PRM NOTES

THE IMPORTANCE OF SUSTAINABLE PURCHASING AND SUPPLY

An OPITO case study
Page 1: Introduction

What would happen if Christmas trees were not available until Easter? How would
you feel if you tried to buy a coffee at your favourite high street caf only to be told
they had run out of coffee beans? Making sure the key components that a business
or service relies on are available when needed is the responsibility of the purchasing
role.

Opito 17 Image 9Purchasing and supply also known as procurement may appear
to be a hidden function in many organisations. In fact, procurement is a highly
strategic role, whether the organisation is manufacturing or service-orientated, in
the public or private sector, for profit or not. Procurement is complex. It covers the
full supply chain from contracts (negotiating), procurement (purchasing) and
logistics (storage/distribution).

All businesses need inputs in order to be able to operate. These might be physical
inputs, such as raw materials, like engine components for a car manufacturer. They
may also be service-based, such as specialist engineering consultancy when
trialling new technology or distribution services for a high street retailer. It is vital
that inputs not only meet the required quality and reliability standards, but also that
they are competitively priced.
Opito 17 Diagram 1Effective purchasing

Purchasing and supply focuses on sourcing, pricing and buying the right things, at
the right price and at the right time in order to deliver a service or product. Effective
purchasing can help an organisation to reduce costs, maintain quality and manage
the levels of risk to its supply chain. The scale or importance of the item is relative
to the level of risk to the business. Missing coffee beans will affect the days profits;
getting the wrong size of engine for a car could close down the production line.
OPITO and CIPS

Opito 17 Image 5For the oil and gas industry with its high levels of risk, the
Chartered Institute of Purchasing & Supply (CIPS) is providing training to improve
the efficiency and effectiveness of purchasing and supply. OPITO, the focal point for
skills, learning and development in the oil and gas industry, undertook a labour
market survey of the industry which identified a sector-wide skills shortage. Oil &
Gas UK then undertook a supply chain survey. This showed that there is both a
current shortage and a likely future need for purchasing and supply chain specialists
for the oil and gas industry.

CIPS and OPITO are therefore working together to promote career opportunities and
develop specialised training to meet this need. This case study explores the role of
purchasing and supply in the oil and gas industry.

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PAGE 2: THE PURCHASING AND SUPPLY ROLE

Opito 17 Image 6Every business, from an NHS hospital to the biggest brands in the
world such as Coca-Cola or McDonalds, needs supplies. Purchasing may involve the
day-to-day necessities like photocopier paper, soap and towels for wash rooms or
service support for IT equipment. However, the purchasing role also covers hightech or large scale equipment for major projects such as the building of an aircraft
carrier or the Olympic stadium, as well as the skills required to operate it.

Purchasing and supply roles therefore require high levels of skill. CIPS is the
professional body which aims to promote the highest standards of excellence in
purchasing and supply management across all industries. It provides these through
its professional qualifications programme, focused training and education and by
rigorous assessment procedures.
Adding value to the business

Those involved in purchasing and supply are in a position to consider every stage of
a business processes, from raw materials to waste management. This helicopter
view can help a procurement manager to spot ways of making efficiencies or
opportunities to improve the quality of products or services bought. They can see
not just internal impacts, but also what is happening in the external environment
and the marketplace. This can help to generate new ideas to add value to the
business, identify how it can increase competitive advantage or improve
sustainability.

An example of how vital the role is occurred when BP needed to manage the supply
chain of emergency goods following the Deepwater Horizon oil spill in the Gulf of
Mexico in 2010. The supply chain team had to source everything from mealworms
to feed wounded birds, to booms to prevent the oil spreading further, to dispersant
materials to remove the oil. The challenges included finding sufficiently large
quantities available quickly as well as trying to keep budgets under control.
Opito 17 Image 4Supporting innovation

Procurement managers are also involved in researching suppliers in new markets

and developing new and innovative procurement methods to improve effectiveness.
They also agree and manage service level agreements (SLAs). An SLA is a contract
that specifies standards, timings and payments for the supply along with penalties
for missing targets. It sets out the responsibilities and expectations for both the
business (the buyer) and its suppliers. A key element of the SLA is ensuring that the
price quoted by suppliers will not be subject to change, thus affecting the
purchasing budget.

