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Course Overview and

Module 1: Supply Chain


Management Fundamentals
Table of Contents
COURSE OVERVIEW ............. ............................... ..... ...................................................... ....... ....... i
MODULE 1: SUPPLY CHAIN MANAGEMENT FUNDAMENTALS
Introduction ......................................... ... .. .................. ............... ........................................................... 1-l
Section A: Overview of Supply Chain Management ..................... .. .................................... 1-3
Identifying Supply Chains ................................................................................... ... ............................. 1-3
Key Supply Chain Management Processes ......... .............................................................................. 1-10
Evolution of Supply Chain Management .......................................................................................... 1-17
Creating Value through Supply Chain Management.. ....................................................................... 1-29
The Impact of Globalization on Supply Chain Management. ........................................................... 1-45

Section B: Supply Chain Management Strategy .. ............................................................... 1-51


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 ....... .. ........................................... ......... ......................... 1-92

Section C: Managing the Supply Chain ......................................................... ....................... 1-103


Using Corporate and Supply Chain Strategies to Set Priorities and Make Decisions ..................... 1-104
Elements of Supply Chain Management ......................................................................................... 1-110
Supply Chain Performance Metrics ................................................................................................. 1-114
Managing the Supply Chain for Financial Performance .............................. ................................... 1-128
Managing and Leading People in the Supply Chain ...................................... ................................. 1-133
Synchronization and Key Success Factors ..................................................... ............. .................... 1-136
Security and Compliance Issues .................................................................... .. ..... .. ......................... 1-138

Section D: Improving the Supply Chain ............................................ ................................... 1-146


Continuous Improvement ........................................ .. ................................ .. .. ....... ... ........................ 1-146
Visibility and Analysis ....................................... ............................................................................. 1-152

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Goals and Benchmarking .............................................................................................................. .. . 1-160


Continuous Improvement Methods ......... .. ...................................................................................... 1-162
Implementation and Change Management ...................................................................................... 1-185

Exam Preparation Questions ................ ................................................................ .................. .. 1-192


Bibliography ..................................................................................................................................... l-196
Cumulative Course Index ................... .................,......................... ............................................. 1-200

20 10 APlC
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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 not
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
Curtis Brewer, CFPIM, CIRM,
CSCP
Jashobrata Bose, CSCP
AI Bukey, CFPIM, CIRM,
CSCP
Luc Chalmet, Ph.D, CFPIM,
CSCP
Prashant Chaudhary, CSCP
Prasanta K. Dash, CSCP, PMP
Sudripto De, CSCP
Alan Downs, CPIM, CSCP
Janice M. Gullo, CPIM, CSCP
Amit Kumar Gupta, BE, CSCP
Joni Holeman, CFPIM, CIRM,
CSCP
Eric P. Jack, Ph.D., CFPIM,
CSCP
Rajesh Kumar Jagadeeswaran,
CPIM, CSCP
Dave Jankowski, CFPIM, CSCP
Julie Jenson, CPIM, CSCP
Honey Johnson, CFPIM, CIRM,
C.P.M., CSCP

Rajesh Kamat, CSCP


Prakash Kanagalekar, CPIM,
CSCP
Jack Kerr, CPIM, CSCP, C.P.M.
Jose Lara
Mike Loughman, CSCP
Giuseppe Lovecchio, CFPIM,
CSCP
Richard Merritt, CFPIM, CSCP,
C.P.M.
Thiagu Mathan, CSCP
Alan L. Milliken, CFPIM,
CIRM, CSCP
Peter W. Murray, CIRM
Mike Okrent, Ph.D., CIRM,
CSCP
Kasthuri Rengan Ponnambalam,
CSCP
Gautam Chand Pradhan, CPIM,
CSCP
David Rivers, CFPIM, CIRM,
CSCP
Maryanne Ross, CFPIM, CIRM,
CSCP

Kimber Rueff, CPIM, CIRM,


CSCP, C.P.M.
Ignacio Sanchez-Chiappe
Carolyn Sly, CPIM, CSCP,
C.P.M.
Pam Somers, CPIM, CIRM,
CSCP
Chad Stricklin
Shashank Tilak, CPIM, CSCP
Huan-Jau (Arthur) Tseng,
CFPIM, CSCP
Dave Turbide, CFPIM, CIRM
Sudeep Valmiki, CSCP
Rosemary Van Treeck, CPIM,
CIRM, CSCP
Robert Vokurka, Ph.D., CFPIM,
CIRM, CSCP, C.P.M.
Eddie J. Whitfield, CPIM,
CIRM, CSCP
Vivek Wikhe, CSCP
Blair Williams, Jonah, CFPIM,
CSCP

The APICS CSCP Learning System is printed on 30% post-consumer waste recycled paper.

2010 APICS
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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 learning 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 in the
course

Before you use the Web components of the course, you must enroll:
1.

Go to www.LearnCSCP.com, and, from the menu sidebar, 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 last name. Create a user name and password between four and
eight characters long. Then click OK.

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
User name:

Password:

Note that your access code is valid for one year after your first enrollment.

2010 APICS
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Version 2.1, 2010 Edition

Course Overview

Accessing the
program

Once you are enrolled, you can access and leave the program as often as you
wish. To access the program:
1.

Go to www.LearnCSCP.com.

2. Enter your user name and password.


3. Click Log In to enter the course.
Read the online overview, and then go to the course menu, from which you
select course components.
Exiting the
program

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. Ifyou 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.

Online help

The Help option on the Enroll screen 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.org/cscp.

Learn more

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/cscp 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 wit/1
this enjoyable and
complete program as
you prepare for the
APICS CSCP
examination and
develop your
professional
expertise.

2010 APICS
All rights reserved.

The APICS CSCP Learning System is based on the APICS CSCP Exam

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.

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Version 2.1, 2010 Edition

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
The pre-test allows
you to evaluate your
understanding of
supply chain
concepts and focus
your study.

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 function.
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 moduleby-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.

The entire program


includes more than
750 pages of text
reinforced by online
practice testing and
learning reinforcement activities.

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.

At the end of each


module section is a
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 review.

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

2010 APICS
All rights reserved.

111

Version 2.1 , 2010 Edition

Course Overview

Module 3: Managing Customer and Supplier Relationships (30%)


Each module
includes a
bibliography
referencing the
books used in the
development of that
module.

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 oflnformation Technology in the Supply Chain

ERP in Supply Chain Management

Innovative Technologies and Their Uses

Using IT to Enhance Supply Chain Performance

e-Business

Step 3: Complete the module-specific test.


Module-specific tests
check your
understanding of
each module.

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 test is 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 eFiashcards.


These eFiashcards
provide an
opportunity to review
terms and definitions
by module.

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 eFlashcards 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.

Step 5: Complete the eFiashcards across modules.


eFiashcards can also
be chosen and
printed to review
terms and definitions
across modules.

2010 APICS
All rights reserved.

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 eFlashcards.

iv

Version 2.1, 2010 Edition

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
Post-test questions
will be new. If you
don 't pass the posttest, 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.

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
you are on track to complete the certification exam in the time allotted. If you
leave the test, you can reenter it and will have the option to either continue or
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.


Review your report to
measure your
progress through the
course at any time.

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.


Help us improve our
product offerings and
request your Letter of
Recognition.

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 learning system) from the Program Evaluation form.

2010 APICS
All rights reserved.

Version 2.1, 2010 Edition

Course Overview

The following is a graphic representation of the APICS CSCP Learning System.

APICS CSCP Learning System

Pre-Test
I

Module 1

Module2

Module3

Module4

ModuleSpecific Test

ModuleSpecific Test

ModuleSpecific Test

ModuleSpecific Test

...

...

...

...

ModuleSpecific
eF!ashcards

ModuleSpecific
eflashcards

ModuleSpecific
eFiashcards

ModuleSpecific
eflashcards

eflashcards

...

Post-Test

...

Report

...

2010 APICS
All rights reserved.

vi

Version2.1, 2010 Edition

Module 1: Supply Chain


Management Fundamentals

Introduction
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 ofleaders 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 vocabulary-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.

2010 APICS
All rights reserved.

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 describes 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.

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lvfodu /e I: Supply Chc1in J\tlcmogement F11ndamen tals

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.

2010 APIC.
All rights reserved.

Section D explores the methods of assessing, measuring, and improving


supply chain performance.

1-2

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.

+Identifying Supply Chains


Basic supply
chain

According to the APICS Dictionary, 12th edition, a supply chain is a "global


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 Zaraare 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

Supplier

Producer
............ Primary
product
flow

Customer
............ Primary
product
flow

Primary cash flow

2010 APICS
All rights reserved.

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Version 2.1 , 2010 Edition

Module 1: Supply Chain Management Fundamentals

These "entities" that perform the processes can be business or governmental


organizations or (at least in theory) individuals. They can also be departments or
functional areas or individuals within a larger organization; there are internal as
well as external supply chains. For the most part the model applies to corporations.
Most work on supply chains, both theoretical and applied, involves a
manufacturing firm in the middle (although service firms also have supply chains)
with a supplier of materials or components on the "upstream" side and a customer
on the "downstream" side. Technically, a supply chain needs only those three
entities to exist, but that isn't realistic for the types of global supply chains of
interest in this course.

Basic supply
chain: three
entities

The simplified chain in Exhibit 1-1 might be made up of these organizations:

A supplier, defined in the APICS Dictionary, 12th edition, as a "provider of


goods or services [or a] seller with whom the buyer does business, as opposed
to a vendor, which is a generic term referring to all sellers in the marketplace."
The supplier provides materials, energy, services, or components for use in
producing a product or service. These could include items as diverse as sugar
cane, fruit, industrial metals, roofing nails, electric wiring, fabric, computer
chips, aircraft turbines, natural gas, electrical power, or transportation services.

A producer that receives services, materials, supplies, energy, and components


to use in creating finished products, such as dress shirts, packaged dinners,
airplanes, electric power, legal counsel, or guided tours. (Note that supply
chains for services may be more abstract than those for manufacturing.)

A retailer that receives shipments of finished products to deliver to its


customers, who wear the shirts, eat the packaged dinners, fly the planes, or tum
on the lights.

Basic supply
chain: four
flows

Four basic flows connect these entities together:

The flow of physical materials and services from suppliers through the
intermediate entities that transform them into consumable items for
distribution to the final customer

The flow of cash from the customer back "upstream" toward the raw
material supplier

The flow of information back and forth along the chain (also back and forth
within the entities and between the chain and external entities, such as
governments, markets, and competitors)

The reverse flow of products returned for repairs, recycling, or disposal


(This is called the reverse supply chain, and it is handled by reverse
logistics, which involves different arrangements than the forward logistics
that carried materials and products in the other direction.)

2010 APICS
All rights reserved.

1-4

Version 2.1, 2010 Edition

Section A: Overview of Supply Chain Management

Supply chain
example

Consider, as a very simplified instance of this stripped-down supply chain


model, a young girl and her sister who set up a lemonade stand to sell lemonade
made by their mother to passersby on the comer. In the United States, this is a
familiar sight on warm summer days. In many ways, the lemonade stand
resembles small family businesses that exist in cities all across the world-a
vegetable stand in a farmer's market, a sidewalk grill cooking crepes or shish
kebab, a cart filled with souvenirs for passing tourists. It is a simpler example,
however, in that the lemonade stand requires no licensing and isn't technically
commercial. It's more a family hobby or a business lesson for the children
involved.
The lemonade stand represents one end of a supply chain. The supplier is the
comer store that sells basic ingredients to the mother. The mother is the
"producer" who turns the ingredients into lemonade. The stand, operated by the
girls, is the retailer that sells lemonade to the customers, consisting of the
thirsty, or perhaps merely sympathetic, passersby who pay for a glass of
lemonade. (In this case the retailer is most likely not a paying customer of the
producer, but at least in theory the mother might be taking a cut of the profits.)
Notice that even in this simplest of supply chains, the basic model needs
amplification. For instance, there are more suppliers than one. While sugar and
lemons may be procured from the same comer store, water comes from the
kitchen faucet, and the supplier of water may actually be a government entity
rather than another business. Electricity is supplied to light the kitchen
"manufacturing center." Adjacent to the work site is a warehouse of sorts with
refrigeration for storing the fruit plus shelves and drawers to hold various
supplies, such as glasses and utensils. There is also wood to build the stand and
poster paper and markers for making signs to advertise the stand. Somewhere in
the chain, though they remain invisible in our model, are suppliers' suppliers,
who bring materials, components, or services to the comer grocery and the
utilities.

Manufacturing
supply chain
model

Exhibit 1-2 on the next page at least hints at the organizational complexity that
appears in corporate supply chains by adding a second tier of suppliers and
more distribution centers and customers. Notice that there are suppliers of
services as well as materials. Discussions of supply chains typically put
manufacturing at the center and suppliers of components to the iinmediate left.
It may be that component suppliers are the most crucial consideration when
designing and managing a supply chain for manufactured products, but utilities
and other services are not inconsequential contributors to the cost of operations.

2010 APICS
All rights reserved.

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Version 2.1, 2010 Edition

Module I: Supply Chain Management Fundamentals

Exhibit 1-2: Manufacturing Supply Chain Model

Information flow

Distributor

Cu stomer
Distributor
Cu stomer
Primary ........
-product flow

Primary

-+--- payment flow

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 crucial considerations
when locating plants and warehouses. If water and electricity (or natural
gas, or 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 a 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 to a
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.")

2010 APICS
All rights reserved.

1-6

Version 2.1, 2010 Edition

Section A: Overview of Supply Chain Management

Services also
have supply
chains

Although the traditional supply chain model was developed in manufacturing, the
service industry, too, has supply chains. According to the APICS Dictionary, 12th
edition, a firm in the service industry is "in its narrowest sense, an organization
that provides an intangible product (e.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 13 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 Utility Supply Chain
Fuel supplies

j Electric backup power

Electric transformers
Home customers
Facility maintenance

""--1Commercial customers I

I Programming services I
Jan.itoria l services

..
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 oflast year's results. The flows of cash may be based
upon information contained in cash register or credit card receipts at the comer
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

@ 2010 APICS

All rights reserved.

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Version 2.1, 2010 Edition

Module 1: Supply Chain Management Fundamentals

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
other-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 business avoids many complexities that confront 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 businesses began in someone's home office, garage, or
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
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 modem supply chains.

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Summing up

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 across 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, returned 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, governments 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.

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+Key Supply Chain Management Processes


Supply chain
processes

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, the supply chain becomes just a
little more difficult to identify-let alone manage.
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 ofthe 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.

Beware of
conflicting
definitions

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.

Value chain
primary
activities and
the supply
chain

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Another source of confusion about definitions comes from the sometimes


interchangeable use of"value chain" and "supply chain." Although many would
assume that a supply chain is, in fact, a value chain-at least it is 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 product/service development,

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production/operations, and distribution. The intent of a value chain is to


increase the value of a 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 Band 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
it in 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.
It's worth noting that in this definition, as in many discussions of supply chains,
value chains, and value streams, it is difficult to maintain a clear separation
between processes- such as 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.

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APICS
definition of
supply chain
management

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
case, 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
or a 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
or 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
chain 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.

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SCOR supply
chain process
model

The Supply-Chain Operations Reference (SCOR) model is "a process


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


Council'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, metrics, best practices, and
technology features in a unified structure.
SCOR Model 9.0
assumptions

The Supply-Chain Council (SCC) intends the SCOR model for use by its members
to enhance their understanding of their supply chains 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).
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 SupplyChain Council is hosting efforts to build models of sales, design, and marketing
using the same logic as the model featured here.

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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 ofExhibit 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 internal or external. The model goes out two tiers in
both directions; the second-tier suppliers and customers are asswned to be
external. 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 processes are carried out by
the central triad of chain members (which, after all, may be under the same
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
Company" and two tiers of suppliers and customers, it can be applied to supply
chains containing many linked firms.
Exhibit 1-4: SCOR Supply-Chain Operations Reference Model

Suppliers'
Supplier

I
1

SupplierInternal or External

.---~~------~

Your Company

CustomerInternal or External

Customer's
Customer

Source: Adapted from Supply-Chain Council

SCOR Model 9.0


applicability

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There is more to the SCOR model than the five process descriptions and their
relationships as illustrated in Exhibit 1-4. Later in this module we'lllook more

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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 ofNew Zealand.

Five SCOR
processes

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'lllook 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
term "silo" is a metaphor drawn from the large storage silos prevalent throughout
American agricultural communities. The use ofthe term generally implies a lack
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 functions. 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.

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Exhibit 1-5: SCOR Processes Defined


Demand/Supply Planning and Management
Balance resources with requirements and establish/communicate 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 engineer-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 Engineer-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 Management for Stocked, Make-toOrder, and Engineer-to-Order Product
All order management steps from processing inquiries and quotes to routing shipments and
selecting carriers.
Warehouse management from receiving and picking product to load and ship product
Receive and verify product at customer site and install, if necessary.
Invoicing customer.
Manage Deliver business rules, performance, information, finished product inventories, capital
assets, transportation, product life cycle, import/export requirements, 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 defective
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 product-and deliver- authorize product return, schedule return receipt,
receive product, and transfer MRO product.
All Return Excess Product steps from source-identify product condition, disposition product,
request product return authorization, schedule product shipment, and return excess productand 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 compliance, and supply
chain return risk.
Source: SCOR 9.0 Ovetview Booklet, Supply-Chain Council

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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
a 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
areas.
We've looked at the five processes in the SCOR model developed by the
Supply-Chain Council. This model provides useful guidance in developing
cross-functional, cross-company approaches to managing supply chain
processes. Next we'lllook at the evolution of supply chain management as
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 council's headquarters
(info@supply-chain. org).

+Evolution of Supply Chain Management


Two types of
supply chain
management

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
an especially successful avatar ofthis 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 generally went out of fashion as
corporations became vaster in scale and global supply chains became longer.
It's difficult for one corporation to gamer the expertise needed to excel in all

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elements of the supply chain, so corporations in Europe and North America,


especially, have turned instead to outsourcing those aspects of their 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
customer-producer-supplier illustrations refer to three separate companies.
This is, of course, not necessarily the case; the entities could be departments
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

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
tetm "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 Mercurys as well).
Exhibit 1-6 illustrates, roughly, the vertical integration of a supply chain as
practiced by Henry Ford.

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Exhibit 1-6: Vertical Integration/Supply Chain Management a Ia Henry Ford

Ownership
Management
Marketing/Sales
Finance

Vertical integration persists as one method of managing a supply chain;


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 multinational corporations that once
were vertically integrated have chosen to eliminate non-core functions
within the company and rely instead on outside supply chain partners. The
complexity and expense of managing all those diverse activities drives top
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 vertical integration is control. A department or
wholly owned subsidiary with no independent presence in the marketplace
can't deal with competitors to sell its components or services at a higher
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,

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amounts produced-all aspects of its business-are controlled by the


overarching management.

Lateral
integration

Once corporate ownership abandons the idea of vertical integration and turns
instead to outsourcing various activities, it loses control ofthese 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 provider of the same product or service. This assumes, of
course, that the independent provider supplies all the needs of the original
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 confidentialitythough 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 inhouse 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.

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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 ofHolland'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 multi tiered 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: Lateral (Horizontal) Supply Chain

Information flows

Primary
product flows

Stages of
supply chain
management
evolution

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Primary
cash flows

In biology there used to be a saying, "Ontogeny recapitulates phylogeny"; the


individual develops through the stages of species evolution. It was thought that
the fetus developed gills to represent evolution through the fish stage, for
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

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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
users. Exhibit 1-9 provides an illustration of Stage 2 supply chain evolution, the
semifunctional enterprise. Information flow has been improved and functional
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

<111141----

~
~

Information ---IJII~
Marketing/
sales

Production
control
Materials/
products/services

<lllllfl----

Payments - - - -

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 (or "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
returns 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 returns to investors without reserving a portion for
continued improvement of products and processes.

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Stage 3:
integrated
enterprise

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 1990sthe same time that personal computers were becoming more powerful, reliable,
and affordable. In any firm, however, integration of internal 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
functions and sharing of information through companywide enterprise resources
planning (ERP) software.
Exhibit 1-10: Integrated Enterprise

Materials/
products/services

~
~
<llllt---- Payments - - - - ; ~

--+

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 access to the same data. The first step in this process was
the development ofMRP software in the 1950s to automate the bill of material.
Later, MRP was upgraded to MRP II, 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"

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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 CPFR (collaborative planning, forecasting,
and replenishment). In place of traditional production 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, representatives from diverse functions can help develop a design that is
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.
Other advances in Stage 3 include improvements in customer service arising from
more astute segmentation of markets and the development of more efficient
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 logistics supplier, such as
UPS, to "insource" by using its expertise to help optimize logistics decisions.

Stage 4: extended
enterprise

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 a
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 decides
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

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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

Materials/
products/services

....lift----

Payments _ _....,.

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 '11 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
too often the result of coercion by the dominant partner, who was looking for
guaranteed on-time delivery of quality items at a relatively low price. Powerful
retailers, as well as channel-dominating manufacturers, can also exert
considerable leverage over their suppliers, gaining agreement on difficult-tokeep promises in exchange for access to enormous global markets. The more
powerful firm may, for example, rid itself of inventory holding costs by
requiring the suppliers to keep the inventory in its warehouse to ensure that
goods 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.

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As in Stage 3, the new links forged in Stage 4 depend first of all on a conceptual
breakthrough, not on technology-with the exception of e-commerce. But in
Stage 4, technology enables the extended enterprise to reach fmther, to add new
partners, to move faster in response to market changes, and to operate with
broader scope than in Stage 3. Although technology is deeply embedded in the
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 II and
broke through the functional 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
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 enterprise is built on intranets, extranets, peerto-peer networks, the Internet, or a combination of those platforms. Partners begin
to synchronize their ERP systems across corporate boundaries (as noted earlier in
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 training; it can wipe out entire echelons ofthe supply
chain. As airlines began to sell their tickets directly online, for example, the need

>9

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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 fore-commerce.) Behind the scenes of such
consumer-to-business e-commerce, there is also increasing business-to-business ecommerce 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 chain
values

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, 12th 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
"value added." Adding value to a good or service is the responsibility 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. It is 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.

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Everyone might agree, at least in a capitalist context, that businesses exist to


earn a profit. Making money definitely constitutes a measure of success. 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
gross 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.
Granted that money is a necessary measure of the success of supply chain
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.

Not all profits are


justified

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
governments may have a stake in the way the business is conducted.

Measuring value
one stakeholder
group at a time

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 customer
may make a price increase unwise.

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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
be passed through to customers as price discounts? Should they be delivered
instead to investors as dividends? Should they be reinvested in equipment or
plant upgrades that improve working conditions? Any of these choices will have
differential impact on internal company stakeholders.
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 it is 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.

Balancing varied
stakeholder
values

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.

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Exhibit 1-12: Supply Chain Stakeholder Values


Supply Chain
Stakeholders

Stakeholder
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
chain
management

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, 12th 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

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Good environmental management and sustainability concerns--organizational


efforts to conserve energy, reduce waste and carbon footp1ints, and recycle

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Public opinion and the power of consumer choice-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 carbon 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 such as reduced employee turnover
because of staff pride and loyalty. Close working relationships with suppliers on
green initiatives can lead to increased knowledge, integration, and cooperation and,
in tum, 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
product but cost less, was easy to recycle, and took less space than the tray,
allowing more units to fit into a shipping container in transport from China.

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Global financial investment managers have noted that robust analyses of businesses
now often include assessments of environmental initiatives. Without forwardlooking 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: Initiatives and the Green Supply Chain
Initiatives

Compliance

Examples

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, wh ich 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 U.K.

Education and
training

Worldwide, there is participation in college and university degrees , certificate


programs, professional development courses, and on-the-job training for
sustainable energy, environmental and carbon footprinting, and other green
topics.

Logistics

Efforts are widespread to reduce fuel consumption . There is less use of air
freight ; increased use of rail transport, hybrid road fleets, and sea transport;
relocated warehouses; and reconfigured distribution centers .

Green
manufacturing
practices

There are initiatives to move away from traditional and wasteful


manufacturing practices to sustainable development practices including
recycling, conservation, waste management, pollution control , and a variety
of other related issues.

Packaging

Organizations are replacing traditional packaging materials with more ecofriendly 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
technologies

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 a couple of innovations for cleaner emissions around ports .

Information sharing

Organizations collaborate to build databases of information about


environmental improvement initiatives across supply chains .

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Not all supply chains are exposed to the same type or magnitude of environmental
pressures. Certainly, transportation and logistics have expe1ienced high-profile
scrutiny 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
heavier carbon footprint than those produced locally. Regardless of who are the
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.

Financial
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
one area of the business will simply mean spending more elsewhere-possibly
creating a net loss. Cost cutting, therefore, needs to aim for net gains 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 selfdefeating tradeoff happens all too often. The warehouse manager might, for
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 ofwarehouse 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

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necessitates 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 a 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
definitely creates a problem for the business 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
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 investi:nents 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. If an
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 (ROI) 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 returned during a specified time
period." ROA is defined as "net income for the previous 12 months divided
by total assets" (APICS D ictionary, 12th edition).

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Gains must be equitably distributed.


A third danger to avoid when pursuing efficiency or effectiveness is creating 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 return 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 products 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
benefits of an alteration in the placement of inventory (or any other process
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.

Customer
value

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
from "sensible shoes" through spa treatments. Decisions all along the chain have
to be coordinated to get the appropriate level of quality through the right design,
the right production, and the right materials.

Affordability
The votion 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

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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 oftheir net worth into a
Porsche or a Cadillac. Even Porsche is cost-conscious in its choice of outsourced
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 at the 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
drives supply chain managers to develop collaborative design processes that result
in specifications for products of good quality that can be efficiently manufactured
from readily available materials. Efficiency does not generally arise from poorly
trained workers, low-bid suppliers, indifferent design engineers, and halfhaphazard 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 services right on time. This may
affect not only the placement of inventories but also the selection of transportation
modes (overnight delivery, refrigerated containers, etc.) .

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, wananty
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.

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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.

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For green consumers, it is most typically a matter of what is important to them


and what they are willing to pay for. Green consumers tend to be influenced
more by social and perceptual concerns 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
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
be 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 practices is an increasing
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 tum, can
expose green customers to risk.
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
strategy is to serve a mass market with everyday low prices may have a different
approach to all these values than a manufacturer whose intent is to market luxury
goods at the high end of the income scale. No firm that wants to remain

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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
ofwork boots than they have for the buyer of a pair ofhigh-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
organization's founder, Sam Walton, knew that delivering goods to his out-of-theway 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-style products, continuous innovation, and rapid product
development to capture the latest trends in taste for each new season. All their
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 creation of customer
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.

Social
value

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

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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
Europe exist because those societies value public transportation. And, by
contrast, travel and freight carriage on trains has historically been hampered
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 replacementswarranty 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. All 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.

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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.

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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.
More efficient transportation technologies enable the shipment of perishable
and fragile goods long distances. A sign advet1ising "fresh seafood" in a
restaurant in the middle of a continent provides one example. Perishable
produce travels around the globe, making all fruits and vegetables perpetually
"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,
companies large and small can send and receive goods efficiently and securely
around the world.
Broadband transmission through the Internet facilitates the outsourcing of
services once geographically restricted by the time required for mailing
documents. X-rays can be analyzed and returned in a country half a world away
from the patient. Computer "help desks," similarly, can be located anywhere
that has the infrastructure. Some countries even specialize in providing complex
medical procedures to patients who fly from distant lands.
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."

The
challenges of
globalization

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 seems 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 is 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

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dramatic changes in the scale of global supply chains is probably the top reason
that supply chain management and logistics have now become boardroom and
CEO level concerns in most companies." As one global supply chain runs
leaner and faster, others will have to slim down and catch up.
The same issue of The Supply Chain Digest Letter contains advice about how to
meet the challenge of global supply chain management. Specifically, it describes
"The 10 Keys to Global Logistics and Trade Management Excellence."
1.

Focus on total delivered cost management.


One of the challenges of global sourcing is determining the landed cost of
an item from its raw material source to final distribution. Money saved at
one point may be lost by increased expenses at another. The temptation to
use the cheapest labor available globally, for example, may raise other
costs, such as those for transportation, training, infrastructure, tariffs, and
taxes. Estimating all those costs has proved to be a more significant
challenge than many outsourcing enterprises expected. (Landed cost is
treated in more detail in Section C of this module.)

2. Further automate global logistics processes.


Elsewhere in the same issue, The Supply Chain Digest writers point out that
globalization has advanced so rapidly that it has outpaced the technology
supply chains need to optimize their far-flung operations. Global chains
may have numerous hand off points, and related processes are still handled
manually in many supply chains.
3. Achieve end-to-end visibility.
With better use of global positioning and the Internet, supply chain
operators should be able to know, moment by moment, where shipments are
and when they will arrive at their destinations. The Supply Chain Digest
advocates development of "one-touch information flow" for all activities.
4. Leverage supplier portals and achieve advanced ship notice compliance.
Use of Web portals helps create end-to-end visibility by connecting suppliers
and customers globally. Portals can be used to generate various transaction
documents and track order status.
5. Commit to total identification and regulatory compliance.
The threat of attacks on shipping has prompted new regulations as well as
voluntary security arrangements. Successful supply chain managers
recognize the need to comply fully with regulations and security precautions

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to avoid unnecessary delays in shipping. They also participate in voluntary


supply chain security efforts such as the U.S . Customs and Border Protection
(CBP) Customs-Trade Partnership Against Terrorism (C-TPAT), the
Canadian Partners in Protection (PIP), the International Ship and Port
Facility Security Code (ISPS Code), or ISO 28000:2007, the International
Organization for Standardization standard for the establishment and
management of supply chain security.
Compliance matters are treated later in this module.

6. Maintain transportation flexibility.


Choosing among the many possible combinations of carriers, routes, and
logistics providers requires careful management.
7. Embrace variability management.
The problem of excess safety stock building up and dwindling
unpredictably along the chain only grows more daunting as supply chains
lengthen globally and include many more handoffs. Managers can combat
the problem of variability by reducing lead times and making better use of
advanced information technology to track supply chain data.
8. Build integrated international and domestic workflows.
Transportation centers, which are well-established for domestic logistics,
should be expanded to include global transportation.
9. Adopt an integrated planning and execution platform.
Transportation planners should have access to real-time data from the
domestic and international portions of deliveries.
10. Focus on financial supply chain management.
Supply chains convey physical objects, information, and financial data.
Maintaining relationships with foreign trading partners requires mastery of
the financial aspects of import and export, such as letters of credit.
International financing is covered in Section D of Module 2.

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Section B: Supply Chain Management Strategy

This section is designed to

Define "corporate strategy" and "supply chain strategy" and explain the need to align the two
strategies

Explain the strategic importance of customer focus and the demand-driven supply chain

Outline the elements that must be present to support alignment of supply chain and corporate
strategy, including organizational design, supply chain processes, global metrics, technology
and systems, and people

Explain the need to be able to alter or abandon strategies in reaction to specified changes in
the business environment or in the business itself

List supply chain competitive priorities and explain the importance of each to the future
direction of supply chain management

Define enterprise resources planning (ERP) and identify the issues to resolve when designing
an ERP system

Outline risk management strategies that focus on security and continuity of operations.

There's a kind of magic in some words, "strategy" and "strategic" among them.
Place "strategic" in front of the name of any business process and suddenly that
process acquires an aura of great importance. Strategic sourcing sounds so much
grander than mere sourcing (let alone procurement). Strategic objectives cry out
to be achieved in a way that simple objectives do not. Strategic planning sounds
considerably more sophisticated and powerful than plain old planning.
There's a reason those words have such power, and it's not mere rhetorical
bluster. Strategy, originally a military term, is how generals marshal all
available resources in pursuit of victory. Strategy wins football games and chess
matches- or loses them. Corporate strategy, if intelligently conceived and
masterfully carried out, governs all of a corporation's processes and brings it
success in the global competition for markets.
And if corporate strategy is, like military strategy, the marshaling of all
resources, then it becomes clear that the corporation's supply chain (SC) can be
its most potent strategic resource. Designing and building the right supply chain
may just be the most powerful way to gain an edge on the competition, to move
faster, deliver more value, and be more flexible in the face of both steady
change and surprises. From that perspective, supply chain strategy is corporate

(f

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strategy-one way corporations distinguish themselves in the competitive


contest to create value for their customers and investors.
In the end, the adjective "strategic" may be more evocative in connection with

corporate and supply chain thinking than the noun "strategy." The noun implies
something static. In a world of whirlwind change, the adjective may just be a
little more practical and even more magical. The strategic thinker stands ready
to seize whatever opportunity arises, to make whatever change is necessary, in
pursuit of an underlying goal or even a vision. The strategic thinker will, in fact,
drop an underperforming strategy at a moment's notice when chance delivers a
new opportunity.
When a young fellow named Bill Gates talked IBM into letting him keep the
rights to develop his own markets for his quick and dirty operating system
called DOS, IBM thought that was all right. They had a strategy for selling
hardware. DOS just made the hardware run. Gates built the software engine for
IBM, but he was thinking strategically-looking at every situation for the
hidden possibilities. IBM didn't see the wider world of software development
independent of their metal boxes. They missed a huge strategic opportunity;
Gates saw it and seized it. By the time IBM caught on and developed OS/2, it
was too late to catch Microsoft. The rest, as they say, is history; or maybe it's
magic.
In this section, we'll explore some fundamental aspects of corporate and supply

chain management strategies:

Corporate strategy as it relates to supply chain strategy

Collaboration

Aligning supply chain strategy with corporate strategy and changing


strategy when conditions change

Competitive priorities and future direction

Using ERP to align operations with strategy

Risk management strategies

+Corporate Strategy
In its definition of strategy, the APICS Dictionary, 12th edition, tells us that "the
strategy of an enterprise identifies how a company will function in its
environment. The strategy specifies how to satisfy customers, how to grow the
business, how to compete in its environment, how to manage the organization and
develop capabilities within the business, and how to achieve financial objectives."
How hard can that be?

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Goals of
corporate
strategy

Let's begin parsing that definition with the part about satisfying customers. The
main point to keep in mind is this: Whatever strategy the corporation adopts to
satisfy customers, grow, compete, organize itself, and make money, the supply
chain has to operate to further those goals. To give a simple example, if
customers are clamoring for deeply discounted prices on durable, high-volume
goods with stable demand, a supply chain strategy that invests heavily in speedy
delivery is very likely to be wasting the corporation's money. (However, with
supply chains eve1y decision takes place within a matrix of decisions, so you
can never say never about any individual strategy. Speedy delivery might
somehow fit in with a successful overall approach. But the focus of investment
seems likely to be off the mark in the example.)
A supporting point to keep in mind is this: Unless a supply chain is vertically
integrated within one company, it will contain a number of independent
organizations, each with its own goals, processes, operations, technology, and
strategy. So, when we refer to the necessity of aligning supply chain strategy
with corporate strategy, we have to be specific about which corporation's
strategy we mean. In general, the reference is to the strategies of a channel
master or nucleus firm. Traditionally, that's the manufacturer of a product-the
company that sits right at the center of the chain (or network) with suppliers in
tiers on one side and customers on the other. But the dominant firm, with the
dominant strategy, may instead be a large retailer, in which case the strategies
of the supplier-manufacturers have to align not only with their own corporate
goals but with their customer's corporate and supply chain strategies. The
suppliers of suppliers also have strategies to be brought into alignment. Finally,
the strategies, once aligned, have to do two things: serve the end customers'
needs and be profitable for the chain as a whole and each company individually.

Strategy:
customer
focus and
alignment

When it comes to supply chains, it's what's good for the customer that countsnot what's good for the nucleus company or even what seems to be good for the
supply chain itself. Supply chain management ought to be all about giving the
final customer the right product at the right time and place for the right price. It
isn't necessarily about the most advanced product or service, nor is it always
about the lowest price, the fastest time, or the most convenient place. It's about
the balance of quality, price, and availability (timing and place) that's just right
for the supply chain's customer.
Is determining what's right in all those measures easy? Well, no, of course it isn't.
And achieving all those values wouldn't be easy, either, even if they were
completely obvious, which they seldom are. Only two things are obvious. First,
serving the end-user customer is the primary driver of supply chain decisions.
And, second, the organizations in the supply chain have to make a profit and stay

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in business to serve the customer. Design engineers-or, better yet, design teams
from across the network--design products that are right for the end customer (and
can be sold profitably). Market research looks for the true, and not always
obvious, needs in potential consumers that the supply chain can be engineered to
satisfy profitably. Logistics strategy begins with data about customer demands for
availability--of materials, components, service, or finished products, depending
upon the customer- and then it looks for ways to move products in a costeffective way with acceptable risk. Decisions are never just about product features
or just about price or just about speedy delivery. They are about the right features
at the right price on the right schedule. DOS was not a great operating system; it
was just the right operating system for the time and the market.
As we saw in the previous section, there are other stakeholders who also have to
be brought along for the ride. In fact, "customer" is a complex concept in relation
to supply chains, because there are multiple customers with different stakes in the
process. When we talk about customer focus, we mean the end user, the consumer
of the product. But only the retailer actually sees the end user and has a direct
relationship with that person or entity. Everyone else in the supply chain has a
more immediate customer just downstream to our right in the supply chain
diagram. If the supply chain is completely aligned in its focus on the end
customer, then, at least in theory, serving the customer just to an organization's
downstream side would automatically serve the end user and also be in the
supplying organization's best interest as well as the interest of investors.
Moreover, within each supply chain partner there are internal "customers" whose
needs also must be aligned with corporate and supply chain strategies. Each
manager must understand his or her role in making the supply chain profitable,
and staff, too, must be rewarded, motivated, and trained in alignment with the
needs of the supply chain's end customer. The society at large and the government
that (sometimes) codifies social value in its laws and regulations must also be
served. Ultimately, what's good for the supply chain is good for the customer,
within the limits set by those other stakeholders. But achieving that happy
alignment of all strategies along the chain requires strong leadership, constant
attention, and, perhaps, a little magic.
Consider the case with green supply chain management. By many accounts,
successful green supply chain management requires a very strategic mindset,
involving numerous personnel and financial resources and a commitment from
suppliers from first to lower tiers of the supply chain as well as consumers further
up the supply chain. There needs to be cooperation between different departments
in a company (e.g., purchasing and environmental or design departments) and
collaboration between the different departments within a company and their

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counterparts at suppliers. This type of collaboration between supply chain partners


necessitates breaking down cultural barriers and building a culture of trust to
ensure that the focus is on end-to-end supply chain activities and not just discrete
supply chain processes.
Organizations need not be ashamed of saying that they are looking to make a
profit when strategizing in terms of the environment, society, and the economy.
Being informed is the starting point when applying this to green supply chain
management. Then organizations must take leadership roles, and, in conjunction
with their suppliers, both must be responsible in their decisions and actions to
achieve ecological and economic balance. Developing a green supply chain
culture can be difficult. But in green supply chain management, no one
organization can go it alone.

Strategy:
forecastdriven
enterprise

One of the traditional problems with meeting customers' availability requirements


arises from the difficulty of knowing what those requirements will be from day to
day, month to month, quarter to quarter, and so on. If a manufacturer could be
guaranteed that its wholesale or retail customers were going to need 1,000 SKUs
(stockkeeping units) every Wednesday afternoon, getting products to customers at
the right time and place would be a matter of simple calculation based upon lead
times for production and delivery. In tum, the manufacturer would look at the bill
of material, determine the lead time for each, and submit schedules to its suppliers.
Unfortunately, it's difficult to predict even the most stable demand-say, for a
product like diapers. There is some variability in demand for diapers, even though
they aren't subject to seasonal style changes or rapid peaks and valleys in response
to outside influences affecting ability to pay. (That's why Procter & Gamble
cooperates with Wal-Mart to plan for demand and replenishment of diapers.) The
chain of demand (to coin a phrase) begins at the far retail end of the supply chain
and works its way back toward the source of raw materials used in making the
product. And the traditional way of attempting to satisfy this demand is to forecast
it. (In Module 2 we'll look in some detail at forecasting methods.)
Forecasting works along the chain like this:

The retailer forecasts demand from young parents.

The wholesaler forecasts demand from all its retailers.

The manufacturer forecasts demand from the distributors.

The component suppliers forecast demand from manufacturers.

