomenon, So how are organizations, supply chains, and other stakeholders addressing green concerns? Consider but a sample of environmentally directed supply chain management practices shown in Exhibit 1-13. Exhibit 1-13: Initi ives and the Green Supply Chain Initiatives Examples ‘Compliance Organizations comply with international treaties such as the Montreal, Protocol, which is designed to phase out production and use of chemicals, depleting the ozone layer, or the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which has legally binding carbon reduction targets and commitments to reduce six greenhouse gas emissions. ‘Compliance includes observance of country regulations such as the U.S. Environmental Protection Agency's regulations or the carbon auditing system in the UK, Education and Worldwide, there is participation in college and university degrees, certificate technologies training programs, professional development courses, and on-the-job training for sustainable energy, environmental and carbon footprinting, and other green topies. Logistics Efforts are widespread to reduce fuel consumption. There is less use of alr freight; increased use of rail transport, hybrid road fleets, and sea transport relocated warehouses: and reconfigured distribution centers. Green There are initiatives to move away from traditional and wasteful manufacturing manufacturing practices to sustainable development practices including practices recycling, conservation, waste management, pollution control, and a variety of other related issues, Packaging Organizations are replacing traditional packaging materials with more eco- friendly alternatives. Sourcing Initiatives include overseas consolidation, more sourcing of goods to local suppliers, and ‘near sourcing” (which encompasses a variety of strategies that attempt to bring sourcing and distribution centers closer to final markets) Innovative New technology and product solutions abound. For example, efforts to reduce harbor-generated port pollution have been a magnet for creative green technologies and products. Diesel-electric technology for tugboats and trucks powered by liquefied natural gas in and around the harbor yard are just 2 couple of innovations for cleaner emissions around ports Information sharing | Organizations collaborate to build databases of information about environmental improvement initiatives across supply chains, © 2010 aPIcs All rights reserved. 134 Version 2.1, 2010 Edition© Financial value 2010 APICS All rights reserved. Section A: Overview of Supply Chain Management Not all supply chains are exposed to the same type or magnitude of environmental pressures. Certainly, transportation and logistics have experienced high-profile serutiny for leaving a big carbon footprint and contributing to the “manmade” greenhouse effect (the enhancement of the earth’s natural greenhouse effect by the addition of greenhouse gases from the burning of fossil fuels—mainly petroleum, coal, and natural gas). Yet some would say that many manufacturing operations have a more significant impact than distribution processes. There’s a perception (right or wrong) that products manufactured and imported from China have a locally. Regardless of who are the heavier carbon footprint than those produc laggards or innovators in environmental practices, green supply chain management is here to stay and adds important stakeholder value. Supply chains and supply chain processes exist not only in for-profit companies but also in many nonprofit, charitable, governmental, and military organizations comprising flows of materials, funds, and information. The discussion that follows focuses on three types of value that supply chains can (and must) create: financial value, customer value, and social value. Early supply chain management efforts generally aimed to improve financial performance by reducing costs. While squeezing excess costs out of an enterprise certainly has the potential to provide value to one or more stakeholders, it has to be done carefully for three reasons: * Tradeoffs may be self-defeating. ‘One danger in pursuing cost reductions is the possibility that spending less in isewhere—possibly at the bottom line. Reducing costs in one area may simply mean raising them in another area. In the functional stage of supply chain evolution, this sort of self defeating tradeoff happens all too often. The warehouse manager might, for one area of the business will simply mean spending more creating a net loss. Cost cutting, therefore, needs to aim for net gai example, eliminate one or more storage facilities to save warehousing costs without consulting the traffic manager about the need for compensating changes in transportation. More highly evolved supply chain management coordinates selection of warchouse numbers and location with costs of transportation, impact on fulfillment, and other relevant considerations using sophisticated optimization software—and perhaps putting the entire process under third-party ‘management. The same consideration holds throughout the supply chain, Changes at any one point in the system will create changes elsewhere; therefore, change has to be viewed holistically. Supply chain management 1.35 Version 2.1, 2010 Edition‘Module 1: Supply Chain Management Fundamentals nee, sitates cross-functional teamwork for the internal change and cross-entity teamwork for the lateral chain, ‘The guiding principle always has to be creation of value at the customer's end of the chain. If@ leaner supply chain can deliver the same customer satisfaction with a greater profit, then cost cutting is fully justified. While the problem of self-defeating tradeoffs applies in any business venture, supply chains add a layer of complexity because they involve more than one business. Shifting costs from one department to another in a single corporation doesn’t necessarily harm the bottom line (although it might, depending on the departments). But shifting costs from one entity in the chain to another iness that takes on the added load. Nor is this a merely academic observation, Powerful supply chain nucleus firms have been known to reduce their cost of holding inventory, for one example, by shifting the burden to suppliers with less leverage, thus increasing the nucleus definitely creates a problem for the bu firm's financial performance at the supplier’s expense. «It takes money