Longer term purchaser and supplier relationships can provide stability and add
value to both parties. The purchaser may be able to get the best possible terms and
prices or a supplier may go the extra mile for the business in an urgent situation.
This type of collaboration builds trust between buyer and supplier, which might
enable a just-in-time relationship, where both parties hold minimum stock and so
reduce costs.

OPITO | The importance of sustainable purch

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Page 3: Purchasing and supply in oil and gas

Opito 17 Image 8The oil and gas industry is divided into the upstream and
downstream operations. Upstream involves exploring for oil and gas and extracting
it safely. The downstream part of the industry is concerned with refining, distribution
and sales.
The supply chain

The oil and gas industry has very long supply chains. Many companies may be
involved in supplying the materials, components and services at different stages
and across the various processes involved in extracting, refining and distributing oil
and gas. Procurement becomes even more important in this type of global
operation. A company such as BP sources services and supplies from many different
countries. These include mechanical and electrical parts, to professional services
such as project management or legal expertise for drawing up contracts.

Reliability is a crucial factor in supply, both of quality and timing. If supplies are of
poor quality, delivered late or cost more than was agreed, this will affect
productivity and profitability. If production is delayed or faulty products need to be
scrapped, this can reduce profits. Poor quality inputs could also affect the safety of
the process a major consideration in the oil and gas industry.

For example, to help improve safety and quality of supply, BP is introducing safety
performance indicators into contracts of suppliers involved in high-risk activities.
Suppliers who do not meet these standards may be removed from contracts. As part
of this safety focus, BP is also planning to reduce use of agency staff in procurement
roles and boost its in-house expertise in supply chain management.
Opito 17 Image 7'Make or buy'

An important decision for many businesses is whether to carry out a particular part
of its process itself (make) or buy in the components or expertise it needs. This
decision might depend on, for example, whether the skills and capacity are
available in-house; whether there is a need for high security of supply; or whether it
is simply cheaper to outsource.

For example, an oil company could choose to rent or own an oil platform. If it rents,
its costs are limited to the rental period, with repairs and maintenance the
responsibility of the owner. Buying outright might cost more initially but the
company has the benefit of the asset. However, it also has the issues and costs of
maintenance and ultimately, disposal. Purchasing managers work with operational
managers to consider these issues and find the most cost-effective and efficient
solution for the business.

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Page 4: Sustainable procurement

Opito 17 Image 3Other key factors to consider when choosing a supplier include
their ability to respond quickly to changing customer needs and how well they can
help towards meeting a business sustainability goals.

CIPS offers a structured online audit process to help purchasing managers map their
organisations purchasing systems against best practice. This enables them to
assess how energy efficient and sustainable their purchasing processes are.
Benefits of sustainable sourcing

Sustainable procurement is a high profile matter for businesses today. It can help to
save money, reduce waste, improve competitiveness and build a business
reputation. As part of their sustainability programmes, many oil companies have
invested in local transportation networks or built schools. They provide jobs and by

sourcing supplies locally help to develop the local economy. The global oil industry
has a responsibility to the countries in which it operates to manage its operations in
as sustainable way as possible. A purchasing manager might want to consider
whether the supplier behaves responsibly, for example, adhering to ethical
standards or sourcing raw materials in an ethical way.

For example, Shell is working with its existing suppliers to implement the Shell
Supplier Principles. These set out the minimum standards which Shell suppliers
need to meet. These include using energy and natural resources as efficiently as
possible to minimise impact on the environment and covering health and safety
issues.
Efficiency

Other aspects of sustainable business include managing waste effectively and

reducing the companys carbon footprint. This can be improved by choosing
suppliers who also take their responsibilities towards environmental impact
seriously. For example, Marks & Spencer made 70 million of efficiency savings
during 2010/11. Alongside reductions in waste and packaging and increased energy
efficiency, the company is working with suppliers to reduce carbon emissions in the
supply chain by improving efficiency of deliveries.

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Page 5: Roles and skills

Opito 17 Image 1Although engineering and technical roles are crucial in the oil and
gas industry, oil companies also require lawyers, accountants, geologists,
electricians, plumbers, crane drivers, mechanics, divers and designers.

