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• 1
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•• Fundamentalsof
•• Supply Chain Management
•• Module 1 - Book 1 of 2
•• 2012 APICS CSCP Exam Content Manual (ECM)
•• Course Overview
Section A: Supply Chain Management Concepts
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Preparing for the Certification Exam
Studying the APICS CSCP Learning System combined with on-thc-joh knowledge. professional experience,
••
and other APICS learning tools. such as the .·lJ>ICS Dictionarv. is the most effective way to prepare for the
APICS CSCP certification examination. The APJCS CSCP Leaming System is intended to cover the body of
knowledge tested by the APICS CSCP certification examination; however, the APICS CSCP Learning
••
System docs not "teach the test." The I.earning System focuses on acquiring knowledge, whereas the exam
tests the candidate ·s abi Ii ty to apply that know ledge in accordance with accepted industry standards. ••
Content on the exam is based on real-world scenarios and requires candidates to apply the concepts in the
APICS CSCP Learning System, While both the APICS CSCP Learning System and the APICS CSCP ••
certification examination arc based on the APICS CSCP Exam Content Manual (which is availablefor
fin! download al 111t'iJ'.L~ai]J_(SCl>.s!J11J_>
developed independently
J<e,1011rce Center > Certification Exam Resources], they arc
of one another. To preserve exam integrity. specific exam questions and their
••
breadth arc not shared with the APICS CSCP Learning System developers.
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Intellectual Property and Copyright Nutice
All printed materials in the APICS CSCP Learning System and all material and information in the ••
••
companion online component arc owned by APJCS and protected by United States copyright law as well as
international treaties and protocols. including the Berne Convention. The APICS CSCP Learning System
and the companion Access Code for the CSCP onlinc component arc for your personal educational use only
and may not he copied. reproduced. reprinted. modified. displayed. published, transmitted (electronically
otherwise). transferred. sold. distributed, leased, licensed, adapted, uploaded. downloaded, or reformatted.
or
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In addition to being illegal. distributing CSCP materials in violation of copyright laws will limit the
program· s uselu l ness. AP lCS invests s ignilicant resources to create quality professional development
opportunities for its membership. Please do not violate APICS' intellectual property rights or copyright
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laws.
••
APIC\' Dictionary, 13111 Edition Reference
Definitions contained within the AP JCS CSCP Learning System arc consistent with the AP/CS Dictionary. ••
13th edition. You may purchase the complete dictionary from the J\PICS bookstore.
••
/'1odule /~Book I Checklist: ••
Fundamentals of Supply Chain Management
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Section Start Date Completion Date Section Quiz Score*
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•• Course Overview and
Module 1: Fundamentals of
•• SupplyChain Management
•• Book 1
•• Module 1, Book 1 Contents
•• COURSE OVERVIEW i
•• Introduction
1-3
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The SCOR® Model: Linking Processes, Metrics, Best Practices, and Technologies 1-13
Vertical versus Horizontal Integration 1-15
Supply Chain Management Objectives 1-24
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Functions of Inventory 1-155
Inventory-Related Cost Categories 1-157
Effects of Inventory on the Financial Statements 1-159
• All rights reserved @ Primed <'II 1011',, p<>sl~c,;i1>tJ111er wuxt c rccyclcd paper
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Module 1, Book 2 Contents
•
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Section E: Logistics Fundamentals
Role of I .ogistics in Supply Chain Munagcment..
1-171
1-171
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Lugistics
Reverse
Service Providers
Logistics
3Pf.s and 4PLs
. .
1-181
1-1 SS
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Section F: Market Segmentation 1-J l)7 ••
Reasons to ldcntif)' and U ndcrstand
\Vays lo
Understanding
Scgrncn1 Markets
tile \V~rnls and Needs of Each Segment
Mark ct Segments 1-197
1-200
1-203
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Section G: Demand Planning 1-209
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Forecast i ng l k1rnmd
Dcmaud Munagcmcnt
. .
. .
1-2]()
1-2.:;<) ••
I ink<igl'" '\1nung the·
Dc1rnnd \lanagcrncnt
Ekmt·nt"·························
Functional Rcsponsihiliiics
.. ··········
and Inter laces
1-257
1-262 ••
Section H: Customer Relationship Management (CRM) Concepts
'\cl·d for CR\1
1-274
J-274
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Sc(lpc ofCR\1
l·~lcmcnh of CR vl
1-2/(J
1-2 77 ••
fknclits of CR\l
lmplcrncntinp CR\1 .
