Supply Chain Management MMM 341 1 Dr C

Supply Chain Management MMM 341/1 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

References • Dobler D. W. and Burt D. N. (1996) “Purchasing and supply management: text and cases 6 th Edition”, Mc. Graw Hill, Singapore, ISBN 0 -07 -114144 -8 • Hicks C. , Earl C. F. and Mc. Govern T. (1999) “Supply Chain Management: a Strategic Issue in Engineer-to-Order Manufacturing”, International Journal of Production Economics 65(2) pp 179 -190 MMM 341/2 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

“A 5% reduction in costs can have the same effect on the bottom line as a 25% increase in turnover” MMM 341/3 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Drivers Companies in all sectors are seeking ways to: • reduce costs • shorten product development times • manage risk. MMM 341/4 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Supply Chains There are two types of supply chain: • External supply chain - involving other companies. Supply chain management involves relationships with: the customer through marketing and sales; and with suppliers through the procurement function. • Internal supply chain - involving functions / departments / business units within the organisation. MMM 341/5 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Supply Chains The transactions in supply chains are characterised by: • adding value up through the chain • incurring costs (and consequent payments) down the chain. A market economy can be viewed in terms of competing supply chains. Many sectors have therefore focused on reducing waste in the supply chain as a whole e. g. automotive industry, CRINE in the oil industry. MMM 341/6 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Types of supply chain relationship • Single stage - sourcing standard items for steady state production • Double stage - tendering stage, followed by contract execution stage. May involve significant engineering activity and the development of conceptual designs. Probability of success often low <30% MMM 341/7 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Supply Chain Management Aims • • • Reduction of costs Reduction of lead times Reduction in transactions Release of value Ensuring appropriate quality MMM 341/8 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Trends • Outsourcing of non-core activities to suppliers • Focusing of operations • A reduction in supply base as companies shift from multiple to single sourcing • Long-term buyer supplier relationships. • Partnerships rather than adversarial trading The outcome of these changes are that companies are establishing new relationships with their suppliers. MMM 341/9 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Traditional model • Adversarial arms-length trading. • Buyers defined production and process specifications. • Components were obtained from multiple sources. • Little information was disclosed to suppliers on technologies, processes and production targets • Price competition was the primary criterion on which contracts were awarded. MMM 341/10 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Multi-sourced trading • Characterised by win-lose transactions and mutual mistrust • Multiple sourcing constitutes a strategy for reducing purchasing uncertainty. • Moving towards single sourcing partnership arrangements can be frustrated by long-term adversarial attitudes. • Cultural change, the absence of trust and the prevalence of opportunism are major barriers to change in buyer-supplier relationships. MMM 341/11 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Evolution of partnership models • Adversarial relationships proved counter productive to both parties. • By 1980’s a partnership model was being adopted to reduce costs, resolve scheduling problems and other technical difficulties. • Strategic change was required to implement total quality principles and JIT. • The partnership, or obligational model, is characterised by close operational and strategic links between buyer and supplier; the provision of technical and managed assistance to suppliers and the establishment of preferred supplier status or single sourcing agreements. MMM 341/12 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Outsourcing opportunities • Strategic benefits of outsourcing to best-inclass suppliers • Greater flexibility in the purchase of rapidly developing new technologies • A reduction in design cycle times • Higher quality • Cost advantages due to higher volume production • Risk is transferred to the supplier • Less capital is required as the requirement for investment is transferred to the supplier. This is a major driver for companies aiming to optimise ROCE. • Technology critical to success should not be outsourced. MMM 341/13 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Power Relationships • In many cases “collaborative” relationships are underpinned by strong buyer control, enforced through vetting and monitoring • Powerful buyers impose terms on weaker dependent suppliers (e. g. supermarkets) • Research has concentrated upon focal producers able to exert a significant degree of control over smaller suppliers (e. g. automotive companies) • Other sectors such as engineer-to-order, low volume manufacture may have different power relationships. MMM 341/14 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Core Activities Core activities can be interpreted in several ways: • an activity traditionally performed internally; • critical to business performance • creating current or potential competitive advantage • driving future growth, innovation or rejuvenation of the enterprise. MMM 341/15 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Common doubts • Research suggests that adoption of new practices is piecemeal and concentrated in particular sectors e. g. automotive and electronics industries. • Even in leading-edge companies mistrust between buyers and suppliers has been found to be prevalent • There have been difficulties experienced in establishing tiered systems of component supply. • Many companies have struggled to implement JIT • Despite the importance of quality and delivery, price and cost are still the main determinant of contract awards MMM 341/16 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Comments • Large batch and flow line systems generally exhibit the characteristics of standardisation of products, repetitive manufacturing and assembly processes that are necessary to allow the full application of JIT techniques. • Some techniques such as supplier quality certification and point of use delivery may far broader applicability. • Development of partnership relationships may require a significant volume of business. • The impetus for product development may reside with either the buyer or the supplier. MMM 341/17 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Traditional Purchasing Traditionally the purchasing function was evaluated in terms: • The purchase price of materials. • The ability to “keep production running” • The cost of the Purchasing Department’s operation It was often a reactive clerical function that responded to requests from other business functions such as engineering or production. MMM 341/18 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Current Perspective World-class companies expect supply chain management to focus on the following value adding outputs: • Quality – purchased materials and services should be virtually defect free. Many defects can be traced back to bought in items. • Cost – minimisation of total cost of acquiring, transporting, holding, converting items as well as quality costs. • Time – need to minimise time to market for new products as well as minimising leadtimes to increase flexibility. MMM 341/19 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Current perspective (continued) • Technology - ensuring that the firm’s supply base provides appropriate technology in a timely manner; ensuring that technology associated with core competence is carefully controlled. • Continuity of supply - need to reduce risk of supply disruptions. These may have impact on other functions (aluminium vs carbon fibre reinforced plastics in the aerospace industry). May involve the development of alliances. MMM 341/20 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Strategic Focus • Integration - the firm’s supply chain strategy should be integrated with marketing, production and financial strategies. • Business environment - supply chain must address the identification of threats and opportunities (with particular reference to suppliers and customers). • Technology - access and control, avoid turning suppliers into competitors. • Information systems - need timely, accurate and cost effective transfer of information with buyers and suppliers (e. g. electronic data interchange). MMM 341/21 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Strategic focus (cont. ) • Value chain - need to ensure that the value chain of which the company is a part is competitive (e. g. careful management of margins through the supply chain) • ABC analysis - concentrate on high value items - decentralise decision making for low value items. MMM 341/22 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne

Major Developments • Cross functional teams - engineering, procurement, marketing, tendering, accounting • Supply chains - management and development to ensure competitiveness • Partnerships and alliances - relationships may be either mutually beneficial open relationships or the creation of a separate legal entity called a joint venture (e. g. capital goods for the oil industry). MMM 341/23 © Dr. C. Hicks, MMM Engineering University of Newcastle upon Tyne