Roles in purchasing and supply cover all levels, from operational such as buyers and
store managers, to strategic such as in supply chain analysis or strategic sourcing,
so there are opportunities for everyone.

Entry levels vary. Many people join oil and gas companies after having worked in
other industries. Some young people join the industry straight from school; others
after a college or university course. For example, Hannah has a degree in
mathematics and economics.

I wanted a career that would offer variety and challenge. As a purchasing

manager I have both. My job has given me a detailed knowledge of different parts of
the oil and gas industry, plus a significant amount of responsibility.

Procurement in action

Graeme is a group procurement and supply chain manager with over 25 years
experience in the industry. With an engineering background, he did not originally
consider purchasing and supply as a career but got a taste for the challenges of the
procurement role when he spent six months in the job as part of his degree.

'The procurement process in oil and gas is complex, with a key reliance on safety.
In addition, some of the materials we use in this industry are highly specialised,
which can mean long lead times for purchase. However, the engineers or companies
needing the materials expect very quick responses, so management and forecasting
to anticipate their needs is highly important.

Opito 17 Image 9People involved in purchasing need business knowledge and the
ability to analyse markets. CIPS provides six levels of qualifications for the
procurement and supply profession across the world. All UK qualifications are Ofqual
(the Office of Qualifications and Examinations Regulator) accredited and appear on
the Register of Regulated Qualifications. Students may start a CIPS qualification with
no entry requirements.

Steve is head of global procurement and supply chain management at Prosafe, a

leading owner and operator of oil and gas rigs.

Procurement is a highly strategic role. The oil and gas industry supports the whole
world economy, from the fuel in vehicles to plastic paperclips. My company provides
oil companies with accommodation vessels which are like floating hotels. Deliveries
might reach a platform only once a week, so every last detail from wi-fi access and
toilet paper to all the operational and engineering requirements has to be in place,
at the right time, in the right quantity and quality. Young people may not be aware
of how interesting it is to work in purchasing and supply chain roles - there is no
standard day. I love it and I believe the job I do makes a difference.

Opito Careers OpitoMuhib is a procurement specialist at BP. He sources both

equipment and services and deals with contracts that range in value from 1 million
to 60 million. His role includes careful assessment of the effectiveness of each
supplier to ensure BP is getting value for money. This is a large responsibility and it
may involve deciding whether or not to change supplier. This is a major decision as
it carries potential risk to the company and the continuation of its operations.

Purchasing and supply is a powerful and highly responsible role, dealing with
high value contracts. The real satisfaction I get is from seeing what I do make a
huge difference. I really enjoy my job and see my long term future career in this
industry.

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Page 6: Conclusion

Opito 17 Image 2Well-managed procurement ensures that supplies of the required

quality are available at the right time, place and cost. Supply chain managers help
to:

reduce costs and improve profitability bulk buying can provide economies of
scale
reduce waste by selecting inputs that generate less waste (and also lower costs)
manage demand, for example, through just-in-time supply
improve cash flow by securing favourable prices and payment terms
improve efficiency by making sure suppliers hit deadlines
improve the competitiveness of the business by seeking out innovative products
and services to add value.

Opito 17 Image 9In the oil and gas industry, where safety is a central concern,
effective management of purchasing and supply is a vital role. Its procurement
managers need to have good people skills, sound common sense, commercial and
business skills and the ability to communicate appropriately at all levels.

OPITO and CIPS are working together to ensure that the industry has the relevant
training and qualifications programmes to meet the long-term needs of the oil and
gas industry.

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INTRODUCTION

In this area of quickly changing corporate environments, purchasing managers are

encouraged to be proactive. Spekman and Hill[1] stated that purchasing managers
need to develop a more proactive strategic approach, and Rajagopal and Bernard[2]
encouraged a proactive approach to purchasing planning.