The raw materials suppliers forecast demand from the component


manufacturers. (Somewhere way upstream at the source of the diaper chain,
assuming old-fashioned cloth diapers, is somebody growing cotton and
hedging risk with futures contracts.)

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How well does this work? Let's say you don't want to be placing large bets on the
accuracy of all those forecasts. Here's what happens:

Those young parents vary their diaper-buying patterns in fairly small


increments due to factors nobody fully understands. Perhaps they just go to
different stores for a change, shop on Tuesday instead of Thursday, or buy
more at one time because the diapers are on sale (and nobody mentioned the
retailer's promotion plans upstream to all those companies affected by the
variability in demand), or flu season affects volume needs. At any rate,
demand never quite meets the forecast. So the retailer pads each order with a
little extra "safety stock" to put in the storeroom. (According to the APICS

Dictionary, 12th edition, safety stock is "in general, a quantity of stock


planned to be in inventory to protect against fluctuations in demand or supply
[or,] in the context of master production scheduling, the additional inventory
and capacity planned as protection against forecast errors and short-term
changes in the backlog.")

The distributor forecasts demand based on past orders from its retailers. Now,
those demand patterns have a wider variability than the demand pattern at the
retailer's checkout counters. Why? Because of that safety stock. Sometimes
the safety stock accumulates because demand is less than the forecast, and this
means that the retailer's next order is for less than its forecast-or perhaps it
doesn't have to order at the usual time at all, because it has a glut of diaperswhich it probably sells off in a promotion. The upshot of all this is that the
small variations in end-user demand are magnified at the distributor.

Up the chain, the manufacturer of those diapers looks at the demand pattern
from the distributor and makes its own forecasts, which show an even wider
swing in variability.

And (you get the picture) so it goes up the chain with ever-wider swings in
variability until it hits that cotton farm.

This pattern of variability is called the bullwhip effect, and it affects all manner of
supply chains that are based on serial forecasting by each independent division or
firm that touches the product as it travels from raw material to finished retail item.
If you imagine snapping a bullwhip and watching the ripples widen as they move
away from your hand, you can picture the trend line of the supply chain's
bullwhip effect. Exhibit 1-15 provides a different sort of graphic representation of
the bullwhip effect. The snakelike ripples aren't graphed, but the increasing
distortion in demand patterns is described as it moves up the chain from the retail
customer toward the raw material supply.

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Exhibit 1-15: Bullwhip Effect

...

1' actory

.
@
.

Small demand uncertainty becomes more


and more distorted.
<I

...

"

Di tritutor

us to mer

Strategy:
demanddriven
enterprise

The bullwhip effect is driven by demand forecasts; the solution is to substitute


actual information for the forecasts-which are always wrong. This isn't
necessarily a simple matter, either, but supply chain professionals have evolved
techniques for letting actual orders-not forecasts-drive production and
distribution. It's called "make-to-order" instead of"make-to-stock" (which
could be called "make-to-forecast").
When a supply chain works in response to forecasts, it's called a "push" chain.
The APICS Dictionary, 12th edition, gives the synonymous term "push system"
three related meanings:
1) In production, the production of items at times required by a given
schedule planned in advance.
2) In material control, the issuing of material according to a given
schedule or issuing material to a job order at its start time.
3) In distribution, a system for replenishing field warehouse
inventories where replenishment decision-making is centralized,
usually at the manufacturing site or central supply facility.
Everything in a push system is, in a manner of speaking, pushed downstream
from one point to the next according to schedules based on the forecasts. The
supplier delivers components in the amounts determined by the schedule to
inventory, where they await use in manufacturing. The plant turns them into
finished products and pushes the products to the distribution center or the
retailer, where they await an order from downstream.
At that point the product isn't being pushed by the schedule; it's being pulled by
demand. The APICS Dictionary, 12th edition, provides three meanings for the
term "pull system" to parallel the three meanings provided for push system:
1) In production, the production of items only as demanded for use or
to replace those taken for use.
2) In material control, the withdrawal of inventory as demanded by the
using operations. Material is not issued until a signal comes from
the user.
3) In distribution, a system for replenishing field warehouse
inventories where replenishment decisions are made at the field
warehouse itself, not at the central warehouse or plant.

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In the demand-driven chain, no product is produced until an order comes inmoving the "push/pull frontier," as it's called, back up the chain at least to the
plant. Instead of producing to the forecast and sending finished products to
inventory, the production process doesn't begin until information comes in
based on sales. There is, in other words, no fixed production schedule in a
strictly demand-driven supply chain. Product is turned out only in response to
an actual order, "on demand," in other words. Note however that on the supplier
side of the plant forecasts still determine delivery of raw material. The art of
forecasting remains crucial, even in a demand-driven chain.
The challenge in changing from forecast-driven to demand-driven, from push to
pull, is reducing inventory without also lowering customer satisfaction. When a
demand-driven system is set up and managed properly, it can actually enhance
customer service while reducing costs. But stockouts are a risk. As always with
supply chains, the decision to switch to a demand-pull process trades one type
of risk for another. In the forecast-push process, the risk is related to the buildup of inventory all along the chain. Not only does inventory cost money while it
sits in a retail stockroom, distribution center, or preproduction storage area; it
runs the risk ofbecorning obsolete or irrelevant for a number of reasons. In a
world of rapid innovation, inventory obsolescence is a very real threat. Cisco
Systems, for years an exemplar of successful and innovative supply chain
management, had to dispose ofUS$2.25 billion worth of useless inventory
when the dot-com bubble burst at the beginning of this millennium. All those
season close-out sales you see in clothing and department stores are a way of
clearing out the overstock. Bookstore remainder tables (which are much less in
evidence than they were a decade or two in the past) are a sign of inventory
overhang caused by failed forecasting. Magazine distributors used to destroy
huge quantities of monthly magazines 12 times a year when they came back
from retail outlets. Those are the results of producing to forecasts no one trusts
and purposely overstocking to be sure of meeting unexpectedly high demand.
The risk in the build-to-order model, on the other hand, is that orders will begin
to come in above capacity and all along the chain there will be expensive
activity to run the plant overtime, buy more and faster transportation, or sweettalk customers into waiting for their orders to be filled or substituting a different
product. (Running short of stock is also a risk in the forecast-driven chain.
Forecasts can be wrong in either direction. That's why the safety stock builds up
at each point where orders come in.)
Building a demand-driven enterprise can require significant changes in all
supply chain processes.

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The following lists some major considerations:

Access to real demand data along the chain (visibility)


The first requirement is to replace the forecasts with real data. The only
supply chain partner with access to these data firsthand is the retailer, and
retailers in the past have been no more willing to share business data than
any other fi1ms. The other partners lack "visibility"-one of the main
supply chain principles promoted by APICS. They simply cannot see what's
going on with the end customer. But visibility is a necessity for building a
pull system, and pioneers like Wal-Mart have led the way in that regard.
With point-of-sale scanning or radio frequency identification (RFID), a
retailer can alert its suppliers to customer activity instantaneously. Instead
of producing to the monthly forecast, manufacturers with that kind of
immediate signal from the front lines can plan one day's production runs at
the end ofthe preceding day. They produce just enough to replace the sold
items.

Trust and collaboration among supply chain partners


Collaboration is implied in the sharing of information. But more is at stake
than simply sharing sales information. Partners may have to invest in new
technology and develop new systems to be able to use the real-time data.
With orders going out on a very different schedule (in fact, not on a
schedule) all processes will have to be altered- warehousing (storage no
longer needed), packaging, shipping, and planning will all be handled
differently in the new system. In return for receiving real-time data that
allow reduction of inventory, suppliers and distributors have to agree to
change their processes in whatever ways may be necessary to make the new
system function without disrupting customer service.

'

Agility
Because the inventory buffers leave the supply chain, the trade partners
need to develop agility-the ability to respond to the variability in the flow
of orders based on sales. The plant, for example, may have to undergo
considerable change if it has to produce several different kinds of products
under the new circumstances. When building to forecast, a plant can run a
larger volume of each product to send to inventory. But when building to
order, the plant may have to produce several different types of products in a
day. There will be no room for long changeover times between runs of
different products; therefore, equipment, processes, work center layouts,
staffing, or siting-or all these things-may have to change to create the
capacity required to handle the new system.

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To return to the simple model ofthe lemonade stand, make-to-forecast might mean
that Mom mixes a batch of lemonade just before the stand opens based on the
number of customers from the previous day. (That would be a "naive forecast," as
you' 11 see in Module 2.) If the forecast is wrong-say, the weather turns bad
midway through "business hours"-there will be leftover lemonade, which most
likely won't be problematic unless the operators drink too much of it and spoil
their appetites. The other possibility is that demand will overwhelm supply and
perhaps Mom has gone to pick up big sister at soccer practice and customers go
away thirsty. With forecasts being so unreliable, the lemonade stand proprietors
might decide to switch to a make-to-order schedule. After each sale, they could call
in to the kitchen to update the lemonade manufacturer, who would probably want
to keep a few glasses ahead. Inventory could be made much smaller, if not
eliminated. The drinks might be a bit fresher. There would be a tradeoff in cost,
however, because more trips from kitchen to stand would be required.
(Transportation and warehousing always have to be balanced.) Raw materialslemons, sugar, water-would still be purchased on forecasts, since running to the
comer store for more lemons would be wasteful of time and money. The sisters
might also decide to move part of production closer to the customer by adding
sugar to taste. But "postponement" is another topic for Module 2.

Strategy:
number of
supply chains

When we're drawing pictures of supply chain models, it's customary to assume that
one chain connects each partner to the next. In fact, one firm can have more than
one supply chain, depending upon the number and type of products that are passing
along the chain and other variables. For a product with a complex bill of material
(many parts that combine into many components to make the final product), a
manufacturer may be bringing in materials from many suppliers. And these
materials might range from low-priced commodities to fragile or sophisticated
materials that require special shipping and handling. Suppliers might range from
small specialized firms to raw materials giants larger than the manufacturer. Some
are key accounts; some might be occasional buyers . The finished products may be
sold through several very different channels-e-commerce, printed catalogs,
commercial, and retail. These variables may combine in different ways, each
suggesting its own type of supply chain strategy. We'll consider some effective and
ineffective alignments of supply chain types and product variables.
In "What Is the Right Supply Chain for Your Product?" Marshall L. Fisher

distinguished two types of products that call for different supply chain strategies:
functional and innovative. They differ as follows.
Functional products that change little from year to year have longer life cycles

(perhaps more than two years), relatively low contribution margins, and little

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variety. Because demand for them is stable, they are fairly easy to forecast, with a
margin of error in the 10 percent range, very few stockouts, and no end-of-season
markdowns. The appropriate supply chain for these products should emphasize
predictability and low cost with performance indicators such as the following:

High average utilization rate in manufacturing

Minimal inventory with high inventory turns

Short lead time (consistent with low cost)

Suppliers chosen for cost and quality

Product design that strives for maximum performance and minimal cost

Make-to-order functional products-for example, replacement parts for


customized equipment-usually have long lead times (six months to a year).
Innovative products contrast to functional products on every dimension. They
have unpredictable demand, relatively short life cycles (three months for
seasonal clothing), and high contribution margins of 20 to 60 percent. They may
have millions of variants in each category, an average stockout rate from 10 to
40 percent, and end-of-season markdowns in the range of 10 to 25 percent of
regular price. The margin of error on forecasts for innovative products is high40 to 100 percent-but the lead time to make them to order may be as low as
one day and generally is no more than two weeks. The supply chain for
innovative products should emphasize market responsiveness rather than
physical efficiency, with indicators such as the following:

Excess buffer capacity and significant buffer (or safety) stock of parts or
finished items

Aggressive reduction of lead times

Suppliers chosen for speed, flexibility, and quality (rather than cost)

Modular design that postpones differentiation as long as possible

The key performance indicators for each supply chain differ because of the
product characteristics. Aggressively reducing lead times, for example, is
appropriate for innovative products but would be irrelevant for functional
products that can be manufactured and delivered on predictable schedules in
high volumes. Inventory reduction makes good sense as a performance
indicator for supply chains if the product is functional but not if it's
innovative. Because margins are low on functional products (those markets
tend to be very competitive), cost reduction in the supply chain is essential.
Innovative products, on the other hand, with their high margins and
unpredictable demand, justifY extra expense for holding costs. (Fisher also
proposes, however, that manufacturers of innovative products can look for
other solutions to the problem of unpredictable demand, such as aggressively

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reducing lead times and producing products to order rather than for
inventory.) The same class of product, the author argues, can be either
innovative or functional. Automobiles fit that description, with a low-priced,
no-frills car like a base model Chevrolet Cobalt or Hyundai Excel
representing the functional end of the spectrum and a Porsche representing the
other end. Similarly, coffee can be functional- as anyone who has worked in
an office knows, in which case it should be available quickly at a low price
with perhaps cream and sugar as options. At a high-end coffee shop, on the
other hand, patrons are willing to endure longer lead times and pay more
money for their coffee, but they want variety in return.
The idea that the same type of product can be either functional or innovative
implies that one company might have more than one supply chain. And that's
the contention of Jonathan Byrnes, a professor at MIT. Writing in the Harvard
Business School's Working Knowledge, Byrnes asserts that one supply chain
is not enough; two, three, or more would be preferable. "One size fits all"
supply chains may have been sufficient in the past, he believes, when that was
the competitive norm, but new information technology makes it possible to
have multiple, dynamic chains that can accommodate different product and
information flows.
Byrnes breaks products into three categories: staples, seasonal products, and
fashion. Much like Fisher's functional products, staples (white underwear is
Fisher's example) have steady, year-round demand and low margins. He
advises stocking them only in retail outlets in small quantities and
transporting them in truckload quantities. (A full truck, as you'll see in
Module 2, is more cost-effective for the shipper than a partially loaded
vehicle.) Fashion products are like Fisher's innovative items with
unpredictable demand. Zara, the Spanish clothing manufacturer mentioned
earlier, has two supply chains, one for staples and the other for fashion
clothing. To get the fastest response time, Zara uses European suppliers for
the fashion items. But for the more predictable demand items, it uses eastern
European suppliers that have poor response time (not a concern) and lower
cost. In addition to varying the supply chain by product type, Fisher
recommends several other variables to consider-store type and time in
season or product cycle. Demand varies considerably over the life cycle of
many products. The same item might have infrequent demand at first, more
stable demand in its maturity phase, and falling demand at the end of its life
cycle. With more than one supply chain, the nucleus firm can move its
products from one chain to the other in response to changing variables, such
as type of channel or life-cycle stage.

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Supply chain
verSUS SUpply
chain?

It's commonly said that competition increasingly occurs between supply


chains rather than between companies. There is truth in this observation, but it
isn't quite as straightforward as it sounds at first hearing.
In Section A we described management of horizontal supply chains as
evolving through a series of steps, from functional decision making through
internal integration across functions and then outward toward the extended
enterprise made up of supply chain partnerships and information networks.
We also looked at the more traditional architecture of vertical integration, or
bringing many supply chain activities inside one company instead of
outsourcing functions to partner firms in a linked chain. Extrapolating from
the evolutionary trend toward more outsourcing and the building of
electronically linked virtual enterprises, many observers and participants see a
future global marketplace in which giant supply chains compete for shares of
many markets around the globe. A study published in the Supply Chain
Management Review (James B. Rice, Jr., and Richard M. Hoppe, "Supply
Chain vs. Supply Chain: The Hype and the Reality") tested this idea and
found some weaknesses in both its predictive power and its clarity.
Rice, the director of the Integrated Supply Chain Management Program at
MIT, and Hoppe, a consultant, made several discoveries relevant to supply
chain strategy:

Even experts in a Delphi study (a focus group that responds


anonymously to questionnaires) interpreted the SC vs. SC in rather
different scenarios.

For various reasons, direct competition between supply chains, in the


most literal interpretation, simply can't occur in some industries because
of the structure of the marketplace.

Let's look at the different ways in which experts interpreted the SC vs. SC
idea first and then see why supply chains literally cannot be competitors in
some industries.

Three ways to
compete with
supply chain
strategy

While most of the assembled experts believed that, indeed, the future belongs
to competing supply chains, analysis of their responses revealed considerable
divergence of opinion about the meaning of the terms used in the description of
competing supply chains. As the authors point out, if we're not all speaking the
same language in these fundamental matters, we can get ourselves and our
supply networks out of alignment.

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When we talk about supply chains competing against other supply chains, we
might be referring to any (or all) of the following situations:

Groups of companies allied as partners in supply networks (the authors'


preferred term) will compete with other groups of companies allied in
supply networks. The networks will be distinct from one another in all
ways. For example, they won't all be getting their logistics advice from
FedEx, their marketing strategies from the same consulting firm, and their
components from the same suppliers. This is the most literal view of the
matter. According to Rice and Hoppe, competition at this literal level
exists in only a limited degree and is not likely to become the model of the
future. In point of fact, they offer no examples that seem to fit the model.
The companies they offer to exemplify head-to-head supply chain
competitors tend toward the vertically integrated company rather than the
extended enterprise. They propose the fashion and poultry industries as
arenas in which supply chains compete with supply chains. The Spanish
manufacturer Zara, for instance, relies upon a network of European
suppliers to gain speed to market with new fashions for its European
customers. While these manufacturers are more expensive than the
offshore manufacturers used by some competing firms, Zara judges the
ability to get fashions into the stores rapidly to be worth the investment.
Thus, their supply chain strategy dovetails nicely with their corporate
strategy. However, they maintain a near vertical chain rather than a
network of outsourced suppliers, according to Rice and Hoppe; only their
sewing is sent outside. They are not, therefore, an example of a hue supply
network of independent companies. Similarly, in the poultry business,
competitors Perdue Farms and Tyson Foods have well-developed supply
chain management strategies, but both are nearly vertical in their
integration. The message holds that supply chain excellence, when aligned
with corporate strategy, can lead to competitive success. But the vision of
the wholly outsourced network of affiliated partner firms may, as the
authors claim, not be the wave of the future or the reality of the present.

Almost equally popular was the view that competition will be carried out
between, or among, individual companies on the basis of their supply chain
management capabilities. This sounds like a subtle difference from the
literal view, but it does have application in the real marketplace of
competing companies. One company, while it might not be entirely distinct
from another in its choice of suppliers, for example, might still excel in
some area of supply chain management, such as array of product choices,
reliability, or price based on the skill with which the company integrates its

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various internal functions and external partnerships. U.S. automobile


manufacturers may, as the article points out, purchase components from
many of the same suppliers-now that they have all outsourced their parts
divisions. In fact, many of those suppliers may be the same non-U.S.
companies, such as Japanese electronics manufacturers who also supply
Japanese auto companies who may have their plants in the United States or
Canada. Despite all the overlap in their supply chains, however, the
companies remain quite distinct and heavily reliant upon effective supply
chain management. Another example mentioned in the article is the
competition among computer companies. Dell, Gateway, and HP-Compaq
assemble computers with chips bought from AMD (Advanced Micro
Devices) and Intel, software from Microsoft, graphics and audio subsystems
from the same group of (competing) suppliers, and so on. They can't be
seen, therefore, as pure and literal competing supply networks. However,
computer companies definitely do compete on the basis of their supply
chain models, with Dell (at the time the article was published) selling solely
through the Internet and operating as a virtual company with order
information shared instantaneously among its suppliers. Dell and Apple
Computer, or HP-Compaq and Apple, approach the personal computer
buyer through very distinct supply chains, competing on the basis of
different supply chain designs, with less overlap in suppliers. But they are
still single companies rather than distinctive supply networks.
The nature of networks in the personal computer industry is complex
enough to be beyond easy graphic illustration. On the PC side, for example,
Intel and AMD supply processors to all the competing brands. Intel insists
that computers with its processor feature the "Intel Inside" logo. Intel and
AMD, in other words, are competing for the same customers as, say, Dell
and HP-Compaq, but they are doing it through the computer makers. While
this fits the model of supply chain collaboration, the supplier-partners are
lending support to competitors. The chipmakers also sell their processors
independently to individual users and to off-brand companies that will
assemble a computer to order for retail customers who want to mix and
match parts from different companies. Similarly, makers of monitors, such
as Sony and LG, provide their products independently on store shelves and
in package deals with various computer makers, where they may retain their
brand name or be rebranded as if they belonged to the computer
manufacturer. Sony also sells computers under its own brand. Printers
provide similarly complicated examples of network arrangements.

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A smaller minority of Delphi study participants thought that competing


supply chains would be dominated by channel masters whose policies
would determine the nature of the entire supply network. This would
distinguish the model from the vertical integration of a Zara or Tyson on the
one hand and from the'network of independent partners on the other. This
certainly would seem to provide another example of supply chain strategy
as corporate strategy. The major examples of this channel master approach
to supply chain competition- Dell, Wal-Mart, and the automotive
manufacturers-overlap with other SC models. In this arena, Sears provides
an interesting example of the complexity of the channel master chain (or did
for its long history before the takeover by Kmart). It could be, on the one
hand, a retailer of brands available elsewhere in casual clothing and many
other departments. It could be the sole retailer of a product line, such as
Kenmore Appliances-which were manufactured for Sears by companies
such as Whirlpool, which also sold their competing appliances in the same
department of the store handling the Kenmore brand. And it could be the
sole retailer of Craftsman tools and lawn mowers.
A channel master may be able to organize the supply chain to serve its
corporate strategy, but that may leave the other films in the chain to align
their strategy with the channel master's. This can pose considerable
hardship on the dominated partner. Dell Computer is able to require its
component suppliers to open distribution centers near its plants, for
example, and Wal-Mart is legendary for its power to require suppliers to
conform to its policies. Of course, a Dell or a Wal-Mart offers suppliers
access to an enormous worldwide market. In fact, the leverage ofWal-Mart
is so great that it counts Dell among its suppliers. And why not, since, in
holiday season, Wal-Mart moves as many 4,000 Dell computers per day.

Limits on SC vs.
SC competition

The Rice and Hoppe view of supply chain vs. supply chain competition offers
support for the idea that there are not universal supply chain models and that the
best configuration for any firm is the one that conforms to its corporate strategy.
But it also reinforces a cautious view about the current and future possibilities
for supply chain vs. supply chain competition in the literal sense.
Here are some of the limitations they envision:

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Use of common suppliers in competing chains may work to the advantage


of both competitors, but at the very least the situation invites conflict of
interest. Insofar as manufacturers want to keep their designs and processes
proprietary, they take a risk when they link up with competing component
suppliers-and the suppliers also risk their intellectual property.

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When one partner invests in its suppliers to build a partnership that brings
unique value to their shared customer, it may be investing in capabilities
that also benefit competitors who use the same supplier.

Aligning business strategies with supply chain strategies can be made


difficult or impossible when supply chains are sharing suppliers.

Sharing information with partners is one requirement for supply chain


integration, but it also creates the risk of losing control of the information to
competitors or to the supplier, who may become a competitor.

The authors also point to some perhaps even more daunting limitations.
Industries with a small number of dominant suppliers do not provide fertile
ground for coordinated supplier-customer relationships. Supply networks, when
they do form, may lack the central authority necessary to mount a campaign
against competitors-unless they are vertically integrated chains under unitary
corporate ownership. Finally, the authors cast doubt upon the practical benefits
of coordinating a chain across more than three tiers--one tier upstream and one
down. Going beyond those boundaries, they believe, creates a complex,
inflexible system.
Nevertheless, true supply chain competition may still be feasible in a limited
number of situations-when the competitors are vertically integrated, when the
companies in the chain have sole-source suppliers, and in fragmented industries
with suppliers wholly dedicated to one or another chain. And beyond that,
competitors will still depend upon their supply chain strategies to differentiate
themselves and realize their goals. It's just not quite as simple a proposition as
the common wisdom might make it seem.

Building
collaborative
relationships
Building blocks of
collaborative
relationship~

Central to the design of supply chain strategy is the development of collaborative


relationships among the supplier-customer partners along the chain. There can be
little hope of strategic alignment without well-developed collaborations.
Building these partnerships depends upon the following:

Auditable information exchange and technology for connectivity

Deterrence-based arrangements such as formal contracts that make


adherence to proper behavior a matter of self-interest

Incentive-based arrangements such as aligning sales and management goals


to collaborative objectives

Process-based arrangements such as long-term trust building based on


constant communications and feedback that spiral out into greater trust over
time

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Assignment of leaders with the appropriate level of authority to enforce the


relationship

Focus on the entire supply chain

Networkwide visibility and measurement of the bullwhip effect to assess


the impact of collective management of inventory

Features and
benefits of
collaboration

Sharing of knowledge, not mere data

Clearly visible sharing of both the benefits and the burdens of the
relationship

Varied types of commitment, depending upon factors such as length of


relationship, feedback, and amount of added value by each potential partner

Exhibit 1-16 summarizes the benefits to the supply chain of collaborative


relationships.

Exhibit 1-16: Features and Benefits of Collaboration

Collaborative Relationship Features

Benefits

Joint development of shared processes


Open sharing of information and
knowledge
Jointly developed performance metrics
Open two-way communications
Networkwide visibility
Clear roles and responsibilities
Joint problem solving
Conm1itment to the relationship

Lower costs
Improved quality
Better customer service
Reduced inventories
Rapid project results
Reduced cycle times and lead times
More effective working relationships
Enhanced commitment to one another

Another primary requirement is top management commitment, demonstrated by


actions and relationship building. Actions include information sharing with
external parties and with internal staff, changing of incentives to match
collaborative goals, enforcement of agreements by departments and staff,
stabilization of pricing and ordering, and improvement of operations.
Relationship building includes seeking out external relationships and working to
improve personal communications to develop greater trust as well as internal
verbal and proactive support for the relationships to develop team spirit.
Division managers across every enterprise in the network must place the interests
of the whole above their local interests. These managers will also be asked to
make major changes in how they operate. These major changes will occur only
when top management changes the individual incentives of their managers and
puts personal pressure on these managers to make the required changes.

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Management
tasks

The first task for managers who wish to build collaboration is to designate
relationship goals and plan the steps necessary to reach them. Managers should
begin this process by determining the specific contribution of each party and the
criteria for measuring that contribution. Obviously, total profits should be one
of the criteria, but there should be other specific measures, including
nonfinancial contributions. The criteria should be flexible enough to allow each
party to use innovation to meet its goals. In early stages, relationships should
emphasize equity in profits among all parties. Equity will help motivate all
parties to work toward the good of the whole.
The second task is to define roles for each party, taking care to avoid redundant
efforts. Conflicts can occur if these roles make one party more dependent upon
another than they wish to be. To alleviate this common problem, networks should
avoid sequential interdependence, in which the second party cannot begin work
until the first party is done. Instead, they should establish reciprocal
interdependence, in which the exchange of tasks and services occurs in both
directions. Examples of this include CPFR (collaborative planning, forecasting, and
replenishment). Although mutual interdependence is more complex to manage, it
can also provide much greater rewards.
Since no contract can cover all contingencies, the third task is to create a policy for
resolving conflicts. If a conflict is serious enough to require amending the contract,
negotiations to do so should include all affected parties. Many firms prefer to
resolve differences through informal negotiation rather than by revisiting the
contract. All parties to the contract should agree upon a plan to govern such
negotiations to ensure that they aren't too informal. The plan should call for regular
meetings among key managers and cross-enterprise teams, and it should include
guidelines for referring problems to the highest level necessary to resolve the
conflict. Either the contract should specify how finance and IT establish rules for
transactions, or a policy and procedures guide should do so. Contracts, policies,
procedures, and informal conflict resolution must be sensitive to cultural
differences. In the United States, courts can resolve conflicts without detriment to
long-term relationships among parties to a contract. The opposite is true in most
Asian countries.
Finally, managers must stay involved after the design phase. The best design will
fall apart if not constantly maintained, and top management must not abdicate its
responsibility for adhering to the collaborative arrangements. Without management
commitment, each party tends to revert to its own self-interests. Weaker parties in
the relationship may bear the brunt of problems; without an effort to maintain
equity, the relationships will tend to fall apart. The design's benefits and flaws will
be easier to see if monitored, and managers should continually adjust the plan in
response to any problems that arise in practice.

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Barriers to
collaboration

Building successful collaborations requires overcoming predictable obstacles,


including the following constraints.

Suboptimization
When supply chains are not truly connected at the planning level, each part
of the supply chain will work to maximize its own profits or to increase
other measures at the expense of the supply chain partners. When this
occurs despite the recommendations of a holistic optimization tool, it is a
double loss because the investment in global planning is being put to waste.
For example, when a product is available in limited amounts, retail orders
must be monitored across the chain. If each store is allowed to determine its
own order quantity, the result might be overstocking of locations that order
early and stockouts elsewhere. Transportation costs are another area
commonly suboptimized.

Individual incentives that conflict with organizational goals


Incentives, such as sales force bonuses, structured without thought for the
supply chain strategy, can often be counterproductive. For example, sales
quotas for distributors or manufacturers are often based on monthly or
quarterly targets for sales to retailers instead of on those retailer's actual
sales. While the distributor doesn't actually control retail sales, this practice
can lead to channel stuffing (intentionally selling too much inventory) and is
aggravated by promotions intended to increase sales at the end of a period.
These practices create a great deal of excess inventory as well as variability
in demand that the manufacturer must then deal with. Instead sales goals
must be aligned with actual demand. Many companies have stopped giving
sales incentives and instead have turned to other metrics that more
effectively align sales with company objectives.

Working with competitors


Supply chain management books tout the success of collaborations among
competitors, but many of these ventures also fail. This is pattly due to lack of
trust and cultural rigidity, but it also reflects the reality that one firm is trying
to win market share at the expense of the other. Such relationships should be
kept at arm's length to ensure fairness, and extra caution must be devoted to
sharing information. Companies may pretend to embrace collaboration when
they really only want access to information for their own benefit. Companies
will always have good reason to treat competitors warily.

Bottlenecks caused by weaker partners


The slowest or least integrated partner in a network will often limit the
technological collaboration level of a company as well as the level of trust

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that can be built. If the firm is not willing to invest in a technical and social
change process, the only alternative may be to find a more willing or able
partner who can keep up with the network's collaboration curve.

Technology barriers
When potential partners have incompatible systems, it increases the
difficulty of sharing data, especially when one or more companies uses very
old legacy or ERP systems that do not adapt well to the newer integration
solutions such as business process management (BPM), discussed in
Section A of Module 4, or Web services, discussed in Section D of Module
4. Incompatible and/or antiquated hardware infrastructures can also prove a
barrier to collaboration.

Power-based relationships
Rather than building relationships based upon trust and mutual benefit, the
nucleus firm may use its leverage to dictate the te1ms of relationships to the
other members. While the profits of the nucleus firm increase, other
members of the network may suffer losses. When this occurs, the
disadvantaged partners may rebel. Resistance may result in redundancy,
loss of overall profitability for the chain, or an actual reversal of the power
relationship. Once in power, the mistreated party may retaliate instead of
using the opportunity to develop equitable relationships along the chain.

Underestimated benefits
When collaboration is seen as another type of process reengineering, the
partners generally measure the results in reduced cost and cycle time rather
than return on investment (ROI). Simply measuring efficiency increases
will fail to see some of the true long-term benefits of collaboration. This
may lead managers to reject a collaborative venture based on a failure to see
such gains as removal of reduplicated efforts, enhanced innovation, and
better use of total system assets and processes.

Culture conflicts
Cultures tend to be egocentric and thus tend to resist external collaboration.
They feel that their ways are the best ways of doing things and will often
reject a different way without even considering it. Culture conflicts are
increased when each company relies on its own sources of information and
is unable to see the impact of its choices on other areas of the network.
When companies don't see the negative results oftheir actions, they can't
learn from their mistakes.

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Another culture conflict arises when managers delay or prevent


collaboration. Such managers generally have safeguarded their positions by
not sharing information so that they must be sought for their expertise.
Others feel that collaboration is a fad or a bad idea altogether. Still others
talk about collaboration, but they are only interested in receiving the
benefits from a partner without reciprocating.

Levels of
communication

Communication between partners can take place on different levels; not all
collaborations depend upon the same degree or intensity of communication.
We'll consider four levels of communication.

Transactional with information sharing


At this level of communication, each partner has access to a single source of
data about matters such as workflow, forecasts, and transactions. Contracts
are generally medium term.

Shared processes and partnership


At this level, partners collaborate in specific processes such as design. They
share knowledge across the network. Contracts are longer term.

Linked competitive vision and strategic alliance


At this level, supply chain partners function as a virtual entity, working out
even the highest level of strategy together. The partners develop
considerable trust and achieve social and cultural understanding as well as
information sharing. Strategic alliances may last for decades.

Backward integration (mergers and acquisitions)


While purchasing other entities in the supply chain may seem to go against
the historical grain, it does happen. Outsourcing current functions isn't the
only way to forge links in a chain. Mergers or acquisitions may involve two
companies in the same echelon rather than horizontal supplier-customer
partners. The merger of Gillette with Procter & Gamble is one such merger,
as is the purchase of Sears by Kmart. There has been a great deal of
amalgamation among service firms, including mergers of banks with other
financial providers to create "one-stop shopping" for consumers of financial
products, and mergers in heavy industry, such as the purchase of Jaguar and
shares of Mazda by Ford Motor Company. Although mergers would seem
to provide the deepest level of trust and communication, the sudden clash of
business, regional, and national cultures involved often requires years of
work to align attitudes, technology, and business practices.

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Levels of
collaborative
intensity

Determining the level of collaborative intensity that each relationship requires


depends on cost, quality, delivery reliability, precision, and flexibility. Cost
speaks for itself, but cost and quality often are inversely proportional. Quality
and delivery reliability are usually measured by number of defects allowed or
late orders and are often collectively rated by members of an exchange using
supplier history. Precision is measured as degree of variance from
specifications. (Small variances in components from different vendors may
actually prevent assembly.) Flexibility is the ability of the supplier or
manufacturer to deliver in varying quantities when given a specific number of
days' notice. These criteria are strongly influenced by four factors related to the
product or service: strategic importance, complexity, number of suppliers, and
uncertainty.

Strategic importance
The primary sourcing consideration is the strategic importance of the
product or service. If the company cannot afford to make mistakes, it should
produce the item in-house, even ifthis is more expensive. If the company
lacks internal capability, it should form an alliance with one or more firms
that can make the item or perform the service. Multiple sources provide a
backup. Commodity products, by contrast, are widely available and have
little strategic importance and should be purchased at arm's length at the
lowest available price. This includes modular products and overhead items
such as electricity.

Complexity
The next factor is the complexity of the item and of the process steps
required to produce it. Strategic alliances may be needed for very complex
items simply because of the level of collaborative planning needed to get
the item right in the necessary time frame. Examples include military
technologies such as missiles. Many contractors may need to form strategic
alliances to get all of the components to work together and to provide the
appropriate level of security. Airplanes also require alliances for many
major systems, although minor systems can be sourced through lower-level
relationships.

Number of suppliers
The number of suppliers available for a product or service will also
determine how much the company should escalate the relationship. When
very few or only one supplier is available to produce the specific
component or good required, the company may need to form a strategic
relationship in order to guarantee continued availability of the item. For
example, Canon is one of the only producers of high-quality engines

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suitable for use in laser printers, so HP has a strategic alliance with them for
this part even though the two compete on printer sales directly. Focusing
only on price or time to market with such a supplier would be a mistake.

Uncertainty
Finally, uncertainty is a primary concern in building relationships.
Uncertainty is the risk that the good or service may not be available or
may have strong fluctuations in price or quality. Even if there are
hundreds of suppliers offinished lumber on the market, there may be
great variability in quality and in precision of milling. If a manufacturer
that uses this lumber advertises its superior quality of lumber as a selling
point, then it is well advised not to simply buy at arm's length but to
develop a partnership with one or more suppliers who can meet these
stringent levels of quality. They may be able to have a middle-level
relationship or even purchase on a private exchange if such a service
provides prequalification as a value-added service, however.

If an item combines more than one of these categories, such as few suppliers
and uncertainty, then the need for higher collaborative intensity is stepped up
quickly. Strategic importance can be considered one part of the perspective,
while the supply chain challenges of complexity, number of suppliers, and
uncertainty can be grouped together to form a second perspective. Exhibit 117 shows how this creates four basic categories of goods.
Exhibit 1-17: Strategic Impact Versus Supply Chain Difficulty
Low Supply Chain
Difficulty

High Supply Chain


Difficulty

Low Strategic
Importance

Commodity
materials

Bottleneck materials

High Strategic
Importance

Leveragable
materials

Direct/core
competency materials

As mentioned before, cost reduction is the priority for commodity items. These
items are best purchased at arm's length. Bottleneck materials are also of low
strategic importance, but efforts must be made to ensure that the need for these
items is fulfilled. Therefore some level of ongoing relationship may be called
for. Items of high strategic importance but low difficulty levels call for
collaboration to maximize both cost savings and reliability through means such
as bulk purchasing by multiple members of the supply chain. Items of high

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strategic importance and high difficulty call for strategic partnerships to ensure
availability and quality.
Sometimes firms do not heed these factors and end up buying at arm's
length to get the lowest price for items that are critical in one or more of
these ways. Sometimes the cost of the process of checking goods for
defects or repairing them or for resolving problems with customers after
resale is quite a bit higher than the cost savings found by switching from
supplier to supplier. Some damage to reputation may be irrevocable but
hard to measure. Companies must add these costs to the cost of the product
when determining how much they are actually spending.

+ Aligning Supply Chain Strategy with Corporate Strategy


Whatever type of supply chain a company establishes internally across
functions and externally with trading partners, success depends first upon
alignment of supply chain strategy and corporate strategy (or corporate
strategies, in the case of horizontal chains). As we've seen, a channel master
such as Zara may develop two supply chains aligned to different product lines
and markets-one supply chain to support a low-price functional line of
products with relatively stable demand and the other to support higher-margin,
fashion-oriented products with rapid turnover. After alignment, the other
essential factor is the infrastructure of the chain-the resources that give the
internal and external partners the power to act in concert to achieve their
competitive objectives.
A supply chain is constructed of organizations, people, processes, and
information. And all of those resources must also be aligned with one another
and with the corporate and supply chain strategies.

Strategic
planning

The success of the supply chain in achieving its two-sided goal of creating
customer value and financial value rests upon sound strategic planning in the
following areas:

Organizational design

Supply chain processes

Systems and technology

People

Supply chain metrics

Exhibit 1-18 provides a graphic representation of the decision-making process


that goes into aligning corporate and supply chain strategies.

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Exhibit 1-18: Aligning Corporate and Supply Chain Strategies

orporarc trategy

Competitive priorities
(cost, quality, time,
price, etc.)
apabil itiescurrenr, needed, plan

Functional area strategiesfinance, marketing, supply chain,


and others

Organizational
design

Must develop the


supply chain
capabilities required
to plan and execute
strategy

f---------~

Organizational design refers to all the structured relationships in an


organization-the organizations that make up a supply chain, in this case.
Organizational design includes the nature and arrangement of such elements as
communication, the chains of authority and responsibility, financial
management, and job descriptions. In the previous section we looked at the
stages of supply chain evolution; each stage was linked to a significant
alteration of organizational design. Development of an effective supply chain, in
other words, necessitates development of an organizational design that will
support the supply chain.
In the first stage, decisions about matters related to supply and distribution
might be made almost on an ad hoc basis. Formal communication may be
limited to tactical, job-related matters. Meetings are scattered and poorly
organized. Training may be nonexistent. With an ad hoc design, an organization
has no possibility of forming or participating in an effective supply chain.
Material requirements planning (MRP) takes place at a basic level, with a bill of
material and current on-hand/on-order data.
In the second stage, organizational design follows functional lines, with

marketing and sales, production, warehousing, distribution, and so forth each


ensconced in its own silo and focused on meeting its own goals. Supply chain
decisions, such as number and location of warehouses, inventory management,
or modes of transportation are made entirely within their separate silos.