.
.
..............................................
.
l -2X l
1-282 ••
l\ccd fur and Uses of Customer lnlornuuion
l-1:.>9
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Total (\isl ui" Ownership
Outsourcing and Offshnring
1-2()1)
l-2()4
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.vlakc-vcrsus-Buy
Range (If.
Analy~i:-.
Buyer-Supplier RcLnionships
.
. .
. .. .. .. .. l -2l/<)
1-303 ••
lk\L'lllping
Sur1pl
Supply Plan\
icr l~cl:tt ion-hip \L1n:1gcn1L'11( (SI~ \l)
.
.
...................
....................................
l -11
1-.~()l)
)!)
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Interrelationship h.:l11 c..:n Cl\\! and SR:\l .
Bibliogr
aphy . .. 1-323
•• 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
•• 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 Leaming System:
Greg P. Allgair Julie Jenson, CPIM, CSCP Maryanne Ross, CFPIM, CIRM,
••
Prasanta K. Dash, CSCP, PMP Giuseppe Lovecchio, CFPIM, CSCP
Sudripto De, CSCP Richard Merritt, CFPIM, CSCP, Huan-Jau (Arthur) Tseng, CFPIM,
C.P.M. CSCP
Arnaud Deshais, CPIM, CIRM,
••
Ralph G. Fariello, CFPIM, CIRM,
CSCP CSCP CIRM, CSCP
Laura E. Gram, CSCP Peter W. Murray, C!RM Wout Vcrwocrd, CFPIM, CIRM,
CSCP
•• CSCP
Dave Jankowski, CFPfM, CSCP
Blair Williams, Jonah, CFPIM,
CSCP
•• 0 2012 APICS
@
V crsion 3.0, 2012 Edition
••
••
•• APICS CSCP
•• Exam Content Manual
•• This manual is in effect from
•• January1, 2012, throughDecember 2012 .
•• 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 manual.
••
8430 West Bryn Mawr Avenue
Suite 1000
Chicago, IL 60631-3439 USA
•• (773) 867-1777
(800) 444-2742
Fax: (773) 639-3001
•• No portion of this document may be reproduced under any circumstances. CSCP is a registered trademark of
APICS .
•• Stock #09031-2012
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•• Table of Contents
•• Letter to Candidates ECM-1
•• • Introduction
ECM-2
•• Question Format
Taking the Test
ECM-2
ECM-3
ECM-4
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APICS CSCP learning System
APICS CSCP Instructor-Led Review Courses
APICS Educational Programs
ECM-4
ECM-5
ECM-5
•• APICS Certified in Production and Inventory Management (CPIM} Basics of Supply Chain Management
(BSCM) Review Course and Examination ECM-5
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APICS CSCP Certification Maintenance Continuing Professional Development ECM-5
ECM-7
•• Key Terminology
Supplemental Glossary
Bibliography
ECM-14
ECM-17
ECM-18
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•• CSCP Exam Content fJlanuzil
••
•• Letter to Candidates
The subject matter is organized into three content
areas.
•• Dear Candidate:
•
••
relied on APICS for its superior training,
internationally recognized certifications,
comprehensive resources, and worldwide network
of accomplished industry professionals.
design of a supply chain, the processes that
support the organization's strategy, improvement
of the sustainability of the organization and its
trading partners, and compliance with applicable
regulations and voluntary standards .
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The APICS CSCP program is primarily intended
for professionals in supply chain management and
operations management and is designed to test
Implementationand Operations
This section covers managing and balancing
the candidate's knowledge and application of the supply and demand through measuring,
•• •
•
organizational roles and infrastructures in the
supply chain
material, information, and financial flows
success in your pursuit of the CSCP designation.
•• •
•
intra- and interorganizational relationships
selection and use of technologies to enable
••
effective process management.