PROACTIVE PURCHASING

Insight into the meaning of proactive purchasing management is gained from an

examination of purchasing textbooks. Leenders and Fearon[3] discuss five major
categories of purchasing strategies:

1. Assurance of supply 2. Cost reduction 3. Supply support 4. Environmental change

5. Competitive edge

They also discuss many specific strategic purchasing opportunities which could
certainly be considered proactive. Examples include backward vertical integration,
outsourcing, establishing supplier quality assurance programs, supplier
development, supplier-purchaser data sharing, and risk-sharing with the supplier.
Henritz, Farrell, Giunipero, and Kolchin[4] identify several substantial risks that
occur when purchasing is not included in the strategic-planning process. These risks
include threats to supply assurance, possibility of improper supplier selection,
problems with environmental constraints, increased company liability, and
uncertainty of supply and lead time. When these perspectives are combined, a view
of proactive purchasing begins to emerge. Dobler and Burt[5] provide additional
insight about the term "proactive". They contend that the purchasing discipline is
moving from a transaction perspective to a supply management orientation. As this
transition occurs, two shifts in focus are occurring:

1. From internal processes to value-adding benefits 2. From tactical management to

strategic management

Burt[6] highlights the importance of developing integrated systems for design,

procurement, quality, inventory management, and production in order to move from
a reactive purchasing activity to a proactive procurement system which will add
value to the firm's operations. Burt recognizes that "procurement of material and
services is a process that cuts across organizational boundaries, and
implementation of an integrated procurement system results in proactive
procurement, as distinguished from reactive purchasing."[7]

Burt and Pinkerton[8] define proactive procurement management as "the process of

professionally and aggressively adding value during the four stages required for
effective procurement." The four stages include:

1. Determining what to buy

2. Identifying and developing the appropriate relationship with the supplier

3. Obtaining the lowest total cost associated with purchasing and converting the
required material or service

4. Ensuring that the required material or service is received in a timely manner and
that future supply will be available[9]

The concept of proactive purchasing management is also addressed by Carr[10]

who defines proactive purchasing as purchasing's willingness to take risks and to
effectively use current knowledge to make decisions about the future. Carr contends
that purchasing proaction includes purchasing foresight and purchasing's
willingness to initiate change. Carr's study of purchasing strategy included
responses from 739 purchasing managers. The study shows a positive correlation
between the level of strategic purchasing and proactive purchasing, but the
strength of the correlation is low. In a second analysis, Carr shows a stronger, and
statistically significant ([Alpha] [less than] 0.05) relationship between proactive
purchasing and management of the supplier market/base.[11] The findings lead to
the conclusion that relationships exist between risk, strong pursuit of objectives,
early supplier involvement, and careful management, development, and evaluation
of suppliers. It is important to note that Carr[12] views risk as integral to proactive
purchasing management.

The first of a new series of articles on Procurement Thinking, explains Supply Positioning, one
of the fundamental thinking tools in procurement. It is also known by other names such as
Kraljic Analysis and Purchasing Portfolio Analysis.
Suppliers represent the largest part of most organisations. Analysis of major businesses suggests
that external purchases account for 60-75% of turnover (1). In 2012 the average FT350

businesses spent four times as much on suppliers as on staff, with the largest Dutch companies
spending over seven times more on suppliers than staff.
If you treat all your supplier the same, and manage them using just common sense and gut-feel,
then you are likely to get the same results as most of your competitors and severely limiting
your ability to differentiate yourself in your market.
But all suppliers are not the same and they do not have the same impact on your organisation.
Strategic Procurement is about ensuring you have the supply base you need to meet your
business objectives, now and in the future, in a way your significant competitors find difficult to
emulate. In the public sector, it is about achieving on-going improvement in performance
and value. Supply Positioning is the first step in gaining insight into what is important to you
and the best approaches to take.