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Communication flows upward through the chain of command or, perhaps,


horizontally in departmental teams. There is little or no formal communication
through the silo walls to coordinate supply- and distribution-related decisions.
Systems with functions may be automated with specific software applications.
MRP II replaces MRP, and the firm implements cross-functional planning. Jobs
may be enriched to include more variety and wider responsibility. Training in
some areas includes "soft skill" seminars in management, communications, and
needs-based sales, laying the groundwork for more strategic and innovative
approaches to marketing and operations.
In the third stage, cross-functional teams are formed to measure and improve
businesswide processes, building (in the better cases) on continuous
improvement initiatives undertaken within functional areas. The company
adopts a cross-functional team approach to product design. Marketing and sales
team up with operations in a continuous sales and operations planning process
to coordinate aggregate planning across the enterprise to maintain alignment
with the strategic and business plans ofthe organization. Formal
communication occurs among members of structured peer groups, and the
topics become multidisciplinary. Training follows suit by adding coaching and
team formation workshops. Automation crosses functional boundaries,
following the early historical breakthrough with MRP II that ties the bill of
material together with finance. ERP replaces MRP II, adding functional
modules until it makes data accessible across the entire enterprise. Supply chain
decisions can now become more effectively aligned with corporate strategy
because of the focus on companywide processes and improved communication.
In the fourth stage, the organization takes advantage of its integrated operations
to begin forming partnerships with suppliers or customers. For example, a
retailer may send point-of-sale data directly up the chain to manufacturers
through synchronized intranet and extranet or Internet connections. This level of
collaboration can't take place until suppliers and customers have overcome
barriers in their own organizations-such as functional organization and lack of
technological sophistication. Electronic communication and point-of-sale
scanners give other partners in a chain instant access to POS data-no matter
where they are. The organization may take advantage of its internal coherence
to begin outsourcing its peripheral functions to concentrate on one or a few
areas of strength. A logistics specialist, such as UPS, may step in to further
integrate warehouse-inventory-transportation processes. Both components and
services can be supplied from multiple trading partners located anywhere in the
world where local infrastructure permits and labor with necessary skills is
available at a competitive price. The internal systems at this point may be

:'

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thoroughly merged with external systems so that trade partners function in


seamless harmony to form a virtual company. Cross-functional teams in charge
of supply chain processes need to be centrally coordinated. To give the proper
organizational visibility to supply chain activities, these activities should be
directed from the executive level.

Supply chain
processes

Supply chain management covers a series oflinked processes. It's true that
organizations have always been involved in managing such functions as
planning, buying, manufacturing and delivering products, and getting paid. But
supply chain management (and organizational design) have evolved from control
of discrete business functions like procurement, manufacturing planning, and
logistics to an emphasis on business process excellence and the management of a
network of relationships tied together by complex information flows .
Although management of any one activity or link in the chain may be
straightforward, effective supply chain management requires mastery of the
connected processes.

Systems and
technology

An important part of the evolution of supply chain management has been the
development of sophisticated software that can automate various supply chain
activities. A perhaps even more important advance in technology has been the
development of integrated networks- intranets, extranets, and the Internet. And
still in progress is the evolution of software that can use networks to tie together
the various software applications associated with specific activities within supply
chain processes. Enterprise resources planning packages from competing
software consulting (or vending) companies have steadily advanced from the
ability to manage operations in one plant to enterprisewide integration and on to
cross-company functionality. In addition to automation and networking, made
possible by the computer revolution, other technologies have come along that
can feed information into the networks for instant access by all users. Bar codes
on products and radio frequency devices implanted within can pick up sales data
and send them instantaneously throughout a network for use in revising forecasts
and triggering operations along the chain. Such data can also be fed into
databases for marketing analysis to gain insight into customer behavior. Along
with global positioning, RFID makes it possible to track SKUs anywhere in the
world to provide customers with information about the progress of shipments and
to alert shippers and consignees to any difficulties that require actions (perhaps
using supply chain event management software).
The hardware to run these complex applications continues to advance in power
and speed, even as it becomes more affordable. There have been, and still are,

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technological hurdles to surmount in this evolution, such as the incompatibility


of programming languages, different software applications, and network
protocols. There are also human and organizational barriers that can prevent
taking full advantage of available technology. Despite the steady moderation of
price, hardware, software, and electronic linkages can cause company cost
management experts to furrow their brows and send off sharply worded
electronic memos. Users have to be trained, and, in some cases, they also have to
be converted from a skeptical to an accepting attitude toward new technologies.
But the most significant barrier is lack of trust among companies along the chain
and even across functional areas or teams within organizations. Integrating
supply chain processes means sharing data, and that is generally seen as a risk.
But there's little point in network connectivity if supply chain partners can't use
those connections to process shared information. Processes are designed and
managed by human beings, to be sure. They can be conducted by means of
phone calls, printed messages, faxes, couriers, and mail services. But they can't
be conducted that way at world-class, competitive velocity.
If technology is essential in supply chain process excellence, it is also a critical
factor in achieving world-class strategic alignment. One major international
petroleum company, for example, instituted advanced information technology to
convert from a supply-driven to a demand-driven enterprise. Demand data from
filling stations and large industrial customers become instantly available
throughout the supply and distribution networks for use in marketing, logistics,
planning, and refining. These shared demand data feed into virtually every
decision made along the supply chain, from spot-market purchases to scheduling
of refill runs. When all supply chain processes operate from the same base of data,
the partners function as seamlessly as if they were one company. That's what's
meant by a "virtual network," but in fact it isn't the network that's virtual. The
network is very real. It's the company (which really isn't a company but a set of
cooperating entities) that is virtual.
People

Few organizations have a department of supply chain management. It goes without


saying that horizontally organized chains (unlike vertically integrated supply
chains) have no unified ownership or management structures. And yet the
development of supply chain strategy and the control of supply chain processes
depend entirely on having the right people in place-people educated in supply
chain thinking rather than functional thinking. Supply chain partner organizations
need to develop expertise in hiring, training, and properly deploying highly skilled
and knowledgeable supply chain specialists to design and monitor supply chain
processes. Of necessity, supply chain management draws upon personnel attached
to multiple functions; they may be donated to the supply chain team only part-time.

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Unlike specialists in traditional functions-production, logistics, procurement,


etc.-supply chain personnel need expertise that extends beyond deep knowledge
of one area (or highly developed skills in one functional discipline). They need to
be broadly knowledgeable about the enterprise as a whole and trained in the art of
inspiring people with different skills and attitudes to work harmoniously in pursuit
of a common goal. People on supply chain teams may represent every function,
from procurement to marketing. On occasion, the supply chain manager may need
to work as a diplomatic go-between when mistrust and misunderstanding prevent
team members from cooperating with one another.
In addition to the multidisciplinary, communication-savvy, holistically oriented
supply chain manager, people with other special skills are crucial to the success of
supply chain initiatives. A team member with cost-management skills comes in
handy when planning an initiative. With so much pressure to keep costs low, an
initiative to upgrade supply chain technology or optimize the logistics network
must be skillfully managed to keep costs in line and avoid driving up product
prices. Modeling the process in advance with data from supply chain pat1ners can
help increase efficiency when the real work begins. In addition to holistic thinkers
and cost-management specialists, supply chain management initiatives need the
help of technology specialists with skill in business software, Web development,
and electronic networks.
Finding and developing the level of talent required to manage supply chains
implies skilled and knowledgeable human resources management. Especially in
large organizations with complex bureaucratic structures, human resources
policies can become misaligned with supply chain strategy. This is another
reason the supply chain has to be the responsibility of an executive-level
champion.
In sum, an organization needs to put in place supply chain professionals, full- or
part-time, who can do the following:

See the supply chain as one continuous entity made up of linked processes.

Manage relationships among team members and between teams to coordinate


different temperaments and visions.

Understand the corporate business model and its alignment with the supply
chain.

Manage costs skillfully for the chain as a whole (understand net value).

Identify and buy or develop technology to provide the entire chain with access
to data and the ability to transfonn the data into information for use in realtime management of supply chain process flows (visibility and velocity).

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Supply chain
metrics

Finally, there's measurement to be considered. If you ask questions such as "How


well is the supply chain performing?" or "Is our supply chain helping or hurting
corporate objectives?" your answer has to include a measurement of some sort to
give it meaning. There are a number of obvious types of yardsticks (or metersticks,
if you will) for assessing your cunent performance:

Your past performance (to show how much you've improved)

Future desired performance (to show how close or far away you are)

A competitor's performance

Industry average performance ("We're better than average!")

World-class, or best-in-class, performance from any industry for the same


activity or process you're assessing

Numbers generally provide the most convincing supporting evidence in the


boardroom and investment analyst's office. If you're bragging about your cash-tocash cycle, for instance, you might say "We've got it down from 50 days to 20, and
that's better than the industry average." (Cash-to-cash, as you'll see later, is the
number of days between the time you spend money and the time you receive
payment.)
And there's a not-so-obvious way of measuring performance: a checklist. This is a
set of things (activities, positions, types of equipment, technologies, etc.) that some
authority believes should be present in an excellent operation. The conversation
goes something like, "We've got our own Web server now, a T-3 line, and a
custom ERP program that touches all functions." One example of such a checklist,
covered in Section D of this module, is the Oliver Wight checklist of supply chain
excellence, compiled by the consulting firm whose name it bears.

Summing up

Taken together, the five elements just discussed support the success of a supply
chain:

Organizational design
The organization is integrated and has progressed from function to process
orientation.

Supply chain processes


Key supply chain processes are in place and functioning at competitive
velocity.

Systems and technology


The technology is sufficiently advanced to tie all processes together and
allow the supply network to operate from the same, simultaneously
available data.

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People
People are deployed who can see the end-to-end chain as a single entity and
manage accordingly.

Metrics
Measures are in place to assess performance against a relevant standard and
identify strengths to encourage and weaknesses to amend.

And all this has to take place in conformity with law and regulations-including
taxes, tariffs, licensing requirements, and terrorist-related security policies.
We'll look at those matters in some detail in the next section.
Once you have a strategy in place and are sure it is properly aligned with
corporate strategy, you need to have the flexibility to change that strategy when
circumstances warrant taking a new direction.

Changing
strategy:
when and why

Having an excellent supply chain strategy in place with the interests of all firms
in the chain aligned and focused on the customer: What could be better? The
ability to change strategies in response to the inevitable changes in the
competitive environment, for one thing. There are at least three common
reasons to alter a supply chain strategy:

Change in the market

Change in business direction

Anticipated change in market

We 'lllook at examples of each reason for change and the role played by
innovation.
Change in market
conditions

Changes in market conditions can happen with stunning rapidity-with the


speed of a bursting bubble. But they also evolve steadily. Supply chains must
be prepared to spot these changes early and adapt quickly. A classic example
of failure to respond quickly to change was Cisco Systems' disastrous
experience when the dot-com bubble burst. For years Cisco had been the very
model of supply chain excellence with its automated workflows and crosscompany communications networks that tied it to customers and suppliers
alike. But when demand for Cisco's routers plummeted rapidly in 2000 and
2001, the company was stuck with over US$2 billion of useless inventory.
Despite the marvels of its interconnected network, Cisco's suppliers (it
outsourced most manufacturing) failed to get the word that demand was
vanishing. So the suppliers kept on sending product into inventory. Their
interests had slipped out of alignment with Cisco's, with disastrous results.

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Lucent, a producer of equipment for telephone companies, experienced a


different kind of disaster when a market for its products opened rapidly in Asia
in the later 1990s. Previously, Lucent had made what seemed to be a very good
strategic decision when it centralized operations in Oklahoma to make its
supply chain more cost-effective and efficient. When Asia became the hot
market, however, Lucent lost out to competitors who had positioned some
plants in the Far East. Lucent's Oklahoma operations were too distant from the
market to make production and delivery affordable. Sometimes being flexible
enough to take advantage of new opportunities requires building some
redundancy into your supply chain. Much early supply chain management
focused on cost cutting, as we've noted earlier in this program. As it turns out, a
chain can become so lean it starves to death when its food source moves away.
Efficiency can tum rapidly from a market advantage into a fatal detriment if it is
pursued to the exclusion of other desirable qualities, such as flexibility and
customer service.
More successful examples are provided by European apparel companies Zara
and Mango. In the market for fashionable apparel, change is a given rather than
a surprise. Every season can bring a shift in taste that makes all processes,
designs, and materials outmoded. So Zara, Mango, and other fashion-conscious
clothing companies have found ways to begin the seasonal design process early.
By paying careful attention to trends on the street they can get a head start in
ordering materials and developing prototypes of designs that seem likely to
appeal to their target customers in the upcoming season. But they delay final
design decisions and the start of manufacturing until real data come in.

Change in
business direction

When a company comes to market in a new way, it may be entering uncharted


territory with no real data to use in making decisions and little ability to forecast
demand and set production schedules. A new product line may require complete
recasting of the supply chain-new raw material supplier, new manufacturing
processes, logistics changes to reach new markets, and new strategies for reaching
the end customer. Toyota Motor Corporation faced those challenges when it
brought out the Prius, its first hybrid car, powered by a combination of gasolinepowered internal combustion energy and electricity. Honda Motor Company
entered the market at about the same time with its hybrid Honda Insight, an
equally unconventional move for that company. There were no comparable
vehicles in the market at the time, so there was no demand history to use in
forecasting sales in the aggregate or for segmenting the potential market.
Toyota dealt with the challenge to forecasting by changing its logistics network
in the United States to reflect its uncertainty about where it would be delivering

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the new models and what sort of buyers might be interested in them. They
suspected that new market segments might be attracted to the offbeat styling,
technical inventiveness, and "green" characteristics of the Prius-customers
who were not interested in their more conventional, family-oriented vehicles.
Instead of allocating cars to dealers based on past performance, they sent
Priuses from the production line to central distribution centers for shipping to
dealers only in response to customer orders forwarded on the Internet. With the
larger pool of cars in central locations, they reduced the risk of stockouts caused
by unexpectedly large consumer demand in any one region. Toyota also allowed
for customization of cars at the distribution centers in response to requests for
specific features-a postponement strategy made possible by modular design.
The system was more expensive, but it provided the required flexibility in
delivery. The percentage of the new model sold in northern California far
exceeded the usual percentage allocated there, while sales in the southeast were
far less than demand patterns for other Toyota models would have predicted.
Without the centralized logistics setup, the Prius would no doubt have gone
immediately out of stock on the west coast while sitting unsold on car lots in the
southeast. So the investment in a new supply chain strategy provided net value
when compared with the probable costs of redirecting cars from the southeast
all the way across the country to California, while likely losing customers due to
the resulting delays.

Anticipated
change in market

As the case of the Prius indicates-and to a degree the strategies of Zara and
Mango-supply chain strategies can be determined to anticipate changes in
demand rather than waiting until they come as a surprise. This might be
considered an advanced form of forecasting, and since forecasts are always
wrong, a very risky strategy. A clothing design operation has no choice in the
matter, since it has to anticipate trends in fashion on a continuous basis. If the
new look will depend on natural fabrics instead of synthetics (or vice versa),
new suppliers will be necessary, and they will have to be under contract before
the season begins. The effectiveness of the European clothiers is in creating a
design process that allows revamping supply strategies at the last possible
minute when real data are beginning to replace forecasts. Toyota, too, was
proactive in setting up a new supply chain in advance of Prius sales. The Prius
itself was part of an innovative approach to the marketplace in anticipation of
new demand patterns resulting from environmental consciousness and the
potential impact of rising petroleum prices.
In similar fashion, forward-looking companies such as British Petroleum,
General Electric, and Florida Power and Light have been developing-perhaps
far in advance of practical application-alternative energy technologies that will

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no doubt require the creation of new supply chain infrastructure. Innovation


clearly plays a major role in keeping supply chains flexible enough to respond
to rapid changes in demand and to the more gradual evolution of markets and
technologies. Innovation is the key to strategic flexibility- not just innovation
in product design but in organizational design and supply chain processes as
well.
Sometimes it's our best qualities that make us most vulnerable. Ability to trust
supply chain partners comes immediately to mind as an example. Perhaps less
obviously, supply chain efficiency can be one of those apparent virtues that can
also be a serious liability. One of the reasons that supply chains lose their
flexibility is success in removing all the fat from inventories and paring process
times down to the Just-in-Time delivery velocity. A supply chain that has
become so fast and so lean may just keep right on mnning in the running
direction until it starves to death for lack of a market. That was almost the fate
of Cisco Systems in the early 21st century.
If supply chains are to be able to respond in advance of market changes, they will
have to play by different rules than many have in the past. Here are a few of them:

Pursue cost efficiencies and increased velocity but not at the exclusion of
flexibility. The strategy of shipping only in full truckloads or full containers
cuts transportation costs, but it can also leave a pattialload of product waiting
at the dock when it should be on the road to a stocked-out facility
downstream.

Develop multiple supply chains that are approptiate to each product line.
Some companies, to achieve those full truckload shipments, will mix
products. While that's a good strategy for speeding up delivery of some
products in the mix, it may be highly inefficient for others. Take the highdollar, lightweight items out of the truck, train, or container and fly them to
their destination. Choose suppliers that give you what each product line
needs-speed to market, quality at a higher p1ice, or ability to change
direction rapidly.

Watch trends in demand at the consumer end of the chain, not just at the
next stop downstream. Visibility to the end of the chain can speed up
response to changes in the market.

Watch the larger trends in global markets-changes in demographics,


political changes, patterns in rules and regulations, access to raw materials,
and so on. Get local assistance when you enter an unfamiliar foreign market
for advice on supply chain strategies.

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Design products for maximum supply chain flexibility. Put suppliers on the
design team to offer help in creating modular designs, allowing fewer
components to be assembled into more products. Time the assembly to
happen as close to actual orders as possible.

+competitive Priorities and Future Direction


Competitive
priorities

There are different ways to win customers to a company's product or services.


Not all authorities take exactly the same approach to defining these approaches,
but the following are commonly mentioned:

Differentiation of the product or service


Design of product or service for a niche (versus broad) market

Low pricing of the product or service

Responsiveness to changing demand (speed to market)

To be successful, a nucleus firm needs a supply chain designed to achieve its


chosen competitive strategy (or mix of strategies). While some fitms may focus
primarily on one strategy, others may pursue more than one. Making one
strategy the priority may make others difficult to achieve. For example,
providing high quality at the lowest price is a challenge. But not all the
strategies are mutually exclusive. Product differentiation and niche marketing
fit well together. Either responsiveness or low cost may be a key competitive
factor that differentiates a firm from its market rivals.

Differentiation

Determining how to differentiate a product or service begins with a competitive


analysis of other firms in the market to see what they have to offer. Competitive
analysis, according to the APICS Dictionary, 12th edition, is "an analysis of a
competitor that includes its strategies, capabilities, prices, and costs."
Once a firm has analyzed the offerings of competitors, it may differentiate its
products and services in a number of different ways. The following are some
types of differentiation:

High quality- durability, appearance, performance, type of materials, and


so on (Ford Motor Company's slogan, "Quality Is Job 1," exemplifies the
marketing aspect of differentiation by quality, as does BMW's "Ultimate
Driving Machine.")

Diversity of the product line, offering customers many options (The


opposite of this approach was Henry Ford's alleged claim that people could
have his cars in any color they wanted as long as they wanted black.)

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Greater reliability (which could be considered a type of quality)

Special features not available from competing products or services

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Supply chain strategies appropriate to product differentiation include

Modular design combined with postponement to allow last-minute


customization to meet specific consumer demands

Minimal inventory to prevent obsolescence

Collaboration with suppliers to develop innovative designs, numerous


options appealing to different customer tastes, artistic design, and so on.

Niche marketing

Firms can choose to develop products and services for a mass market or for a
relatively small slice of a larger market-a market niche. Some examples of
niche market approaches include

Catering to high-net-worth customers with products such as luxury


automobiles, yachts, large homes, or specialized services such as estate
planning, personal training, or expensive cruises

Designing for a limited age group, such as children or senior citizens with

special needs, instead of serving a broader population


Providing products or services for residents of a particular geographic
area, such as growing vegetables for a neighborhood market rather than for
packaging and shipping around the nation or world.

Niche marketing shares some characteristics with product/service


differentiation. In both cases, the product or service provided to customers has
special features. Differentiation by quality, for example, can be the same thing
as catering to high-net-worth customers. (Low-net-worth customers--or value
shoppers--can also be niche, however.) Therefore, some supply chain strategies
will work for both approaches. Collaboration to achieve distinctive design is
one example. Sourcing may focus more on finding special expertise or highquality materials rather than on low-cost labor (depending on the niche).
Low price

Providing a product or service at the lowest price is generally not compatible


with either differentiation or niche marketing. The lower profit margins
provided by this approach are more consistent with mass marketing. However,
even low-cost products have to meet some quality standards to remain
competitive. Also, price competition can exist within a niche or differentiated
market. One luxury automobile may undercut another in price, for example, if it
maintains a level of quality and a sterling reputation.
Supply chain strategies consistent with a low-price approach to competition
include a variety of methods to reduce cost in all areas of the chain, including
resource extraction, transportation, warehousing, and location and design of
retail facilities. A powerful nucleus firm with a low-price strategy and a large
market share can exert great leverage on its suppliers. Such a firm may be able

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to require suppliers to cut facility costs, relocate, adopt lean manufacturing,


change employment practices, and so forth.
A low-price strategy should not be confused with target cost. The APICS
Dictionary, 12th edition, defines target costing as follows:
The process of designing a product to meet a specific cost objective.
Target costing involves setting the planned selling price, subtracting the
desired profit as well as marketing and distribution costs, thus leaving
the required manufacturing or target cost.
Responsiveness

Perhaps the most obvious example of responsiveness is the fast-food industry that
grew up in the last half of the 20th century, led by McDonald's. Diners at fine
restaurants will happily wait half an hour for their foie gras, but employees on short
lunch breaks become impatient with even a few minutes in line as their sandwiches
are prepared. In the early days of the Prius automobile-a highly differentiated
car-buyers were known to wait for months for a new vehicle. (The same
phenomenon occurred when the Volkswagen "Beetle" first came to the United
States, where it was both highly differentiated and low-cost option.) But
businesspeople or diplomats on assignment expect a rental car or limousine to be
ready immediately when they arrive at the airport. Manufacturers of clothing
prosper or go bankrupt by their ability to bring the latest seasonal designs to market
rapidly. Perishable products, such as raw food items, must be delivered rapidlyunlike preserved foods. Services may also compete on the basis of speed by cutting
time spent waiting on the phone, standing in line, or processing paperwork.
Supply chains designed for responsiveness may rely on substantial supplies of
safety stock to avoid outages. (Overstocked seasonal items typically go on sale at
the end of the season.) They may also have multiple warehouses to place products
nearer to users. Third-party providers of rapid transportation-such as package
delivery services-were developed to suit the needs of such supply chains.

Visibility,
velocity,
variability,
variety, and
volume

Often called "the three Vs" of supply chain management, visibility, velocity, and
variability are key elements of successful supply chain strategy. (Visibility was
discussed earlier in this section.) No matter what the specific competitive
priority, the goal of supply chain management is to increase visibility and
velocity while reducing variability. The future of supply chain management lies
in continued pursuit of that goal. In addition, supply chain managers should
attend to two other Vs: variety and volume. Variety refers to the mix of products
and services in a portfolio that must alter to meet changes in customer demand.
Similarly, a supply chain must be flexible enough to expand and contract volume
to meet changes in demand for mass-customized products and services.

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Definitions

According to the APICS Dictionary, 12th edition, visibility, velocity, and


variability are defined as follows:
Visibility: The ability, aided by information technology, to be aware
of activities taking place along the supply chain.
Velocity: In supply chain management, a term used to indicate the
relative speed of all transactions, collectively, within a supply chain
community. A maximum velocity is most desirable because it
indicates a higher asset turnover for stockholders and faster order-todelivery response for customers.
Variability: Natural tendency ofthe results of all business activities to
fluctuate above and below an average value, such as fluctuations
around average time to completion, average number of defects,
average daily sales, average production yields.

Benefits and
drawbacks

Increased visibility along the supply chain benefits supply chain partners and
the end customer in more ways than one. The term "visibility" can refer to the
literal ability of a supply chain manager or employee to see the results of
activities occurring in the chain; it can also refer to technological "awareness"
rather than human seeing. For example, point-of-sale data may be "visible" to
computers in warehouses, the manufacturing plant, and suppliers' facilities.
Data about a sale can instantaneously trigger appropriate actions in all those
places automatically. Shipments are scheduled from the warehouse to replenish
the retailer's shelves, manufacturing produces another unit, and suppliers
release parts to the manufacturer. With all these actions prompted automatically
and instantaneously by technology, the supply chain partners can realize
savings in cost and time. Better visibility has resulted in greater velocity.
Velocity, like visibility, enhances supply chain performance. Methods of increasing
the velocity of transactions along the supply chain include the following:

Relying on more rapid modes of transportation (if there is a net benefit after the
increase in transportation costs)

Reducing the time in which inventory is not moving by using Just-in-Time


delivery and lean manufacturing (The less time inventory spends at rest, the less
likely it is to suffer damage or spoilage. Increased velocity reduces the expenses
involved in warehousing inventory.)

Eliminating activities that don't add value, thus reducing the time required to
accomplish supply chain activities

Speeding up the flow of demand and cash as well as the velocity of inventory
(The more rapidly payments are received from customers, the sooner the money
can be put to work in the business or deposited at interest. Information about
demand changes is crucial when the competitive strategy is responsiveness.)

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Unlike visibility and velocity, variability affects the supply chain negatively.
Supply chain management aims to reduce variability in both supply and demand
as much as possible. The traditional hedge against variability is safety stock. If
greater visibility along the chain results in greater velocity, supply chain
managers should also be able to reduce the amounts of safety stock required to
match supply to spikes in demand. As the "news" about increased purchasing
speeds more rapidly up the chain, distribution and production to meet the
demand can get off to a faster start. Flexibility in matching variety and volume to
fluctuations in demand is also facilitated by enhanced visibility and velocity.
Demand variability, known also as the bullwhip effect, has already been
described and will appear again in Module 2. Supply variability is like a mirror
image of demand variability. Instead of rippling in ever higher peaks up the
chain from the customer end, supply variability increases in waves down the
chain. It starts with small amounts at the resource extraction sites and culminates
in the largest amounts at the retail end of the chain. For example, any variability
in the supply of a raw material, such as an agricultural product that is dependent
upon fluctuating growing conditions, can result in even more widely fluctuating
purchase orders for that raw material from buyers down the chain. A shortage in
supply during one period may result in overpurchasing in the next period, with
the excess accumulating in warehouses as safety stock. Buyers depending upon
the supply will increase or decrease their purchase orders to reflect the variability
of materials, parts, and products available to them, with the variability growing
at each point in the chain. The accumulating excesses will in turn trigger
underpurchasing. Thus variability increases along the chain.

+ Using Enterprise Resources Planning (ERP) to Align


Operations with Strategy
The APICS Dictionary, 12th edition, defines enterprise resources planning as a
"framework for organizing, defining, and standardizing the business processes
necessary to effectively plan and control an organization so [it] can use its
internal knowledge to seek external advantage."
While the general definition of enterprise resources planning refers to the
planning itself, ERP often refers to the software that does the "organizing,
defining, and standardizing" involved in that planning. ERP software receives
more extensive coverage in Module 4, which focuses on information
technology and its role in supply chain management.
The important point to make here is that ERP systems should be created to
provide a link between strategy and operations. This may seem obvious, but in

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fact not all ERP software provides the same capabilities or the same level of
performance. An ERP system with excellent technological characteristics might
be inappropriate for either a company's strategy, operations, or both. Buying or
building the ERP system, therefore, requires careful consideration of the
company's competence and needs, including its supply chain management
requirements.
The ERP core

ERP software is the product of business software evolution, a process that


continues and has no definite endpoint. Any general description of ERP
software, therefore, will be limited in meaning to some point in that evolution.
Enterprise resources planning incorporates earlier strategies and technologies,
including material requirements planning (MRP) and manufacturing resource
planning (MRP II) and extends these systems outward to integrate all areas of
the firm and, increasingly, the supply chain itself.
At its heart, however, ERP remains an accounting-oriented system of
information management. Its core is a centralized database that coordinates
information flow among the various parts of the firm and extended enterprise.

Varieties of ERP

In addition to the database, ERP systems contain software modules to handle


the flow of information to and from specific areas of the enterprise, such as
finance and accounting, human resources, and manufacturing. An important
consideration in designing an ERP system is which modules to include in the
system and how to acquire them.
The earliest ERP applications of necessity were developed for very large
companies with the very large budgets required for developing and installing such
ambitious software. Some vendors, however, offer systems designed specifically
for medium-sized and smaller firms with more limited software budgets.
Most ERP installations from the major vendors are customized to fit the needs
of the client. However, ERP modules incorporate "best practices." While this
can be an advantage in upgrading operations, it can also introduce problems.
The firm may have to modify its operations or strategy to be consistent with the
software. At the very least, this means retraining staff and managers. More
seriously, it can limit the firm's flexibility to innovate and move beyond "best
practices" shared by competitors.
Vendors of ERP proliferate. In addition to looking for the most appropriate ERP
provider, a firm may choose to buy a system module by module from various

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providers. Integrating each module into a coherent system will be more


challenging than buying the entire system from one vendor. On the positive
side, the firm can select modules that are "best of breed" or that are most
compatible with its chosen business practices. A firm may also combine the two
approaches by purchasing an ERP system from one vendor and adding modules
from other providers.
Issues to resolve when designing an ERP system include the following:

Is the system right for the size of our firm and budget?

Does the system include the right modules for our business? (A service firm
will not need the manufacturing module, for example.)

Is it better to buy from one ERP provider, from several "best of breed"
providers, or to combine the two approaches?

Is the "best practices" model built into the system right for our strategic
objectives and capabilities, or will it require too much training and business
reengineering?

Can the designed ERP system be easily modified and supported to


accommodate changing business needs?

+Supply Chain Risk Management Strategies


All investment involves risk, including investing in a supply chain. Even a little
girl's lemonade stand can illustrate, at least by implication, the risks of
managing a supply chain.
Imagine some of the possibilities. Mom (co-owner of the company fleet and
chieflogistician) could have car trouble or an accident in the midst of delivering
lemons. The comer store could go out of business without warning. Bad
weather could keep customers away, drive up the price oflemons or sugar, or
actually destroy the stand. A hardhearted beat patrolman could cite the stand for
lack of a license to operate a business on the sidewalk or ticket customers for
walking across the street in the middle of the block. (The kitchen is in little
danger of being shut down for noncompliance with health regulations, but then
again you can never be certain.) A bad batch oflemons could make a customer
sick. Thieves could take a drink while the stand was temporarily untended. A
favorite customer might move out of the neighborhood. Finally, the
neighborhood bully might take a notion to knock the stand down, cover it with
graffiti, or intimidate customers.
The problems in this microcosm imply all the dangers that lie in wait for larger
enterprises. And so would the solutions. In brief, a little redundancy might be in
order as a buffer against most ofthese difficulties: availability of a second car, a

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backup for Mom in the kitchen, a second or third source for supplies besides
that comer store, and an arrangement with big sister to watch the stand when
little sister has to be away from it. These redundancies and contingency plans
could go quite a ways toward ensuring the steady operation of the lemonade
stand in the face of some potential disruptions. A bit of research and
contingency planning could help avoid disruptions caused by weather or
inadvertent violations of the law. Finally, a word to that overly aggressive
patrolman might help with the neighborhood graffiti artists and bullies.
The potential problems with a lemonade stand, though it is a vety small
microcosm to be sure, accurately mirror many of the risks that threaten real-world
supply chains in the global marketplace. Consider a few not-so-hypothetical risks
for global enterprises.
Example: A Canadian company that manufactures electric motors
recently established new relationships with global vendors to
accommodate booming international demand. A few seemingly justified
shortcuts were taken in the initial site inspections to expedite the selection
process. Subsequently, poor-quality issues have skyrocketed and external
failure costs from having defective products in the field and shipped to
customers are eroding profits and damaging the firm's reputation.
Example: A multinational medical device manufacturer experiences
numerous service problems resulting from technology incompatibilities
with business partners and third parties. The root cause-a lack of open
standards and problems with business process integration .
Example: Shipping seasonal textile goods made in Southeast Asia to a
global retailer involves multiple parties, transportation modes, and port
calls. Along the way, a political uprising paralyzes air freight and a labor
dispute disrupts operations at a major port of call.
Example: An earthquake and ensuing pandemic in Central America take
a major supplier's operation offline indefinitely. Because of the Just-inTime manufacturing interdependencies, the effect ripples throughout
supply chain operations.

Supply chain
risk
terminology

Risk is generally defined as a hazard, a source of danger, or a possibility of


incurring loss, misfortune, or injury. What is risk in the organizational context?
It is the chance that something will happen, positively or negatively, that will
affect business goals and objectives. Risk management is the process of
identifying risk, analyzing exposures to risk, and detennining how to best
handle those exposures.
In supply chains, risk management is a complex end-to-end concern. A supply
chain presents many opportunities in terms of resource availability, technology,
market access, and the like. But it also substantially increases dependence on

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critical resources (human expertise and materials), transport capability, and


other considerations. And, as witnessed in the examples above, globalization
poses myriad additional risks that can expose a supply chain to upheaval. The
Supply-Chain Council (SCC) defines supply chain risk management as follows:
The systematic identification, assessment, and quantification of
potential supply chain disruptions with the objective to control exposure
to risk or reduce its negative impact on supply chain performance.
A risk management strategy describes how an organization plans to address the
vulnerabilities it has identified throughout the supply chain by controlling,
mitigating, reducing, or eliminating risk.
Risk managers have a critical role in supply chain risk management. They must
examine the supply chain to

Map the entire supply chain and understand interdependencies

Identify potential failure points along the supply chain

Create risk awareness throughout the supply chain

Devise methods to lessen risks before they become a costly problem for the
enterprise.

Supply chain
risk
categories

Different conventions exist for categorizing supply chain risks. The APICS
Dictionary, 12th edition, defines a risk category as "a cluster of risk causes with

a label such as external, environmental, technical, or organizational." In Exhibit


1-19, we see examples of supply chain risks that are classified as internal or
external. Keep in mind that the list is not intended to be all-inclusive.
Exhibit 1-19: Supply Chain Risk Categories

Within the Supply Chain

Outside the Supply Chain

Insufficient quality

Labor shortages

Unreliable suppliers

Supply shortages

Poor labor relations , work slowdowns ,


or strikes

Machine breakdowns

Political instability

Incompatible/inflexible technology or
technology disruptions

Uncertain demand

Communication issues across different


cultures

Transportation delays

Financial risks from currency


instability/fluctuations

Terrorism or wars
Natural disasters
Large variability in demand

Service failures

Compliance risks

Legal/regulatory risks

Customs risks

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The Global Association of Risk Professionals uses a different convention and


classifies risk in operational categories:

Personnel risk (e.g., internal fraud, human error)


Physical assets (e.g., loss of business environments/assets)

Technology (e.g., virus damage, system failures)

Relationships (e.g., liabilities, lawsuits)

External/regulatory (e.g., external fraud, government incentives/restrictions)

The point is that there are many potential supply chain risks-internal and
external, operational, financial, social, and political. Risk is a common concern in
supply chain management. The practice of identifying risks and categorizing them
is a fairly common first step. Assessing and quantifying risks and developing
robust end-to-end strategies to address the risks comprise the next phase.

Risk profile

A risk profile is influenced by such factors as specific risk level and the
organization's own tolerance for risk.
Risk level is commonly described using the following equation:
Risk Level = Probability of Occurrence x Magnitude of Loss

Some risks are so unlikely or their effects so minimal that the organization will
choose to accept them. Risk acceptance is defined in the APJCS Dictionary,
12th edition, as "a decision to take no action to deal with a risk or an inability to
format a plan to deal with the risk." For example, a change in the political
administration of the United States could impact a multinational organization's
supply chain activities there, but the probability is extremely unlikely and there
is really nothing the organization can do that would mitigate the effects.
However, if an organization's success depends on its relationship with the
current regime in a politically unstable country, it may be prudent to avoid the
risk and locate suppliers elsewhere. As theAPICS Dictionary, 12th edition, tells
us, risk avoidance is "changing a plan to eliminate a risk or to protect plan
objectives from its impact."
Organizations tend to have characteristic tolerances for risk such as risk-tolerant
or risk-averse. To understand the continuum, contrast a risk-tolerant
organization that manufactures a basic commodity such as gravel or lumber
(where the benefits of accepting risk outweigh the potential harm) with a riskaverse pharmaceutical company (where a risk like contaminated raw ingredients
or improperly certified suppliers could lead to deaths, lawsuits, substantial
negative publicity, or a drop in share value).

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The SCC notes that risk must also have a time dimension or a specific time
horizon (e.g., day, month, and year) and a specific perspective or view that
defines the scope (e.g., boundaries, what's not included, etc.).

Risk
prevention

Strategies to address supply chain risk should include a risk response plan and
risk response planning. The APICS Dictionary, 12th edition, defines both terms
as follows.
Risk response plan: A document defining known risks including
description, cause, likelihood, costs, and proposed responses. It also
identifies current status on each risk.
Risk response planning: The process of developing a plan to avoid risks
and to mitigate the effect of those that cannot be avoided.
Risk prevention strategies typically involve four fundamental actions:

Assess risks.

Assessing risks

Balancing risk management and cost

Preparing for disruption

Sharing risks among supply chain partners

The primary function of a supply chain is to keep goods, information, and


payments flowing through the network and arriving everywhere in the right
numbers at the right time and in good shape. Therefore the chief risks to supply
chains are all those events that might disrupt the flows. Those potential disruptions
that challenge supply chain strategists include the following key dangers:

Failure of a mode of transportation, such as a shipwreck, a power outage that


closes down pipeline pumping stations, operator strikes, or similar disruptions

Balance risk
management and
cost.

Harm to goods, facilities, or markets caused by adverse weather, fire, floods,


vandalism, or terrorist activities

Loss of a key asset or supplier

Inadvertent noncompliance with regulations, ordinances, licensing

requirements, and the like


Theft of real or intellectual property

Failure of or dramatic change in patronage by an important customer

Designing a secure supply chain, one that can keep functioning despite disruptive
events, is another form of supply chain flexibility. You don't want to lose the
ability to keep products and information flowing to customers without disruption
because part of your cost-management initiative has been to eliminate disaster
planning. Every company buys insurance as a prudent investment. Yet many
companies forgo contingency planning to save money-or simply out of neglect.
Invest in security.

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Prepare for
disruption.

Make contingency planning a part of your supply chain strategy and consider
the following tactics:

Prepare contingency plans and review them regularly.

Make certain supply chain professionals own the contingency plans and are
specifically responsible for keeping them current and implementing them if
the need arises.

Don't rely only on extra stores of inventory. There can never be enough of
it to cover all potential problems and it, too, is vulnerable. You need
alternate processes to keep functioning after a disaster.

Research best practices in your industry and globally. Require supply chain
partners to do the same in your service contracts with them and have them
submit written contingency plans. Like all other supply chain processes,
contingency planning should cross company and functional boundaries.
While each organization will have specific responsibilities in a disaster, all
their activities will have to be coordinated.

Develop a sourcing process that takes the loss of each key supplier into
account and includes specific alternatives.

When sourcing outside your borders, consider potential risks in assessing


the total cost of the product or service being provided. Assessing the value
of a supplier on the basis of price alone is foolish. Rely on knowledgeable
intermediaries when assessing foreign suppliers and customers. How likely
are your foreign partners to be disrupted by earthquake, flood, fire, famine,
war, political interference, or economic uncertainty? In the world after
September 11, tsunamis, hurricanes, and floods, you have to plan as if
apocalypse were possible. Taking another look at sources closer to home
may be advisable.

Pay special attention to maintenance of information flows. Telephone lines


can go down and stay down for hours, days, and weeks. Power can go out
for similar periods of time, and generators require fuel supplies that can also
run out. Know how you're going to communicate among supply chain
partners to coordinate the disaster plan's implementation.

Track your shipments with RFID and global positioning. You can't
implement a contingency plan until you know you have a problem.

Test your plans and train employees and managers to understand and
implement them.

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Share risks
among supply
chain partners.

Surviving a disaster requires collaboration. Make certain that all supply chain
partners are prepared to work in concert and play their parts reliably.
Coordinated response after a disaster is more than a companywide or
enterprisewide responsibility. In the aftermath of earthquakes in Japan, SevenEleven Japan proved itself an indispensable source of supplies and logistics for
devastated areas. Before Hurricane Katrina deluged New Orleans and other
locations along the U.S. Gulf Coast, Wal-Mart had a fleet of trucks in place
and ready to roll into stricken areas with supplies. A strong supply chain is
more than good business; it's good citizenship.