The APJCS CSCP program will help you advance Roly White, CFPIM, CIRM, CSCP
your career while giving you validated CSCP Examination Committee Chair
••
choice. The judgment is not one person's opinion; You will receive your final exam score along with
it is the accepted choice according to the APICS diagnostic information on your performance.
body of knowledge. Example 4 asks for the MOST
appropriate choice. Example 5 calls for the
•• at lowest cost
(B) using technology to select low-cost, high-
quality sources of materials
references to allow candidates some discretion in
selecting test preparation materials that they find
accessible and understandable. In deciding if a
•• (A) increased customer expectations excellent material. The serious student of supply
(B) reduced commodity prices chain management who wishes to stay current
with the state of the art will take advantage of
(C) increased ease in comparison shopping publications such as those listed in the
••
Take care to avoid assuming information not preparation. It provides an overview of the major
given or "second guessing" the question. Do not topics included in the exam, as well as a list of the
look for hidden tricks or exceptional concepts that are relevant to that topic .
circumstances. Every effort has been made to
••
there will likely be some content in the exam not
covered by the learning system. Thus, the use of
the current exam content manual to assist
candidates with their studies is essential.
••
The growing number of individuals choosing to
and the APICS International Conference & Expo. pursue professional development through APICS'
For a list of APICS learning opportunities and Certified Supply Chain Professional (CSCP)
information on course availability, call APICS program indicates a strong awareness that
•• Basicsof SupplyChain
Management (BSCM)
success.
•• •
•
exploring new technology solutions
reinforcing skills
••
maintain your APICS CSCP designation will be share your knowledge with others by participating
mailed to candidates upon successful completion in APICS research and educational activities at
of the certification requirements. Visit the APICS local, district, national, and international levels.
APICS Code of Ethics:
website at apics.org or call APICS Customer
Service at 1-800-444-2742 (United States and
Canada) or +1-773-867-1777. • To maintain and improve sound business
practices and foster high standards of
••
•
professional conduct.
To hold in professional confidence any
information gained of the business of a fellow
••
•
member's company and to refrain from using
such information in an unethical manner.
To seek success without taking unfair
••
advantage or using questionable acts that
would compromise one's self-respect. ••
•
•
To neither engage in nor sanction any
exploitation of one's membership, company, or
•
profession.
To encourage, and cooperate in, the
interchange of knowledge and techniques for
••
•
the mutual benefit of the profession.
To be careful with one's criticisms and liberal
with one's praise; to build and not to destroy.
••
• Whenever a doubt arises as to the right or
ethics of one's position or action, to resolve
such doubt according to generally accepted
••
•
standards of truth, fair dealing, and good taste.
To maintain high personal standards of moral ••
••
responsibility, character, and business integrity.
• To uphold the high ideals of the association as
outlined in the bylaws.
•• SupplyChain
Professional (CSCP)
supply and demand through measuring, analyzing,
and improving supply chain processes .
••
exams.
The candidate will be able to define the actions
CSCP EXAMINATION COMMITTEE necessary to implement selected solutions. This
includes an understanding of, and ability to,
••
• selection and use of technologies to enable
CSCP, The Ohio State University
effective process management.
Eduardo A. Shelley, CFPIM, CIRM, CSCP
Solmex Many of the items on this exam require the
••
applied to managing the end-to-end forward and importance of these topics will vary among
backward flow of materials, information, and value industries. The percentage figures given below
in a supply chain. can be used as a guideline for the APICS CSCP
exam content.
••
PART OF EXAM
Fundamentals of Supply Chain Management
(SCM) Fundamentals
This section provides the foundation for the exam of Supply Chain
••
I 33.33%
by addressing the concepts and strategies used Management
for effective supply chain management. It includes (SCM)
an overview of supply chain management, Supply Chain
•
••
Content Outline B. Supply Chain Alignment with Business Strategy:
The supply chain strategy should align with and
••
••
I. Fundamentals of Supply Chain Management enable the business strategy. Achieving
(SCM) appropriate alignment requires an
understanding of the forms of competitive
This section addresses the fundamental concepts
used for effective SCM and will provide the
foundation for the APICS CSCP exam. It includes
an overview of SCM concepts and the need to
advantage being pursued. It also requires an
understanding of the organizational strategy,
priorities, capabilities, and the resolution of ••
••
misalignments or gaps. Knowledge in this area
align resources with the strategy of the
encompasses:
organization. Management and improvement of
the supply chain are then addressed. Exam 1. Competitive advantages
questions covering this area will include elements
related to the following: 2. Business capabilities and strategy
a. Organizational strategy
••
A. Supply Chain Management Concepts: A
thorough understanding of the roles in a supply
chain network and the flow of value through it is
b. Prioritization options
c. Organizational capabilities ••
required. A broad understanding of the supply
chain management processes, objectives,
integration, and benefits is also required. 3.