Supply Positioning is a technique to bring focus to all procurement activities. It structures our
thinking to guide us in what to do and what not to do in different circumstances, and can be used
in a wide range of situations. It can be used for

Prioritising limited resources when to spend time and when not to bother in.
o selecting suppliers
o strategic improvement projects and category management activities
o managing supplier performance and relationships
o reducing business risk
o managing disputes
o negotiating deals and contract details

Suggesting which approaches and tactics are most appropriate

o competition or collaboration
o long-term, medium-term, or spot buying
o local or global sourcing
o complexity of selection process
o arms-length or close supervision/involvement

Supply Positioning looks at all our categories of expenditure, and positions each one along two
dimensions
1. Value of Spend
2. Supply market difficulty and risk

It should be noted that the tool is used with categories of spend, not suppliers. Defining the
boundary of a category is a topic in its own right, it may seem simple but it is not. The second
key is that the definition is not tablets-of-stone. You should always be looking to see if your
interests are best served by combining categories into a super-category or breaking them down
into sub-categories.
Back to the two dimensions. Value is self evident, Market Difficultly/Supply Risk less so.
Market Difficulty is a combination of aspects such as

how easy it is to find good suppliers

how easily we can change from one supplier to another once we have chosen one

the impact on us if things go wrong with a supplier

There are a number of elements that should be taken into account, including degree of
competition in a supply market, rate of technology change, degree of patent or regulatory
protection, flexibility of specification, capacity utilisation of suppliers, ease of change of
supplier, lead time, and ease of meeting your specification.
Market difficulty is usually assessed in relative terms (high-medium-low), though structured
word models can be used to give it a numerical value, and in highly complex situations
mathematical modelling techniques can be used.
All categories can then be positioned on a 2 dimensional map as shown below. Where a category
sits on this chart is what influences its priority and the strategies and tactics you should consider.

If we look at the four categories A, B, C and D on the positioning map.

Category A is one you spend relatively little on, in an easy market. Most organisations have a
large number of such categories, representing lots of activity, but little total value and risk. For
categories such as these our strategy is to spend as little time as possible on them we should
have much more important things to spend our limited attention on. Usually the acquisition cost
and the opportunity cost of peoples time far outweighs the purchase price of the item/service.
The most famous example of this is the US Governments $435 hammer from the early 1980s
where the allocated costs of sourcing, contracting, systems, stores, etc, were almost 100 times the
purchase price of the hammer. The actual hammer price had been reduced by a
sourcing exercise and a saving was claimed! It became so famous that vice-president Al Gore
introduced the Hammer Award to recognise public servants who cut through wasteful
bureaucracy. The same report identified a $600 toilet seat too! The figures are somewhat
suspect, but they make the point well,
Tactics which you can use to minimise effort include allowing users to buy directly on company
credit cards, on-line catalogues, self-approving orders, claiming on expenses, vendor-managed
on-site stock, using a single wholesaler or general service provider for a wide range of such
categories. These categories are an easy place to start if you are considering procurement
process outsourcing there are many transactions but spend and risk are low. Categories which
are located in the green area of the positioning map, known as tactical acquisition categories,
will usually benefit from similar treatment.

Category B is also a very low spend, but is in a difficult market. This could be because it is only
available from a single supplier, for example a patent-protected spare part for an old machine, or
updates to a legacy piece of software, or even MIcrosoft licences. Here your business could be
harmed if you cant get the goods or services when you need them you cant just go to another
supplier. The strategy here is to ensure supply. Price is not important.
You: Hey boss Ive just saved 33% on next years gas contract. I only had to agree to going
onto an interruptible supply tariff
Boss: Mmmmm.so youve saved us about $15,000 a year, and all we have to do is to accept
that our production line shuts down for a maximum of 2 hours, upto 5 times a year? Now the
furnace is a manufacturing constraint, and one hours lost production is worth $55,000 to us in
gross margin. So exactly how is it a good deal to save $15,000 at the risk of losing half-amillion?
Most bosses wouldnt be quite so kind.
Tactics you can use to ensure supply include holding significant stock levels, active risk
planning, supplier relationship management, re-design and re-specification, developing new
suppliers. Categories in the red area of the positioning map, known as strategic
security categories, will usually benefit from similar treatment.

Category C is one of the most important to your business it is worth a significant amount and
the market is difficult and high risk. Suppliers in these categories are likely to have a critical role
to play in your business. This could be a major outsourced customer-facing service provider, or
a major investment project involving innovative technology. Your strategy here is supplier
intimacy. Once you choose your supplier, changing your mind will be very difficult and could
have serious business implications. This means that your selection process is likely to be very
different, carrying out detailed assessment of your preferred supplier using a cross-functional
team.
The kind of tactics that are used in categories like C include collaboration, extensive supplier
relationship management, risk management, and strategic price & cost management, whilst at the
same time keeping an eye on whether lower risk alternatives are emerging. Categories in the
yellow area of the positioning map, known as strategic critical categories, will usually benefit
from similar treatment.