Risk
management
guidelines

In a collaborative white paper, "Keeping Ahead of Supply Chain Risk and

Uncertainty," published through an alliance of Accenture (a global


management consulting, technology services, and outsourcing company) and
Oracle (a global enterprise software company), the point was made that
combating global supply chain risk necessitates agile, proactive actions. Their
guidelines are shown in Exhibit 1-20 and basic implications for supply chain
management are noted.
Exhibit 1-20: Risk Management Guidelines
Guideline

SCM Implications

Effective risk management


programs are formal constructs.

Supply chains have to combine technology with


good business processes that are both riskaware and as much as possible self-healing .
The goal should be to create a "resilient
enterprise."

Effective risk management


programs are holistic in nature.

SCM professionals need to look at the system


in totality, not as small pieces of the machine.

Effective risk management


programs emphasize symptoms
over scenarios .

The force behind any company's program is


preparation best served by focusing on risk
commonalities (shared symptoms) as opposed
to every possible individual scenario . In this
way, supply chains are better prepared to
handle things that do crop up .

Source: Adapted from "Keeping Ahead of Supply Chain Risk and Uncertainty, "
published by Accenture and Oracle

Risk
management
best practices

A global multi-industry risk management project approved by the Supply-Chain


Council looked at ways to help organizations avoid/minimize costs and mitigate
supply chain disruptions. The premise was that managing risk proactively could
offer a competitive edge. Exhibit 1-21 lists the best practices resulting from the
study. (These practices also support SCOR Model9 .0.)

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Exhibit 1-21: Risk Management Best Practices


Best Practice: Formal Risk Management
Supply chain risk
management
(SCRM)

Systematically identifying, assessing, and resolving potential disruptions in


supply chain networks with the objective of reducing their negative impact on
the network's performance

Best Practices: Visibility and Quantification of Risk


Supply chain risk
identification

Creating a list of potential events that could disrupt or harm any aspect of the
supply chain's performance

Supply chain risk


monitoring

Monitoring and reviewing identified risks using a predefined time and process in
order to prevent them from disrupting or harming the supply chain's
performance

Supply chain risk


assessment

Quantifying risk to understand where the greatest risks may exist in order to
prioritize resources for risk mitigation and management; measures include
likelihood and impact

Best Practices: Coordinated Risk Management


Risk management
program's
coordination with
partners

Coordinating risk management with supply chain partners by emphasizing


cooperation among departments within a single company and among different
companies of a supply chain to effectively manage the full range of risks as a
whole; establishing a risk management coordination committee

Sourcing risk
mitigation
strategies

Includes strategies to address source risks, for example, multiple sources of


supply, strategic agreements with suppliers, and supplier partnerships

Crisis
communication
planning

Creating a plan for managing a crisis when it occurs

Best Practices: Supply Chain Designed for Risk


Supply chain
business rules

Establishing business rules (e .g., customer priority, supplier priority, production


routing, transportation routing , etc.) based on minimizing the risk to the supply
chain

Supply chain
information

Managing supply chain information networks to minimize the risk to the supply
chain; includes information sharing with partners as well as internal locations ;
helps all parties to be quickly informed of a real or potential disruption and
respond quickly and appropriately to minimize the disruption impact

Supply chain
network

Designing node locations, transportation routes, capacity size and location,


number of suppliers, number of production locations, etc., in a fashion that
mitigates potential disruptions to the ability to deliver product/service to the end
customer

Source: Supply Chain Risk Management Team, Supply-Chain Council , Inc., 2009

The importance of managing and mitigating risk throughout a supply chain


cannot be overemphasized. It bears direct responsibility for supply chain
success in a risk-laden global world.

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This section is designed to

Describe the process of developing measurable goals and objectives

Explain the use of corporate and supply chain strategy to drive supply chain decision making,
including the make-or-buy decision

Describe the principles underlying successful management of people in the supply chain

Outline the use of metrics to guide supply chain management, including key performance
indicators (KPis), balanced scorecard, and SCOR metrics

Outline the financial impact of supply chain management decisions on costs and profits

Identify the impact on supply chains of significant regulations, including the Sarbanes-Oxley
Act and others.

After developing corporate and supply chain strategies, the firm-or the trading
partners collectively-need to support the broad strategies by defining
measurable objectives for each manager along the chain. To borrow from the
SCOR model, the process is still in the "plan" phase, when objectives are
defined. This phase sets the direction for all the other processes-source, make,
deliver, and return. Strategy and objectives are developed first at top
management levels and filter down through the levels of management on each
trading partner's organization chart.
At every level, managers are responsible for synchronizing results in their areas
with the supply chain and corporate strategies. For example, if strategy at the
business level were to develop a recycling program for an aging line of
products, the sales and operations team might develop a forecasting program on
the marketing side to estimate the numbers of returned products, while
operations would check available capacity and perhaps recommend
modifications in current facilities and hiring policies. At the tactical level,
recycling plant managers might develop lean six-sigma processes (more about
lean and six sigma in Section D) to ensure an efficient, reliable process.
Possibly some of these functions would be outsourced to a specialist; a logistics
provider, for instance, might take over planning and execution of the reverse
logistics aspects of bringing the returned products in from consumers to the
recycling facility. Customer relations could be creating a strategy and specific
objectives for developing a customer base to purchase the output of the

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recycling facility. And all these activities should be supported by relevant flows
of communication and training, and, of course, tied to the financial plan.
Metrics would be developed for the key elements of the plan, such as response
times for pickup and delivery of returns after receiving notice from a drop-off
point that returned products were ready to be picked up. Finance would be
involved, of course, to cost the various operations and determine the breakeven
point when the operation could become profitable. Metrics would cut across
functions and organizations, and multifunctional teams would coordinate each
process.
Above these levels there would be an overarching strategic intention to support
the supply chain's growing image of environmental responsibility, thereby
enhancing the loyalty of its ecology-minded customer base.

Using Corporate and Supply Chain Strategies to Set


Priorities and Make Decisions
It's tempting to say that all decisions affecting the supply chain should be based
on corporate and supply chain strategy. It's perhaps more realistic to say that the
decisions and strategy should be consistent. It's a version of the chicken-egg
puzzle. Sometimes the strategy needs to change to fit the priorities, as when a
market suddenly opens up and your enterprise could, with a modest investment,
compete successfully for new business. Whichever way you look at the matter,
however, priorities need to be set strategically. We'lllook at the way that
strategic decisions might be made in regard to customers and markets,
technology, processes, and sourcing.

Customer and
market
decisions

Supply chains should be configured to reflect customers' needs as well as


trading partners' capacities. There is no universally appropriate supply chain
strategy. We saw earlier that Zara, the Spanish clothier, has two distinct supply
chains: one for its more functional products and the other for fashion products. A
firm with multiple product lines needs to conduct a careful market assessment
and match multiple supply chains to the strategy that is right for each market.

Technology
decisions

Since technology has become the powerful force that extends supply chain visibility
across multiple echelons while providing world-shrinking velocity, it always
deserves serious consideration as an aid to achieving strategic objectives. But
technology is also expensive to install, sometimes difficult to learn ("user-friendly"
is a term of art), and, for some, downright threatening. Know what you're getting
into before inviting the cable stringers into your office complex with their long drill
bits and crimping tools. But if your strategy requires velocity for acceptable order
fulfillment, if your incoming stream of payments is floating through the government

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mail instead of zipping electronically into your bank account, if your customers
expect to shop at a Web site-then you need the cables and servers and software to
get the job done. In any event you need to remain competitive. You don't want to
be the last typist in a wired world.
Technology is available to increase the velocity and accuracy of information flows,
cash flows, checkout processes, inventory tracking, production scheduling ... and
virtually any process of any length inside the supply chain. Whatever the process
you're aiming to improve, technology can almost certainly help. But it has to be
selected by specialists who know what is current and can guide process
stakeholders in choosing the right hardware and software at the right price to
conform to overall strategy. The collateral effects of new technology have to be
taken into account as well. The theory of constraints tells us that there is no point in
buying expensive hardware and software to speed up the flow of information,
materials, or payments if they will just be sent speeding into a bottleneck (or
constraint) that will stop their progress. When developing a technology benefit-cost
analysis, be sure to consider costs of future upgrades. Hardware and software both
have abbreviated life cycles; keeping up with improvements adds to the costliness
of a system. Finally, complex enterprisewide software can be a great help in
synchronizing activities along the supply chain. Like all complex solutions,
however, it can create its own set of problems; once you put in place an
enterprisewide software system, you can find yourself locked inflexibly into its
assumptions and unable to make process improvements without also altering the
technology-at considerable expense. More than great technology, you need the
right technology applied to the right process by the right people.

Process
decisions

A supply chain is a set of processes, and they can be fine-tuned to suit each
customer segment. When planning improvement initiatives, select the processes
that are central to the supply chain strategy, measure and benchmark them, and
focus your attention on one process or a small manageable number of processes.

The make-orbuy decision

Sourcing involves complex, challenging decisions. Manufactured goods,


components, and services can be acquired by purchasing a firm that delivers
them by arm's length transaction or by outsourcing. Let's look at the "make-orbuy" decision to produce goods or services in-house or to outsource their
production.
The trend in the latter decades of the 20th century and early in this century has
been toward outsourcing non-core activities to supply chain partners. These
partners may be located near at hand or offshore. As supply chains grow in
length and global dispersion, they can locate each partner in the country or

~&'

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region best suited by climate, culture, resources, tax policy, etc., to support each
specific activity. At this writing, it remains to be seen whether rising fuel and
transportation costs will put a limit on the length of supply chains.
Trends in
outsourcing

Outsourcing was initially a strategy in manufacturing supply chains. However,


advances in computer hardware and software and global broadband networking
has enabled global outsourcing of service activities, such as help desks,
accounting, and medical testing. Accounting activities, for example, can be
carried out across multiple time zones. Working half a world away with
immediate Internet file transfers, a day-shift accountant can perform services
during the customer's nighttime hours. Documents can be e-mailed across
oceans faster than they can be printed out and carried to an office down the hall.
Anything that can be digitized can be outsourced globally. As a consequence,
many corporations have sought out the cheapest labor sources in a wide variety
of occupations. This outsourcing takes place in many directions-not only from
"developed countries" to "emerging economies." While the United States and
European Union countries may send many jobs to Asia, workers from other
areas of the world also migrate into the developed areas. Moreover, developed
countries outsource to one another. Japanese car dealers once made inroads into
U.S. and European markets with low-priced automobiles. But, as these
companies developed new models appealing to all market segments, they began
moving production closer to customers in countries such as the U.S. and Canada.
The German manufacturer Volkswagen made Volkswagen "Beetles" for
decades in Mexico after production ceased in the home country.

Choosing
activities to
outsource

Before selecting an outsourcing partner to provide materials or services, a supply


chain firm needs to ask and answer a set of questions about the possible consequences
of giving the activity in question to another firm. These questions include:

Is the activity a core competency?


What are the consequences of losing related skills or knowledge?

What is the landed cost?

Is the activity a core competency?


There is seldom a good reason for outsourcing a core competency. There are very
good reasons to outsource tasks an enterprise does only adequately or poorly. A
logistics specialist can make its clients look very good by providing customers
with same-day or next-day service (plus other options for those who don't need
fast delivery). Huge, specialized providers of that sort can actually give a client an
edge over competitors. But if an enterprise has its own fleet and is known around
the region for the color of the trucks, the skill of the drivers, and flawless delivery,

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it should carefully consider the effect on its image before letting a third-party
provider take over its delivery functions-even if logistics isn't a core activity.
A detailed process for considering core competencies in the make-or-buy decision
is described in Customer-Centered Supply Chain Management (Kuglin, 1998). As
an example, assume that an enterprise is considering contracting with a supply
chain partner, yet to be identified, to provide its customers with overnight orderto-delivery service. Kuglin's process might be adapted as follows.

Step 1: Determine whether or not the enterprise already has overnight


order-to-delivery as a core competency.
In making this determination, the enterprise consults both internal experts and
external experts among its clients and providers. If there is a difference of
opinion, the enterprise does further research to decide which opinion is
correct. It is possible that the enterprise believes overnight delivery is a core
competency while clients say otherwise. It is also possible that clients believe
the enterprise has overnight delivery as a core competency but the enterprise
itself is not fully aware that it has that capability.
(Kuglin uses the process as part of a complete transformation to a customercentered supply chain leader. In that effort, the enterprise develops a complete
list of all core and non-core competencies as part of a decision of what
activities to outsource and which to keep or develop as core competencies.)

Step 2: Determine whether or not there is a need in the marketplace for


overnight order-to-delivery service.
While interviewing customers and suppliers about the core competency of
the enterprise, the interviewers also question respondents about the need for
the capability in the marketplace.

Step 3: Determine the relationship between the enterprise's capability


to deliver the service and the need for the service in the marketplace.
The preceding steps can produce several outcomes:

The marketplace needs overnight delivery and the enterprise already can
meet that need as a core competency. In this case, the enterprise might
choose to market its capability to raise awareness in the marketplace. (It
will "make" rather than "buy" overnight delivery.)

The marketplace does not need overnight delivery, in which case the
enterprise may not need to maintain, develop, or buy that capability.

The marketplace needs overnight delivery, but the enterprise is not able
to provide it as a core competency. This situation triggers the final step,
which is the make-or-buy decision either to develop the capability or to
find a supply chain partner who can do so as a core competency.

ll,}

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Step 4: If a need for overnight order-to-delivery service exists in the


marketplace and that capability is not a core competency of the
enterprise, determine whether to develop the capability as a core
competency or to outsource the capability to a supply chain partner.

Develop the core competency to perform the activity.


The firm may decide to develop core competency in providing overnight
order-to-delivery service. This may be advisable if doing so is consistent
with the firm's mission and vision-if it has the resources to develop
that core competency within a time frame acceptable to the market.

Outsource the activity.


Having decided to outsource overnight order-to-delivery service, the
enterprise makes a short list of available third-party logistics providers
and selects one to develop into a supply chain partner. The selection
process may be accomplished by soliciting proposals; Kuglin suggests,
instead, developing a business problem and asking potential providers to
work with the enterprise to find a solution. This method tests the unique
abilities of each firm.

What are the consequences of lost skills or knowledge?


When an enterprise outsources functions to another firm, domestic or foreign, it
may be divesting itself of valuable expertise in exchange for enhanced focus and
lower costs. When all the components of a complex electronic system are made
offshore, for example, the enterprise no longer maintains the knowledge of those
systems in-house. The skill, knowledge, and perhaps the creativity of its former
workers in that area are gone and cannot be easily recovered. The cost of those
losses may be difficult to measure and balance against the gains, but they are real.
What is the landed cost?
Once an enterprise has decided to outsource a particular component or service,
attention turns to comparisons of quality, cost, and availability. Components or
services delivered by a foreign supplier are often priced far lower than if they
were produced domestically. Even assuming that the components or services are
of the same quality, however, there are other considerations. Will the foreign
suppliers be able to provide the components in sufficient quantities to meet
production needs? Are there infrastructure constraints that may stall shipments
unexpectedly? Will labor, economic, or political problems suddenly cut off
supplies? Will shipments be secure against pilferage, damage in transit or
handling, tampering, and terrorism? Finally, what other costs are incurred by
bringing the components to the manufacturing site from a foreign rather than
domestic producer?

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Landed cost includes all those related expenses that must be added to the
purchase price of materials or services to make a fair comparison among similar
items obtained from different locations. In addition to purchase price, items
shipped in from another country are subject to logistics costs, such as duties,
taxes, fees for various intermediary services, insurance, and special packaging
costs. There may be costs associated with extra employees. Expatriates
(employees sent abroad to work in a country other than where they live) may be
needed to manage the new relationships.
If the goods from domestic and foreign sources are of equal quality and cost
becomes the main consideration, landed cost provides a basis for a meaningful
comparison. These features oflanded cost are captured in the APICS Dictionary,
12th edition, definition: "product cost plus the costs oflogistics, such as
warehousing, transportation, and handling fees." (Landed cost is covered again
in Module 2 in connection with global logistics.)
Landed costs are different from line haul costs. Line haul costs are cost elements
(within physical distribution) that vary by distance traveled and not by weight
carried (e.g., fuel, drivers' wages, wear and tear on the vehicle).
Justification for
and benefits of
outsourcing

The previous description of a step-by-step process to follow in the make-or-buy


decision implies the justification for outsourcing: By outsourcing to a supply
chain partner an activity that is not a core competency, an enterprise essentially
adds that competency to its capabilities.
Although there are potential drawbacks to outsourcing as noted above, such as
potential loss of skills and knowledge and higher-than-expected landed cost,
there are also potential benefits, such as the following:

Economies of scale
A third-party provider with core competency in the outsourced activity may
be able to increase the number of orders efficiently processed from the
customers of the outsourcing enterprise, thus expanding market share.

Risk reduction
Outsourcing transfers risks, such as demand uncertainty, to the third-party
provider. The provider may be better equipped to manage demand
uncertainty by spreading forecasts over a larger number of customers. (It
may handle many more orders than those brought in by any one of its
clients.) The outsourcing provider may also be able to react more rapidly to
changes in customer demand.

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Increased capital available for investment


Since some of the capital required to engage in the outsourced activity is
supplied by the third-party provider, the enterprise has more capital available
for research, payment of dividends, debt reduction, or other purposes.

Clearer focus
As noted earlier, an enterprise outsources an activity only if it is not a core
competency (in most cases). It does so to increase its ability to focus on its
core activities.

Access to new technologies


The third-party provider, because it focuses on the outsourced activity as a
core competency, is more likely to have the latest and most effective resources
for carrying out that activity. Indeed, if it is to maintain its market share, it
must keep up with advances in strategy and technology.

Faster development cycle times


The third-party supplier's technical expertise may enable the enterprise to
accelerate development time for new products or services.

+Elements of Supply Chain Management


The issues confronted by supply chain managers run the gamut from day-to-day
operational considerations to tactical matters and long-term strategic decisions.
These can be aggregated into the following elements of supply chain
management:

Network planning

Inventory control

Supply contracts
Outsourcing and procurement strategies

Product design

Customer value

Information technology and decision support systems

These issues are all covered in more detail throughout this course. They are
briefly introduced in the following discussion.

Network
planning

A supply chain's network consists of physical facilities and the transportation


links among them. As supply chains grow in length and complexity, these
facilities may be spread out among numerous regions, countries, and continents.
Planning a network that provides an optimal return on all investments is a
problem of great complexity that requires long-term, strategic thinking. Each
decision must be made in light of its impact on the entire supply chain, not only

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on the single matter under consideration. Adding to the number of warehouses,


for example, may have the benefit of putting goods closer to the customer, but it
may also add to total inventory and increase the costs of transportation. To solve
the optimization problem for the entire network, supply chain managers must
rely upon the most powerful technology available to them.
Among the many considerations to be factored into the optimal network
configuration are

Inventory
control

Number, location, and capacity of warehouses

Location of plants and production levels

Transportation between all facilities.

In addition to determining the number and location of warehouses, supply chain


managers in manufacturing enterprises must also oversee the stocking of
warehouses with an optimal level of inventory. And they must establish
transportation links that ensure timely arrival at and departure from warehouses.
In the ideal network, raw materials, components, and resources might never be

at rest in a warehouse. Instead, they would always be in motion until arriving,


just in time, at each location along the chain. One reason this ideal state is
difficult, or impossible, to achieve in reality is the fluctuation in demand all
along the supply chain, beginning with the ultimate customer. Unpredictable
demand, along with other factors such as accidents and adverse weather
conditions, mean that maintaining some levels of inventory at various locations
along the chain is generally necessary.
One method ofkeeping inventory in motion the maximum amount of time is a
distribution strategy called cross-docking. Used with particular success by WalMart, cross-docking involves (as the name suggests) moving incoming
shipments directly across the dock to outward-bound caniers. The inventory
thus transferred may literally never be at rest in the warehouse.
The supply chain manager's challenge in the area of inventory control,
therefore, involves gauging future demand as accurately as possible and keeping
inventory as low as possible without disruptions in delivery to customers.
Module 2 covers in detail all matters related to inventory control, including
demand management and forecasting, warehouse management systems, and
transportation management systems as well as inventory management itselfincluding cross-docking and other distribution strategies.

Supply
contracts

Optimizing the supply chain requires approaching supply contracts from a


nontraditional perspective.

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Traditional thinking emphasizes making the greatest possible profit for the
enterprise without regard to the impact on suppliers. Suppliers look for the price
that will yield the highest margin for them without regard to customer needs.
Buyers look for the lowest price without regard to impact on the supplier.
Contracts may cover only short-term transactional arrangements.
Supply chain thinking requires a strategic view of sourcing that focuses on the
long-term success of all partners along the chain. Pricing, discounts, delivery
timing, and related matters can be established cooperatively, taking into account
the needs of supplier and buyer. The emphasis is on establishing alliances rather
than simply making a series of transactions, pitting suppliers against one another
to drive down prices. The pressures in contemporary markets, from both
customers and suppliers, necessitate the forming of alliances that contribute to the
profitability of an integrated supply chain as well as each partner. Among the
strategies used to integrate supply chains are information sharing, internal as well
as external integration, and the formation of various types of partnerships.
Strategic sourcing and establishment of supply chain alliances are explored in
depth in Module 3, which covers customer and supplier relationship management.

Outsourcing
and
procurement
strategies

Deciding what activities to keep in-house and what activities to transfer to

Product
design

In traditional practice, product (or service) design may be carried out in isolation
from other areas of an enterprise and without involving supply chain partners.

supply chain partners-the "make-or-buy" decision-was explored earlier in


this section.

Module 2 looks in depth at the design process and the way it can be enhanced by
involvement of other departments, functions, and supply chain partners. By
including perspectives such as those of marketing, production, and logistics,
designers can develop products that are better matched to customer needs,
cheaper to build, easier to transport and store, and easier on the environment.
In striving for an effective and efficient supply chain, there is also a need to plan
for the product life cycle in product design. Increasingly, supply chain managers
incorporate environmental concerns in their plans from the beginning (for
products and for the processes they use to make them). Environmental life cycle
analysis looks at the environmental impact of a product (or service) up and down
the supply chain-starting from raw material extraction through manufacturing,
use, and final disposal. Multiple supply chain processes are involved, such as

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sourcing, material handling, manufacturing, packaging, and transportation.


Along the way, process improvements often result. Managers across the supply
chain cooperate with each other, and the benefits reach beyond green to include
reduced costs and improved customer support. Green supply chain management
practices that integrate environmental management with conventional supply
chain practices not only reduce life cycle environmental impacts but also support
the supply chain common goal of value delivety.
Even as designers take into account the demands of other supply chain partners,
so must supply chain managers take into account the features of products and
services. The supply chain itself can be designed to take advantage of the goods
and services it develops and delivers to its ultimate customers.

Customer
value

The most important consideration when designing goods and services is the
ultimate customer. What does the customer consider to be of value? Is it low
price? Some specific feature or combination of features? Is it timely delivery? Is
it safety or comfort? Is it some combination of these or other considerations?
The ultimate consumer of a product or service cares nothing about the processes
within the chain----design, quality control, logistics, lean manufacturing, and so
on. The customer cares only about the result of these processes. This may be
obvious, but it is also surprisingly easy to forget.
Some of the challenges in providing value to the end customer are

Developing a mix of products, services, and intangibles that adds up to


value in the eyes ofthe customer

Developing ways to measure customer value specific to supply chain


customers

Establishing appropriate relationships to contribute to customer value

Designing the SC to enhance customer value.

Managing customer relationships is covered in Module 3.

Information
technology
and decision
support
systems

-, 2010 APICS
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Module 4 focuses entirely on the uses of information technology (IT) in supply


chain management.
Some important considerations in this area are

Determining what data to transmit and what to ignore

Deciding how data will be analyzed and used

Determining the impact of the Internet

Designing and setting up infrastructure

Integrating IT and design support systems into competitive strategy.

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+Supply Chain Performance Metrics


As explained in the previous section, measurement (or metrics) forms one of the
key supporting elements of supply chain strategy. Whether the management
challenge is assessing the current state of the supply chain, setting goals and
objectives, or tracking progress of an initiative, a set of meaningful metrics is as
essential as a map to a traveler. As the saying goes, "You get what you measure."
This is at least half true. While there is no guarantee of achieving the goal a firm
decides to measure, it's a virtual certainty the firm won't achieve what it fails to
measure. Once a firm selects objectives and metrics, they need to be communicated
throughout the extended enterprise along with the benefits of achieving them.
Since it's not feasible to measure and monitor every supply chain goal or activity,
you have to choose a reasonable number of key performance indicators (KPis) that
are related to your strategic objectives. The discussion that follows briefly reviews
the nature of KPis and then looks in more detail at two formal systems of
measurement. The first is the balanced scorecard, a four-part system developed
to evaluate organizational performance on more dimensions than the financial.
Some supply chains have successfully adopted the balanced scorecard approach to
measuring performance. The second measurement system has been developed by
the Supply-Chain Council (SCC) in connection with the SCOR model, which
was described earlier.

Key
performance
indicators
(KPis)

We've discussed a number of strategic attributes of supply chains, among them


velocity, visibility, variability, collaboration, trust, customer focus, and
flexibility. We could add other attributes such as security (risk management),
compliance with all regulations, and environmental excellence (with a welldeveloped, profitable reverse supply chain). Any of these attributes could be
woven into strategy, expanded into specific objectives, and subjected to
measurement. If the strategy were to increase the velocity with which
information flows from the end customer back through the chain, we could
develop objectives (probably having to do with technology), assess the current
state of the system, and identify metrics to measure progress toward a specific
goal. The key indicator might be a measure of the actual velocity of
communications. Perhaps demand data are aggregated monthly and
communicated in face-to-face S&OP meetings. The goal could be to substitute
direct transfer of data from the point of sale via scanners, bar codes, and the
Internet. A great many enabling objectives might be put in place (buying
equipment, training staff, and so on), but the key indicator would be a measure
of velocity. This KPI would be a true supply chain metric, because the process it
measures crosses echelons. (It would also be linked to other benefits, such as

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increased visibility of actual demand and a decrease in the variability that


results from multiple forecasts.) Of course, we would also need to track the
customer satisfaction and financial impact. Does the faster communication and
sharing of demand data pay off in terms of customer service and profitability? A
KPI for variability might be the extent of the bullwhip effect.
Supply chain managers have developed many key indicators that practitioners
can adapt to their own purposes. Here are a few examples developed by the
Efficient Consumer Response Performance Measures Operating Committee:

In regard to product introductions, key performance indicators include


internal failure rate, scrap, external failure rate, warranties, returns, and
introduction lead time.

KPis for merchandizing products include market share, volume growth, and
total supply chain inventoty turns. (Note that inventory has to be aggregated
across the supply chain.)

Replenishment KPis include order fill rate, on-time delivery, and order
fulfillment lead time.

And there are many others.


The key point about KPis is that they have to be applied to supply chain
processes that are derived from the corporate and supply chain strategies. A KPI
will not promote collaborative behavior if it measures only activity within a
silo-inventory holding costs at one warehouse, cost containment on one leg of
a cross-country shipment, or increased production at one plant. It may do more
harm than good to reduce inventory if the lack of a buffer causes the wholesaler
downstream to experience more frequent shortages of stock. Speeding up one
process in a synchronized system throws everything out of balance. Costs cut
unilaterally in one area invariably lead to increased expense somewhere else.
Activities in supply chains are all linked together. You can't move one link in a
chain without disturbing all other links.
Two systematic ways to develop supply chain metrics are provided by
the balanced scorecard and the SCOR process model.

Balanced
scorecard

Metrics provide a way to keep score, so it was only natural that someone would
create a business-related scorecard. If your objective is to improve order fill rate
from 93 percent to 98 percent, then you've created a contest with its own rules
and an ultimate goal that signals an end to the game. Sure enough, in 1992 Robert
S. Kaplan and David Norton introduced the balanced scorecard (BSC). Initially
designed to give managers a comprehensive view of business performance, it has
since been adapted to the design and measurement of supply chain performance.

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Why is it "balanced"? Because the scorecard includes four different types of


measurements that aim to provide a broader, more balanced perspective on
business performance than traditional performance measures focused only on
financial results.
As you can see in Exhibit 1-22, the scorecard provides four different
perspectives on performance:

Customer perspective

Business process perspective

Innovation and learning perspective

Financial perspective
Exhibit 1-22: The Balanced Scorecard (BSC)
Customer
Perspective

Goals

Innovation and Learning


Perspective

Measures

Goals

Business Process
Perspective
Goals

Measures

Financial
Perspective

Measures

Goals

Measures

Let's consider what each perspective adds to a manager's knowledge of his or


her area's role in the supply chain.

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Customer perspective
The customer's view of the business clearly has value for assessing the
current performance and future prospects of the business. Measures such as
on-time delivery or even more subjective measures such as satisfaction with
customer service or impression of reliability are important to track.

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Key elements in a
balanced
scorecard
initiative

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Business process perspective


In a functionally oriented business, this area might focus on number of
prospecting calls or productivity. It can also encompass flexible response,
waste reduction, or other supply chain management goals.

Innovation and learning perspective


This area can include formal training for staff, or it can refer to innovations
in products or processes (such as adopting a balanced scorecard approach to
supply chain management).

Financial perspective
The traditional way of judging business performance relied on such
measures as cash-to-cash cycle, return on investment, and debt-to-equity
ratio. But financial measures are retrospective, and they don't always
provide a true indication of the current state of affairs, much less of future
performance (as prospectuses are required to remind us). Kaplan and
Norton wanted to give managers a tool that would encourage a broader,
more future-oriented view. Nevertheless, a balanced scorecard approach
must always include the financial perspective; bottom-line results are still
the final measure of success.

Developing a balanced scorecard approach to managing the supply chain


requires careful preparation, leadership, and follow-through. Here are some key
elements that should be present in a balanced scorecard initiative:

Communicate the strategic purpose of the balanced scorecard to supply


chain partners.
Company strategy, let alone supply chain strategy, too often remains in the
minds of top executives without filtering out to other levels of management.
If managers are to help make change happen, they have to understand why
it's good for the business, the customer, their own area, and themselves.

Develop goals and measures consistent with the corporate and supply
chain strategies.
There's a temptation to use the balanced scorecard as a brainstorming tool
without understanding that the four areas need to be mutually reinforcing
and aligned with strategy. They aren't catch-all containers for random
suggestions. If the supply strategy is to penetrate a new, high-end market
with an innovative electronics gizmo, then the business process perspective
might be to develop a more rapid product innovation cycle linked to
measures of process innovation and design workshops in the innovation and
learning area, reduced delivery cycles in the customer perspective area, and
a profitability measure in the financial area.

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Create schedules and assign responsibilities.


Especially in a supply chain context there is a need to establish ownership
of results. When an initiative crosses functional areas in one firm it is likely
to encounter resistance if not coordinated and promoted from above. In the
supply chain comprising different firms, there is no unified "above";
agreement has to be established first at the executive level across the chain.
Then a reporting structure has to be established across company boundaries.
Moreover, there may be structural obstacles to overcome, such as
incompatible systems .

Setting up a balanced scorecard initiative is no job for novices. The first time
around it can be worthwhile to bring in outside expertise. Still, even a highly
sophisticated consultant cannot substitute for support at the executive level;
outsiders are not always immediately accepted if employees aren't convinced
that management is behind the initiative.

Level 1 SCOR
metrics

The Supply-Chain Operations Reference (SCOR) model is maintained and


endorsed by the Supply-Chain Council (SCC), and it appears several times in
this course. The SCC, formed from two previous groups in 1996, is a member
organization, with application open to any company willing to pay a fee and
participate in "applying and advancing state-of-the-art supply-chain
management systems and practices." They intend the SCOR model to be a
"cross-industry standard for supply-chain management." Organizations that
apply the model are encouraged to join to help develop the model and receive
full member benefits.
SCOR, as we saw in Section A, identifies five supply chain processes: plan,
source, make, deliver, and return. To measure performance in these areas, the
SCC has also developed a system ofmetrics. We 're limiting this discussion to
Level 1 metrics, the highest level. This provides a taste of the SCOR
measurement system, but beyond Level 1 are several deeper levels with
hundreds of more-specific, related measurements.
The nine Level 1 metrics explained here are primary, high-level measures and
are not tied to specific processes in the plan, source, make, deliver, return
model. Instead, they may cut across multiple SCOR processes .
Among the advantages of the SCOR model are several key attributes:

It was developed specifically to measure cross-functional, cross-company

supply chain processes.

It includes formulas to calculate numerical values for each performance

attribute, and that allows it to be used to compare performance against

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industry-best or best-in-class performance as well as against a company's


own previous performance and future goal.

It has been developed and refined by dozens of major firms and applied in

initiatives available to
SCOR metrics and
performance
attributes

sec members as case studies.

Exhibit 1-23 shows the nine Level 1 metrics in the right-hand column. In the lefthand and middle columns, it names and explains the supply chain performance
attribute measured by each metric. The first performance attribute, for example, is
supply chain reliability, defined as "delivering the correct product, to the correct
place, at the correct time, in the correct condition and packaging, in the correct
quantity, with the correct documentation, to the correct customer." The metric for
assessing reliability is perfect order fulfillment. It is measured, as you'll see in the
explanations that follow, as the percentage of total orders that were delivered
perfectly (correct place, amount, conditions, etc.). Once the supply chain has a
percentage score for its perfect order fulfillment performance (its reliability), it
can then research the industry (or the world) to determine its ranking among
relevant organizations and decide whether to undertake an improvement initiative.
The computer system can be used to execute reliable fulfillment.
Exhibit 1-23: SCOR Metrics and Performance Attributes

Performance Attribute

Performance Attribute
Definition

Level 1 Metric

Supply chain reliability

The performance of the supply


chain in delivering the correct
product, to the correct place, at
the correct time, in the correct
condition and packaging, in the
correct quantity, with the correct
documentation, to the correct
customer

Perfect order fulfillment

Supply chain
responsiveness

The speed at which a supply


chain provides products to the
customer

Order fulfillment cycle time

Supply chain flexibility

The agility of a supply chain in


responding to marketplace
changes to gain or maintain
competitive advantage

Upside supply chain flexibility


Upside supply chain adaptability
Downside supply chain adaptability

Supply chain costs

The costs associated with


operating the supply chain

Supply chain management cost


Cost of goods sold

Supply chain asset


management

The effectiveness of an
organization in managing assets
to support demand satisfaction;
includes the management of all
assets: fixed and working capital

Cash-to-cash cycle time


Return on supply chain fixed assets

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The attributes of a successful supply chain, as the exhibit shows, are the
following:

Reliability, which is defined as the percentage of orders that are filled


perfectly (on time, no damage, etc.) (If your customer orders 1,000
SKUs and they all show up at the designated facility on time,
undamaged, and completely documented and packaged, you've
delivered a perfect order.)

Responsiveness, which refers to the amount of time required to


complete a delivery (Reliability doesn't include a specific reference to
speed, but it does state that the customer defines "on-time" delivery.)

Flexibility, which refers to the supply chain's ability to respond to


unplanned orders in larger amounts than expected (or smaller amounts)
or earlier than expected

Costs required to operate the supply chain

Asset management

As you can see, the supply chain performance attributes cover more than strictly
financial performance. Reliability and responsiveness are "customer-facing"
qualities ofthe chain and would be appropriate to measure and, if necessary,
improve if the overall strategy focused on customer loyalty. Flexibility
measures the supply chain's ability to meet unexpected increases in demand or
to avoid negative consequences of a decline in demand. Flexibility metrics face
both inward to the chain and out to the customer. Supply chain cost and asset
management metrics bring the overall assessment down to earth with measures
of financial effectiveness and profitability. These metrics are useful if the
strategy focuses on financial returns.
The selection of metrics depends, as noted, upon the supply chain strategy; there
is no requirement that all Level 1 metrics have to be applied simultaneously. In
fact the opposite is more likely to be true. Since the metrics are intended to
apply across boundaries, any initiative will require thorough explanation at the
very least to all those managers affected in the different functional areas and
companies. Improving supply chain responsiveness, for example, might involve
multiple suppliers, altered production processes, even product redesign to
achieve the ability to put more product into customers' hands on short notice or
to get the product there faster. To achieve greater overall velocity might require
that one link in the chain actually underperform in the interest of boosting
performance elsewhere. Shipping might have to rely on more expensive
transportation, for example. These tradeoffs have to be carefully negotiated with
those involved, and rewards may have to be shared in such a way that the

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interest of each stakeholder is brought into alignment with that of the overall
enterprise. Strong leadership from above is paramount. A pilot project is helpful
if it starts at the most manageable level and has a good chance of quick success.
Applying one metric across two or three supply chain partners is not too modest
a project. Remember that underlying the Level 1 metrics are further levels of
metrics to provide guidance that is more specific and more complex.
The specific definitions of the Levell metrics follow, along with formulas to
calculate them, when appropriate.

Supply chain
reliability

The only Level 1 measure of supply chain reliability is perfect order


fulfillment. It is defined as the percentage of orders meeting delivery
performance with complete and accurate documentation and no delivery
damage.
Components of a perfect order include all items and quantities, so any late
items or any items delivered in the wrong amount would violate the
requirements of a perfect order. The definition of "on time" has to come
from the customer. Documentation includes all packing slips, bills oflading,
invoices, etc.
A perfect order must satisfy all of the following conditions:

A product is considered perfect if the product ordered is the product


provided.

A quantity is considered perfect if the product ordered is provided in the


ordered quantity.

A delivery is considered perfect if the location and delivery time ordered


are met upon receipt.

A customer is considered perfect if the product is delivered to the


specified entity.

Documentation supporting the order is considered perfect if it is all


accurate, complete, and on time.

The product condition is considered perfect if the product is delivered


and faultlessly installed (as applicable) according to specifications with
no damage, is customer-ready, and is accepted by the customer.

The calculation for perfect order fulfillment is as follows:


Perfect Order Fulfillment= Total Perfect Orders I Total Number of Orders

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Supply chain
responsiveness

The order fulfillment cycle time is the sole Level 1 measure of supply chain
responsiveness. Average actual cycle time is the average speed at which the
supply chain delivers products to customers. Cycle time for individual orders
may vary.
For each individual order, this cycle time starts with the order receipt and ends
with customer acceptance of the order. The order fulfillment cycle time consists
of a gross component and a net component and is calculated as follows:

Order Fulfillment Cycle Time

=Order Fulfillment Process Time + Order Fulfillment Dwell Time

Order fulfillment process time approximates order fulfillment lead time (the
minimum amount of time to fulfill a customer order in the absence of
inventory). Dwell time is the amount of time an order spends waiting to move
from one stage of processing to another stage.
The formula for calculating average actual cycle time for a group of orders is
the following:
Average Actual Cycle Time =
Sum of Actual Cycle Times for All Orders Delivered I Total Number of Orders Delivered

Supply chain
flexibility

Flexibility in the supply chain is its ability to respond to market changes and
remain competitive. Although the attribute is described as "flexibility," it is
measured in two different ways on the upside; one metric is called
"adaptability" and one is called "flexibility."
Upside supply chain flexibility is defined as the number of days required to
achieve an unplanned sustainable 20 percent increase in quantities delivered.
The flexibility metric, in other words, measures the speed with which an
organization can increase its production by 20 percent and maintain that
pace. It is an "upside" measure because the market, the demand, has moved
upward. If the firm is unable to meet the new requirement within an
acceptable number of days, of course, stockouts may result followed by loss
of clients.
Upside supply chain flexibility refers to the least amount of time required to
achieve the unplanned sustainable increase when considering source, make,
and deliver components. It should be noted that the most inflexible firm in
the supply chain might limit the flexibility of the entire chain.

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The other metric for measuring upside flexibility of the chain is called
"adaptability." Instead of referring to time required to achieve a given
increase in production, it refers to the maximum amount of increased
production the organization could achieve and sustain in a fixed amount of
time. Upside supply chain adaptability is defined as the amount of
increased production an organization can achieve and sustain in 30 days'
time. In other words, if unexpected orders come in with the requirement that
they be filled within 30 days, what total amount of new product can the
organization produce in that time?
The calculation of upside supply chain adaptability determines the largest
sustainable quantity increase that can be achieved when considering source,
make, and deliver components.
Supply chain flexibility is also measurable on the downside. It refers to the
ability to handle a reduction in orders rather than an increase. Downside

supply chain adaptability is defined as the reduction in quantities ordered


sustainable at 30 days prior to delivery with no inventory or cost penalties.
The calculation of downside supply chain adaptability determines the largest
sustainable quantity decrease that can be achieved when considering source,
make, and deliver components.