d. Alignment of capabilities and strategy
Resolving misalignment or gaps ••
Knowledge in this area encompasses:
1. Basic supply chain
4. Collaboration among trading partners
a. Benefits of collaboration ••
••
a. Entities b. Requirements for success
b. Structures
C. Supply Chain Design and Improvement
c. Flows Considerations: The supply chain strategy
2. Supply chain management processes -
SCOR® model
should be designed with an understanding of
the marketplace. It also requires an
understanding of supply chain management
••
a. Planning demand and supply
b. Sourcing goods and services
c. Producing goods and services
design and continuous improvement
considerations. Knowledge in this area
encompasses:
••
d. Delivering goods and services
e. Planning for and processing returns
1.
2.
Understanding the marketplace
Supply chain design considerations
••
3.
4.
Vertical and horizontal integration
Supply chain management objectives
a. Network configuration
b. Inventory location and levels ••
a. Improved customer service
b. Efficient use of systemwide resources
c. Product design
d. Information technology
e. Support systems
••
c. Effective use of systemwide resources
d. Leverage of partner strengths 3. Continuous improvement
a. Product considerations
••
5. Supply chain management benefits
a. Improved market knowledge
b. Increased velocity in the flows of goods
b. Process improvement initiatives
c. Managing change ••
and services, funds, and information
c. Increased visibility of flows
D. Inventory Management: Inventories throughout
the supply chain must be planned and ••
••
d. Reduced variability of flows controlled for effective supply chain
e. Integrated operations management. Managing inventories, in turn,
requires an understanding of the costs of
f. Improved management of risk
g. Increased sustainability
••
8 @ 2012 APlCS The Association for Operations Management
••
•
••
•• maintaining and not maintaining inventory.
Knowledge in this area encompasses:
G. Demand Planning: An understanding of demand
forecasting, the components of demand
management, associated linkages, and demand
•• 1.
2.
Need for inventory
Aggregate and item inventory management
management functional responsibilities and
interfaces is required. Knowledge in this area
encompasses:
•• 3.
4.
Flow of material
Functions of inventory
1. Forecasting demand
a . Demand forecasting concepts
•
6. d . Combination methods
statements
•• a . Logistics functions
b. Logistics value proposition
c. Flow of goods and information
4. Demand management functional
responsibilities and interfaces
•• 2.
d. Push, pull, and push-pull systems
Logistic service providers
a. Product development
b.
c.
Marketing
Sales
•• 3. Reverse logistics
a . Activities supported
understanding of the need, scope, elements,
and benefits of CRM. Knowledge in this area
encompasses:
••
b. Design for reverse logistics
c . Benefits 1. Need for CRM
••
F.
market segmentation is required. Understanding
3. Elements of CRM
the reasons for identifying market segments,
ways to segment markets, and understanding
5.
Benefits of CRM
Implementing CRM
•• 2.
3.
Ways to segment markets
Understanding the wants and needs of each
I. Supply Management Concepts: Effective
management of all sources of supply requires
an understanding of the components of the total
••
cost of ownership and the considerations in
segment deciding whether to source an item internally or
externally. It also requires an understanding of
••
,. •• CSCP Exam Content Manual ECM-9
••
the types of relationships that can exist between
a firm and its suppliers, the development of
supply plans, and supplier relationship
B. Risk Management: Designing a robust supply
chain requires recognizing the sources and ••
••
forms of risks, the magnitude and potential
management. Knowledge in this area impact of each, and methods of mitigating each
encompasses: form of risk. Knowledge in this area
encompasses:
1.
2.
Total cost of ownership
b.