Category D has a significant financial impact on the organisation, but the risks are relatively
low. The impact and damage from choosing the wrong supplier is much lower than
the strategic critical categories. Examples might be traded commodities with abundant supply or
energy. Here is where the price you pay becomes probably the most important variable. Your

strategy for category D is to minimise cost or maximise profit contribution. This doesnt mean
that you can ignore quality and specification compliance, it is just that there are several
competent suppliers who are keen to win your business. The main selection criterion is likely to
be price, acquisition cost, or life-cycle cost.
The kind of tactics you might deploy include frequent change of suppliers, broad market research
& awareness, global sourcing, tactical cost analysis, e-auctions, frequent change of team
members and tactics, using generic standards, opportunistic contracts (fire-sales). You are
unlikely to enter into long-term contracts in these kind of categories (though this can be a good
approach, it should be used with great care and caution in the blue area of the map). Categories
in the blue area of the positioning map, known as tactical profit categories, will usually benefit
from similar treatment.
Although the blue zone might be seen as the categories where the buyer can exploit their power,
this should be done with care and skill. There is a great risk if you use a bully-boy approach.
The best suppliers in any category will not necessarily be desperate for your business, and will
often resent being bullied and decline your invitation to tender.

As well as the overall procurement strategy and tactics, Supply Positioning will impact

The skills needed to select and manage your suppliers

The type of contract and its duration

The team make up

Your selection process, and involvement of senior business stakeholders

How you manage your suppliers

The frequency you will be going to the market

Your make/buy (in-source/out-source) decisions

Cost of Acquisition vs. Total Cost

of Ownership
Posted on March 15, 2011 by David

One of the things that companies often face when

deploying new technologies are the costs involved. Many times they have to decide which is
more important to them; the cost of acquisition or the total cost of ownership. When considering
Cloud, Hyperscale and High Performance Computing technologies, the stakes can get
considerably higher.
With such a wide range of choices out there on the market, you have to make a series of choices
that will impact the way you operate and how much it will cost you over time. The temptation
that many companies have is to go with the cheapest solution they can, but in the end, they find
out how much that cheap solution costs them much more. Not long ago I met with the CEO of a
company that for the longest time standardized on traditional Dell Blades. Always wanting to
ensure that he was getting the most for his money he evaluated what he thought would be an
equally good solution for his company. The total savings was probably less than five thousand
dollars per chassis, but it was enough for him to give it a try. As we sat in his office he was
recalling that decision with less than wonderful memories.
The vendor I had switched to in order to save a little money ended up costing me four days of
downtimebefore I even got a phone call back from the folks in tech support. Once I did it took
another three weeks to have a replacement system shipped to me. I didnt even unpack it. I sent
it back along with the others, and moved back to Dell. Yes, I might pay a little more, but I know
when I call for service and support Ill have my systems fixed in four hours or less. Even if it is
a system that is under the next business day support, I know I wont be down three weeks.
In this case the total cost of ownership was measured in loss of compute time, and while the cost
of acquisition, the loss of compute time ended up costing more that had they stuck with that they
had. He also mentioned that deployment of the hardware from this manufacturer had its own
challenges and took quite a bit of time, but Ill avoid mentioning specifics for now as to give it
away.
Then we need to look at power consumption and rack footprint. When it a collocation facility,
these are the two things you need to watch out for or youll run the risk of watching your
operating costs go up and up. Using the Dell c6100 or the c6105 as an example, I can put what
is the equivalent of four R610s (taking 4u of rack space) and condense that down into 2u, and
then reduce the power consumption by an average of 20% (using similar configurations as
calculated on the Dell ESSA tool). Now replace that R610 with a previous generation server and