Supply chain
costs

The two metrics at Level 1 for measuring the costs of operating the supply
chain-all direct and indirect expenses from end to end of the chain-are
supply chain management cost and cost of goods sold. Taken together, they
account for the costs of all SCOR processes; that is, they cover the costs to
plan, make, source, deliver, and return.

Supply chain management cost (SCMC) is defined as all direct and indirect
expenses associated with operating SCOR business processes across the
supply chain.
The calculation of supply chain management cost involves finding the sum
of the cost to strategize and plan, the cost to source, the cost to deliver, and
the cost to return.
Exhibit 1-24 illustrates the scope of SCMC in SCOR Levels 1 through 4.
Note that costs to make are shaded in gray to indicate that they are not
included in SCMC.

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to get paid), or low levels of payables (the firm is not benefiting from keeping
money invested as long as possible before making payments). If unnecessarily
high inventmy levels are the problem, the firm can reduce the cycle time by
improved forecasting and JIT initiatives to reduce inventory (consistent with
avoiding stockouts).
Return on supply chain fixed assets measures the return an organization
receives on its invested capital (e.g., plant and equipment) in supply chain fixed
assets. This includes the fixed assets used in plan, source, make, deliver, and
return. It is calculated as follows:
Return on Supply Chain Fixed Assets =
(Supply Chain Revenue- COGS- Supply Chain Management Costs) I Supply Chain Fixed Assets

For example, if supply chain revenue is US$1,000,000, cost of goods sold is


US$700,000, supply chain management costs are US$150,000, and supply chain
fixed assets cost US$600,000, then the return on fixed assets is 25 percent.
25% = (US$1,000,000- US$700,000- US$150 ,000) I US$600,000

SCOR Model 9.0


and risk
management

SCOR 9.0 also has applicability to risk management and the potential to
improve supply chain risk management (SCRM). Earlier discussions of risk
management referenced the results of the global multi-industry risk
management project approved by the SCC. The project reports that using SCOR
as a risk management foundation can improve supply chain risk management
through

Faster implementation

More comprehensive identification of potential risks

Better application of SCRM best practices

Better SCRM coordination with customers, suppliers, and stakeholders .

The alignment of risk management to four of the five SCOR processes and
select performance attributes are shown in Exhibit 1-26 on the next page. It
should be noted that some attributes will require ongoing definition. But many
organizations should be able to make initial inroads with these enabling
measurement categories.
Supply chain risk management has become an increasingly more critical aspect of
global supply chain strategy. These are all reasonable initial metrics. And while it
takes some time to build a critical mass of available benchmark data to reasonably
map an organization to other similar organizations, the effort is worthwhile.

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Exhibit 1-26: SCOR 9.0 and Risk Management


SCOR Process
Plan

Select Performance Attributes


Supply chain agility
Industry benchmark comparison (percentage)
Options or hedge rating (percentage)

Manage supply chain plan riskdefined as the process of identifying,


coordinating, and managing supply
chain risks by aligning with the overall
business risk management program.
This enabler includes identifying the
potential risks, assessing the
probability and potential impact of
risks, and planning risk mitigation
strategies.

Source

Supply chain reliability


Supplier mitigation plans implemented (percent)
Value-at-risk (VAR) of product/customer
performance
Age of supplier risk data (months)

Manage supply chain source riskincludes identifying and assessing


source risks that could impact the
organization 's or supplier's ability to
deliver materials in a timely manner, at
reasonable cost, and with acceptable
quality.

Supply chain costs


Mitigation cost overall or event ($)

Supply chain responsiveness


External event response (average days)
Supply chain agility
Internal event response time (average days)
Supply chain costs
Mitigation cost overall or event($)

Make
Manage supply chain make risk-the
process of managing risks related to
producing products on time at a
reasonable cost with good quality as
well as planning and implementing
responses to make risks .

Supply chain reliability


Supplier mitigation plans implemented (percent)
Value-at-risk (make)
Age of supplier or customer risk data (months)
Supply chain responsiveness
External event response (average days)

Supply chain agility


Industry benchmark comparison (percentage)
Internal event response time (average days)
Supply chain costs
Mitigation cost overall or event ($)

Deliver
Manage supply chain deliver risk-the
process of managing risks that could
impact the company's ability to deliver
product on time at a reasonable cost
and quality.

Supply chain reliability


Value-at-risk (deliver)
Age of product/customer risk data (months)
Supply chain responsiveness
External event response (~verage days)
Supply chain agility
Industry benchmark comparison (percentage)
Internal event response (average days)

Supply chain costs


Mitigation cost overall or event ($)

Source: Supply Chain Risk Management Team, Supply-Chain Council, Inc., 2009

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GreenSCOR

SCOR performance attributes also have relevance for environmental concerns.


The research sponsored by the Office of the Deputy Under Secretary of
Defense (Installations and Environment) that was cited in the earlier discussion
of SCOR established the following parallel environmental definitions.

Reliability
The ability to deliver the correct product. Reduces waste from product
discards and reduces air emissions and fuel use from extra transportation
for returned products. Proper documentation enables all players in the
supply chain to keep better track of hazardous materials or toxins that are
embedded in certain products, thus allowing them to arrange for proper
storage, handling, and disposal.

Responsiveness
The environmental impacts that affect the speed of material movement,
including regulatory or pollution control steps within a process.

Flexibility
The degree to which a firm can meet the environmental demands of its
customers. This pertains to the products, their production, transportation
and recyclability, etc.

Costs
The costs of environmental compliance and cleanup as well as energy
costs.

Asset management
Managing assets in a manner that reduces environmental impacts and
reduces internal costs.

+Managing the Supply Chain for Financial Performance


The supply chain constitutes one long cost center; consequently, the initial
efforts in supply chain management focused primarily on cutting some of those
costs. It was all about removal: lean production removed waste, Just-in-Time
(JIT) removed time and unnecessary motion, six sigma removed defects. More
astute warehousing and transportation decisions lowered costs of logistics (at
least that was the intention).
You may also hear the term "spend management." Relative to financial
performance, spend management is managing the outflow of funds in order to
buy goods and services. The term is intended to encompass such processes as
outsourcing, procurement, e-procurement, and supply chain management.

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If supply chain management can reduce the amount spent without reducing
customer service or revenue, then it certainly contributes to the company's
financial performance. Saving money hasn't gone out of fashion, and the
enterprise realizes a gain when costs go down just as surely as when revenues
go up (assuming in both cases that all else remains the same). Profit is simply
the difference between money earned and money spent.
That view of supply chain management is being replaced by a more positive,
and more complex, approach to supply chain management's contribution to the
bottom line. In this section we'lllook at the financial impacts of supply chain
management decisions.

Financial
statements

Two financial statements that help managers and investors track the financial
results of supply chain decisions are the balance sheet and the income statement.
These statements have two different, but complementary, functions. The APICS
Dictionary, 12th edition, defines the two financial statements as follows:
Balance sheet: a fmancial statement showing the resources owned, the
debts owed, and the owner's share of a company at a given point in time
Income statement: a financial statement showing the net income over a
given period of time

Balance sheet

The balance sheet acquires its name from the fact that it has two major sections
that have to be in balance-assets on the one hand and liabilities and equity on the
other. To take a simple example, say a company raises US$500,000 by issuing
stock and US$500,000 by borrowing from a bank or issuing bonds to purchase
US$1 million of equipment. Its balance sheet would show US$1 million in assets
(the equipment) and US$1 million in liabilities and shareholders' equity. Exhibit
1-27 on the next page displays a sample balance sheet for a publicly traded
company that shows how this works on a larger scale.
The balance sheet in the exhibit contains many more items than hard assets,
such as equipment and real estate, for example, receivables-money the
company has not been paid by customers-as well as inventory that has not yet
been sold and prepaid insurance. Inventory valuation reflects the value of the
inventory at either its cost or its market value. Because inventory value can
change with time, some recognition is taken ofthe age distribution of inventory
(APICS Dictionary, 12th edition). The liabilities and equities side shows similar
items, such as accounts payable and accrued expenses-debts that have not yet
been paid by the company.

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Exhibit 1-27: Sample Balance Sheet


XYZ Company Balance Sheet
December 31, Y2

December 31, Y1

US$24,628

US$36,125

429,949

385,273

Other receivables

18,941

15,210

Note receivable-related party

80,532

ASSETS
Current assets:
Cash and short-term investments
Trade receivables, net of US$30K allowance

Inventory

252,567

215,619

Prepaid insurance

7,500
814,117

7,500
659,727

Property and equipment

209,330

209,300

Less accumulated depreciation

(75,332)

133,998

(63,402)
145,898

US$948,115

US$805,625

US$175,321

US$165,200

2,500

1,200

Total current assets


Fixed assets:

Net fixed assets


TOTAL ASSETS
LIABILITIES AND EQUITY .
Current liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
Line of credit

Total current liabilities

36,000

36,000

145,000

111,993

358,821

314,393

Long-term debt

117,343

120,000

Total current and long-term liabilities

476,164

434,393

100,000

100,000

Shareholders' equity:
Common stock, US$1 par value
Additional paid-in capital
Retained earnings

Total shareholders' equity


TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY

50,000

50,000

321 ,951

221,232

471,951

371,232

US$948,115

US$805,625

Note: Y1 and Y2 dividends per share US$1 paid US$.25 per quarter; 100,000 shares of common stock
outstanding.

The balances in this balance sheet are US$948,115 for both assets and liabilities
and shareholders' equity on December 31 in Year 2 and US$805,625 in Year 1.
Balance sheets generally allow comparisons such as these to highlight trends.
Managers and potential investors will study the numbers in the two columns to
assess the changes in long-term and short-term liabilities , shareholders' equity,
and other measures. In the exhibit, for example, XYZ has considerably more
shareholders' equity in year 2 than in year 1 (US$471 ,951, up from US$371 ,232) .

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It has less long-term debt- but considerably more in current liabilities. The

relationship between the amount of money raised by equity in comparison to the


amount raised by debt is a major concern of the audiences for balance sheets.
(The total for shareholders' equity includes retained earnings and paid-in capital
as well as the par value of the common stock, a nominal amount of US$1. The
additional paid-in capital represents shareholder investment above the par value of
the stock. Retained earnings are earnings not paid out as dividends but retained by
the company for other uses.)

Income statement

What about the income statement? Sometimes called a profit-and-loss


statement, this statement shows the relationship of earnings to expenses over a
given period of time. Exhibit 1-28 provides an example.
While the balance sheet is static-often called a "snapshot" of the company's
financial position-the income statement is dynamic. It shows managers,
investors, and creditors whether the company has made or lost money during
some period of time, such as a quarter or a year.
Exhibit 1-28: Sample Income Statement
XYC Company Income Statement
YTD Actual
December31 , Y2

December 31 , Y1

INCOME
SALES, NET

US$1 ,986,456

US$1 ,822 ,326

1,187,652

1,020 ,503

798,804

801,823

472 ,360

471 ,375

84 ,372

556,732

75,323
546,698

242,072

255,125

(16,453)

(16,523)

Less:
Cost of goods sold

GROSS PROFIT
Operating expenses:
Selling , general, and
admin istrative expenses
Depreciation and amortization

Total operating expenses


Operating income (loss)
Other income (expense):
Interest expense
Other income (expense)

(2 ,600)

(1 ,900)

Income taxes

(22,300)

(23,646)

Total other income (expense)

(41,353)

(42,069)

US$200,719

US$213,056

NET INCOME (LOSS)

(0

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As the exhibit makes clear, "making money" is a relative term. An income


statement measures profitability in more than one way. Gross profit is determined
by subtracting cost of goods sold from net sales. Operating income (or operating
profit) is determined by subtracting several other expenses from gross profit. These
include depreciation and am01tization and general and administrative expenses as
well as selling expenses. General and administrative expenses reflect "the costs of
general managers, computer systems, research and development, and others"
(APJCS Dictionary, 12th edition). The bottom line on the income statement is net

income, which is even less than gross profit or operating income. The net income
reflects the payment of interest and taxes and the effects of other expenses or
mcome.

Tax savings
and the
supply chain

One relatively new aspect of supply chain management is tax planning to reduce the
global tax liability of the extended enterprise. Paying less in taxes around the world
translates into increased eamings per share. (As we just saw, taxes are subtracted
from revenues when calculating net income-the bottom line on the income
statement.) By aligning tax planning with supply chain efficiency initiatives
companies can, if they're in the right circumstances, realize a double bonus of
increased operating efficiency and significant tax savings. Some of these savings
may contribute to cash flow in the short term, thus providing an immediate benefit
from investments in the process. This strategy applies for the most part to large,
multinational organizations that are in the midst of modifying their supply chains,
giving them the oppottunity to locate assets and operations in low-tax countries.

Procurement
and taxes

When rethinking procurement strategy, multinational corporations may decide


to set up a central, global procurement and sourcing center. In this way the
supply chain benefits from various efficiencies created by consolidation of staff
and equipment. If, in addition, the company locates the global facility in a lowtax region, the tax savings will magnify its savings from efficiencies of scale.
This works because tax authorities generally levy taxes on separate streams of
corporate income, depending upon where they are earned. The global
procurement center thus becomes subject to the tax policies of its country of
residence. Central procurement facilities can also, if they plan carefully, reduce
other costs in the supply chain, such as tariffs and value-added taxes levied at
considerably different rates in different ports around the globe.

Taxes and
logistics
networks

Organizations can also realize tax savings by combining tax planning with
logistics reengineering projects. Some large companies review their networks
every five years or so to see if they can find ways to improve product flows for
efficiency's sake. While they're cutting lead times, reducing manufacturing
costs, and shaving transportation outlays, they can also reduce their global tax

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liability by closing facilities in high-tax jurisdictions and moving them to


countries with lower tax rates.

Taxes and
information
technology

A particularly intriguing tax-saving strategy is the purchase of supply chain


software to improve planning and responsiveness. This could be an enterprise
resources planning system or a system with more limited application. But in any
case the company purchasing the software can have it designed so it
automatically determines the right tax payment for the company, thus freeing up
the people who would otherwise have done the tax work. At the same, the
software is earning a tax break for itself. Such systems can also be useful in
compliance with the Sarbanes-Oxley Act and can locate all justifiable tax
credits and deductions.

+Managing and Leading People in the Supply Chain


Managing a supply chain effectively requires sophisticated coordination of
human resources throughout the nucleus firm and other firms in the chain. In a
multiple-fif!Il supply chain with true collaboration, this is clearly more
challenging than in a single firm, although generations of organizational
development specialists can testify that the perfect organizational chart remains
elusive. Organizational and human resources challenges were addressed in
Section B at the level of strategy. Managing well is largely a matter of
implementing the strategy, which requires skillful management plus strong
leadership. What follows here recaps themes from the discussion of strategy and
elsewhere regarding organizations and roles necessary to manage a supply
chain. We'll also briefly introduce the concept of leadership as a set of attributes
distinct from those required in day-to-day management.

Organizations

As we saw in the discussion of supply chain evolution, organizational design can


either support or undermine the management of the supply chain. If all the
functional areas in the nucleus organization (or in a vertically integrated
manufacturing company) are trapped within their silos, there can be no
collaborative management of the flow of goods and information that constitute the
supply chain. So the essential requirement for successful supply chain management
is process-oriented organizations. Within that orientation it is possible to develop
visibility across the supply chain and develop a team approach to synchronizing the
activities required to source, make, deliver, and return the supply chain's products.
Clearly, executive management must be committed to the process orientation and
cross-functional teamwork across the supply chain's organizations.

Roles

One of the challenges ofthe transition from functional organization to pursuit


of business process excellence is the development of new roles that relate to

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processes rather than specific functional activities. As we saw in Section A,


there isn ' t universal agreement on how to include and exclude business
functions from the supply chain. If you take a more traditional view, for
example, you might say that a company develops a product and then designs a
supply chain to purchase supplies, manufacture the product from those
materials and components, and deliver the finished product to customers. From
that functional perspective, supply chain tasks are performed in isolation.
Procurement selects vendors, transportation finds a way to get materials from
the vendor to the plant, warehousing handles storage needs, and so on, without
any collaboration. Once a firm decides that the process from extraction of raw
material to sale of finished product is a set of linked activities, teamwork,
technology, and process optimization begin to look like necessities.
You'll see in the remainder of this and subsequent modules an emphasis on
collaboration among what once were discrete functional roles. Transportation and
warehousing, for example, can be optimized in software that plots the various
possible routes taken by different modes of transportation and matches that with
warehousing considerations, such as the number and location of warehouses. Given
the large number of options in a global marketplace, technology becomes a
necessary tool in these considerations. Moreover, the end-to-end process pulls in
people whose roles might once have seemed irrelevant to such logistics issues. The
design of a product, it has become apparent, is too important to be left to design
engineers. The entire supply chain has a stake in product design (which is covered
in Module 2). Manufacturing can provide important contributions to design,
because they know what is going to work well or badly when the blueprint gets
sent to the plant for production. Logistics and design can work together to produce
a product that is easier to store and ship. For example, a logistically intelligent
design team is responsible for all those desks that can be collapsed into
components and shipped to distribution centers in convenient boxes, which can
then be stored, shelved, and sold to retail customers much more easily than
finished desks. Purchasing, too, contributes to design with its know ledge of sources
of materials that provide the durability, cost effectiveness, or other attribute that
will best fit with the strategic considerations. Marketing, of course, weighs in with
its knowledge of what the end user is looking for in the way of features.
Management of all this cross-functional activity can be handled by people in
organizations with specific supply chain responsibilities-roles that have been
added as supply chains evolved. From a leadership and organizational
perspective, supply chain resources can either be represented by an executivelevel supply chain leader and organization or they can be located within
operations, marketing and sales, or finance.

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Positions directly related to supply chain management require professionals


with the following attributes:

An ability to view the supply chain as a series of linked processes rather


than a series of isolated activities joined by arm's length transactions

The skill and experience necessary to manage critical relationships

An understanding of the business model

The ability to make decisions based on statistical analysis and facts

Advanced cost management ability

An understanding of electronic business systems

Outside of areas and managers specifically designated for the supply chain,
other areas need to know about supply chain strategies and understand their
roles in furthering the success of those strategies. Here is a list of some areas
that contribute to the supply chain without (arguably) belonging to it:

Engineering contributes by evaluating technical capabilities during supplier


site visits and by interacting with supply managers during product
development.

Marketing develops accurate and timely demand requirements and explains


end-customer requirements with supply chain planning groups.

Finance validates cost savings from supply chain activities and identifies
the impact of supply chain initiatives on corporate performance indicators
such as return on investment (ROI). Finance also assesses the impact of
inventory improvements on cash flow and working capital requirements.

Accounting provides accurate data to support internal and external cost


analysis.

Information technology supports the development of supply chain


information systems, including performance measurement systems.

Human resources recruits people to staff supply chain positions and


consequently needs to be fully informed about the requirements of processoriented positions. Human resources also provides training and education
programs related to supply chain knowledge and skill areas.

Legal performs timely and effective reviews of supply chain contracts and
assesses the risks and impacts of supply chain strategies.

Leadership and The literature of organizational development includes a great deal of theorizing
management
about the differences between leadership and management; current training
programs for managers often include a leadership component. While it is easy to
generate controversy about subjects as complex as management and leadership,
few would dispute the need in supply chain activities for both great managers
and inspiring leaders.

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Managers perform the roles on the organizational chmi: They develop objectives in
line with strategies and run their departments by hiring the right people for the
jobs, communicating responsibilities clearly, solving problems, coaching their
people in how to handle difficult situations, and promoting the needs of their
people to management up the corporate ladder. In a supply chain situation,
managers must all know how to cross functional boundaries and interact with other
managers and staff outside their departments. Managing in the supply chain takes
teamwork skills that may not have been emphasized, or even recognized, in
traditional, functionally organized firms.
Leadership, whether it is inborn or teachable, exists outside the organizational chart
and is not always present in a manager, even a good one. There are employees and
managers with leadership abilities on the shop floor and in executive suites. You
find out who they are in moments of crisis. They are the ones who suddenly know
what needs to be done and who naturally attract followers to solve the problem.
Leaders may be terrible managers-but they are likely to have the gift of assigning
management to someone else and inspiring great accomplishments from that
person. It would be an understatement to say that supply chains require leadership,
both in moments of stress and for the long term. Supply chains are dynamic, and
the longer they get, the riskier they are. Companies with great supply chains will
have great leaders at or near the top. These leaders will have a vision that drives
them to mold their organization and its partners into an effective unit to bring great
products to the end customers in uniquely appropriate, efficient ways. And they
will inspire effective management and innovative leadership all along the chain.

+Synchronization and Key Success Factors


Definition

An earlier section of this module explored the evolution of supply chains from a
state of multiple dysfunction toward total integration. From a slightly different
perspective, supply chains can be seen as evolving toward a state of complete
synchronization. While integration implies fully formed relationships along the
chain, synchronization refers to the timing of supply chain events. The root
meaning of the word "synchronization" is "contemporary"-existing at the same
time. In a fully synchronized supply chain, one event triggers another
instantaneously. Tom Friedman, in his book The World Is Flat, provides an
example of synchronous movement along the Wal-Mart supply chain.
A consumer will lift [a product] off the shelf, and the cashier will scan it
in, and the moment that happens, a signal will be generated. That signal
will go out across the Wal-Mart network to the supplier of the productwhether that supplier's factory is in coastal China or coastal Maine. That
signal will pop up on the supplier's computer screen and prompt him to
make another of that item and ship it via the Wal-Mart supply chain, and
the whole cycle will start anew.

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The APICS Dictionary, 12th edition, defines synchronized production, a part


of supply chain synchronization, as "a manufacturing management
philosophy that includes a consistent set of principles, procedures, and
techniques where every action is evaluated in terms of the global goal of the
system." The definition also refers to specific manufacturing approaches
such as kanban and JIT, which are covered later in this module. Each of
these approaches aims to speed up the manufacturing process, thus moving
the supply chain toward a state of synchronized responsiveness.

Key success
factors

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The key success factors in the synchronized supply chain resemble closely the
success factors identified earlier for the integrated enterprise; they can be
summarized as follows:

Right organization
The synchronized supply chain is process-oriented, with integrated
partnerships among buyers and suppliers and each partner focused on its
core competencies.

Right processes
Manufacturing is streamlined through approaches such as lean and JIT,
and vendors cooperate to create simultaneous production.

Right people
Through hiring, training, and restructuring, partners along the supply
chain create a workforce and management with the skills and
understanding to focus on supply chain goals and processes.

Right technology
The synchronized supply chain takes full advantage of the Internet and
other technologies necessary to make supply chain processes run rapidly
and reliably. According to David F. Ross, synchronization of the
electronic supply chain "is about transmitting e-information as fast as
possible through the supply channel and interlinking all network nodes
to achieve a seamless supply chain response to the customer"
(Introduction to e-Supply Chain Management, 2003)

Right measures
The synchronized supply chain will engage in continuous process
improvement and have in place appropriate measures to identify progress
toward goals related to the right organization, the right processes, the
right people, the right technology, and the right measures.

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+Security and Compliance Issues


Effective supply chain management encompasses a wide array of security and
compliance activities, especially in the movement of materials and reporting of
transactions. Security and compliance issues often have implications for supply
chain cost management, timing, or information systems that require
management's involvement. Failure to comply with security and other regulations
and requirements can result in problems ranging from costs and delays to
complete shutdown of business activity followed by civil or criminal penalties.
The management challenge is to meet requirements imposed by countries and
trading blocs as well as those mandated by revenue, environmental, and security
organizations and to do so with the least possible financial impact. With the
increased focus on security since the September 11, 2001, terrorist attacks in the
United States, supply chain risk management has increased in importance and has
become a major focus for supply chain managers.

Security
issues

Keeping shipments secure from loss, damage, theft, and vandalism has always been
a concern for businesses, whether strictly domestic or in the export-import area. The
growing threat of terrorism has added a new sense of urgency to these long-standing
security worries.
Key security issues include the following:

Ensuring the physical security of modes of transportation and storage

Meeting increased identification requirements and establishing systems to deny


access of unauthorized people to supply chain materials

C-TPAT
(Customs-Trade
Partnership
Against
Terrorism)

Complying with global antiterrorism initiatives, including the United States' CTPAT (Customs-Trade Partnership Against Terrorism) initiative

Keeping supply chain information systems secure from denial of service attacks

C-TPAT is a joint government-business endeavor with the purpose of increasing


the security of supply chains and of U.S. borders. Initiated by U.S. Customs, CTPAT is based upon the idea that achieving the highest levels of security requires
cooperation between the U.S. government and supply chain participants such as
importers, carriers, brokers, warehouse operators, and manufacturers.
Participation by businesses is voluntary. Acceptance is based on submission of
an online application and a signed agreement to take the following actions:

Assess the firm's own supply chain security in accordance with C-TPAT
guidelines that encompass procedural security, physical security, personnel
security, education and training, access controls, manifest procedures, and

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conveyance security. (Guidelines are available on the U.S. Customs and


Border Protection Web site, www.customs.gov.)

Submit a supply chain security profile questionnaire to U.S. Customs.

Develop and implement a program to enhance supply chain security in accord


with C-TPAT guidelines.

Communicate the C-TP AT guidelines to partners in the supply chain and work
toward including the guidelines in relationships with those companies.

In return for instituting C-TP AT security guidelines, participating businesses

receive the following benefits (after evaluation of the application):

Fewer inspections, for reduced border time

An assigned account manager

Access to the C-TP AT membership list (This provides members with access to
C-TPAT-certified providers that may be appropriate to their supply chains.)

Eligibility for account-based processes such as bimonthly or monthly payments

An emphasis on self-policing rather than customs verifications

C-TPAT began offering partnership admission to importers and carriers with intent
to expand enrollment to all supply chain participants. Business partners cooperate
with customs in developing security guidelines, with the explicit intention of
keeping costs down and reflecting a realistic business perspective. C-TPAT
participants that don't comply with these guidelines may have their benefits
suspended or the participation canceled. Otherwise, C-TP AT creates no new
liabilities beyond existing trade laws and regulations.

Compliance
issues

Compliance issues include the following:

Tariffs and taxes (which are covered in Module 2 along with other exportimport issues)

Environmental issues regarding materials, packaging, and related matters

Financial reporting

Identification of transaction activities to governmental and reporting agencies

Establishing proper control steps and appropriate identification of compliance


measures and activities instituted to avoid civil and criminal penalties

Business organizations are subject to regulations developed and enforced or


monitored by governments and other regulatory agencies. Two important areas of
regulations are financial disclosure requirements and material content reporting. In
regard to financial reporting, the Sarbanes-Oxley Act, passed by the U.S. Congress
in 2002, is especially relevant to supply chains. Reporting of material content is
part of a larger movement toward sustainable trade practices that promote a clean,
safe, healthy environment. Documentation requirements developed by

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organizations such as the U.S. Food and Drug Administration (FDA), the U.K.
Medicines and Healthcare Products Regulatory Agency (MHRA), and other similar
regulating organizations also affect supply chains in the pharmaceutical area.

Sarbanes-Oxley
Act (SOX)

The Sarbanes-Oxley Act (SOX) was part of the U.S. government's response to
corporate financial scandals involving major companies. The focus of the act is on
corporate governance, and its aim is to protect investors by adding to the scope of
disclosures already required by U.S. securities laws. Segregation of duties to
prevent conflicts of interest ranks high among the act's concerns. For example, the
person (or unit) acting as buyer in a transaction should not also be the seller or any
associate of the seller who might profit from the transaction.
The U.S. Securities and Exchange Commission (SEC), established by the Securities
Exchange Act of 1934, is responsible for SOX and for corporate compliance with it.
CFOs and CEOs of publicly traded companies-the firms covered by the 1934
act-are very much aware of SOX and its impact on their firms.
Two provisions of the act, Sections 401 and 404, are especially relevant to supply
chain management. In brief, these two sections require, respectively, that quatierly
and annual reports must disclose ce1tain off-balance-sheet transactions (401) and
must also provide detailed descriptions of certain internal control systems (404).
While 401 has limited applicability to some supply chain contracts, 404 is broadly
relevant to many supply chain processes, including outsourcing arrangements. Firms
that move aggressively in the direction mandated by Section 404 of SOX have a
chance to improve the management of their supply chains and gain a competitive
advantage on their rivals.

Section 401 is an addition to the U.S. Securities Act of 1934, which applies to all
publicly traded companies. It requires disclosure of "material off-balance-sheet
transactions, arrangements, obligations (including contingent obligations), and
other relationships of the issuer [i.e., the company itself, an issuer of securities]
with other. .. entities or persons" if these arrangements may have a current or
future material effect on the fum's financial condition, operations, etc. This
especially affects service contracts, such as those typically written with ocean
carriers, and vendor-managed inventory (VMI) arrangements undertaken to hedge
risk and move assets off the balance sheet. (VMI involves a supplier's retaining
control, and sometimes ownership, of inventory at the customer's location rather
than selling it to the customer for subsequent resale. We'lllook more closely at
VMI arrangements in Module 2.)
Section 404 directs the SEC to prescribe rules requiring annual reports to include
an intemal control report that does two things: 1) states management's

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responsibility for establishing and maintaining controls and procedures for


financial reporting and 2) contains an assessment of the effectiveness of the
controls and procedures. If the supply chain is to be truly controlled to the level
required in SOX, then it must be a well-structured process that runs across
multiple functions and not merely a series of transactions pretending to be a
process. Control requires visibility across the process-from purchase orders for
components through deliveries to customers. Technology may be a necessary aid
to achieving end-to-end visibility, but it isn't by itself sufficient to constitute
SOX-level control. Mere tracking of inventory cannot substitute for efficiency and
effectiveness in all supply chain activities.
Outsourcing of processes and transactions comes under both Sections 401 and
404. Off-balance-sheet agreements with suppliers need to be reported (401) and
subjected to effective internal controls (404). SOX is more demanding in this
regard than current auditing standards. Service providers to the supply chain, such
as logistics providers, must be made to understand their responsibilities to
publicly traded clients that are subject to SOX requirements.
SOX requires disclosure of risks and strategies that will go into effect after
disruptive events to mitigate their effects. Such events might include hurricanes,
accidents, and threats or actual instances of terror.
Again, moving aggressively to bring the supply chain under internal control and
developing effective risk management strategies can not only comply with SOX
but also build a better, more competitive supply chain. Sarbanes-Oxley passed the
U.S. Congress at a time when massive business fraud had reduced investor and
consumer confidence in the marketplace. To the extent that it helps restore
confidence and inspires more effective internal controls, it does all businesses a
service. Other disclosure requirements, instituted in the European Union (EU), for
example, can also support a more efficient and credible competitive environment
for businesses and their supply chains.
What about penalties for violating SOX requirements? The SEC's division of
enforcement investigates possible violations of securities laws, recommends taking
violators to court when appropriate, and negotiates settlements on the SEC's
behalf. Besides generating lawsuits and negative publicity, the SEC also directs
national securities exchanges and associations to prohibit the listing of securities of
noncompliant companies. The act requires corporate CEOs and CFOs to certifY
quarterly and annual reports filed with the SEC. Corporate officers must attest to
the validity of those reports, and an officer who does not comply or who submits
an inaccurate ce1tification is subject to a fine of up to US$1 million and ten years
in prison, even if done mistakenly. If a wrong certification is submitted purposely,

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the fine can be up to US$5 million and 20 years in prison. While SEC authority is
limited to bringing civil suits against rule breakers, the commission also works
closely with various law enforcement agencies to develop and bring criminal cases
when warranted by corporate misconduct, such as fraud and insider trading.

Material content
reporting and
sustainable trade
practices

In addition to national laws regarding the handling of dangerous goods (also


called hazardous materials or "hazmat"), there is a movement to support more
thorough documentation and disclosure of potentially problematic material
content of goods exchanged in trade. (Dangerous goods regulations are covered
in Module 2 's section on global logistics.) Material content reporting is part of a
larger effort to encourage reuse, recycling, and recovery of industrial materials
and responsible handling of end-of-life products.
One example of this movement is the Global Reporting Initiative (GRl), an
independent institution composed of several hundred stakeholders that disseminates
globally applicable Sustainability Guidelines for voluntary use. The Initiative
includes a variety of organizations representing business, labor, accounting, human
rights, and environmental advocates, and it works in cooperation with the United
Nations (UN). In effect, the GRl is helping businesses develop reverse logistics
KPis to assess and improve their environmental performance-and is doing so in
advance of binding laws and regulations likely to be developed by governments.
Nokia provides one (among many possible) example of a company that has
developed its own reporting system by applying GRl guidelines. Nokia's Web site
(www.Europe.nokia.com) provides a summary of its extensive sustainability report,
which includes disclosure of energy consumption, carbon dioxide emissions, water
consumption, waste, and ozone-depleting substances.
The European Union is also contributing to the sustainability movement with
legislation relating to material content disclosure, reuse of materials, recycling,
and related issues. The EU Waste Electrical and Electronic Equipment (WEEE)
directive mandates that suppliers take back equipment at the end of its economic
life, and it also sets targets for recycling and recovery of material used in
electronics. The directive arises from concerns about specific materials used in
electronics products, such as mercury, cadmium, lead, chromium VI, and other
heavy metals and flame retardants. In 2002 the EU issued a Restriction of
Hazardous Substances (RoHs) directive for electrical and electronic equipment.
Independent of the GRI, the UN, or EU directives, the U.S . shoe manufacturer
Timberland has developed the following set of"EcoMetrics" to assess the
environmental impact of its products:

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Energy to produce

Global warming contribution

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Material efficiency (weight of product in relation to weight of material used


in making it

Additional attributes (for example, use of renewable energy in manufacturing


the product)

The company has also been developing a list of "ingredients" to include with
each product, as food manufacturers list ingredients on their packaging. Since
there are on average 55 pat1s per shoe, that task has proved difficult.

U.S. Food and


Drug
Administration

The U.S. Food and Drug Administration (FDA) has developed regulations
requiring more thorough documentation of the chain of custody or "pedigree" of
drugs. Supply chains are affected in the documentation and information that
must accompany pharmaceutical products as they move from company to
company, including distribution centers and carriers. Supporting legislation is
being phased in by separate states.

Other
environmental
concerns

Not only the products exchanged in trade but the packaging and shipping
materials involved are potentially problematic. Wooden pallets, for example,
have become controversial for a variety of reasons. China and the European
Union have both issued restrictions on incoming materials packed on pallets
made of soft woods that may contain harmful insects. Chemical treatments to
sterilize the wood have come under fire for themselves being hazardous. Aside
from harboring harmful pests, the pallets themselves can be a significant source
of waste if they are used only once and discarded (as many have been designed
to be used). The wood itself is still a resource, even in pallets that cannot be
repaired or reused and should be recycled.
Solutions to the problems with wooden pallets include the following, among
others:

Sterilizing the wood with heat or chemicals (if not themselves harmful)

Reusing undamaged pallets and repairing damaged pallets

Grinding up pallets that are beyond use or repair for recycling

Using pallets made of materials other than soft woods, including plastic and
corrugated cardboard

Using slip sheets (corrugated or plastic sheets) instead of pallets, a solution


adopted successfully by Home Depot, Xerox, and Apple Computer

While there are as yet no global standards governing electronics or other


products in regard to material content reporting, reduction of hazardous
materials components, or responsible end-of-life recycling and disposal, the
trend in that direction seems likely to continue growing.

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Reasons for
adopting
continuous
improvement

The reasons for taking a continuous improvement approach to supply chain


management can be boiled down to the following:

SCM is process-oriented.
Supply chain management is itself process-oriented. The basic units of the
supply chain are not products or services that emerge from the chain; they
are the processes that flow along the chain among functions and partners.

Supply chains are dynamic.


A supply chain (or supply network) constantly expands, contracts, and
incorporates new stakeholders and new products. A constantly changing
system requires continuous reengineering and process improvement.

Supply chains evolve.


Supply chains have evolved from functional isolation, to cross-functional
cooperation, to global networks linked by electronic communications and
enterprise software. As supply chains evolve across new frontiers of
organization, scope, and technological complexity, they are in constant need
of process improvement.

Continuous improvement can reduce the costs of poor quality.


Although continuous improvement programs-or total quality management
initiatives of any sort-require an investment of resources, they should be
presented to management as methods of reducing the costs of poor quality,
for a net gain on the investment. That is, quality may be expensive, but the
costs of poor quality are often greater. The APICS Dictionary, 12th edition,
defines the cost of poor quality as follows:
Costs associated with providing poor quality products or services [in]
four categories:
(1) Internal failure costs ... associated with defects found before the
customer receives the product or service;
(2) External failure costs ... associated with defects found after the
customer receives the product or service;
(3) Appraisal costs .. .incurred to determine the degree of
conformance to quality requirements; and
(4) Prevention costs .. .incurred to keep failure and appraisal costs
to a minimum.

+visibility and Analysis


There's a saying in the quality movement, "Facts are your friend." And indeed
they are. You need massive data to manage supply chains effectively, to select
processes for improvement, to map a process accurately, and to measure the
progress of your process improvement initiatives toward their goals.

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Without data, you don't know what customers value, so you can't design
processes with any assurance that you're targeting their needs. Without tracking
data, you can't tell if you're succeeding or failing. Data are crucial as a basis for
executive decisions at the highest level and also for refining and controlling
operations at the most minute level. Without accurate financial data, you can't
assess the contribution of process improvements toward improving the bottom
line. If you don't have data to assess the condition of the supply chain, you're
left to guess at what needs to be improved.
This section covers supply chain visibility and the analysis phase that begins an
improvement initiative. The two are closely related.

Visibility

Visibility means being able, figuratively , to see what's happening in the supply
chain. In traditional, functionally oriented fim1s, silo walls obstruct "horizontal"
visibility outside one 's own department. ("Vertical" visibility also tends to be
limited. Management may be able to see downward to activities at the tactical
level, but visibility upward may be limited to information framed as directives and
performance reviews.) The further supply chain partners can see through functional
walls and also upstream and downstream into the activities taking place in other
tiers of the chain, the better chance they all have of synchronizing their operations
to produce value for the customer.
For example, with global positioning and satellite communications, logistics
managers can track individual items as they are shipped across the world to
customers in foreign countries. In fact, anyone in the chain with the necessary
technology, including the customer, can be given access to this information. This
real-time visibility into customer shipments gives logistics managers the ability to
react to difficulties long before they could have just a few years ago. Of course the
same technology, combined with the Internet, gives carriers such as UPS and their
competitors the ability to let their customers track their own packages online.
Visibility, in this case, enhances customer service.
Sharing real demand data along the chain is another example of visibility. Whereas
the traditional "push" systems of distribution sent materials and goods out on a
predetermined schedule and relied on inventory to provide goods for new orders,
current "pull" systems can reduce inventory to very small amounts and wait for
orders to come before assembling a product. That process depends upon partners
upstream from the retailer having the ability to "see" customer orders. In a
networked supply chain, actual demand can become instantly and simultaneously
visible to everyone on the network. Such data sharing can bring other information
into view, such as schedules and capacity. Significant changes in schedules or

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resources can be communicated instantly across the chain to give all partners time
to revise their operations and remain synchronized with each other.
One obstacle to visibility along supply chains has been the unwillingness of
partners to share information. Consequently, implementing process improvement
requires building trust across the functions and partners who are party to the
process involved. A small-scale pilot project can be helpful in demonstrating the
value of change. Once pattners see that data sharing can work to their advantage,
they are more willing to provide that all-important visibility into their operations.
And, most appropriately in the present context, data used to measure supply chain
performance against key indicators can be made much more easily available to
continuous process improvement teams. Visibility is one key to successful
improvement initiatives.

Process
analysis

Continuous improvement is directed from the top down and implemented from
the bottom up. Selecting processes for improvement is a job for top
management. It's they who are accountable for the strategic direction of the
fitm, and so it is they who decide the priority order of process improvement.
But once that is done, a team should form that includes employees, especially
those who operate within the process itself. Implementation of quality initiatives
is a companywide process (or a supply-chain-long process) and should involve
employees at all levels. The team's first step is to describe the process in depth
and then analyze the process to find the root causes of inferior performancethe fundamental reasons it isn't contributing to achieving supply chain goals.
We'lllook at some of the standard techniques for defining a process and
analyzing it to uncover the cause of its malfunction.