ISO 14000 Series of Environmental
Management Systems Standard
Governmental regulatory compliance 2.
d. Total, or landed, cost of acquisition
Free trade zones
••
••
c. Industry-specific guidelines and
standards a. Definition
d. Impact of supply chain decisions b. Benefits
••
c. Requirements
3. Social
a. ISO 26000 Guidance on Social 3. Trading blocs
Responsibility
••
a. Definition
b. Corporate social responsibility b. Effects on supply chains within the bloc
considerations
c. Effects on supply chains that extend
4.
5.
United Nations 'The Global Compact"
Triple bottom line (TBL)
outside the bloc
••
10 @ 2012 APlCS The Association for Operations Manaqernerrt ••
•
••
•• 4. Operational considerations
a. Exporting issues
b. Attributes of a responsive supply chain
c. Supply chain fit with the organizations'
•• b. Importing issues
c. lncoterms F.
markets requirements
••
that enable designing, tracking, operating, and
5. Implications of globalization communicating among trading partners within a
a. Legal and regulatory considerations supply chain is necessary. The correct
application of appropriate technology is needed
1. Transportation
c. Comprehensive supply chain
management system
••
a. Transportation objectives and d. Need for timely and accurate data
considerations
b. Stakeholders in transportation decisions 2. Key application tools
•• c. Modes of transportation
d. Considerations in mode selection
a. Enterprise resources planning (ERP)
b.
systems
Advanced planning and scheduling
•• 2. Warehousing
a. Warehousing objectives and
considerations
(APS) systems
c. Supply chain event management
(SCEM)
•• b. Warehouse capabilities
c. Automated material handling
d. Warehouse management systems
(WMS)
••
e. Transportation management systems
3. Transportation and warehousing trade-offs (TMS)
a. Public/private
3. Data acquisition and communications tools
••
b. Owning/leasing assets
a. Interface devices
c. Capacity constraints
b. Data communications methods
••
to balance efficiency and responsiveness in the
supply chain. It also requires a set of e. Automatic identification technologies
comprehensive measures that are agreed upon 4. Supply chain design and optimization tools
and used by the organizations in the supply
•• a. Customer-focused metrics
b. Financial metrics
5. lnterorganization integration tools
a. Information technology in collaborations
and joint processes
•• c. Operational metrics
d. Other key performance indicators
(KPls)
b. Standardization
c. Challenges
•• ECM-11
•
b. Internet-enabled supply chains 3. Measuring customer service
c. E-business considerations a. Response to inquiries
d. Business-to-business commerce (828)
and business-to-consumer sales (B2C)
b. Order processing
c. Level of service
d. Product or service quality
••
••
G. Influencing and Prioritizing Demand: A thorough
understanding of how the members of a supply e. Customer satisfaction
chain can influence demand and how they may
4. Challenges in implementing CRM
need to prioritize demand when necessary is
required. Knowledge in this area encompasses:
1. Designing products and services
I. Supplier Relationship Management (SRM):
Successful implementation of supplier
••
a. Standardization
b. Simplification
relationship management requires an
understanding of the underlying concepts, the
enabling technologies, and the requirements for
••
c. Customization
d. Sustainability considerations
e. Design and development collaboration
improved management of sources of supply.
Knowledge in this area encompasses: ••
2. Marketing
a. Market research
1. Supplier selection
a. Corporate social responsibility (CSR)
b. Negotiations
••
b. Demand generation
c. Influencing demand
c. Internet-enabled sourcing
d. Contract performance ••
3.
4.
Selling
Matching customer orders to supply
2.
e. Alignment with supply chain needs
••
types and segments of customers 6. Challenges in implementing SRM
2. Using technology to implement CRM
J. Inventory Planning and Control: Inventories
a. Benefits of using a customer data
warehouse
b. Sales force automation
throughout the supply chain must be planned,
located, and controlled for effective supply chain
management. Managing inventories in turn ••
••
c. Keys to successful CRM requires an understanding of the total costs of
implementation maintaining and not maintaining inventory and
the techniques for planning and controlling
3.
Communicating
Measuring performance
requirements and priorities
•• 1. Inventory planning
a. Locations of inventory
a.
b.
Operational measures
Financial measures
•• 2.
b. Levels of inventory
Inventory control
C. Managing Supply from External Sources:
Managing supply from external sources requires
an understanding of the basic purchasing
•• a.
b.
c.