the numbers just go up when you look at something like a PowerEdge 1950 and a c6100 /
c6105. What if you dont need the power of an R610 or a c6100 / c6105? Perhaps a Microserver
would fit you better. What is a Microserver? Think about putting eight or twelve servers in a 3u
chassis, while using less power. Check out this video from Drew Schulke of Dell Data Center
Solutions as he talks about these Microservers.
When you are able to reduce the power you consume for compute power, and you are able to
reduce the rack footprint you are now able to take that money and put it elsewhere, like R&D or
other areas, your TCO goes way down. Even if it costs a little more to purchase upfront, it often
times pays for itself month after month is worth it many times over. When you get a server
chassis in a single box ready to rack and plug in without having to put it all togetheror better
yet, getting the servers racked and cabled in the factory, then shipped ready to plug in to the wall
and the network, think of the man-hours you save in deployment time.
It is always good to save money where you can. But in the end you need to always remember
that you get what you pay for, and often times, cheap solutions end up costing you more.
Home > Articles

Defining the Supply Chain

By CSCMP CSCMP, Haozhe Chen, C. Clifford Defee, Brian J. Gibson, Joe B. Hanna

Jan 10, 2014

Contents

1. Key Terminology and Concepts

2. Supply Chain Concepts
3. Key Participants
4. Purpose and Goals
5. Evaluation of Supply Chain Management
6. Value Proposition
7. Structure of the Book
8. Chapter Summary

9. References

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Interaction between Supply Chain Processes, Tools, and Technologies
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Definitive Guide to Integrated Supply Chain Management, The: Optimize the

Interaction between Supply Chain Processes, Tools, and Technologies
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Supply Chain Concepts

Before an organization tries to focus on supply chain management, its leaders must determine
what the supply chain encompasses. Just as you cant manage what you dont measure, you cant
plan and execute what you havent clearly defined. Hence, it is important to articulate the overall
purpose, scope, and components of a supply chain. Following are useful supply chain definitions
that highlight critical aspects of a supply chain.

From the Council of Supply Chain Management Professionals (2010)The material

and informational interchanges in the logistical process, stretching from acquisition of

raw materials to delivery of finished products to the end user. All vendors, service
providers, and customers are links in the supply chain.

From Christopher Martin L. (1992)The network of organizations that are involved,

through upstream and downstream linkages, in the different processes and activities that
produce value in the form of products and services delivered to the ultimate consumer.

From Coyle, Langley, Novak, and Gibson (2013)A series of integrated enterprises
that must share information and coordinate physical execution to ensure a smooth,
integrated flow of goods, services, information, and cash through the pipeline.

One important feature of these definitions is the concept of an integrated network or system. A
simplistic depiction of a supply chain, as featured in Figure 1-1, suggests that a supply chain is
linear with organizations linked only to their immediate upstream suppliers and downstream
customers. It also focuses on only one-way material flow, which fails to consider vital
information and financial flows, as well as reverse material flows. Such misconceptions
oversimplify reality and fail to reveal the dynamic nature of a supply chain network.

Figure 1-1 Linear representation of a supply line

In truth, supply chains require a multiplicity of relationships and numerous paths through which
products and information travel. This is better reflected by the conceptual diagram of a supply
chain in Figure 1-2, in which the supply chain is a web or network of participants and resources.
To gain maximum benefit from the supply chain, a company must dynamically draw upon its
available internal capabilities and the external resources of its supply chain network to fulfill
customer requirements. This network of organizations, their facilities, and transportation linkages
facilitate the procurement of materials, transformation of materials into desired products, and
distribution of the products to customers.

Figure 1-2 Network representation of a supply chain

Simple representations aside, it is critical to understand that no two supply chains are exactly
alike. An organizations supply chain structure and relationships will be influenced by its
industry, geographic scope of activity, supply base, product variety, fulfillment methods, and
demand patterns. Consider, for example, a multinational manufacturer and a local farm-to-table
restaurant. Both organizations would benefit from strong and stable supply chains. However, the
manufacturers network is at greater risk of disruption and must integrate geographically diverse
suppliers with multiple selling channels.