Process mapping

The first order ofbusiness is to develop a thorough description of the process.


Several techniques exist for that, but perhaps process mapping is the most
widely and successfully applied.
The APICS Dictionary, 12th edition, defines a process map as follows:
A diagram of the flow of a production process or service process
through the production system. Standardized symbols are used to
designate processing, flow directions, branching decisions, input/output,
and other aspects of the process.
All types of processes can be mapped- manufacturing flow, information flow,
or the stages of a financial transaction. Mapping the process helps participants
in an improvement team identify every significant aspect of an inefficient or
ineffective process and then locate the problem areas. In addition to illustrating

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each step in a process, the map can include other useful information such as the
duration of each step, required resources, responsible positions, and financial
impact. Process maps can be produced with pencil and paper, but they can also
be put into various types of software, including Microsoft Visio, SigmaFlow,
iGrafx, or even PowerPoint, Excel, or Word.
Exhibit 1-29 shows a typical process map in the form of a flowchart, depicting
the order fulfillment process.
Exhibit 1-29: Process Map of the Order Fulfillment Process

Emer
order

Order
bl ck

real<!

l'<.v

shipm~m

No

Perform
goods

reate

master

data

\lC

Creal.:
invoice

One way to carry out process mapping is to schedule it as a brainstorming session


for the improvement team. Using Post-it Notes, each team member individually
lists every task he or she can identifY in the process, one per note. After 20
minutes or a half hour (or whatever time seems appropriate to the process), team
members stick the notes with the task listings on the chalkboard, one person at a
time, while others continue thinking and writing. When all tasks have been
posted, individuals or teams attempt to group the tasks by themes and put the
groups in the order of performance. Next the group selects names for the themes,
and a volunteer writes a final list of tasks, by theme, on a flip chart. At the end of
the session, the entire process should be mapped, with all essential tasks in order
and associated with the names of performers and the time each takes.

Identify the
pattern

After carefully and completely describing the process, a next step is to identifY the
pattern of variability. These data have to be gathered over a period of time, not in a
brainstorming session. Error tracking is especially pertinent to the six-sigma
approach. Methods include control charts and defect measurement.

Control chart
The control chart, according to the APICS Dictionary, 12th edition, provides "a
graphic comparison of process performance data with predetermined computed
limits." Such charts are useful because they provide a visual method for
tracking process variance. This activity is called statistical process control (or

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statistical quality control) and is defined in the APICS Dictionary, 12th edition,
as "the application of statistical techniques to monitor and adjust an operation."
The data in the control chart usually consist of samples from a regular sequence
in a production process. The chart allows the project team to see quickly when
variation from the targeted value spikes to an unacceptable level-a level that
customers would consider defective. Exhibit 1-30 illustrates a control chart with
a center line (CL) representing the mean value and upper and lower control
limits (UCL and LCL) establishing the boundaries of acceptable performance.
ln this chart all the opportunities fall within the acceptable range.
Exhibit 1-30: A Control Chart

' - - - - - - - - - - - - Thnc

The control chart might track process outcomes in one of several ways. A
straightforward type of control chart tracks numbers, such as size of a
component. In that type of chart, the control limits would establish the
maximum and minimum variance in terms of a measure such as millimeters.
The numbers in another chart might measure wait time at an ATM, in which
case there might be only an upper control limit since an absence of waiting
would not be considered a defect by the customer. Another type of chart might
record percentages, such as the percentage of times some event occurs in each
sample. This approach is especially appropriate if samples are not the same
size. Control charts are useful for managing a process as well as fixing it.

Defect measurement
Defect measurement is a straightforward method of accounting for the
number of defects that represent product or service failures. The emphasis is
on the customer's definition of a defect, so there must be in place a
measurement system that allows insight into customer responses. Visibility,
again, is crucial. You can't fix what you can't see.
Customer complaints are one method of gaining information. Focus groups
are another method, one that allows more control than merely tracking
customer complaints without having a chance to question the customer
directly. A focus group, led by a trained facilitator and observed by
representatives of the process improvement team, can establish more
reliable data about customer experiences than a collection of complaints.

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Finding root
causes

Once the process improvement team has identified the flaws in the process, they
need to look for the root causes of the problems. Convening a focus group is
one way of probing for causes. Root cause analysis helps uncover the original
cause that might lie underneath more-superficial complaints. A Pareto diagram
can help identify the causes that can be attacked most efficiently and effectively
with scarce resources.

Pareto diagram
The Pareto diagram is based on Pareto's law, "a concept developed by
Vilfredo Pareto, an Italian economist, that states that a small percentage of a
group accounts for the largest fraction of the impact, value, etc." (APICS
Dictionary, 12th edition). Closely associated with Pareto's law is the 80-20
rule, which "suggests that most effects come from relatively few causes;
that is, 80 percent of the effects (or sales or costs) come from 20 percent of
the possible causes (or items)" (APICS Dictionary, 12th edition). Pareto
diagrams can be used to isolate possible sources of customer complaints or
other problems and locate the 20 percent of the sources that are causing the
most trouble. (The percentages are, of course, variable.) You get the most
return on your investment if you can eliminate a large percentage of
problems by attacking a small number of causes.
Pareto diagrams can be applied to any measurable data, including currency
units, time, opinions, accidents, etc. The chart in Exhibit 1-31 illustrates the
general shape of a Pareto chart, with the larger bar representing the major
causes of a phenomenon. In this case, 80 percent of the complaints were
attributable to problems with finish as opposed to weight or shape. The
place to focus money and effort, therefore, would be in making
improvements to the finishing process.
Exhibit 1-31: Pareto Diagram

r-.,;

"

Occurrence

o;o

Pareto diagrams rank causesfrom


most significant to least significant.
They are a visual analysis tool.

80
'I
~

'J

15
Finish

Weight

IL
I

Shape

"\.

Etc.

Attribute

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Cause-and-effect diagram
A cause-and-effect diagram is a method of organizing factors (causes) that
affect a problem or process being investigated (effect). This type of diagram
may also be called an Ishikawa diagram, after the person who first
developed it, or a fishbone diagram, as the elements of the diagram
resemble the skeleton of a fish.
The goal of a cause-and-effect diagram is to identify all of the possible
causes of an effect and then select the most likely ones for further
investigation.
The graphic in Exhibit 1-32 illustrates a cause-and-effect diagram showing
commonly cited categories of causes (environment, people, materials,
measurement, methods, and equipment). For every cause, there are usually
several underlying subcategories (such as equipment failure, caused by lack
of maintenance). The development of a cause-and-effect diagram is a
repetitive process that requires going back and forth to identify causes and
effects. A cause-and-effect diagram links an effect with the possible causes
of the effect. The idea is to find the root cause of the effect in order to
correct and solve the problem.
Exhibit 1-32: Cause-and-Effect Diagram

Effect

Cause
Environment

Materials

People

Aud its

Problem
No P.O. Numbers
on Raw Material
Invoices

No maintenance
per formed

Measurement

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Root cause analysis


A root cause is the original problem that leads to an unacceptable rate of
defects. Eliminating a root cause can bring a process into conformance with
the six-sigma limit on defects, whereas attacking a secondary problem may do
little or nothing to eliminate the customer complaints.
For example, sometimes training to improve employee skills will be
suggested as a solution for a problem, when in fact employee skill or
understanding is not the real source of the difficulty. If a system is broken, no
amount of employee training will fix it. Let's say a financial service provider
is receiving a high rate of complaints from customers who can't understand
their account reports, and the firm responds by training sales assistants to give
better explanations of the rep011s when customers call in to complain. The
documents are the root cause of the problem, and the training is not the most
efficient way to invest to provide what customers need.
The Japanese have a method of approaching root cause analysis called "Why?
Why? Why? Why? Why?" because it is based on the theory that answering a
question about causation five times will lead you through the false causes to
the real one. Whether or not five is the magic number is less important than
the underlying message: Finding root causes may take considerable digging
through layers of superficial causes. One of the "Big Three" car companies, as
an example, conducted customer interviews to determine why they were
receiving complaints that the seats in their cars were too low. Since that
complaint was factually inaccurate, the researchers probed more deeply and
discovered that the problem could be resolved by setting the side window
ledges lower in the doors. The answer "low seats" was superficial. The root
cause of the complaint was really about the placement of the windows.
Whether the interviewers had to ask three times, five times, or 10 times isn't
as important as the fact that they had to keep asking.

Once the project team has gathered and analyzed data on the nature of the process
and the source of significant problems, they have a solid basis for designing
countermeasures to eliminate the problems or reduce their negative effects to an
acceptable level. A countermeasure to the problem of finish identified by the
Pareto diagram in Exhibit 1-31 might look like this: Increase quality of finish on
dinnerware by implementing a new glazing process with a target of a 20 percent
increase in the customer survey satisfaction index. (You would of course have to
have a particular finish process in mind.) But how does an enterprise arrive at a
goal like increasing customer satisfaction by 20 percent? One answer to that
question is benchmarking, a method for setting goals and measuring progress,
which is the subject of the next section.

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+Goals and Benchmarking


Benchmarking is a way of setting goals at specific levels by reference to an outside
performance standard, such as best practices or the perfmmance of another
department or enterprise. For example, a benchmark might be best-in-class cycle
time for any enterprise in an industry or a competitor with the lowest cycle time on
a particular process. The Supply-Chain Council (SCC), owners of the SCOR
process model, conducts benchmarking surveys that are available to its members,
allowing them to judge their own performance against that of other organizations
using the SCOR measures described earlier. Another method is to benchmark
against a checklist of world-class processes (rather than specific performance
measures). The Oliver Wight consultants, for example, compile the Oliver Wight
checklist of supply chain best practices and make it available to members.
There are three broad approaches to benchmarking: competitive benchmarking
(comparison with a leading competitor); best-in-class benchmarlGng
(comparison with the best in any industry); and process benchmarking, which
compares -the process itself to -an ideal-process rather than measuring the
outcome of the process in amount of time, number of errors, production
quantities, etc. Each approach has its merits.

Competitive
benchmarking

In competitive benchmarlGng, an enterprise compares its performance to that of a


competitor in its own industry. For example, manufacturing lead time might be a
key performance indicator for an enterprise. Benchmarking would begin with
determining average lead time and variability over a number of production cycles.
These numbers could be compared with the performance of a competitor, an
enterprise with similar challenges in the same industry. Perhaps that competitor has
a 25 percent shorter lead time and less variability but is still able to produce at the
same level of quality. The process improvement team can use this competitor's lead
time as the goal for improvement. It is quantifiable, measurable, and realistic, since
the competitor is already achieving it. Therefore, it makes an acceptable benchmark.
There's an obvious payoff to competitive benchmarking as a method of setting a
performance goal. Reaching the benchmark, or surpassing it, means the
enterprise has improved its competitive position. Ford Motor Company used
competitive benchmarking to make a truly remarkable breakthrough in
improving their accounts payable process. Their first restructming of accounts
payable, without a benchmarked goal, yielded a 20 percent reduction in
personnel. For a second pass at improving the process, Ford benchmarked its
perfmmance against Mazda and was able to cut personnel from 500 to 75.
Seeing a competitor exceeding performance in a key process lets an enterprise
know that change is possible. And yet, despite the dramatic example from the

({.!i

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automobile industry, restricting the search for benchmarks to a company's


direct competitors may be too limiting. Best-in-class benchmarking provides
another method of goal setting, with some advantages.

Best-in-class
benchmarking

With the best-in-class benchmarking strategy, a firm looks to the best anywhere to
develop a goal for improvement. Widening the search for a benchmark makes it
possible to find even more dramatic and inspiring possibilities. Accounts payable
doesn't differ radically from industry to industry; Ford might have been able to find
an even more efficient model for the process than Mazda's by looking outside the
car industry. Even in areas where at first the dissimilarities seem an overwhelming
barrier, a best-in-class approach may still help develop the most inspiring goals. A
major health care provider in Minnesota revamped the procedures in its endoscopy
clinic by bonowing from Toyota's lean production system. While receiving some
criticism for borrowing assembly-line methods to improve delivery of a service, in
fact the provider not only enabled doctors to reduce the backlog of patients waiting
for exams, it allowed the doctors to have at least as much time with each patient.
The improvements also saved substantial money. The decision to process patients
witli th_e_siriie effiCieiicy-Toyota achieves -in its manufacturing plants turned out to
be good for the doctors, the patients, and the clinic. The health care provider
benefited from getting outside its own industry- not only for a benchmark but for
innovative process improvement techniques.

Process
benchmarking

Another approach to improving a process is to benchmark it against a checklist of


world-class process descriptions. Rather than focusing on measurable aspects of
process performance such as duration of cycle time, a process checklist draws
attention to the features of the process, to its qualitative aspects. The Oliver Wight
group of business excellence consultants provides such a checklist for use in all
industries. The process descriptions reflect the consultants' experiences around the
world, and they include considerations such as the following:
Use of strategy to drive supply chain planning and execution

Optimization of capacity, inventory, and other supply chain elements


Use of monthly reviews for monitoring capability and flexibility

Presence of data-sharing processes, financial integration, and teams including


suppliers and customers

In sum, benchmarking your goals against the best in your industry or the best in
class provides an effective way to choose realistic yet inspiring goals. It's only
natural to have more faith in your ability to reach a goal if you know someone
else has been there before. Not long after Roger Bannister reset the benchmark
for running a mile at slightly less than four minutes, other runners not only
broke four minutes but ran past Bannister's own mark.

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It's worth noting that Bannister himself did not use another runner's performance
as his benchmark. He reached beyond any other cunent or historical mile runners
for a pioneering goal. Sometimes, even the best-in-class mark may be too limited a
goal for a firm to follow. Someone-or some enterprise- has to be first. But even
a pioneer like Bannister followed a strategy of continuous improvement to reach
his goal. He got there through years of training, continuously shaving small
amounts oftime offhis previous performances until he surpassed the speed that
some believed was physiologically impossible. He reached his goal, quite literally,
one step at a time.

Continuous Improvement Methods


Several well-tested approaches to process improvement evolved during the last
half of the 20th century. Most are related to the quality movement (TQM) to
one degree or another, emphasizing the reduction of defects or elimination of
waste in the use of time and materials. These approaches are compatible and
may have the most impact when combined under a continuous improvement
umbrella. Six sigma focuses on enhancing customer experience by reducing the
number of defects in a process until they approach statistical insignificance. The
other approaches can be integrated with a six-sigma attack on enor rates. Justin-Time focuses on reducing inventories to zero so that products always appear
when they are needed, not before. It blends well with lean supply chain
management, which emphasizes reduction of waste and redundancy.
In the remainder of this section, we'll outline the basic goals and methods used
by six sigma, JIT, and lean as outlined in Exhibit 1-33.
Exhibit 1-33: Three Approaches to Continuous Improvement
ontinuou
Jmpro ement

There are many approaches and


methods to purs ue the continuous
improvement go ais.

I
Just-in-Time
(JJT)
Key concepts:
Have inventory only when
necessary
Reduce setups, lot sizes, and
lead times
Reduce waste (materials, time,
labor, etc.)
Move from work order to
continuous flow environment
Vendor scheduling
Plant maintenance
Total quality management

ix igma

Key concepts:
No more than 3.4 defects per
million opportunities
Defects defined from customer
perspective
Keep process variability within
"six sigmas" of the target value
Train at all levels

Le

Key concepts:
TIT production
Quality designed into the
product'process
Empowered teams
Eliminate inventories
Banish waste and strive for
perfection
Safe, orderly workplace

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Six sigma

The APICS Dictionary, 12th edition, defines six sigma as follows:


A methodology that furnishes tools for the improvement of business
processes. The intent is to decrease process variation and improve
product quality.
Six sigma aims to achieve near-perfect products and services. The specific
objective in a six-sigma organization is to get as close as possible to "zero
defects," with an outer limit of 3.4 defects per million "opportunities." In sixsigma language, a defect is anything that annoys a customer, and an opportunity
is any chance to be annoying. If a company produces a million light bulbs, no
more than 3.4 should fail to meet customer expectations. If a bank sets up
A TMs, their customers should experience disappointment during no more than
3.4 times in a million opportunities-which may not be the same thing as one
million visits to an ATM. Customers may have more than one expectation; for
example, they may expect the machine to be online, the instructions to be easy
to understand, the wait for their turn to be short, and, of course, the operation to
succeed in delivering or depositing the correct amount. That would be four
opportunities for a defect per visit.
One potential challenge to using the six-sigma approach arises from the
difficulty of determining what constitutes a defect. Another challenge comes
from setting a meaningful limit on variability. For instance, there is probably a
range of wait times at the ATM that most customers will generally find
acceptable. Is it 30 seconds? A minute? Two minutes? The project team leader,
or the executive sponsoring the project, may be tempted to set the limits of
variability as wide as possible to achieve a six-sigma level of defects. Also, not
all opportunities are as significant as others. While some wait time is likely to
be acceptable to customers, failure to record a deposit correctly or deliver the
requested amount of change may very well be completely unacceptable. A
customer making a withdrawal will surely register a complaint if he or she
receives any amount less than the amount requested. Even receiving more than
requested might be considered a defect from the customer's perspective if it
leads to problems in reconciling the monthly statement. The bank, of course,
will consider either outcome completely unacceptable. (Defect, disappointment,
and customer expectations are open to definition by focus group or other
research methods.)
Exhibit 1-34 illustrates the aim of six sigma to reduce defects to near zero. If
you assume that one million opportunities for a defect, such as those identified
above for ATM visits, will result in the familiar bell curve with the target value
in the center, then about 99.9997 percent of those opportunities will fall within

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six sigmas (or standard deviations) from the target value. That will leave only
3.4 opportunities Uust over 0.0003 percent) that result in defects.
Exhibit 1-34: Six-Sigma Control
I
I
I

99.9997% of

1 ..1- - 1

___.,

'
I'
I

'
I

I
I
I
I
I

'
I
I

Six sigmas from


target

Elements of six
sigma

Target

Six sigmas from


target

When a process measurably fails to meet customer requirements by producing


more than 3.4 defects per million opportunities, six sigma offers a set of tools
for developing solutions under the guidance of a six-sigma-certified employee
or consultant.
Attaining six-sigma quality requires attention to three elements: the customer,
the process, and the employee.

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Customer
The definition of quality-that is, the acceptable rate of defects-is in the
mind of the customer. Customer expectations might include outstanding
performance, reliability, competitive price, on-time delivery, excellent
service, and so on. All these areas provide opportunities for defects that
may drive a customer to your competitor.

Process
When assessing a process, the company has to adopt the customer's
mindset-an "outside-in" view of the company's performance. The goal is
not only a low number of errors but also consistent performance. That is,
the performance should remain very close to that number of errors and not
show a great deal of variability in either direction. For instance, an airfreight carrier with on-time performance that stays right around an
acceptable level may create more customer satisfaction than a carrier that
has the same average on-time rate but is very enatic and unpredictable, with

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some very late arrivals counterbalanced by a number of early arrivals. This


may well produce enough disgruntled customers that a significant number
would shift business to the more-predictable carrier.

Employee
Full employee participation has been a principle of quality systems since the
early work of W. Edwards Deming. When it comes to customer satisfaction,
there are no irrelevant employees (or processes). Bank tellers, receptionists,
and file clerks (or data entry specialists) may occupy low rungs on the
corporate ladder, but their "defects" tend to be highly annoying and visible
to the customer. A company fully committed to the six-sigma approach will
offer training at all levels. Six-sigma initiatives typically are directed from
the top but implemented "from below," by employee teams.
Training in six-sigma tools and techniques takes place at different levels,
with the possibility of certification at the level of green belt, black belt, and
master black belt. People with any of the three "belts" have sufficient
knowledge of quality standards,-design and development procedures, and
statistical analysis that they can lead process design or process improvement
projects. Black belts and master black belts operate as full-time employees;
master black belts primarily engage in teaching. Green belts may be
consultants or employees with other responsibilities.

Six-sigma
process and tools

The six-sigma process for conducting a continuous improvement initiative takes


place in five phases, known by the initials of the phases as DMAIC: Define,
Measure, Analyze, Improve, Control.

Phase 1: Define the nature of the problem.

Phase 2: Measure existing performance and commence recording data and


facts that provide information about the underlying causes of the problem.

Phase 3: Analyze the information to determine the root causes of the


problem.

Phase 4: Improve the process by effecting solutions to the problem.

Phase 5: Control the process until the solutions become ingrained.

Six sigma has developed a similar model to guide the creation of new processes
(as opposed to conducting an improvement initiative): Define, Measure,
Analyze, Design, Verify (DMADV).
Because of its statistical basis, six-sigma analysis depends heavily upon
thorough, reliable, measurable data. Without that level of visibility, there can be
no determination of the rate of defects. Some of the fundamental six-sigma

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techniques for defining, measuring, and analyzing a process, such as process


mapping, control charts, and Pareto diagrams, were covered earlier in the section
on visibility, analysis, and the importance of data.
Here's a review:

Control chart
Control charts provide a visual representation of variance to allow the
business to see quickly when variance falls outside acceptable control limits.

Defect measurement
Defect measurement tracks the number of defects that represent product or
service failures from the customer's perspective.

Pareto diagram
The Pareto diagram is based on the familiar Pareto principle, also known as
the 80-20 rule, according to which 80 percent of problems (or other

phenomena) can be attributed to 20 percent of possible sources. Pareto


__ __diagrams isolate .possiblesources of customer-complaints and locate the 20
percent that are causing the most trouble.

Root cause analysis


A root cause is the original problem that leads to an unacceptable rate of
defects. Eliminating a root cause can bring a process into conformance with
the six-sigma limit on errors, whereas attacking a secondary problem may
do little or nothing to eliminate the customer complaints.

Next we' lllook at a case study of a six-sigma project.


Six-sigma case

The isixsigma.com Web site (www.isixsigma.com) features an instructive


example of a six-sigma case led by a black belt. The problematic process was a
system for collecting bank deposits. Reasoning that local customers would want
to mail their deposits to a local address instead of a national depository, the
bank collected mailed deposits at its branches and forwarded them by express
reshipping to the central location for processing. Unfortunately, at each step in
the mailing chain, there were possibilities for delay. As a consequence, deposit
checks were sometimes not posted to accounts for days-leading to
considerable complaining by customers.
A six-sigma black belt conducted an analysis of the situation and found that
mailing to the central bank would lead to significantly faster postings. Further
research discovered that the mailing address wasn't a significant concern among
customers. Finally, benchmarking revealed that customers of local competitors
were mailing deposits to central depositories.

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Carefully mapping and analyzing the process provided visibility into the actual
experience of customers, allowing the bank to revamp the process and
determine what measures of quality were important to customers-as opposed
to the preferences of the bank.

Eliminating
waste

Two complementary approaches to quality improvement are JIT and lean,


both ofwhich emphasize the elimination of non-value-added activities.
"Waste" in this context is given a broad definition by the APICS Dictionary,
12th edition:
1) Any activity that does not add value to the good or service in the
eyes of the consumer
2) A by-product of a process or task with unique characteristics
requiring special management control
The definition further explains that "waste production can usually be planned
and somewhat controlled. Scrap is typically not planned and may result from
the same production run as waste."
While JIT and lean have their most familiar applications in manufacturing,
they also have wider application in supply chain management. A smoothrunning production process is best achieved as part of a smooth-running
supply chain.

Just-in-Time (JIT)

TheAPICS Dictionary, 12th edition, defines Just-in-Time as follows:


A philosophy of manufacturing based on planned elimination of all
waste and on continuous improvement of productivity. The primary
elements include having only the required inventory when needed; to
improve quality to zero defects; to reduce lead times by reducing
setup times, queue lengths, and lot sizes; to incrementally revise the
operations themselves; and to accomplish these activities at minimum
cost.
JIT adapts TQM principles, with a primary emphasis on eliminating time in
queues at work centers by having the right materials arrive at the right places at
the right times. This implies more than mere speed or timing; it implies quality
as well. Any worker in a JIT facility has the power, the responsibility, and the
means to halt production to pull a defective product. Any lack of quality can
prevent the rapid flow of goods to their appointed stations and create queues of
stalled inventory.
Exhibit 1-35 illustrates the principal features of JIT.

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Exhibit 1-35: Features of Just-in-Time Production


Just-in-Time (JJT) Elements
1. Have inventory only when needed.
2. Quality at zero defects level.
3. Reduce lead times by:
Reducing setup times.
Reducing queue lengths.
Reducing lot sizes.
4. Review and revise operations.
5. Strong supplier relationships.
6. Multiskilled labor force.
7. Move toward cellular manufacturing
environment.

JIT Philosophy

Eliminate all waste.


Strive for continuous productivity
improvements.

Applies to the following forms of manufacturing


environments: job shops, process, repetitive.

JIT Benefits

Manufacturing cycle time reduction


Inventory reduction
Labor cost reduction
Quality cost reduction
Material cost reduction
Improved vendor relationships

Three JIT basics


Three JIT focuses warrant mention at the beginning: waste reduction, variability
reduction, and pulling materials into a work center rather than pushing them in
from the preceding center.

Waste reduction
Storage, inspections, queues at work centers, and defects all fail to add
value while costing money and slowing down production. Through
continuous improvement, JIT targets each of these conditions for step-bystep elimination. (Waste reduction is also a lean goal.)

Variability reduction
Continuous improvement includes elimination of variability discovered in
the system no matter what the source, internal or external. The source might
be inaccurate engineering drawings, equipment that fails to perform up to
standards, or going into production without understanding customer
requirements.

Pulling materials into production


In traditional systems, materials and parts move from place to place by

being "pushed" from behind. Raw materials are extracted and sent to
manufacturing. Materials and components move away from workstations

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when the operation there has been completed. Manufacturing ships goods
out when they are in finished form. All of this activity takes place in
accordance with schedules determined in advance on the basis of forecasts.
JIT takes the opposite approach and "pulls" items through the system when
they are needed, not according to preset schedules. Materials don't move
from supplier to plant until requested. Similarly, work-in-process (WIP)
doesn't move from one work center to another until a signal indicates that
the time is right. Lots sizes are kept small, and orders are entered more
frequently. This reduces or eliminates any inventory waiting to be
processed. And that in tum brings quality problems to light more quickly.
Defects in materials can be hidden when there are inventory buffers; a
defective component can be discarded and another taken from the safety
stock. But in JIT there is no buffer, so there are no quick substitutions
possible when a defective component comes on line. Therefore, a defect
causes a slowdown and signals the need for process improvement.
Elements of JIT -for continuous improvement
JIT isn't limited to activities in the production facility. Here are some of the

elements of the supply chain that are subject to continuous improvement


according to JIT principles:

Suppliers
Some supply chains have always included a JIT component. Fine restaurant

supply chains are an example. Perishable items for consumption must be


delivered on time with minimal variability and waste if they are to be served
fresh to high-paying customers. JIT extends that model into manufacturing
supply chains by building long-term relationships with a limited number of
suppliers who are willing to incorporate JIT principles into their own
businesses. A JIT supplier delivers on time, ships only quality goods that
require no inspection, and reduces inventory in warehouses and in transit.
Sometimes suppliers actually move their warehouses into the plant to ensure
that supplies are always available with almost no transport time or other delays.
Not all suppliers are willing to be JIT partners. They may not want to be tied up
in a long-term contract or to move at the pace of JIT, which can necessitate
frequent, rapid engineering changes. The demand for zero defects and small,
frequent shipments may also run counter to supplier preferences.

JIT layout
Another way to reduce waste is to lay out the production facility in such a

way as to minimize distances and maximize flexibility. Employees may be

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arranged in "work cells" that focus on one family of products manufactured


with similar processes. This minimizes the distance the products travel
through production and, ideally, allows production of one unit at a time in
response to an order. Equipment is designed to be movable, with nothing
bolted to the floor, so cells can be easily re-formed to accommodate new
product families. Workers, too, are made more flexible by cross-training.

Inventory reduction
"Inventory is evil," in the words of Japanese JIT guru Shigeo Shingo. In
some instances inventory may be a necessary evil, but Shingo's strong
statement captures the spirit of JIT. Operations managers may begin
instituting JIT by reducing inventory to the bare minimum necessary for
efficient operation. With no "safety stock," everything in the system has to
work almost perfectly to avoid breakdowns . Continuous improvement finds
ways to eliminate variability and defects so the system will work without
inventory buffers. Lot sizes must be kept small to avoid accumulation of
inventory, and that brings down costs of holding and handling items in
storage or in queues. However, as holding costs go down, setup costs tend
to rise-small, frequent lots mean more setups. So reducing setup time is
another JIT improvement project.

Scheduling
Good communication is essential for efficient scheduling. In JIT, schedules
are widely communicated within organizations and along the chain,
improving suppliers' ability to be responsive to orders.
Two particular types of schedules are favored in JIT: level and kanban.

A level schedule involves small batches of constantly changing items, so


that production for each day exactly meets demand for the day.
(Production and demand are level.) This can produce as many units as a
large-batch system, but it requires reduction of setup time to do so.

The kanban (pronounced kahn-bahn) system originated in Japan, where


display cards are generally used to signal that a work site is ready for a
new batch of materials. (In Japanese, "kanban," loosely translated, means
card, billboard, or sign.) According to the APICS Dictionary, 12th edition:
[Kanban] uses standard containers or lot sizes with a single card
attached to each. It is a pull system in which work centers signal
with a card that they wish to withdraw parts from feeding
operations or suppliers.

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Kanban works (like JIT in general) in fast-paced mass production


environments where one station is close enough to the next that a visual
signal will suffice to trigger a delivery. Cards are no longer the only visual
signal in use. A light, an empty parts bin, colored golf balls, or even an
empty space on the floor can also signal readiness for materials.

Continuous job improvement


JIT includes continuous employee and job improvement as well as continuous
process improvement. In JIT organizations, responsibility for process
improvement rests upon the workers closest to the process, so those employees
take on supervisory responsibilities. There is, consequently, an emphasis on
training and cross-training to boost employees' skills and knowledge to keep
up with their growing responsibilities. Jobs, too, are expanded and enriched to
increase the challenge to employees and to enhance their commitment to
continuous improvement of every aspect of the workplace.

In sum, JIT is a version of quality that begins with the idea that inventory is "evil"

and proceeds from that perception to the task of continuously improving all aspects
of the plant and the supply chain to eliminate inventory, waste, and variability. JIT
supply chains "pull" materials, work-in-process, components, and finished goods
into each facility and operation, from extraction through final sale. (The alternative
is to "push" items from one point to the next before they are requested, so they wait
in warehouses or queues until the next facility or workstation is ready for them.)
The goal is to have materials arrive defect-free and just in time for use or for sale.

Lean supply chain


thinking

Lean improvement initiatives focus on reduction or elimination of waste in all


areas. The APICS Dictionary, 12th edition, identifies "lean" and "lean
manufacturing" as synonyms for "lean production," which it defines as follows:
A philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various
activities of the enterprise. It involves identifying and eliminating
non-value-adding activities in design, production, supply chain
management, and dealing with customers. Lean producers employ
teams ofmultiskilled workers at all levels ofthe organization and
use highly flexible, increasingly automated machines to produce
volumes of products in potentially enormous variety. It contains a
set of principles and practices to reduce cost through the relentless
removal of waste and through the simplification of all
manufacturing and support processes.
Lean is not a new concept. In fact, there are demonstrations of process thinking
in manufacturing dating back to the Venetian Arsenal in the 1450s, where

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methods of mass production were used to build merchant and war ships. But
most lean resources credit Henry Ford as the first person to truly integrate an
entire production process when he created what he called "flow production" in
1913. Ford's techniques, however, lacked flexibility; they were intended to
produce only black Model T automobiles. During the 1930s, Toyota revised
Ford's concepts to provide both continuity in process flow and a wide variety in
product offerings. This became known as the Toyota Production System (TPS).
We will examine key aspects of the Toyota system throughout this discussion of
lean.
Lean thinking has applications all along the supply chain-from eliminating
unnecessary steps in product design to aligning suppliers' processes with the
delivery schedules required for lean manufacturing. Waste, in the world oflean
thinking, is anything that fails to add value in the eyes of the customer. Recall
the six-sigma case we looked at earlier. Bank customers did not value the
mailing of deposits to a local address as the bank thought they might. Instead,
they wanted quick postings to their accounts. Therefore the added service the
bank provided-mailing to a local address with express shipping to a central
depository-was a waste. It aimed to increase value provided to customers, but
instead it added a wasteful feature that customers didn't want. Waste can refer
to unnecessary materials, equipment, processes, features, plant, personnel,
time-any operational element that can be eliminated without reducing the
value provided to the customer.
For example, consider taking an airline flight as a supply chain process. Airlines
have many suppliers and provide many services beyond just the flight itself. If we
looked only at the value-added portion of the supply chain, the actual flight itself,
we might consider only how to get the plane from Point A to Point B faster.
However, if we look at the total supply chain, we would find that there are many
areas of waste in the non-value-added areas. And if we reduce the wastes in these
areas, we can get more benefit than if we concentrated on just the flight. Areas of
waste in this example include getting to the airport, parking, getting inside the
terminal, waiting to check in, checking in, getting to security, waiting in the
security line, passing through the security process, etc. These non-value-added
times can be more than the actual flight itself. Just as importantly, as airlines have
discovered, reducing these non-value-added costs and times for their customers
has not only made the customers happier; the airlines have experienced lower
costs. Checking in and selecting seats online are two examples of ways that
airlines have reduced their costs while reducing non-value-added wait time for
their customers. This is a definite win-win for the supply chain and for the
customer.

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Likewise, a supplier of retail goods to a major retailer can "lean" its supply
chain by using point-of-sale data from its customers to create replenishment
orders to ship the right amount of product directly to each store. This eliminates
the bullwhip effect and helps keep inventory levels lower than ifthey were
using only forecasting methods to drive their processes.
Lean initiatives are fueled by a specific set of tools and techniques. For
example, lean production often goes hand in hand with JIT and, as the banking
example described above shows, is also compatible with six sigma. Exhibit 1-36
outlines the main features of lean production.
Exhibit 1-36: Lean Production

Lean
Production

A philosophy of production that emphasizes the minimization of


the am~unt of all the resources used in the various activities of the
enterpnse

Identify and eliminate non-value-adding activities in design, production,


supply chain management

! - - - --

1 - - ---+ Employ teams ofmultiskilled employees


1--- - -

Use flexible and automated machines

1 - - - ---+

Use JIT production and strive toward six-sigma quality

'--- --

Consists of a set of principles and practices to reduce costs via removal of


waste and simplification of all manufacturing and support processes

Implementation:
1. Map the final assembly process.
2. Clean and organize areas to be changed.
3. Install kanban pull scheduling between order entry and final assembly.
4. Work backward in the production process using kanban to link final assembly to internal and
external component suppliers.
5. Reduce setup times and batch sizes.
6. Reduce defects.
7. Do employee training.

Several of these lean concepts will be revisited in subsequent content.

Lean objectives
Lean supply chains strive to achieve the following objectives.

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Eliminate waste in business value streams.


Lean supply chains eliminate all processes that add cost without adding
customer value, including materials handling, inspection (perfect products
don't require inspection), inventory, and rework (get it right the first time).

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The perfectly lean system would have none of the foregoing, and it also
would reduce distances that parts and employees have to travel to avoid
wasted time and wasted steps.

Meet customer demand.


Organizations adopt lean and encourage their suppliers to do so to
strengthen the supply chain. Lean systems aim to produce only products and
services that customers want.

Increase velocity.
Velocity refers to the time it takes to provide value to the customer. As
noted earlier, velocity in supply chain management is "the relative speed of
all transactions, collectively, within a supply chain community." The
definition goes on to state that "a maximum velocity is most desirable
because it indicates higher asset turnover for stockholders and faster orderto-delivery response for customers." Through the use of JIT and other lean
techniques, velocity produces products and services only as fast as
customers want them.

Reduce need for working capital.


Working capital (the cash available for the day-to-day operations of a firm)
is increased because of reduced inventory and improved productivity.

Increase inventory turns.


Inventory turnover, or inventory turns, is "the number of times that an
inventory cycles, or "turns over," during the year" (APICS Dictionary, 12th
edition). Shortening lead times and building to order results in increased
inventory turns.

Gain market share.


Quality, low cost, short lead times, and other lean principles help
organizations and supply chains gain competitive advantage and leverage
that into more product and service sales.

Increase profitability.
Increased profitability results when non-value activities are reduced and
volume is added without adding resources.

Develop the workforce.


Lean reinforces the occupational development of employees though improved
job design, training opportunities, more challenging work, more responsibility

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and participation at all employee levels, and more teamwork. Job titles are
typically reduced and worker flexibility thereby increased.

Produce products and services with perfect quality.


When all is functioning according to plan, lean systems allow employees to
produce perfect results.

In lean supply chains, organizations find suppliers whose methods will synchronize
with lean requirements and develop long-term relationships with them.

(Developing relationships with partners rather than seeking low bids for every
project is a fundamental lean principle.) Organizations educate suppliers to
understand and be willing to play a role in creating value for customers by
streamlining processes.
Lean principles
Lean Thinking, a book by James P. Womack and Daniel T. Jones (1996), identifies
five principles that epitomize lean. These core lean principles are summarized in
Exhibit 1-37. General implications for supply chain management are included.
Exhibit 1-37: Lean Principles
Principle

Implications for Supply Chain Management

Create value for the


customer.

Only a customer can define what constitutes value in terms of a product or


service. When a supply chain creates value for customers, it recognizes
what creates value from the customer's perspective and answers the
question "What will the customer pay for?"

Identify all steps across a


value stream.

As noted in the AP/CS Dictionary, 12th edition , a value stream


encompasses all "the processes of creating , producing, and delivering a
good or service to the market." All of the activities (both value-added and
non-value-added and those that are highly visible as well as more subtle
ones) that are performed to process raw material to finished product, from
order to cash and from product concept to product launch, are included.
Identifying steps across the entire value stream often exposes waste.

Create value flow.

What are the actions that create value flow? One-piece or continuous,
smooth flow is the ultimate objective. When striving for smooth flow,
problems that must be dealt with become visible.

Pull products based upon


customer demand.

Pull scheduling replaces what is used and drives actions toward a maketo-order environment (versus push production scheduling). In pull, each
successive step in an overall process signals the preceding step that it
needs more material/product to work on and triggers the predecessor to
produce the needed material/product. In a pull environment, no one
upstream function or department should produce a product or service until
the customer downstream asks for it.

Strive for perfection by


continually removing
successive layers of
waste.

Relentless continuous improvement removes successive layers of waste .


Continuous improvement results are maximized when the first four lean
principles are in place.

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House of Toyota
The House of Toyota is a framework commonly used to explain the entire scope
of lean. The House of Toyota graphic was created by Taiichi Ohno and Eiji
Toyoda of Toyota to help explain the Toyota Production System to employees
and suppliers.
In Exhibit 1-38 we see a typical representation of the House ofToyota.
Exhibit 1-38: House of Toyota

Best quality, lowest cost, shortest lead time by


eliminating wasted time and activity

.Ju t-in-Time (Jil)


Tal<! time

One-piece flow
Pull systems

Culture of
Continuous
Improvement
Respect for people
Safety
Morale

Manual or
f!Utomllted line to p
Separate opcn!lor
and machine
acri lties
l\list11 kc-prqofiog
ln-51Ation .;untrol

Source: APICS Lean Enterprise Workshop Series

The metaphor of a house was used to convey stability. Operational stability (the
house foundation) implies stable demand and processes through leveling,
standardized work, and processes improved through kaizen.
The APICS Dictionary, 12th edition, tells us that leveling (also referred to as
load leveling, capacity smoothing, or level loading) is defined as follows.
Spreading orders out in time or rescheduling operations so that the
amount of work to be done in sequential time periods tends to be
distributed evenly and is achievable. Although both material and labor
are ideally level loaded, specific businesses and industries may load to
one or the other exclusively (e.g., service industries).
In the Toyota Production System, "heijunka" is the Japanese term akin to

leveling. The APICS Dictionary, 12th edition defines it as part of the Just-inTime philosophy and "an approach to level production throughout the supply
chain to match the planned rate of end product sales."