Determining order quantities
Ordering systems
Safety stock and safety lead time
processes, selecting suppliers, and evaluating
suppliers. Knowledge in this area
encompasses:
•• d.
e.
Organization of storage locations
Methods of tracking inventory
1. Communicating requirements and priorities
Supplier certification
1. Demand prioritization
•• 3.
4.
Synchronizing supply and demand
Metrics 2.
iii.
Capturing
Order status reporting
•• b.
c.
Controlling priorities
Materials and inventory
application of each. Knowledge in this area
encompasses:
•
c. Theory of constraints (TOC) c
2.
d. Total quality management
•• engineer-to-order
enterprise resources planning {ERP}
extensible markup language (XML}
joint venture
Just-in-Time (JIT)
•• extranet
extrinsic forecasting method
K
kaizen
••
kaizen event
F kanban
feedback keiretsu
•• forecast error
forecasting
landed cost
lead time
lean
•• G
general and administrative expenses (G&A)
global strategy
legacy systems
level of service
••
level strategy
g localization linear programming
graphical user interface (GUI) line haul costs
•• H
gross margin load leveling
local area network (LAN)
logistics
•• income statement
incoterms
independent demand
market driven
market research
••
Internet
interplant demand material requirements planning (MRP}
intra net materials management
•• inventory turns
inventory valuation
inventory velocity
multicountry strategy
multisourcing
••
•• CSCP Exam Content Manual ECM-15
••
N
0
network
s
safety stock
sales and operations planning (S&OP)
••
obsolescence
optimization
ordering cost
seasonality
semipassive tag
service industry
••
order losers
order qualifiers
service-oriented architecture (SOA)
simulation
single-source supplier
••
p
order winners
outsourcing six sigma
software-as-a-service (SaaS) ••
package to order
Pareto analysis
sole-source supplier
sourcing
spend management
••
Pareto's law
partnership
passive tag
standard costs
stockkeeping unit (SKU) ••
••
stockout costs
pipeline inventory strategic alliance
planning horizon strategic planning
portal strategic sourcing
private trading exchange (PTX)
••
subcontracting
process chart supplier
process map supplier certification
procurement
product differentiation
product family
supplier-input-process-output-customer (SIPOC)
diagram
supplier relationship management (SRM)
••
product life cycle
profit
supply chain
supply chain event management (SCEM)
supply chain management (SCM)
••
••
profit margin
pull system Supply-Chain Operations Reference-model
purchasing (SCOR®)
Q
push system supply chain risk
supply chain visibility
sustainability
••
quality function deployment (QFD)
quick response program (QRP)
T
synchronized production
••
••
R tactical buying
radio frequency identification (RFID) tag tactical planning
rapid replenishment target costing
relational database
resource management
return on assets (ROA)
tariff
third-party logistics (3PL) ••
return on investment (ROI)
reverse auction
total cost of ownership (TCO)
trade bloc
trading bloc ••
reverse logistics
reverse supply chain
risk pooling
transportation management system (TMS)
trend
triple bottom line (TBL)
••
••
16 © 2012 APICS The Association for Operations Management ••
•
••
•• u
United Nations Global Compact (UNGC}
ISO 26000 Guidance on Social Responsibility:
ISO 26000 or ISO SR is an international standard
•• v
universality
adopted by the International Standards
Organization to assist organizations in contributing
to sustainable development beyond legal
compliance through a common understanding of
•• value-added
value-added network (VAN)
value chain
social responsibility. ISO 26000 is not a
management system standard and it's not
intended or appropriate for certification purposes
•• value stream
value stream mapping
or regulatory or contractual use.
•• variance
vendor
vendor-managed inventory (VMI)
Guidelines: A standard adopted by the
International Standards Organization that outlines
principles and a set of guidelines to manage risk in
•• w
virtual trading exchange any endeavor. The standard outlines guidelines for
understanding risk, for developing a risk
management policy, for integrating risk
•• x
XML (extensible markup language}
communication processes. ISO 31000 is not a
management system standard and it's not
intended or appropriate for certification purposes
•• Supplemental Glossary
or regulatory or contractual use .