to make money. This concept applies to supply chains. Any manager can reduce costs by reducing staff, cutting outlays for research or training, and delaying expenditures on equipment, but that generally leads to immediate stagnation and eventual failure, Many of the improvements in supply chain performance require inyestinents of money up front to realize greater revenues, profits, or both down the line—or simply to remain competitive on a global playing field. As always, the end result has to be a net gain. Ifan improvement in the supply chain brings in more revenue than the cost of the investment, then it's fully justified. Purchasing automated machinery to improve warehousing, upgrading hardware and software, training managers in team building, and other investments may be necessary to build and ‘maintain a competitive supply chain, Again, the ultimate aim must always be for creation of value at the customer's end of the chain—with sufficient profits to satisfy the needs of other stakeholders. Typical measures of success in the use of invested money and assets more generally are return on investment (RON) and return on assets (ROA). ROI is defined in the APICS Dictionary, 12th edition, as “a relative measure of financial performance that provides a means for comparing various investments by calculating the profits retuned during a specified time period.” ROA is defined as “net income for the previous 12 months divided by total assets” (APICS Dictionary, 12th edition). © 2010 APICS All sights reserved. 1-36 Version 2.1, 2010 EditionCustomer value 2010 APICS All rights reserved. Section A: Overview of Supply Chain Management * Gains must be equitably distributed. A third danger to avoid when pursuing efficiency or effectiveness is c1 ting a financial gain that isn’t distributed with the needs of all stakeholders in mind. Possibly the most common mistake in this regard is to send all cost savings all the way to the consumers’ end of the chain. If all efficiencies are plowed into retail price reductions, the supply chain itself will suffer from lack of financial sustenance, Lean is good; starving is not so good. While customer discounts bring immediate gains in volume and market share, other stakeholders also have to be rewarded. Investors require a competitive retum on loans and equity. Infrastructure has to be maintained and upgraded. In the age of electronic communications, especially, keeping up with the cutting edge requires virtually continuous investment, Employees have to be compensated at a competitive rate, trained in new processes and products, and, more fundamentally, recognized for their contributions. Research and development need support in locating market needs and creating produets and services to satisfy them, And perhaps most challenging of all in a lateral supply chain is the need for productive sharing of any financial gains. As noted earlier, a powerful nucleus firm can gather in the of an alteration in the placement of inventory (or any other procs ben s change) at the expense of its suppliers. This constitutes exploitation rather than partnership and has the potential to be self-defeating if it drives away quality suppliers. Teamwork across company boundaries can create more inventive and effective ways to improve value for customers for a net financial gain that is equitably shared by all stakeholders. In a competitive economy, making money depends upon “responding to customer needs,” which is the definition of the term “market driven” in the APICS Dictionary, 12th edition, The ultimate goal of market-driven supply chain management, therefore, must always be to deliver products and services that the customer values—and, of course, will pay for. Depending upon the market being served, a supply chain may be ‘managed with an eye to delivering one or more of the following values to its end customers, * Quality of product or service “Quality” is a highly variable concept, but it applies to all products and services through spa treatments. Decisions all along the chain have from “sensible shoes” to be coordinated to get the appropriate level of quality through the right design, the right production, and the right materials * Affordability The notion of affordability naturally calls up visions of discount bins and dingy department stores. This is misleading for two reasons. First, almost all products, and services have an appropriate price level, not just items of modest value. (One 137 Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals © 2010 aPIcs All rights reserved, ‘might suspect that people for whom “money is no object” are generally spending someone else’s money.) There are billionaires who drive pickup trucks, because that’s the vehicle priced right for the quality of transportation they desire. There are people of modest means who pour substantial portions of their net worth into a Porsche or a Cadillac. Even Porsche is cost-conscious in its choice of ontsourced manufacturing that can speed up or slow down production to match variations in customer demand, People will pay more for a brand like Porsche—but there is a limit, The supply chain has to invest in the processes, people, and technology appropriate to creating a product atthe right price. Second, the supply chain process that delivers items at the everyday low price may itself be of extraordinarily high quality, since the objective of keeping goods affordable demands complete efficiency in the supply chain. Competition for this market to develop collaborative design processes that result in specifications for products of good quality that can be efficiently manufactured drives supply chain manage from readily available materials. Efficiency does not generally arise from poorly trained workers, low-bid suppliers, indifferent design engineers, and half- haphazard process management. Availability For some products or customers, availability is a paramount value and the supply chain has to be designed to deliver products and s affect not only the placement of inventories but also the selection of transportation modes (overnight delivery, refrigerated containers, etc). vices right on time, This may Service There is an indistinct line that separates product and service. An automobile is a product, for example, but it competes with transportation services (planes for long trips, buses around town). Moreover, the delivery of the automobile to the customer is wrapped in services—financing, dealer preparation, sales, warranty agreements, and, perhaps, available repair and replacement services at the dealership. In recent years, the reverse supply chain, also called the service chain by some authors, has grown in importance. An effective supply chain management process will ensure that service issues are incorporated in the product design stage. Collaborative design will include input from marketing, manufacturing, and supply to create a product that is easy to repair. At the same time the team will develop the reverse chain that takes products back for repair, replacement, or recycling—and is up and running on the day the product is introduced. Environmental impact Consumers and customers influence supply chain practices on many levels. Such is the case with green, as green consumers and green customers often spur environmental supply chain innovation. 