Supply Chain Management Perspectives

Introduced in the early 1980s, the term supply chain management began to take hold in the mid1990s and is now part of the everyday business lexicon. Whereas a supply chain is an entity that
exists for the fulfillment of customer demand, supply chain management involves overt
managerial efforts by the organizations within the supply chain to achieve results (Mentzer et al.,
2001). These efforts can be strategic or operational in nature, though the vast majority of
respondents to a Council of Supply Chain Management Professionals survey indicate that the
primary role of supply chain management within an organization is a combination of strategy
and activity (Gibson, Mentzer, & Cook, 2005).
Defining supply chain management would seem to be a straightforward task, yet it has been a
vexing challenge with the introduction of many alternatives. A Google search for supply chain
management definition quickly yields about 12,000 results. Among this plethora of descriptions,
you will find professional associations, consultants, and academicians addressing similar issues
but providing their own interpretations and areas of emphasis. Following is a sampling of
relevant definitions:

From the Council of Supply Chain Management Professionals (2011)The planning

and management of all activities involved in sourcing and procurement, conversion, and

all logistics management activities. More important, it also includes coordination and
collaboration with channel partners, which can be suppliers, intermediaries, third-party
service providers, and customers. In essence, supply chain management integrates supply
and demand management within and across companies.

From Gartner (2013b)The processes of creating and fulfilling demands for goods and
services. It encompasses a trading partner community engaged in the common goal of
satisfying end customers.

From LaLonde (1997)The delivery of enhanced customer and economic value

through synchronized management of the flow of physical goods and associated
information from sourcing to consumption.

From Stock and Boyer (2009)The management of a network of relationships within a

firm and between interdependent organizations and business units consisting of material
suppliers, purchasing, production facilities, logistics, marketing, and related systems that
facilitate the forward and reverse flow of materials, services, finances, and information
from the original producer to the final customer with the benefits of adding value,
maximizing profitability through efficiencies, and achieving customer satisfaction.

Although the definitions vary in length and complexity, they collectively focus on three themes:
activities, participants, and benefits (Stock & Boyer, 2009). That is, organizations must plan and
coordinate supply chain activities among their network of suppliers and customers to ensure that
the end product is available to fulfill demand in a timely, safe, and cost-efficient manner. When
this is accomplished, the benefits of enhanced customer satisfaction and retention will be
achieved.

Related Terms and Concepts

Supply chain management encompasses a number of business processes, activities, and goals
that are discussed throughout this book. Before moving forward, it is valuable to clarify their
meanings and relevance to supply chain management.
Logistics Management
Logistics is a fundamental set of supply chain processes that facilitates fulfillment of demand.
The goal is to supply the right product or service, at the right place, at the right time. The Council
of Supply Chain Management defines logistics management as that part of supply chain
management that plans, implements, and controls the efficient, effective forward and reverse
flow and storage of goods, services and related information between the point of origin and the
point of consumption in order to meet customers requirements. Whether provided internally, by
a supplier, by the customer, or by an external logistics services provider, these capabilities are
essential for achieving supply chain success.
Supply Management

Supply management focuses on the identification, acquisition, access, positioning, management

of resources, and related capabilities the organization needs or potentially needs in the attainment
of its strategic objectives (Institute for Supply Management, 2010). For most organizations,
logistics controls the distribution of products; whereas supply management controls the strategic
sourcing of direct materials, finished goods, services, capital equipment, and indirect materials.
Both are needed to ensure optimal performance of the supply chain.
Value Chain
The concept of a value chain was developed as a tool for competitive analysis and strategy. It is
composed of primary activities (inbound logistics, operations, outbound logistics, marketing and
sales, and service) and support activities (infrastructure, human resource management,
technology development, and procurement) that work together to provide value to customers and
generate profits for the organization (Porter, 1985). A value chain and a supply chain are
complementary views of an extended enterprise, with integrated supply chain processes enabling
the flows of products and services in one direction, and the value chain generating demand and
cash flows from customers (Ramsey, 2005).
Distribution Channel
Distribution channels support the flow of goods and services from the manufacturer to the final
user or consumer (Council of Supply Chain Management Professionals, 2010). An organization
can establish direct channels to consumers or rely upon traditional intermediaries such as
wholesalers and retailers to facilitate transactions with final users. The rapid expansion of the
Internet as a key selling platform is forcing manufacturers and retailers to develop innovative and
flexible omnichannel capabilities in their supply chains to fulfill customer demand from stores,
distribution centers, and production locations.