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Standardized work (or standard work) has been compared to the steps in a
dance; it defines tasks (such as content, sequence, and timing) to achieve an
optimum process in the time available. And, as noted at the stati of the
continuous improvement content, the APICS Dictionary, 12th edition, defines
kaizen as the Japanese term for "continuing improvement involving everyonemanagers and workers. In manufacturing, kaizen relates to finding and
eliminating waste in machinery, labor, or production methods."
The House ofToyota roof contains the primary goals ofTPS achieved by
eliminating waste.

Best quality
One-piece or continuous flow improves quality because the next
(downstream) process uses the piece shortly after it has been produced at
the previous (upstream) process. Unless there is batch processing, there
will be very few pieces produced with a defect because a defective item
should be found soon after it is made. (If there is batch processing, a
quality problem could potentially be replicated throughout the entire
batch before it is found in a downstream process.)

Lowest cost
A premise of lean is that the least amount of waste will result in the
lowest costs. It should be noted, however, if standard cost accounting is
used for lean projects, the results will actually make it appear as though
many lean efforts are having a seemingly negative financial effect on the
organization. A lean accounting system is required. Where traditional
accounting measurements focus on overhead (e.g., machine utilization,
cost variance, budget adherence), lean measurements focus on delivery
to the customer (e.g., through cycle time and inventory turns). Lean
accounting also necessitates different types of financial, behavioral, and
core process performance metrics. A lean metric is one "that permits a
balanced evaluation and response--quality without sacrificing quantity
objectives" (APICS Dictionary, 12th edition).

Shortest (delivery) lead time


With lean's emphasis on activities such as one-piece flow and pull
systems, queue times (wait times for a product awaiting the next step in a
process) often shrink significantly. The result is typically a short lead
time to the customer.

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Just-in-Time (JIT) andjidoka are two important lean concepts. They are shown
as the outer pillars in the House of Toyota. The house will not stand without
both pillars.

Just-in-Time
As we read earlier in the continuous improvement content, JIT is an
approach that allows delivery ofthe right items at the right time to the right
place in right amounts. Takt time, one-piece flow, and pull systems
facilitate JIT. We have already discussed the general principles of one-piece
flow and pull systems. Takt time needs further explanation.
When a lean system is ticking along at the perfect rate, its production of
finished goods is exactly synchronized with the rate of customer demand.
This reduces inventories to a minimum, eliminating all but work-in-process
and in-transit inventories. The heartbeat of such a synchronized system is
called takt time. Derived from the German word for musical meter, takt
time is computed as follows:
Available Production Time
Takt Time= - - - -- - - - - Customer Demand

For example, say that customer demand for wrist watches is running at
1,000 units per day and available capacity is rated at 700 minutes per day;
takt time would be .7 minutes per watch (700 minutes divided by 1,000
watches). The production system would then have to be designed to
produce a watch every 42 seconds (.7 x 60 seconds), or capacity would
have to be increased.
The end result of JIT is that each process produces only what is needed by
the next process in continuous flow.

Jidoka
The second pillar is jidoka, a Japanese term that can be loosely translated as
"automation with a human touch." In the House of Toyota, j idoka is
facilitated by line stoppage, the separation of operator and machine
activities, mistake-proofing, and in-station (visual) control.
Jidoka is sometimes referred to as "intelligent automation" or
"autonomation." It is the ability to stop production lines, by human or
machine, in the event of problems such as equipment malfunction, quality
issues, or late work. Typical applications in manufacturing are specially
equipped machines that stop a process immediately when a problem occurs
and signal for help. Operators stop work and correct the problem.

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Sometimes managers or supervisors are involved, depending upon the


magnitude of the problem. Whether the stoppage is manual or automated,
jidoka prevents defective products from being produced. It helps identify
and correct problem areas using localization and isolation.
Poka-yoke is a tool used to support jidoka. Often referred to as mistakeproofing or error-proofing, the term comes from "poka," which means
"error," and "yokem," which means "to avoid." Poka-yoke is a failure mode
control-a method or device to detect abnormal conditions and stop the
process.
In-station control (also referred to as visual control or problem
visualization) describes the sequence when a problem arises. Since the
equipment stops when an abnormality is detected, a single operator can
visually monitor and efficiently control many machines. A problem display
board (usually electronic) called "andon" allows an operator to identify
problems in the production line at a glance. The problem is corrected and
improvements are incorporated into the standard workflow.
A Just-in-Time system functions properly when all of the parts that are made
and supplied meet predetennined quality standards. Jidoka supports this through
the detection of errors or defects during production.
The center of the House of Toyota promotes the following core lean principles.

Culture of continuous improvement


In order for lean to be successful, organizational leadership must relinquish
hierarchical authority and create a culture of learning and experimentation to
support continuous improvement. The continuous improvement mindset
starts at the top, and everyone in the organization is involved. Employee
involvement plays an important role in lean manufacturing in terms of both
continuous improvement and quality control efforts. Employees are
rewarded for successful initiatives.

Respect for people


"People" means customers as well as people in the local communities and
employees. How is respect for people achieved? Safety is ensured, the wider
community is served, and employee morale is boosted. Organizations give
back and protect the wider community through green practices and other
environmental initiatives. Employees are empowered and take ownership for
their work. Teams facilitate creativity, effectiveness, and efficiencies.

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Additional lean considerations


There is much more to lean than the House of Toyota and the fundamentals we
have introduced thus far. We now consider some additional concepts
commonly applied in lean initiatives.

Value stream mapping


Value stream mapping is a paper-and-pencil tool that helps you to see and
understand the flow of material and information as a product or service makes
its way through the value stream. While it is similar to process mapping in six
sigma, it tends to display a broader range of supply chain processes, stretching
all the way from receiving raw material to delivering finished goods. Not only
does a value stream map sketch all the steps in a production or service delivery
process; it also includes the management and information systems that
accompany the process.
The basic procedure of value stream mapping is to begin with the drawing of
the process and then overlay a map of the information flows that support the
process. This provides a picture of the current state of the supply chain,
complete with value-adding and non-value-adding activities. After completing
the value stream map of the current state with input and approval from all
stakeholders, the next step is to draw a future state map that eliminates all
wasteful activities. Organizations that successfully convert a shop floor into a
lean production area through value stream mapping will sometimes apply the
same technique to mapping and improving other areas, such as the design
process or administrative procedures.
Value stream mapping is a powerful yet simple tool that does not require
advanced technology and yet provides a way to link reporting requirements,
stakeholders from multiple functions, managers and staff, and metrics to
sustain a lean initiative across the entire supply chain. It gives managers and
employees the same tool and language to communicate. More and more
organizations with successful shop floor lean efforts are also applying value
stream mapping methods and lean principles to administrative areas.

Kaizen event/kaizen blitz<sm)


The APICS Dictionary, 12th edition, defines a kaizen blitz(sm) as follows:
A rapid improvement of a limited process area, for example, a
production cell. Part of the improvement team consists of workers in
that area. The objectives are to use innovative thinking to eliminate
non-value-added work and to immediately implement the changes
within a week or less. Ownership of the improvement by the area work
team and the development of the team's problem-solving skills are
additional benefits.

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In general the kaizen blitz includes basic training, analysis (usually a flowchart
of the process to be redesigned), and the design itself. A related term, kaizen
event, is defined in the 12th edition of the APICS Dictionary as follows:
A time-boxed set of activities carried out by the cell team during the
week of cell implementation. The kaizen event is an implementation
arm of a lean manufacturing program.
Kaizen, as we know, is the Japanese word for continuous improvement, and it
signifies a carefully designed, evolutionary process. The blitz is something of
an anomaly, therefore, and is not without its dangers. For one thing, the quick
turnaround time allows for only superficial training in analysis and design
methods without attention to the subtleties or tradeoffs. A kaizen blitz can be
most useful at the beginning of a lean or TQM initiative to provide a quick
demonstration of the possibilities of reform and thus convince skeptics that
change can be beneficial. But the very success of a blitz can also lead to
negative consequences. TQM, lean, six sigma, and JIT all take months or years
to achieve their objectives and are applicable to whole systems, not to local
procedures~ rhe

kaizen event's success-may lead to complacency rather than

commitment to long-term reform. Therefore the change leaders in the


organization (often assisted by consultants) should embed the kaizen event in a
carefully developed long-term plan that is communicated clearly to all
stakeholders.
Lean techniques, such as the kaizen event, may have seen their first applications
in Toyota and other Japanese firms, but they can be just as usefully applied in
service settings as on shop floors. In the health care example described earlier,
in the discussion of best-in-class benchmarking, the organization adapted
Toyota's Rapid Process Improvement Workshop (RPIW)--essentially a kaizen
blitz-to their endoscopy service to reduce the long wait for appointments that
was annoying their patients. With the improvements that resulted, they doubled
the number of patient visits per day without reducing the time spent with a
physician. After that initial success, the medical center conducted dozens more
RPIWs, which resulted in a savings ofUS$7.5 million in the first year. In this
instance, the initial blitz was perfectly applied as the first step in what became
an organizationwide, lean revamping of the service supply chain.

Five Ss
Order and organization are important in lean. The five Ss (often referred to as
the 5 Ss or 5S) are five terms beginning with "s"-sort, simplify, scrub,
standardize, and sustain. They are sometimes referred to by the Japanese
equivalents: seiri, seiton, seiso, seiketsu, and shitsuke. The purpose ofthe five
Ss is to make everything about the workplace orderly and clean and keep it so.

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Exhibit 1-39 describes the five Ss.


Exhibit 1-39: The Five Ss
Term

Description

Sort

Sort means to separate needed items from unneeded ones and remove the
latter.
Sorting and organizing the work area , leaving only the essential paperwork,
tools, and other materials necessary to perform daily activities, improves
communication between workers and increases product quality and productivity.

Simplify
(set in order)

Simplify means to neatly arrange items for use.


The orderly arrangement of needed items makes them easy to use, accessible
for anyone to find or put away, and eliminates waste in activities.

Scrub
(shine)

Scrub means clean up the work area.

Standardize

Sweeping , systematic cleaning, and shining keeps everything in top condition


so that when someone needs to use something, it is ready to be used; mess
prevention also helps to maintain a safer work area .
Standardize means to develop standard work processes.
Creating a consistent approach for carrying out tasks and procedures helps
clarify what is the "normal'! condition and how to correct "abnormal" conditions.

Sustain

Sustain means to always follow the first four Ss.


Maintain ing and reviewing materials sustains the discipline and commitment of
all other stages.

The five Ss create a workplace suitable for lean production. They convey
the message that quality starts with people in the organization and provide
a framework for a workplace that is clean, uncluttered, safe, and organized,
where people become empowered and engaged.

Setup time reduction


Setup time reduction has a major impact on production costs and product
variety. This practice aims to reduce waste (time and material) in the setup
process. It encompasses improved processes as well as having employees
being responsible for their own setups.

Total productive maintenance


Total productive maintenance (TPM) seeks to engage all levels and functions
in an organization to maximize the overall effectiveness of production
equipment. The APICS Dictionary, 12th edition, defines it as follows.
Preventive maintenance plus continuing efforts to adapt, modify, and
refine equipment to increase flexibility, reduce material handling, and
promote continuous flows . It is operator-oriented maintenance with the
involvement of all qualified employees in all maintenance activities.

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TPM aims to reduce mistakes and accidents. Where maintenance


departments are traditionally responsible for preventive maintenance
programs, TPM seeks to involve workers in all departments and levels, from
the plant floor to senior executives, to ensure effective equipment operation.

Three major areas of waste


As lean strives to eliminate waste, there are three broad types of waste it
focuses on: muda, mura, and muri.
Muda is synonymous with waste-any activity that consumes resources
but creates no value. Recall that value is what the customer is willing to
pay for. "Mura" is a general Japanese term for unevenness or
inconsistency. Mura occurs in the demand for production and in processes.
In lean, mura creates muri. Muri is an overburdened situation-the

overburdening of employees or processes.


For many organizations, mura and muri are the root causes ofmuda. It is
-management's responsibility-to examine the-muda in the processes and
eliminate the deeper root causes of the waste by considering the
connections to mura and muri.
A typical example of the interplay of muda, mura, and muri is an
organization playing catch-up and trying to make forecasted numbers as
the end of a fiscal reporting period approaches. Demand is raised,
increasing mura. This causes production to try to squeeze extra capacity
from the process. Routines and standards are modified or stretched, leading
to muri. Ultimately, this results in downtime, mistakes, backflows, and
waiting. Muda is the waiting and corrections that result.
Lean takes a problem-solving approach rather than a tools-based approach
to eliminating waste. In lean, tools serve specific purposes and support
focused improvement efforts.
Exhibit 1-40 lists tools that are used to combat muda, mura, and muri. All
of these tools have been mentioned in our previous discussion of
continuous improvement.
Exhibit 1-40: Tools to Combat the Major Areas of Lean Waste
Muda

5Ss, TPM, setup reduction, flow, pull, kaizen

Mura

Takt time, heijunka, flow, pull, six sigma

Muri

Takt time, standard work, flow, pull

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As lean strives to identify waste from the customer's perspective and determine
how to eliminate that waste, these tools help to make processes more
standardized, effective, and efficient.

Eight deadly wastes


At the heart of lean is the endless pursuit of reducing what is known as the
eight deadly wastes. An overview of these wastes is shown in Exhibit 1-41.
Exhibit 1-41: The Eight Deadly Wastes

Waste
Overproduction

Characterized by ...
Production ahead of demand; delivering products before they are
needed
Example: A quantity greater than needed (or earlier than needed) is
requested .

Waiting

Transportation

Waiting for the next production step; a delay between the end of one
activity and the start of the next
-Example: Queues build-up because of poorly synchronized
processes and inventory accumulates between processes.
Moving products that are not actually required to perform the
processing; unnecessary transport resulting in added cost
Example: Material is stored far from where it is used, requiring
wasteful system transactions.

Inappropriate
processing

Unneeded activity due to poor tool or product design


Example: Rework and extra handling are needed due to defects.

Unnecessary
inventories

Components and work-in-progress that are not being processed;


finished product that is built up
Example: Stock builds up due to poor scheduling.

Unnecessary
motion

Unnecessary movement of people or equipment to perform the


processing
Example: Poor work area layout requires too much walking or doublehandling by operators .

Defects

Scrap or rework
Example: Scrap results from material produced outside of
specifications.

Unused people
skills

Waste of knowledge or capabilities


Example: Employees are not engaged or empowered .

Toyota's Taiichi Ohno originally defined seven deadly wastes in the


Toyota Production System. The eighth waste (unused people skills) was
defined by Womack and Jones in Lean Thinking. Overproduction is
considered the most serious of the eight wastes.

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In complex supply chains, especially global ones, implementing lean and

responding to demand events from downstream operations poses challenges.


But when system wastes are eliminated, the potential benefits derived from
lean include reduced inventories, lower labor and material costs, energy
efficiencies, increased customer value and improved customer satisfaction,
coordinated continuous improvement efforts across the supply chain, and
competitive advantage and leadership in the global marketplace.

+Implementation and Change Management


Once you've analyzed a process, identified the improvement you want to
make, and selected a benchmark as your target, you're ready to implement the
solution. There are some steps to take as you put your process improvement
initiative into action.
Choose KPis and establish baselines.

Establish a set of key performance indicators using a balanced scorecard


approach and determine baselines for each indicator.

Limit the KPis to a workable number.

Be sure to include the four general areas of the balanced scorecard: business
process improvement (which you should have covered in the design of your
initiative), customer considerations, financial impact, and growth and learning.
Growth and learning can be crucial to the success of supply chain process
improvements.

Establish baseline measures for each KPI and set targets (using benchmarks as
you did for process improvement).

Be sure the change provides a measurable, positive effect on customers and


your bottom line; otherwise, your process improvement won't be fully
successful.

Monitor the performance of the KPis.

Develop both a master plan and a set of project plans.


You need two implementation plans, each identifying milestones, tasks, and
resources:

The master plan contains all improvements in sequence and delineates the end
of implementation and the beginning of the continuous improvement for each.

Project plans schedule all steps required to achieve the targets for each KPI, set
deadlines, and assign accountability for achieving results.

Communicate plans and measures to all participants in the process.


You can't change one part of a system with affecting other parts. All firms and
functional areas involved in the process must know precisely what the

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improvement initiative involves so they can develop their own objectives and
strategies to contribute to a synchronized effort. For instance, if you are
moving toward a lean or JIT approach to production, you will need the
cooperation of suppliers in your efforts to reduce inventories and squeeze all
waste out of the system.
Consider conducting a pilot.
A successful pilot study with a limited number of firms may inspire confidence
in other supply chain partners and make full implementation easier. In effect,
the outcome of the pilot sets a benchmark for the rest of the partners.
Address change management issues.
Change can be enormously disruptive across a large organization if it isn't
handled properly. To ease a firm, let alone several supply chain partners, into a
TQM project, the team, along with executives, must prepare the ground
carefully before the initiative and maintain communication during, and possibly
long after, implementation. Some organizational and personal issues may hinder
progress toward goals ifthey aren't addressed in the-beginning.
These include the following:

Some firms may need to change from a functional to a process-oriented


structure-to undergo Stage 3 supply chain evolution, in other words.
Structural changes may be major and should be included in the master and
project plans .

Highly competent management of change is important. But leadership from


the top ranks of the organization is crucial to the success of continuous
process improvement. If the leaders in the affected partner firms aren't
brought into the process as full partners and passionate advocates, getting the
employees to commit to the change will be difficult or impossible.

Growth and learning will most likely have to be integral to the initiative.
People must not be introduced to new roles and new expectations without
being thoroughly prepared. Training can take different forms depending on
roles and responsibilities. New skills may best be learned in a person-toperson or classroom context with follow-up on the job. New procedures may
best be taught on the job with easy-to-use job aids for reinforcement. (If the
processes are computer-based, the training should also be computer-based.)

Incentives, too, should be adjusted to reflect a balanced scorecard. The


measures of success must reflect the four quadrants of the scorecard-not
only the success of the initiative in meeting its process improvement goals.

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All firms involved in the revised process will have to work together in true
partnership, sharing information and adjusting their strategies with an eye to
the success of the overall chain and the positive impact on the end customer.
Information sharing may have to be approached diplomatically, with an
emphasis on what can be gained in terms of enhanced value for the customer
and smoother operation of the chain.

Training will almost certainly be an important consideration in ensuring the


success of the initiative. It will have to be developed and scheduled.

Monitor results and make adjustments.


Set periodic targets for KPis from the balanced scorecard, being sure to meet
financial goals as well as other scorecard goals.
A successful continuous improvement project works both from the top down and
the bottom up. Projects must be selected in harmony with overall business
strategies with the collaboration ofthe executive team. Management must become
the driving force that gives the continuous improvement its momentum and
credibility.
Implementation is accomplished by working from the bottom up. Implementation
teams should be formed from the employees involved in the processes themselves.
Their intimate knowledge is required to define the process, analyze weak points,
suggest improvements, and implement solutions.

Work under
the improvement umbrella

The most successful continuous improvement programs rely on more than one
technique. Lean and JIT, for example, are completely compatible in their goals
of squeezing waste out of all processes in the supply chain. When a lean system
is running on takt time, in fact, JIT delivery of supplies is virtually a necessity
to honor the commitment to zero accumulation of inventory in production
queues. At the same time, six-sigma attention to the reduction of errors keeps
the focus on achieving high-quality processes, not just fast ones. Errors
inevitably introduce waste into a process.
In 2005, the U.S. Navy initiated a process improvement project with a kaizen
event that demonstrates the compatibility of the techniques described in this
section. The process that needed improving was the "J&A," Navy-speak for
"Justification and Approval to Limit Competition." The J&A applies to the
Navy's acquisition (or sourcing) process and is used to justify sole-source
contracting. It affects every contract specialist in the Navy's air force
(NA V AIR), yet studies found that the policy was confusing to new personnel

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even after training and was subject to divergent interpretation. The result was
variability and poor quality in sourcing. The prescription for change was lean
six sigma, with its focus on reduction of variability and waste.
With the assistance of a black belt lean six-sigma consultant, NAV AIR
conducted a kaizen event. Participants sketched out a value stream map of the
current J &A process, including a detailed list of "touch times" (six-sigma
oppmtunities for error), waiting times, reviews, and "re-do loops" to document
total cycle time. It tumed out that the J&A process had 26 steps and 17 rework
loops, for a cycle time that varied from 27.75 to 129 days. The next step was to
create a future value stream map eliminating wasteful steps and reducing errors,
if possible to zero. The result of their efforts was a template to eliminate the "redo loops" and to make the process so easy to understand that no prior training
would be necessary for perfect completion of a J &A. One link in the template,
for instance, provided complete guidance on conducting a market survey-a
requirement of the process for which there was previously no instruction or
explanation. The new template reduced the number of steps from 26 down to 11
to 13 and the number of rework loops from 17 to zero. Total cycle time dropped
50 percent, to a maximum of 40.5 days and a minimum of 16. The benchmark
for the new J&A process was set to no stops and no "re-dos."

Summing up

In competitive markets, success goes only to those organizations that pursue


continuous improvement using all appropriate quality strategies, including six
sigma, lean, JIT, kaizen events, and value mapping. Bringing the right product
to customers at the right price and at the right time and place means never being
satisfied with current levels of product quality or supply chain performance.
Supply chains, markets, customer demand, and improvement strategies
themselves are constantly evolving, ensuring that today's best-in-class
benchmarks will be entry-level performance tomorrow-just as the four-minute
mile changed from a superhuman ideal goal to back-of-the-pack performance.

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John Wiley and Sons, 2005.
Womack, James P., and Daniel T. Jones. Lean Thinking: Banish Waste and Create Wealth in Your
Corporation. New York: Simon and Schuster, 1996.

Vachon, Stephan. "Green Supply Chain Practices and the Selection of Environmental Technologies."
International Journal ofProduction Research, Vol. 45, Nos. 18-19, 15 September-! October 2007.

2010 APICS
All rights reserved.

l-199

Version 2.1, 2010 Edition

Cumulative Course Index

This cumulative course index covers all four modules of the APICS CSCP Learning System. The page
numbers used in the index include the module number, for example, 1-48 refers to page 48 of Module 1.
assemble-to-order strategy, 2-85-2-86, 2-91, 292
assembly sites, comparing, 2-266
assortment
planning software, 4-90--4-91
in warehousing, 2-207
ATA Camet, 2-246
ATP (available-to-promise), 2-95, 4-72
auctions, and B2B marketplaces, 4-146--4-14 7
audits, technology, 4-32
Auto ID, 2-216-2-217
Auto-ID Center, 4-112
automated guided vehicle systems (AGVS), 2212
automated sorting devices, 2-213
automated storage and retrieval systems
(AS/RS), 2-213-2-214
automatic communication and pick signals, 4-78
automatic communication technologies, 4-1094-110
automatic identification and data capture, 4-38,
4-77--4-78, 4-107--4-118
automation in warehouses, 2-208-2-218
availability
and customer service, 2-192
ofproducts/services, 1-38
available inventory, 2-94
available time, in measuring capacity, 2-121
available-to-promise (ATP), 2-95, 4-72
A WB (airway bill), 2-247-2-248, 2-249

A
ABC inventory analysis, 2-133-2-134
account management, 3-52, 3-53
acquisitions, 1-72,3-72,3-73,4-132
active tags, 4-115
advanced optimization tools, 4-70--4-86
advanced planning and scheduling, 4-71--4-7 4
affordability, ofproducts/services, 1-37-1-38
aftermarket
sales, 3-84-3-85
savings in, 2-224
agents (analytical tool), 4-26--4-27
aggregation layer of B2B/B2C e-business, 4-13 5
agility
among supply chain partners, 1-59
improvement in, 3-130-3-131
AGVS (automated guided vehicle systems), 2-212
AI (artificial intelligence), 4-27--4-28
AIDC. See automatic identification and data
capture
air transport, 2-174-2-176
airway bill (A WB), 2-247-2-248, 2-249
algorithms, genetic, 4-28
alliances
global, 3-76-3-77
strategic, 3-72, 3-73-3-85
analysis, statistical, 4-26
analytical applications, 3-128
analytical tools, 4-19--4-29
anticipation inventories, 2-206
application layer ofB2B/B2C e-business, 4-135
APS. See advanced planning and scheduling
artificial intelligence (AI), 4-27--4-28
AS2, 4-101
A SIRS (automated storage and retrieval
systems), 2-213-2-214

2010 APICS
All rights reserved.

B
B2B commerce. See business-to-business
commerce
B2B exchanges/marketplaces, 4-140--4-149
B2C commerce. See business-to-consumer sales

1-200

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Cumulative Course Index

backbone, enterprise resources planning, 4-584-59


backlog, 2-83
backorders, 2-13 8
backward integration, 1-72, 4-132
balance sheet, 1-129- 1-131
balanced flow, 2-107
balanced scorecard, 1-115-1-118, 1-185, 1186
bar codes, 2-214,2-215, 4-108, 4-110-4-111
batch data, 4-16
batch processing, 4-111
hatched orders, reducing size of, 2-12
benchmarking, 1-150, 1-160-1-162
benefit-cost rationale for new technologies, 431-4-35
best-in-class benchmarking, 1-161
best-of-breed systems vs. enterprise resources
planning systems, 4-56-4-57
bill oflading (B/L), 2-247- 2-248, 2-249
bill of material (BOM), 2-98-2-102
biohazard symbol, 2-189
birdyback service, 2-181
B/L (bill oflading), 2-247-2-248, 2-249
blanket order, 3-73
BLPs (bonded logistics parks), 2-160-2-161
BOM (bill of material), 2-98-2-102
bonded logistics parks (BLPs ), 2-160-2-161
bottleneck, 2-91
BPM (business process management software),
4-38
branding, 2-49-2-50, 4-134
break-bulk operations, 2-205
bridge cranes, 2-211-2-212
BSC. See balanced scorecard
bullwhip effect, 1-56-1-57, 2-6, 2-8-2-13
business direction, change in, 1-83-1-84
business intelligence/analytical applications, 353, 4-19
business intelligence, retail level, 4-90
business layer ofB2B/B2C e-business, 4-136
business plan, 2-40, 2-77-2-79
business process management (BPM) software,
4-38
business systems, 3-50

business-to-business commerce, 4-122


exchanges/marketplaces, 4-140-4-149
layers, 4-135-4-136
terminology, 4-134-4-135
Web-enabled, 4-136-4-139
business-to-business customers, 3-43-3-44
business-to-consumer sales, 4-122
Internet marketing, 4-13 7
layers, 4-13 5-4-13 6
terminology, 4-134-4-135
Web-enabled, 4-136-4-139
"buy on the market" relationship, 3-72
buy-side e-commerce, 4-138
buyer-driven trade exchanges/marketplaces, 4145

c
calculators, 4-26
call centers, 3,.56
capable-to-promise (CTP), 4-72
capacity, 2-114
control, 2-114, 2-115,2-124, 2-128
management, 2-114-2-128
measuring, 2-121-2-124
planning, 2-89- 2-91, 2-114, 2-115, 2-116-2124, 2-128
rated, 2-122- 2-123
requirements planning (CRP), 2-116, 2-117,
2-120-2-124, 2-128
Camet, 2-246
carousels, 2-212
earners
common,2-182-2-184
contract, 2-184
exempt, 2-184-2-185
legal types of, 2-181-2-185
motor, 2-167-2-169, 2-176
private, 2-182
selection of, 4-81
transportation goals of, 2-162
carrying costs, 2-13 7
cash-to-cash cycle time, 1-125- 1-126
cause-and-effect diagram, 1-158
ceo (chief customer officer), 3-23
CDW (customer data warehouse), 3-49

0 2010 APICS
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1-201

Version 2.1, 2010 Edition

CSCP Learning System

competencies, core, 1-106- 1-108


competition and demand variability, 2-6
competitive analysis, 1-86
competitive benchmarking, 1-160-1-161
competitive priorities, 1-86-1-88
compliance
issues, 1-139-1-143
management, 3-119
component
commonality, 2-69
reusing, 2-226-2-227
computer networking, 4-7-4-8
conceptual models, 4-21
concurrent engineering (CE), 2-64
configuration of enterprise resources planning
systems, 4-52
conflict resolution, 1-69
conflicts of interest, 3-131- 3-134
consistency and operational performance, 2192-2-193
consolidation
in export shipment, 2-250
in warehousing, 2-196, 2-204-2-205
consolidators, 2-235, 2-239
consortia trade exchanges (CTX)/consortiabased public marketplaces, 4-143
constraints, 2-126
consular invoice, 2-246
contact channel. See also placement
segmentation by, 3-44
strategy, 3-28-3-29
contact management, 3-53
container on flatcar (COFC), 2-180
containerization, 2-170-2-171
content management e-commerce, 4-138
content search/management, 3-115
contingency planning, 1-97
continuous improvement, 1-146-1-152
defined, 1-147-1-148
methods, 1-162-1-185
model, 1-149-1-151
purpose of, 1-149
continuous job improvement, 1-l 71
continuous replenishment (CR), 2-36, 3-80, 3-81
contract carriers, 2-184
contract deployment, 3-118-3-119

CE (concurrent engineering), 2-64


certificate of insurance, 2-248
certificate of origin, 2-246-2-24 7
certification, 3-101-3-106
chance, in time series forecasts, 2-21
change, 3-91, 3-96
change management issues, 1-186-1-187
changing supply chain strategy, 1-82-1-86
channel. See also placement
segmentation by, 3-44
strategy, 3-28-3-29
channel master, 1-12, 3-141- 3-142, 4-63
chase strategy, 2-84
chief customer officer (CCO), 3-23
churn, predictive, 3-36
classic auctions, 4-146
cleansing, data, 4-18
client/server system, 4-7-4-8
closed-loop material requirements planning, 2-108
COFC (container on flatcar), 2-180
COGS (cost of goods sold ), 1-124-1-125
collaboration, 1-59, 3-72, 3-73, 3-139, 4-13-4-14
barriers to, 1-70-1-72
building, 1-67-1-75
communication in, 1-72
e-business, 4-130-4-134
intensity level, 1-73-1-75,4-132-4-133
management tasks in, 1-69
types of, 2-35- 2-44
collaborative demand planning, 2-5
collaborative design, 2-61-2-69
collaborative intensity, 1-73- 1-75,4-132-4-133
collaborative planning, forecasting, and
replenishment (CPFR), 2-38-2-44
collaborative relationships. See collaboration
collaborative transportation management, 3-823-83, 4-84
co-location, supplier, 3-121- 3-122
commercial invoice, 2-246
common carriers, 2-182-2-184
communication
business, 4-131-4-13 2
commitment to, 3-92
and e-business, 4-131-4-132
levels of, 1-72
technical, 4-131

2010 APICS
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1-202

Version 2.1, 2010 Edition

Cumulative Course Index

contract language, 3-89


contract termination, 3-89
contract warehousing, 2-203
contracts, 3-86- 3-89
control charts, 1-155-1-156, 1-166
conveyors, 2-21 0
core competencies, 1-106-1-108
corporate strategy, 1-52- 1-86
aligning with supply chain strategy, 1-75-186
customer focus/alignment strategy, 1-53- 155
demand-driven enterprise, 1-57- 1-60
forecast-driven enterprise, 1-55- 1-57, 1-58
goals of, 1-53
cost of goods sold (COGS), 1-124-1-125
cost-benefit analysis, 4-31-4-35
costs
carrying, 2-13 7
customer service, 3-133-3-134
hidden, 2-265- 2-266
holding, 2-13 7
import, 2-255, 2-257
intangible, 4-34-4-35
inventory, 2-137-2-139
landed, 1-108-1-109, 2-265- 2-266
ordering, 2-137-2-138
of poor quality, 1-152
reduction of, 3-129
setup, 2-138
supply chain, 1-119, 1-123-1-125
tangible, 4-34-4-35
counting (in inventory), methods of, 2-135-2136
country of origin, 2-246-2-247,2-251-2-252
CPFR (collaborative planning, forecasting, and
replenishment), 2-38-2-44
CR (continuous replenishment), 2-36, 3-80, 3-81
cranes, 2-211-2-212
creating successful supplier relationships, 3-853-96
CRM. See customer relationship management
cross-dock operations, 1-111, 2-205
cross-functional teams in enterprise resources
planning, 4-63-4-64
cross-selling, 3-3 7, 3-54

2010 APICS
All rights reserved .

CRP. See capacity: requirements planning


CTM. See collaborative transportation
management
CTP (capable-to-promise), 4-72
C-TPAT (Customs-Trade Partnership Against
Terrorism), 1-138-1-139
CTX (consortia trade exchanges), 4-143
culture, 3-9, 3-76
conflicts, 1-71-1-72
and customer relationship management, 38-3-12
dimensions of, 3-9, 3-10
and supplier relationship management, 3-83-12
cumulative lead time, 2-93
currency
exchange risk, 2-261
hedging, 2-261
custom linkages, 4-39-4-40
customer aggregation, ~-17
customer care systems, 3-50-3-51
customer data warehouse (CDW), 3-49
customer expectations, 2-193
customer feedback questionnaires, 3-59
customer focus, 3-5-3-6, 3-22-3-25. See also
customer relationship management
customer focus/alignment strategy, 1-53-1-55
customer, in basic supply chain, 1-3, 1-4
customer information, sources of, 3-45
customer, lifetime, 3-20-3-25
customer needs, 3-42-3-44
customer problem tracking, 3-56
customer readiness to adopt technology, 3-44
customer relationship management, 3-3- 3-15, 4-92
challenges in implementing, 3-7-3-8
components of, 3-25-3-31
cultural issues, 3-8-3-12
defined, 3-3
and enterprise resources planning, 4-65-4-66
integration with supplier relationship
management, 3-126-3-143
and lifetime customer, 3-20-3-25
measuring performance, 3-25, 3-58-3-59
outsourcing, 3-59-3-61
and placement decisions, 3-29-3-30
and product decisions, 3-26-3-27

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CSCP Learning System

customer relationship management (continued)


and product life cycle, 3-31-3-35
and promotional activities, 3-30-3-31
roadblocks to implementation, 3-134-3-137
role of information, 3-44-3-48
role oftechnology, 3-13, 3-48-3-57
strategies for customer segments, 3-39-3-44
strategies for customer types, 3-35-3-38
customer resistance to implementation of customer/
supplier relationship management, 3-135
customer retention, 3-54
customer satisfaction, 2-193, 3-58-3-59
customer segmentation, 3-24, 3-39-3-44
customer service, 2-191-2-193, 3-133-3-134
customer success, 2-193
customer types, CRM strategies for, 3-35-3-38
customer value, 1-37- 1-40, 1-113, 3-40-3-41
customer, voice of, 3-45- 3-46
customers
business-to-business, 3-43-3-44
loyal, 3-37-3-38
prospective, 3-36
retail, 3-43
service-minded, 3-42- 3-43
vulnerable, 3-36
win-back, 3-37
customization of enterprise resources planning
systems, 4-52
customs, 2-253, 2-257
clearing, 2-258- 2-259
duties, 2-257
packaging for, 2-250
customs house brokers, 2-235, 2-239
Customs-Trade Partnership Against Terrorism
(C-TPAT), 1-138-1-139
cycle counting, 2-136
cycle stock, 2-130
cycle time, 2-131
cycles, 2-4, 2-20-2-21

D
dangerous goods. See hazardous materials
data
accuracy,4-13,4-18-4-19
aggregation, 4-17
analysis, 4-13, 4-19-4-29

2010 APICS
All rights reserved.

l-204

data (continued)
ancillary, 4-15
batch, 4-16
capture, 4-14-4-16
cleansing, 4-18
collection of, 4-12, 4-14-4-18
dicing, 4-28
dictionary, 4-8
formats, 4-1 06
manipulation language, 4-8
mining, 4-26
networks, external, 3-55
normalization, 4-18
providing access to, 4-12-4-13
real-time, 4-4-4-5,4-16
slicing, 4-28
transpmtation/integration, in radio frequency
identification, 4-117
types of, 4-16
use, 4-11-4-30
validation, 4-17-4-18
visibility of, 4-13
volume, 4-14
warehouses, 3-49,4-10
database management system (DBMS), 4-8, 49-4-10
databases, 4-8-4-11
datamarts, 4-1 0
data-oriented middleware, 4-3 7
DBMS (database management system), 4-8, 49-4-10
decision support systems (DSS), 1-113, 4-24-426
declared value, 2-255
decline stage in product life cycle, 3-35
decoupling, 2-13 0
defect measurement, 1-156, 1-166
delivery
requirements, in contracts, 3-86
scheduling, 4-81
Delphi method, 2-18-2-19
demand, components of, 2-4
demand, definition of, 2-4
demand, dependent, 2-15-2-16, 2-96-2-97, 2137
demand enhancement, 3-129-3-130

Version 2.1, 2010 Edition

Cumulative Course Index

demand forecasting, 2-9-2-10, 4-29--4-30


demand, independent, 2-15-2-16, 2-96-2-97, 2137
demand management, 2-4
demand management auctions, 4-146
demand matching, 2-84
demand planning, 2-3-2-51
collaborative, 2-5
role ofmarketing, 2-44-2-51
in S&OP process, 2-86
demand pull, 2-126
demand time fence, 2-94
demand variability, 1-90
countermeasures, 2-11-2-13
sources of, 2-6-2-8
See also bullwhip effect
demand-driven enterprise, 1-57-1-60
density, and economics of transportation, 2186
dependent demand, 2-15-2-16, 2-96-2-97, 2137
design
for assembly (DF A), 2-64-2-65
collaborative, 2-61-2-69
for the environment, 2-66-2-68
integral, 2-70
for logistics (DFL ), 2-65-2-66
for manufacture (DFM), 2-64-2-65
for manufacture and assembly (DFMA), 264-2-65
modular, 2-69-2-71
of products, 2-60-2-73
for remanufacture, 2-73
for reverse logistics, 2-66-2-68, 2-228-2231
for supply chain, 2-62
development stage in product life cycle, 3-32-3-33
DFA (design for assembly), 2-64-2-65
DFL (design for logistics), 2-65-2-66
DFM (design for manufacture), 2-64-2-65
DFMA (design for manufacture and assembly),
2-64-2-65
DI (distributor integration), 3-81-3-82, 3-136
differentiation of product/service, 1-86-1-87
disasters, and demand variability, 2-8

2010 APICS
All rights reserved.

1-205

distance
and demand variability, 2-8
and economics of transportation, 2-185
distributed processing, 4-7
distribution, 3-130
inventory, 2-111
requirements planning (DRP), 2-110-2-113,
4-74--4-76
distributor, 1-6
integration, 3-81-3-82, 3-136
resistance to implementation of
customer/supplier relationship
management, 3-136
DMADV (Define, Measure, Analyze, Design,
Verify) process, 1-165
DMAIC (Define, Measure, Analyze, Improve,
Control) process, 1-165
dock receipt, 2-248
documentation, export-import, 2-244-2-248, 2258-2-259
downside supply chain adaptability, 1-123
DRP (distribution requirements planning), 2110-2-113, 4-74--4-76
DSS (decision support systems), 1-113,4-24--426
due diligence, 4-36
Dutch auctions, 4-146
duties, customs, 2-257
duty drawbacks, 2-255

E
EAI (enterprise application integration), 4-37--441
EBS (electronic business systems) backbone
functions, 3-113-3-114
e-business
collaboration, 4-130--4-134
communication, 4-131--4-132
costs/drawbacks, 4-126--4-127
joint processes, 4-130--4-134
requirements for success, 4-129--4-130
return on investment, 4-127--4-129
strategy, 4-122--4-123
terminology, 4-121--4-122
e-business supply chain vs. traditional
supply chain, 4-125