1-38 Version 2.1, 2010 EditionSection A: Overview of Supply Chain Management For green consumers, it is most typically a matter of what is important to them and what they are will ‘more by social and perceptual concems than technical issues. (Although green consumers may bring issues tied to regulatory compliance to the forefront.) Public opinion about a firm’s environmental practices may be shaped by the ‘media, community groups, environmental organizations, lobbyists, and others 1g 10 pay for. Green consumers tend to be influenced who exert social pressures. Green consumers may not want to be associated with known negative products or services, but it is difficult to forecast exactly what they would be willing to pay, for example, for ethically sourced products or how ‘much more green consumers might be willing to pay for items manufactured under high environmental and socially acceptable standards. In the spirit of collaboration and integration in buyer-supplier relationships, green customers may engage suppliers in environmental initiatives through ongoing involvement in quality, health and safety, packaging, delivery schedules, and the like, Other customers may make market- or contract-driven green demands of suppliers to address environmental issues, In both cases, the green customer's requests of suppliers are areas the customer attributes to be the supplier's responsibility or within the supplier's sphere of influence, And, in either case, when compared to the vast majority of green consumers, green customers tend to bbe more technically focused. Typical examples of green customer concerns are the technical and economic merits of protocols, policies, and programs or the feasibility of new or existing technologies in meeting regulatory compliance. Many environmental concerns and policies do not have the force of regulatory requirement. In this case, suppliers may not have pressure or incentive to address environmental issues. Further, small suppliers may not have the resources. A customer may not necessarily be responsible for a supplier's activities, other than liabilities for products and services purchased. But the broad implications of sustainable development, emerging technologies, and changing social attitudes about green supply chain practi concern from a strategic perspective in many industries. Suppliers who disregard environmental issues imply that they are laggards in innovation and potentially have poor management and control mechanisms. This, in turn, can expose green customers to risk s is an increasing ‘The emphasis on one value or another (quality, affordability, availability, service, or green) will depend upon the nucleus firm’s market strategy. A retailer whose to serve a mass market with everyday low prices may have a different strategy approach to all these values than 2 manufacturer whose intent is to market luxury goods at the high end of the income scale. No firm that wants to remain © 2010 APICS All rights reserved, 1:39 Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals Social value © 2010 APICS All rights reserved competitive will deliver low-quality items on an unpredictable schedule at a high price, But all these values have different meanings for, say, the purchaser of a pair of work boots than they have for the buyer of a pair of high-heeled shoes for use by a fashion model. The supply chain for each will be managed accordingly, with more resources invested in creating the value of greatest importance to the market. If, for example, availability is a key value to customers, emphasis in the planning stage might be placed upon outsourcing to air express delivery companies with overnight delivery capability, even if that requires putting extra resources into logistics and cutting back elsewhere to stay within budget. Similarly, perishable quantities—which tend to be of high value—require special handling by high-end carriers. On the other hand, ifthe customer doesn't value immediate availability (and the product doesn’t require it) then putting money into rapid delivery is not a rational supply chain decision. There is no logic in making customers pay for quality or service that they don’t value. If affordability (everyday low cost) is the key to unlocking a mass market, the supply chain may have to be kept very lean. Wal-Mart exemplifies such a supply chain, Wal-Mart’s early investment in technology allowed it to track individual items through its supply chain, because the otganization’s founder, Sam Walton, knew that delivering goods to his out-of-the- way stores at the lowest price would require investments in logistics. Money saved by not building and decorating fancy stores or stylish corporate offices went into strategic supply chain investments. A clothing company such as Zara, on the other hand, succeeds by focusing its attention on high development to capture the latest trends in taste for each new season, All their tyle products, continuous innovation, and rapid product decisions about suppliers and distribution have to serve those values. This argues for an entirely different focus in all parts of the supply chain. The value, in other words, is the primary factor in determining supply chain strategy, and that’s a subject to be handled in more detail in the next section of this module. jon of customer Supply chains are also judged on their contribution to the public and the governments that (sometimes) represent their wishes. Generally speaking, a supply chain’s contributions to society come from three factors. ‘* Creating a positive good through delivering socially desired and useful products or services On the positive side, supply chains deliver products and services that are embedded in a social and cultural environment, Businesses produce what society demands, in other words. (And, many argue, what businesses produce also shapes culture and society—for better or for worse.) Sometimes the connection between private business and public need is very direct. For 1-40 Version 2.1, 2010 Edition© 2010 APICS All rights reserved. Section A: Overview of Supply Chain Management example, heavy manufacturers serve governments directly when they produce motor vehicles and planes for purchase by the military. Even those vehicles not, sold to governments, however, serve social purposes as well as providing transportation for vehicle owners and passengers. Bullet trains in Asia and I contrast, travel and freight carriage on trains has historically been hampered trope exist because those societies value public transportation, And, by because each country maintains separate facilities, standards, and regulations that make crossing borders time-consuming and, in some cases, impossible. (Railroad tracks may be different gauges, for example.) The U.S. interstate highway system was constructed, beginning in the 1950s, because the nation placed a high value upon private automobiles—as well as to facilitate commercial truck transport and military logistics. A similar analysis applies to Virtually any product or service to some degree; therefore, the success of a supply chain in delivering quality and service always has a social aspect. Beyond the production of goods and services, supply chains also affect society by the number and types of jobs they create—either for good or ill—and in the generation of tax money to support social purposes. Avoiding or reducing negative environmental side effects of activities such as extraction, processing, and construction In the past several decades there has been growing attention to the impact of business on the natural environment. This applies to supply chain activities all the way from extraction of raw materials through manufacturing processes, logistics, and distribution, Through laws and regulatory agencies, society requires businesses to contribute, through sustainable practices, to a healthy environment, Conforming to these regulations has become an increasingly significant part of supply chain management. It has also resulted in the identification of the reverse supply chain that handles products returning from. customers rather than products and services flowing toward customers. Some of the business of the reverse supply chain involves repairs and replacements — warranty work, for example. (As we'll see in Module 2, this can be a profit center if managed properly.) The reverse supply chain also deals with products that have reached the end of their life cycle and are ready to be recycled or disposed of in a responsible manner. Alll the activities in the reverse supply chain have the potential to create environmental value by reducing, reusing, and recycling resources rather than simply using them up and throwing them away. Integrating green into the supply chain Supply chains have made great strides in delivering socially desired and useful products or services and minimizing the negative environmental side effects of activities. Much of this progress is tied to green supply chain management, L4L Version 2.1, 2010 EditionModule 1: Supply Chain Management Fundamentals © The challenges of globalization 2010 APICS, All ights reserved, size of the middle class in developing nations around the world means new markets for goods and services. Automobiles proliferate on newly paved roads in China and India, replacing bicycles and pedestrians. Cell phones and laptop computers are staples of commerce and social interaction around the globe. Mor and fragile goods long distanc restaurant in the middle of a continent provides one example. Perishable produce travels around the globe, making all fruits and vegetables perpetually ient transportation technologies enable the shipment of perishable . A sign advertising “fresh seafood” in a “in season.” Third-party logistics providers constantly refine their expertise in packaging and transporting all types of goods through the maze of international customs and regulations. With the help of these providers, ficiently and securely companies large and small can send and receive goods around the world. Broadband transmi services once geographically restricted by the time required for mailing ion through the Internet facilitates the outsourcing of documents, X-rays can be analyzed and returned in a country half a world away from the patient. Computer “help desks, that has the infrastructure, Some countries even specialize in providing complex medical procedures to patients who fly from distant lands, similarly, can be located anywhere A combination of factors makes this possible at a competitive price. When a ‘multinational company flies its employees to another country for medical procedures, the transactions involved exemplify new markets, new resources, ‘and new pools of labor made possible by the “interdependence of economies.” Globalization creates challenges for supply chain management, just as it creates opportunities. As national economies grow more interdependent, the cultural and political differences among nations come into sharper focus. The potential for terrorist attacks on goods in transit, marketplaces, oil pipelines, and other elements of international trade exists. As supply chains grow longer and more ‘geographically dispersed, their managers have to contend with different languages, systems of measurement, taxes, tariffs, and other elements of international trade and finance. Moreover, there scems to be an unwritten rule in business that whatever can be done must be done. If one enterprise develops the potential for e-commerce, its competitors must do the same. Once a competitive advantage s achieved using a given technology or strategy, it soon becomes the new standard for all firms in an industry. As The Supply Chain Digest Letter™ for May 2008 notes, “The 1-46 Version 2.1, 20102010 APICS All rights reserved. Section A: Overview of Supply Chain Management