Version 2.1, 2010 Edition

CSCP Learning System

enterprise resources planning (continued)


at retail level, 4-92
and supplier relationship management, 465-4-66
and supply chain evolution, 4-51
system assumptions, 4-52-4-53
system complexity, 4-53
upgrading, 4-51-4-52,4-57-4-58
use in aligning operations with strategy, 190-1-92
varieties of, 1-91-1-92
environment, 1-38-1-40, 1-41-1-44, 1-143, 2225
EOQ (economic order quantity), 2-139- 2-141
EPC (Electronic Product Code), 4-112-4-116
EPCglobal, 4-112-4-116
ERP. See enterprise resources planning
ETCs (export trading companies, 2-236, 2-239
European Union, directives on material content
disclosure, 1-14 2
evolution of supply chain management, 1-17-1-29
exempt carriers, 2-184-2-185
expett systems, 4-28
exploitative/exploratory information technology,
4-31
exponential smoothing, 2-26-2-28
export declaration, 2-244, 2-245
export license, 2-244
export management companies (EMCs), 2-236,
2-239
export packing companies, 2-237, 2-239
export trading companies (ETCs), 2-236, 2-239
export-import
declared value, 2-255
documentation, 2-244--2-248, 2-258-2-259
duty drawbacks, 2-255
harmonized system classification codes, 2253-2-254
import costs, 2-255, 2-257
import duty, 2-255
import licensing, 2-259-2-260
lncoterms, 2-240- 2-243, 3-86-3-87
packaging, 2-248, 2-250-2-251
participants, 2-232-2-239
risk, hedging, 2-260-2-264
value-added tax, 2-255

ebXML (electronic business XML), 4-106


e-commerce, 4-122
economic order quantity (EOQ), 2-139-1-141
economics of transportation, 2-185-2-191
economies of scale, 1-1 09, 2-185- 2-186
EDI. See electronic data interchange
EDT (electronic data transfer), 4-98-4-106
efficiency, 2-122
increased, as result of information sharing,
3-129-3-131
in measuring capacity, 2-122-2-123
electronic business systems (EBS) backbone
functions, 3-113-3-114
electronic business XML (ebXML), 4-106
electronic data interchange, 2-11, 2-12,2-215,4101
electronic data transfer (EDT), 4-98-4-106
Electronic Product Code (EPC), 4-112-4-116
EMA (enterprise marketing automation), 3-533-54
EMCs (export management companies), 2-236,
2-239
energy, recovery of, 2-227
engineer-to-order, 2-85
enterprise application integration (EAI), 4-37-441
enterprise marketing automation (EMA), 3-533-54
enterprise resources planning, 1-90, 4-43, 4-44,
4-50-4-66
advancements, 4-55-4-56
backbone,4-58-4-59
vs. best-of-breed systems, 4-56-4-57
configuration vs. customization, 4-52
core functions, 4-54
and customer relationship management, 465-4-66
defined, 4-50
integration, 4-65
inter-enterprise strategy, 4-62-4-66
linking to, 4-51-4-52
modules for supply chain management, 458-4-61
multiple systems and advanced planning
systems, 4-74
older systems, issues, 4-53

2010 APICS
All rights reserved.

1-206

Version 2.1, 2010 Edition

Cumulative Course Index

fourth-party logistics (4PL), 2-153,2-218-2219,2-220-2-221, 3-79-3-80


free trade zones, 2-256-2-258
freight
forwarders, 2-232-2-234, 2-238
rating, 4-81
frozen zone, 2-94
FTP (file transfer protocol), 4-101
FTZs (foreign trade zones), 2-256-2-258
functional products, 1-60-1-62
fuzzy logic, 4-27

extended enterprise stage of supply chain


management development, 1-22, 1-26-1-29,
4-44-4-45, 4-46-4-47, 4-61
extensible markup language (XML), 4-102-4103
external data networks, 3-55
external factors in demand variability, 2-8
extranet, 4-122
extrinsic forecasting techniques, 2-19, 2-33

F
fat clients, 4-99
Federal Express, 2-179
feedback questionnaires, 3-59
file transfer protocol (FTP), 4-101
fill rate, 2-192
financial performance, managing supply chain
for, 1-128-1-133
financial statements, 1-122-1-132
financial value, creation of, 1-3 5-1-3 7
finished goods inventory, 2-132
fishyback service, 2-180-2-181
five Ss and lean supply chain thinking, 1-181-1182
fixed order point, 2-141
fixed order quantity, 2-139
flexibility and operational performance, 2-193
fluctuation inventory. See safety stock
forecast error, 2-31-2-33
forecast-driven enterprise, 1-55-1-57, 1-58
forecasting, 2-5, 2-12, 2-14-2-34
extrinsic techniques, 2-19, 2-33
intrinsic techniques, 2-19,2-20-2-33
naive, 2-22, 2-28
principles, 2-14-2-15
qualitative approaches, 2-16-2-19
quantitative approaches, 2-19-2-34
service sector, 2-34
forecasts
avoiding multiple, 2-11
mix, 2-14
foreign trade zones, 2-256-2-258
forklift trucks, 2-209
forward auctions, 4-146
foundation layer ofB2B/B2C e-business, 4-135
"four Ps" of marketing, 3-25-3-31

2010 APICS
All rights reserved.

G
general trading companies, 2-236
genetic algorithms, 4-28
global alliances, 3-76-3-77
global locations, evaluation of, 2-267
global logistics, 2-153, 2-231-2-232
declared value, 2-255
documentation, 2-244-2-248, 2-258-2-259
duty drawbacks, 2-255
export-import participants, 2-232-2-239
foreign/free trade zones, 2-256-2-258
harmonized system classification codes, 2253-2-254
import costs, 2-255, 2-257
import licensing, 2-259-2-260
Incoterms, 2-240-2-243, 3-86-3-87
landed/hidden costs, 2-265-2-266
locations, evaluation of, 2-267
packaging concerns, 2-248, 2-250-2-251
risk, hedging, 2-260-2-264
trade agreements, 2-251-2-252, 2-256
Global Reporting Initiative (GRI), 1-142
global sourcing, 3-67-3-68, 3-85-3-89
global track and trace, 4-83
globalization, impact on supply chain
management, 1-45-1-48
government, transportation goals of, 2-162-2163
graphical user interface (GUI), 4-11
green supply chain, 1-32, 1-41-1-44
green supply chain management, 1-32-1-35, 154
GreenSCOR, 1-128
GRI (Global Reporting Initiative), 1-142

1-207

Version 2.1, 2010 Edition

CSCP Learning System

groupware databases, 4-10


growth stage in product life cycle, 3-34
GSI, 4-112
GUI (graphical user interface), 4-11

import duty, 2-255


import licensing, 2-259-2-260
IMS (inventory management systems), 4-74-476
incentives in contracts, 3-88
income statement, 1-129, 1-131-1-132
Incoterms, 2-240-2-243, 3-86-3-87
independent demand, 2-15- 2-16,2-96-2-97, 2137
independent public trade exchanges (ITX)/
public marketplaces, 4-142, 4-143
individual incentives, conflict with organization
goals, 1-70
information, customer, sources of, 3-45
information levels in supply chain, 4-5-4-7
information management tools, 3-128
infmmation, operational planning/execution, 4-6
infmmation, real-time, 4-4-4-5
information, role in customer relationship
management, 3-44-3-48
information sharing, 2-11,2-35
information, strategic, 4-5, 4-6-4-7
information system architecture, 4-3
information, tactical, 4-5, 4-6-4-7
information technology, 1-113,4-2
benefits for supply chain, 4-3
exploitative/exploratory, 4-31
infrastructure, 4-7-4-11
role in supply chain management, 4-30-4-31
and taxes, 1-133
and warehousing, 2-215- 2-218
innovative products, 1-61-1-62
intangible costs, 4-34-4-35
integral design, 2-70
integrated enterprise stage of supply chain
management development, 1-22, 1-25-1-26,
4-44-4-45, 4-46, 4-61
integrated networks, 3-126- 3-129, 3-137-3-143
integration
among technological areas, 3-55-3-56
architecture: distributed processing, 4-40-4-41
of customer and supplier relationship
management, 3-126- 3-143
of supply chain partners, 3-6
intelligent agents, 4-27
intermodal transport, 2-180- 2-181

H
handling, and economics of transportation, 2187-2-188
harmonized system classification codes, 2-2532-254
Harmonized Tariff Schedule (HTS), 2-253- 2254
hazardous materials (hazmat), 2-67,2-188- 2-191
heads-up displays, 4-110
hedging risk, 2-260- 2-264
hidden costs, 2-265- 2-266
historical analogy, 2-17
Hofstede's dimensions of culture, 3-9,3-10
holding costs, 2-13 7
horizontal integration, 1-18, 1-20-1-21
horizontal trade exchanges/marketplaces, 4-144,
4-145
House ofToyota, 1-176-1-179
HTML (hypertext markup language), 4-1 00
HTS (Hrumonized Tariff Schedule), 2-253-2254
HTTP (hypertext transfer protocol), 4-100
hybrid modes of transportation, 2-177-2-181
hybrid production strategy, 2-84
hybrid trade exchanges/marketplaces, 4-144-4145
hypertext, 4-100
hypertext markup language (HTML ), 4-100
hypertext transfer protocol (HTTP), 4-100

identifying patterns, 1-155-1-156


IMDG (International Maritime Dangerous
Goods) Code, 2-190
implementation and change management step in
continuous improvement model, 1-151, 1185- 1-188
implicit business models in enterprise resources
planning, 4-51
import costs, 2-255, 2-257

2010 APICS
All rights reserved.

1-208

Version 2.1, 2010 Edition

Cumulative Course Index

internal resistance to implementation of


customer/supplier relationship management,
3-135-3-136
International Maritime Dangerous Goods
(IMDG) Code, 2-190
International Standards Organization (ISO)
certification, 3-101-3-103
Internet, 4-8
marketplaces, 3-136-3-137
and supply chain, 4-123-4-125
Internet-enabled supplier relationship
management tools, 3-113-3-115
interpersonal skills, 3-90
interplant demand, 2-89-2-90
intranet, 4-122
in-transit inventory, 2-158
intrinsic forecasting techniques, 2-19, 2-20-2-33
introduction stage in product life cycle, 3-33-3-34
inventory, 2-129-2-130
analysis, ABC, 2-133-2-134
anticipation, 2-206
available, 2-94
control, 1-111
costs, 2-137-2-139
distribution, 2-111
in-transit, 2-158
and lot size, 3-131-3-132
management, 2-128-2-144, 4-74-4-76
management systems (IMS), 4-74-4-76
methods of counting, 2-135-2-136
minimum, 2-196
models, 2-136-2-141
optimization software, 3-111
physical, 2-13 6
and product variety, 3-133
reduction, 1-17 0
transportation, 2-152
and transportation costs, 3-132
types of, 2-131-2-132
velocity, 2-129
inverted duties, 2-258
ISO (International Standards Organization)
certification, 3-101-3-103
ITX (independent public trade exchanges), 4142,4-143

2010 APICS
All rights reserved.

J, K
jidoka, 1-178-1-179
JIT. See Just-in-Time
joint processes, and e-business, 4-130-4-134
joint replenishment, 2-42
joint ventures, 3-74
Just-in-Time, l-162, 1-167-1-171, 1-178, 2-107,
2-127, 2-128
kaizen, 1-148, 1-177, 1-180-1-181
kanban, 1-170-1-171, 2-126-2-127
keiretsu, 1-20
key performance indicators (KPis ), 1-114-1115, 1-185, 1-187
knowledge management, 3-53
KPis. See key performance indicators

L
labeling shipments for export, 2-250
labor management systems (LMS), 4-85
land bridge, 2-181
landed cost, 1-108-1-109,2-265-2-266
landfill, disposal in, 2-227
LANs (local area networks), 4-8
lateral integration, 1-18, 1-20-1-21
lateral supply chain management. See lateral
integration
LIC (letter of credit), 2-261-2-264
lead time, 2-10, 2-93, 3-80, 3-132-3-133
leadership compared to management, 1-135-1136
lean supply chain thinking, 1-162, 1-171-1-172,
2-127-2-128
five Ss, 1-181-1-182
House ofToyota, 1-176-1-179
jidoka, 1-178-1-179
and Just-in-Time, 1-178
kaizen event/b1itz(smJ, 1-180-1-181
objectives, 1-173-1-175
principles, 1-17 5
value stream mapping, 1-180
waste, 1-183-1-185
legacy systems, 4-37, 4-53
legal authority in contracts, 3-89
less-than-truckload (LTL) segment of trucking
industry, 2-168, 2-169

1-209

Version 2.1, 2010 Edition

CSCP Learning System

letter of credit (LIC), 2-261 - 2-264


level of service, 2-140
level production strategy, 2-84
level schedule, 1-170
leveling, 1-176, 2-89
liability, 2-188-2-191
life cycle
design, 2-229-2-230
support, 2-197
trends, and demand variability, 2-7
lifetime customer, 3-20-3-25
linear programming, 4-22
liquid zone, 2-94
LMS (labor management systems, 4-85
load, 2-89
leveling, 1-176, 2-89
matching/optimization, 4-81
tendering, 4-81
local area networks (LAN s), 4-8
location planning, 4-91
locations, evaluation of, 2-267
logistics, 2-151-2-157
goals/strategies, 2-153- 2-157, 2-196-2-197
networks, and taxes, 1-132-1-133
parks, 2-160-2-161
system, 2-182
lot size, 2-124,3-131-3-132
lot-for-lot replenishment, 2-103- 2-105
low price, as competitive strategy, 1-87-1-88
loyal customers, 3-37-3-38
L TL (less-than-truckload) segment of trucking
industry, 2-168, 2-169
lumping, 2-10

management estimate, as qualitative approach to


forecasting, 2-17
management processes, supply chain, 1-10-117
managing and leading people, 1-133-1-136
managing supply chain relationships
benefits of, 3-129- 3-134
resolving conflicts of interest, 3-131-3134
manifesting, 4-81
manufacturing execution system (MES), 4-73-474
manufacturing modules in enterprise resources
planning, 4-60-4-61
manufacturing supply chain model, 1-5-1-6
maquiladora, 2-256
market
changes in, 1-82-1-83, 1-84-1-86
research, 2-18, 2-45-2-4 7
marketing
automation, 3-53-3-54
events, 3-54
role in demand planning, 2-5, 2-44-2-51
technology for, 3-51-3-55
mass customization, 2-71-2-73
master planning, 2-93
master production schedule, 2-87-2-96, 2-116,
2-117
master scheduling grid, 2-92-2-95
material content reporting, 1-142-1-143
material requirements planning (MRP), 2-96- 2110
materials management, 2-132
mathematical models, 4-21-4-23
mathematical programming, 4-22
maturity stage in product life cycle, 3-34-3-35
mean absolute deviation (MAD), 2-31-2-33
mean squared error (MSE), 2-32-2-33
measurement of defects, 1-156, 1-166
member services, 3-115
merchandise and assortment planning software,
4-90-4-91
merchandising operations, 4-91
mergers, 1-72, 3-72, 3-73, 4-132
MES (manufacturing execution system), 4-73-474

M
MAD (mean absolute deviation), 2-31-2-33
magnetic stripes, 4-109
maintenance/repair/operations (MRO) inventory,
2-132
make-or-buy decision, 1-105-1-110
make-to-order strategy, 2-85, 2-91, 2-92
make-to-stock strategy, 2-85, 2-91
malfunction recovery and operational
performance, 2-193
management compared to leadership, 1-135- 1136

2010 APICS
All rights reserved.

1-210

Version 2.1, 2010 Edition

..

Cumulative Course Index

metrics, 1-81, 1-114- 1-128


supply chain asset management, 1-119, 1125-1-126
supply chain costs, 1-119, 1-123-1-125
supply chain flexibility, 1-119, 1-122-1-123
supply chain reliability, 1-119, 1-121
supply chain responsiveness, 1-119, 1-122
middleware, 4-37-4-38
minimum inventory, 2-196
minimum variances, 2-196
mining, data, 4-26
mix forecast, 2-14
mixing, in warehousing, 2-207-2-208
model validation, 4-1 7-4-18
modeling, 4-20-4-24
conceptual models, 4-21
mathematical models, 4-21-4-23
optimization, 4-21-4-23
simulation models, 4-20, 4-23-4-24
modular design, 2-69- 2-71
modular system, 2-81
Monte Carlo simulation, 4-24
motor carriers, 2-167-2-169, 2-176
moving averages, 2-22-2-26, 2-28
MPS. See master production schedule
MRO (maintenance/repair/operations) inventory,
2-132
MRP (material requirements planning), 2-96-2110
MRP II, 2-109-2-110
MSE (mean squared error), 2-32-2-33
multilevel bill of material, 2-99
multiple dysfunction stage of supply chain
management development, 1-22-1-23, 4-444-45, 4-61
multiple forecasts, avoiding, 2-11
multiprocessing, 2-81
multisourcing, 3-69

network planning, 1-110- 1-111


networking, computer, 4-7-4-8
networks, 4-43
neural networks, 4-27-4-28
new product introductions, 2-47- 2-50
niche marketing, 1-87
no bucket systems, 2-1 07
nonlinear programming, 4-22-4-23
non-vessel operating common carriers, 2-234- 2235, 2-238
normalization of data, 4-18
North American Free Trade Agreement, 2-2512-252, 2-256
nucleus firm, 1-12, 3-141-3-142,4-63
NVOCCs. See non-vessel operating common
earners

0
Object Naming Service (ONS), 4-114
object-oriented databases, 4-10
objectives of supply chain management, 1-1031-104
offsetting, 2-105
offshoring, 3-67-3-68
off-site delivery centers, 3-120
OLAP (online analytical processing), 4-284-29
Oliver Wight checklist, 1-161
ongoing supplier relationships, 3-72
online analytical processing (OLAP), 4-28-4-29
online sales, 3-55
ONS (Object Naming Service), 4-114
operational execution, 4-6, 4-43-4-44
operational performance and customer service,
2-192-2-193
operational planning, 4-6, 4-43
operating system (0/S), computer, 4-7-4-8
operations planning/control, 2-77-2-79
capacity management, 2-114-2-128
distribution requirements planning, 2-110-2113
inventory management, 2-128-2-144
master production scheduling, 2-87-2-96
material requirements planning, 2-96-2-11 0
sales and operations planning (S&OP), 279-2-87

N
NAFTA. See North American Free Trade
Agreement
naive forecasting, 2-22, 2-28
"nervousness" in material requirements planning
system, 2-106-2-107
net profit, 1-30

2010 APICS
All rights reserved.

1-211

Version 2.1, 2010 Edition

CSCP Learning System

opportunity management applications, 3-53


optimization, 4-21--4-23
"Orange Book," 2-190
orchestrator firm. See nucleus firm
order hatching, 2-10
order fulfillment, 4-84--4-85
order fulfillment cycle time, 1-122
order point models, 2-141
order promising, 2-95
order/provisioning system, 3-55
order requirements in contracts, 3-87
ordering costs, 2-137-2-138
orders shipped complete, 2-192
organizational design, 1-7 6-1-7 8
organizational structure, reengineering, 3-7
origin, country of, 2-246- 2-24 7, 2-251-2252
0/S (operating system), computer, 4-7--4-8
outsourcing, 1-105- 1-110, 1-112,2-12, 2-2182-222, 3-67-3-68
customer relationship management, 3-59-361
risk management in, 3-120
supplier relationship management, 3-118--J120

performance
alerts, in measuring supplier performance, 3108
criteria, in contracts, 3-87
enhancing supplier, 3-100-3-110
operational, and customer service, 2-192-2193
reports, 3-108-3-109
speed of, 2-192
periodic counting, 2-135-2-136
perishables, packaging for, 2-250
personal insight, as qualitative approach to
forecasting, 2-1 7
physical inventory, 2-136
pick-to-light systems, 2-213, 4-109
picking systems, 2-212-2-213
piggyback service, 2-180
pipeline inventory, 2-130-2-131
pipeline management applications, 3-53
pipelines, 2-173-2-17 4, 2-17 6, 2-177
placement, 2-48-2-49, 3-28-3-30
planning horizon, 2-93-2-94
planning time fence, 2-94
poka-yoke, 1-179
poor quality, costs of, 1-152
portals, 4-149--4-151
post-implementation review (ofiT projects), 436--4-37
postponement, 2-13, 2-68, 2-206
post-shipment analysis, 4-82
predictive chum model, 3-36
price, 2-48, 3-27
in contracts, 3-86
fluctuations, 2-10
low, as competitive strategy, 1-87-1-88
stability, 2-12- 2-13
private carriers, 2-182
private fleet management, 4-80--4-81
private trade exchanges/private marketplaces, 4142, 4-143
private warehouses, 2-202
pro forma commercial invoice, 2-246
problem resolution channels in contracts, 388
problem tracking, 3-56

p
P2P (peer-to-peer) network, 4-40--4-41
PAB (projected available balance), 2-94-2-95
PAC. See production: activity control
package delivery services, 2-177-2-180
packaging, 2-49, 2-188, 2-248, 2-250-2-251
pallets, 1-143
Pareto diagram, 1-15 7, 1-166
participant resistance to customer/supplier
relationship management, 3-135-3-137
partnerships, 3-72, 3-73
passive tags, 4-115
patterns, identifying, 1-15 5-1-15 6
payment terms in contracts, 3-87
PCDM (product content data management), 485--4-86
peer-to-peer network, 4-40--4-41
penalties in contracts, 3-88
perfect order fulfillment, 1-121

2010 APICS
All rights reserved.

1-212

Version 2.1, 2010 Edition

Cumulative Course Index

push systems, 1-57-1-58, 1-168-1-169, 2-110,


2-111, 4-3
pyramid forecasting, 2-1 7

process analysis step in continuous improvement


model, 1-150, 1-154-1-159
process assessment step in continuous
improvement model, 1-150-1-151
process benchmarking, 1-161-1-162
process chart, 1-150
process decisions, 1-1 05
process mapping, 1-154-1-155
process-oriented middleware, 4-38
procurement
strategies, 1-112
and taxes, 1-132
producer in basic supply chain, 1-3
product, 3-25-3-27
aggregation, 4-17
design, 1-112-1-113, 2-60-2-73, 2-229
introductions, 2-47-2-50
life cycle, 3-31-3-35
management, 2-50-2-51
reusing, 2-226-=-2~227- - variety, and inventory, 3-133
product content data management (PCDM), 485-4-86
production
activity control, 2-116, 2-117, 2-124-2-128
plan, 2-79-2-80, 2-116, 2-117
strategies, 2-84
synchronized, 1-13 7
profit, 1-30
profit margin, 1-30
profitable-to-promise (PTP), 4-72
project planning step in continuous improvement
model, 1-151
projected available balance, 2-94-2-95
promotion (4 Ps), 3-30-3-31
promotions, 2-8, 2-11, 3-54
prospective customers, 3-36
PTP (profitable-to-promise), 4-72
PTX (private trade exchange), 4-142,4-143
public, transportation goals of, 2-163
public warehouses, 2-202-2-203
pull systems, 1-57-1-60, 1-168-1-169,2-110-2111, 2-127-2-128, 4-3
purchasing roles, impact of supplier relationship
management, 3-115-3-118

2010 APICS
All rights reserved.

Q
QR (quick response) program, 2-35, 3-80
qualitative approaches to forecasting demand, 216-2-19
quality, 2-196
assurance, in contracts, 3-87
costs of poor quality, 1-152
improvement process for suppliers, 3-110
of products/services, 1-3 7
quantitative approaches to forecasting demand,
2-19-2-34
queries, 4-26
questionnaires for customer feedback, 3-59
quick response (QR) program, 2-35, 3-80
quotation management, 3-53

R
radio frequency devices, 4-108
radio frequency identification, 2-215-2-217, 4112-4-118
rail transport, 2-164-2-167, 2-17 6
random variation, 2-4
rapid response, 2-196
rated capacity, 2-122-2-123
rating supplier performance, 3-106, 3-107-3-109
rationing, 2-10-2-11
raw materials inventory, 2-131
RCCP. See rough-cut capacity planning
real-time data, 4-4-4-5, 4-16
recycling, 2-66-2-67, 2-227
relational databases, 4-9
remanufacturing, 2-73
resistance to customer/supplier relationship
management, 3-135-3-137
resource management, 2-119
resource planning, 2-90, 2-116, 2-117, 2-118
resource requirements planning, 2-117-2-119, 2128
resource use, reducing, 2-226
response management, 3-54

1-213

Version 2.1, 2010 Edition

CSCP Learning System

responsiveness, as competitive strategy, 1-88


retail customers, 3-43
retail-level planning and optimization software,
4-90--4-93
return on assets, 1-36
return on investment, 1-36, 4-35, 4-127--4-129
return on supply chain fixed assets, 1-126
reverse auctions, 4-146
reverse logistics, 2-153, 2-222-2-230
design for, 2-66-2-68, 2-227-2-230
packaging for, 2-251
payoff of, 2-230
reverse supply chain, 2-222-2-223. See also
reverse logistics
RF (radio frequency) devices, 4-108
RFID. See radio frequency identification
ripple effect. See bullwhip effect
risk, 1-93
categories of supply chain risk, 1-94-1-95
currency exchange, 2-261
hedging, 2-260-2-264
level, 1-95
management of, 1-92-1-99, 1-126-1-127, 399-3-100, 3-120
mitigating, in technology implementation, 436
pooling, 2-15,2-157
prevention, 1-96-1-98
profile, 1-95-1-96
reduction, and outsourcing, 1-1 09
response plan/planning, 1-96
ROA (return on assets), 1-36
road transport. See motor carriers
roadblocks to implementation of customer/
supplier relationship management, 3-134-3137
roadrailer, 2-180
ROI (return on investment), 1-36,4-35, 4-1274-129
root causes
analysis, 1-159, 1-166
finding, 1-157-1-159
RosettaNet, 4-105--4-106
rough-cut capacity planning, 2-89-2-91, 2-116,
2-117,2-119-2-120,2-128
routing, 2-103, 2-120-2-121,4-80--4-81

2010 APICS
All rights reserved.

5
SaaS (Software as a Service), 4-94--4-95
S&OP (sales and operations planning), 2-79-287
safety stock, 1-55-1-56, 2-9-2-10,2-130, 2142-2-144
sales and marketing, technology for, 3-51-3-55
sales and operations planning (S&OP), 2-79-2-87
sales force automation (SFA), 3-52-3-53
sales force consensus estimate, as qualitative
approach to forecasting, 2-17
sales process/activity management, 3-53
Sarbanes-Oxley Act (SOX), 1-140-1-142
SCEM (supply chain event management), 4-874-90
scheduling
delivery, 4-81
and Just-in-Time, 1-170-1-171
SCM. See supply chain management
SCMC (supply chain management cost), 1-1231-124
scope creep, 4-36
SCOR model. See Supply-Chain Operations
Reference model
scorecards, in measuring supplier performance,
3-108
SCV (supply chain visibility) systems, 4-88--489
seasonal index, 2-29-2-30
seasonality, 2-4, 2-7, 2-20
Section 401 (SOX), 1-140, 1-141
Section 404 (SOX), 1-140-1-141
security
issues, 1-138-1-139, 3-115,4-133
requirements in contracts, 3-88
segmentation, customer, 3-24, 3-39-3-44
sell-side e-commerce, 4-13 7--4-13 8
semifunctional enterprise stage of supply chain
management development, 1-22, 1-23-1-24,
4-44--4-45, 4-46, 4-61
semipassive tags, 4-115
service channel technology, 3-55
service industries, 1-7
service sector forecasting, 2-34
service-minded customers, 3-42-3-43

l-214

Version 2.1, 2010 Edition

Cumulative Course Index

..

service-oriented architecture, 4-39-4-40, 4-1034-105


services, supply chains for, 1-7-1-8
setup costs (in inventory), 2-138
SFA (sales force automation), 3-52-3-53
ship agents, 2-237, 2-239
ship brokers, 2-237, 2-239
shippers, transportation goals of, 2-162
shipping associations, 2-23 7, 2-239
shipment
planning, 4-80
tracking/settlement, 4-81-4-82
shortage gaming, 2-10-2-11, 2-13
short-term storage, 2-160-2-161
silos, 1-15
Simple Object Access Protocol (SOAP), 4-103
simulation models, 4-20, 4-23-4-24
SIPOC (supplier, input, process, output,
customer) diagram, 1-15 0
six sigma, 1-162, 1-163-1-167
SKU (stockkeeping unit), 2-155, 4-17
slushy zone, 2-94
small bucket systems, 2-107
smart cards, 4-109
SOA. See service-oriented architecture
SOAP (Simple Object Access Protocol), 4-103
social value, creation of, 1-40-1-44
software
advanced planning and scheduling, 4-71-474
applications, 4-11
business process management (BPM), 4-38
inventory optimization, 3-111
material requirements planning, 2-107-2110
merchandise and assortment planning, 4-904-91
product content data management (PCDM),
4-85-4-86
retail-level planning and optimization, 4-904-93
supplier relationship management, 3-110-3112
for warehousing, 2-208- 2-209, 2-214-2-218
Software as a Service (SaaS), 4-94-4-95
sorting systems, 2-212- 2-213

2010APICS
All rights reserved.

sourcing, 1-105-1-110, 3-67- 3-68, 3-85-3-89,


3-118
SOX (Sarbanes-Oxley Act), 1-140-1-142
specialty segment of trucking industry, 2-169.
See also Federal Express, United Parcel
Service
speed of performance, 2-192
spend management, 1-128
spot stocking, 2-206- 2-207
SQL (structured query language), 4-26
SRM. See supplier relationship management
stakeholders in supply chain, 1-30-1-32
standard deviation, 2-32
standards
communication, 4-100-4-105
EDI data, 4-101
industry-specific, 4-105-4-106
IT, 4-99-4-100
statements, financial, 1-129-1-132
statistical analysis, 4-26
status reporting in contracts, 3-88
stockkeeping unit (SKU), 2-155,4-17
stock-market style auctions, 4-146-4-14 7
stockouts, 2-138,2-192
stockpiling, 2-206
storage, temporary/short-term, 2-160-2-161
stowability and economics of transpottation, 2187
strategic alliances, 3-72, 3-73-3-85
strategic information, 4-5, 4-6-4-7
strategic network design, 4-42-4-43
strategic planning, 1-75- 1-82, 2-78, 4-5, 4-90
strategic relationships, 3-71 - 3-73
strategic sourcing and supplier relationship
management, 3-66-3-71
strategy
changing, 1-82-1-86
competing with, 1-63-1-66
corporate, 1-52- 1-86
customer focus, 1-5 3-1-5 5
defined, 1-51- 1-52
demand-driven enterprise, 1-57-1-60
global, 1-45
number of supply chains, 1-60-1-62
structured query language (SQL), 4-26
subcontracting, 2-1 03

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suboptimization, 1-70, 4-21--4-23


supplier co-location, 3-121-3-122
supplier in basic supply chain, 1-3, 1-4
supplier, input, process, output, customer
(SIPOC) diagram, 1-150
supplier lead time, 3-80
supplier partnerships, 3-73
supplier rating systems, 3-107-3-109
supplier resistance to implementation of
customer/supplier relationship management,
3-136- 3-137
supplier relationship management, 3-3-3-15, 492
challenges in implementing, 3-7-3-8
change, commitment to, 3-91
communication, 3-92, 3-98
creating successful relationships, 3-85-3-96
cultural issues, 3-8-3-12
defined, 3-3-3-4
and enterprise resources planning, 4-65--466
external interfaces, 3-115
implementation of strategy, 3-97-3-99
integration with customer relationship
management, 3-126-3-143
outsourcing, 3-118-3-120
performance, enhancing, 3-1 00-3-11 0
processing, 3-114
purchasing roles, impact on, 3-115-3-118
quality improvement process, 3-110
rating performance, 3-106, 3-107-3-109
relationship types, 3-71-3-73
risk in relationship, managing, 3-99-3-100
roadblocks to implementation, 3-134-3137
role in supply chain management, 3-66-368
role of technology, 3-13
services, 3-114-3-115
softhNare,3-110-3-112
strategic alliances, 3-72, 3-73-3-85
strategic relationships, 3-71-3-73
strategic sourcing, 3-66- 3-71
strategy implementation, 3-97-3-99
technology, 3-110-3-115
supplier-managed inventory, 3-80-3-81

2010 APICS
All rights reserved.

supply chain
asset management, 1-119, 1-125-1-126
benefits of information technology, 4-3
competition between supply chains, 1-63-167
costs, 1-119, 1-123-1-125
defined, 1-3, 1-9
development, stages of, 4-44--4-4 7
dynamics, 2-5-2-13
e-business supply chain vs. traditional
supply chain, 4-125
flexibility, 1-119, 1-122-1-123
green, 1-32, 1-41-1-44
and information technology, 4-2-4-7
Internet-enabled, 4-123--4-125
managing for financial performance, 1-1281-133
master planning, 4-43
metrics, 1-81
networks, integrated, 3-126-3-129, 3-137-3143
number of supply chains, 1-60-1-62
processes, 1-10- 1-17, 1-78
reliability, 1-119, 1-121
responsiveness, 1-119, 1-122
strategy, 1-75-1-86
synchronization, 1-136-1-137
and taxes, 1-132-1-133
traditional supply chain vs. e-business
supply chain, 4-125
and value chain, 1-10- 1-11
values, 1-29-1-35
visibility systems, 4-88--4-89
supply chain event management (SCEM), 4-874-90
supply chain management
comprehensive system, 4-41--4-4 7
creating value through, 1-29-1-44
defined, 1-10- 1-12
elements of, 1-110-1-113
evolution of, 1-17-1-29
green, 1-32-1-35, 1-54
impact of globalization, 1-45-1-48
innovative technologies, 4-69-4-95
lateral, 1-18, 1-20-1-21
objectives, 1-103-1-104

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supply chain management (continued)


processes, 1-1 0-1-1 7
relationships, 3-3-3-12
role of information technology, 4-30-4-31
role of supplier relationship management, 366-3-68
strategy, 1-51- 1-99
technology, 3-128
vertical, 1-17-1-20
supply chain management cost (SCMC), 1-1231-124
Supply-Chain Operations Reference model, 113-1-17
applicability ofSCOR Model9.0, 1-14-15
assumptions, 1-13-1-14
GreenSCOR, 1-128
metrics, 1-118- 1-128
processes, 1-15- 1-17
and risk management, 1-126-1-127
supply contracts, 1-111-1-112
supply-demand strategies, 2-84-2-86, 2-91- 2-92
surveys, in measuring supplier performance, 3108
sustainable trade practices, 1-142- 1-143
synchronization and supply chains, 1-136-1-137
synchronized production, 1-13 7
synthesized voice, 4-109

technology
audits, 4-32
customer readiness to adopt, 3-44
in customer relationship management, 313
decisions, 1-104-1-105
existing, 3-8
infrastructure, 4-7-4-11
mitigating risk in implementation, 4-36
in supplier relationship management, 3-13,
3-110-3-115
in supply chain management, 3-128
trends, 4-93-4-95
temporary storage, 2-160-2-161
terrorism, 4-4
thin clients, 4-99
third-party logistics (3PL), 2-153,2-218-2-220,
3-79-3-80
three "V s" of supply chain management, 1-881-90
throughput time, 2-126
time fence, 2-93-2-94
time series models. See intrinsic forecasting
techniques
TL (truckload) segment of trucking industry, 2168-2-169
TMS. See transportation: management
systems
TNT Logistics, 2-179
TOFC (trailer on flatcar), 2-180
total cost of ownership (TCO), 3-68
total quality management (TQM), 1-14 7, 1-148
tow tractors with trailers, 2-211
towlines, 2-210
TQM (total quality management), 1-147, 1148
track and trace, global, 4-83
trade agreements, 2-251-2-252, 2-256
trading exchanges, use of supply chain event
management, 4-90
trailer on flatcar (TOFC), 2-180
transfer of ownership in contracts, 3-86-3-87
transportation, 2-12,2-152,2-158-2-193
costs, and inventory, 3-132
costs, and lead time, 3-132-3-133
decision makers, 2-161-2-163

T
tactical information, 4-5, 4-6-4-7
tag read errors, 4-116-4-11 7
tags, EPC, 4-115-4-116
takt time, 1-178
tangible costs, 4-34-4-35
target costing, 1-88
taxes
and information technology, 1-133
and logistics networks, 1-132-1-133
and procurement, 1-132
savings, 1-132
TCO (total cost of ownership), 3-68
technological areas, integration among, 3-55-356
technological limitations to implementation of
customer/supplier relationship management,
3-134-3-135

2010 APICS
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CSCP Learning System

transportation (continued)
economics, 2-185-2-191
inventory, 2-152
legal types of carriers, 2-181-2-185
management systems (TMS), 3-82-3-83, 479--4-84
modes of, 2-163-2-181
network design, 4-80
trend adjustment, 2-28-2-29
trends, 2-4, 2-20
truckload (TL) segment of trucking industry, 2168-2-169

value proposition, 3-42


value stream, 1-11, 1-180
VANs (value-added networks), 4-66
variability, 1-88, 1-89, 1-90, 1-168
variance, 2-196
variation, random, 2-4
VAT (value-added tax), 2-255
velocity, 1-88, 1-89, 1-174,2-129
vendor-managed inventory, 2-11, 2-36-2-38, 380- 3-81, 3-129
vertical integration, 1-17- 1-20
vertical supply chain management. See vertical
integration
vertical trade exchanges/marketplaces, 4-144, 4145
virtual organizations, 3-8
virtual private networks (VPNs), 4-8
virtual trading exchanges, 4-143
visibility, 1-88, 1-89, 1-153-1-154, 4-88--4-89
visibility tools, 4-82
vision systems, 4-109
visual signals. See kanban
VMI. See vendor-managed inventory
VOC (voice of the customer), 3-45-3-46
voice ofthe customer (VOC), 3-45-3-46
volume, and economics oftransportation, 2186
VPNs (virtual private networks), 4-8
"Vs" of supply chain management, three, 1-881-90
vulnerable customers, 3-36

u
UDDI (Universal Description, Discovery, and
Integration), 4-103
United Nations Recommendations on the
Transport of Dangerous Goods (UNRTDG),
2-190
United Parcel Service (UPS), 2-178-2-179
Universal Description, Discovery, and
Integration (UDDI), 4-103
Universal Product Code (UPC), 4-111
universality, 2-71
UNRTDG (United Nations Recommendations
on the Transport of Dangerous Goods), 2-190
UPC (Universal Product Code), 4-111
UPS (United Parcel Service), 2-178-2-179
up-selling, 3-37-3-38, 3-54
upside supply chain adaptability, 1-123
upside supply chain flexibility, 1-122
U.S. Customs and Border Protection, 1-138-1139
U.S. Food and Drug Administration, 1-143
utilization, in measuring capacity, 2-122

W, X, Y, Z
W3C (World Wide Web Consortium), 4-100
wagon cranes, 2-211-2-212
WANs (wide area networks), 4-8
warehouse management systems (WMS), 2-214,
4-76--4-79
warehouses, 2-152-2-153,2-194-2-196
capabilities, 2-204-2-208
equipment, 2-208-2-214
location, 2-200-2-201
number of, 2-197-2-200
ownership, 2-201-2-204
software, 2-208-2-209, 2-214-2-218
warehousing, value-added, 2-195-2-196

v
value, 1-29, 1-37-1-40, 1-113
value added, 1-29, 3-69
value-added networks (VANs), 4-66
value-added tax (VAT), 2-255
value-added warehousing, 2-195-2-196
value chain compared to supply chain, 1-10-111
value profile, 3-42

2010 APICS
All rights reserved.

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Cumulative Course Index

waste elimination/reduction, 1-167-1-185


water transport, 2-170-2-172, 2-176
Web processing, 3-115
Web services, 4-39-4-40, 4-102-4-103
Web Services Description Language (WSDL),
4-103
Web-based agents, 4-26-4-27
Web-based applications, 3-128. See also Internet
Web-based procurement technologies, 3-119-3120
Web-based transportation management systems,
4-82-4-83
Web-based warehouse management systems, 477
Web-enabled business-to-business commerce, 4136-4-139
Web-enabled business-to-consumer sales, 4136-4-139

2010 APICS
All rights reserved.

weighted moving averages, 2-24-2-26, 2-28


wide area networks (WANs), 4-8
win-back customers, 3-37
WIP (work-in-process) inventory, 2-131-2-132
wireless radio data terminal (RDT), 4-109
WMS. See warehouse management systems
workflow management systems, 3-55, 3-115
workforce roles, redefining, 3-7
work-in-process (WIP) inventory, 2-131-2-132
World Trade Organization (WTO), 2-260
World Wide Web Consortium (W3C), 4-100
WSDL (Web Services Description Language),
4-103
WTO (World Trade Organization), 2-260
XML (extensible markup language), 4-102-4103

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