••
countries are geographically close. Examples of
Businessprocessmanagement (BPM): A trade blocs are the European Economic
business discipline or function that uses business Community and the North American Free Trade
••
practices, techniques, and methods to create and Agreement (NAFT A).
improve business processes. BPM is a holistic
approach to the use of appropriate process-related United Nations Global Compact: A voluntary
initiative whereby companies embrace, support,
••
business disciplines to gain business performance
improvements across the enterprise or supply and enact, within their sphere of influence, a set of
chain. It promotes business effectiveness and core values in the areas of human rights, labor
efficiency while striving for innovation, flexibility, standards, the environment, and anticorruption.
••
needs of a local market. The modifications are
made to conform with local laws, customs, culture,
or preferences .
•
••
Bibliography (C) it is everyone's responsibility.
(0) quality targets change frequently.
••
All test candidates should familiarize themselves
with the following references for this examination.
The recommended references pertaining to the
3. An example of the use of a third-party logistics
(3Pl) company would be when a company
••
diagnostic area are listed at the end of each
section of the content outline. All of these
references are available from the APICS
contracts with another company to:
(A) perform its shipping and receiving functions . ••
Bookstore.
Sample Questions
5. Which of the following applications would
enable a company to detect patterns in the
preferences of a customer segment?
••
The following 10 questions are similar in format
and content to the questions on the CSCP exam.
These questions are intended for practice-that is,
(A) Business intelligence
(B) Advanced planning system
••
to enable you to become familiar with the way the
questions are asked. The degree of success that
you have in answering these questions is not
(C) Sales force automation
(D) Artificial intelligence ••
related to your potential for success on the actual
exam and should not be interpreted as such.
6. Cash-to-cash cycle time is a measure of how
efficiently a company: ••
Read each question, select an answer, and check
your responses with the explanations on pages
20-21.
(A) recovers its investment in plant and
equipment
(B) manages assets to generate cash flow
••
1. Which of the following is the primary advantage
of using web-based electronic data interchange
(C) converts inventory into sales
(D) collects on sales to customers ••
(EDI) for communication of transactions?
(A) There is more flexibility in transaction
formats.
7. Which of the following types of inventory is used
to protect against variations in supply and/or ••
••
demand?
(B) It lowers the cost per transaction.
{A) Cycle stock
(C) It eliminates translation of transactions.
(B) Transportation inventory
2.
(0) A larger number of transactions are
supported.
•• 9.
(D) The focus of the relationship is on large
transactions .
Which of the following measures would be most
•• their receipt.
(D) Revenue from orders shipped in a week .
••
••
••
••
••
••
••
••
••
•• ECM-19
•
••
Answers to Sample Questions
Note: References to the content outline appear in
5. A (llH2) A is the best choice because business
intelligence applications collect, organize, and
••
parentheses.
••
20 @ 2012 flPJCS The Association for Operations Management
••
••
•• 9. B (lllB3) Bis the best choice because the items
are being produced to forecast and should be
10. D (lllA) D is the best choice according to the
AP/CS Dictionary definition of supply chain
•• shipped and there is no indication of the actual there is no direct relationship between
number of items that were ordered. Dis not the collaborative supply chain management and
best choice because revenue is a financial the scope of operations for one of the partners.
••
••
••
••
••
••
••
••
••
••
••
••
••
••
1• • CSCP Exam Content M;~nual ECM-21
l:
••
••
•• Course Overview
•• + Getting Started
complete, easy-to-use learning and reference tool.
•• 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 three printed textbooks (called modules), which
•• correspond to the knowledge domains tested on the APlCS CSCP exam. The
course also includes onlinc practice tests and learning reinforcement activities .
•• Please check that you have received the three modules (five textbooks total) and
your online system invitation (provided to you via e-mail) for access to the
•• If anything is missing or if you have not received your invitation e-mail, please
contact APICS CSCP Leaming System Customer Support at 1-888-266-9079
••
(USA/Canada) or+ 1-651-905-2664 (worldwide) .
Accessing the Before you use the online components of the course, you must create an
•• online course
components
account in the system:
l. Click on the link in your invitation e-mail. This will take you to the Web
•• site to create your account to access the online components of the course .
2. Read and accept the tenns-of-usc agreement.
••
3. Create a login name and password. Both must be at least eight characters .
4. Log in using your newly created login name and password .
5. Complete the short survey.
•• You will use your login name and password to access the Web site in the future,
••
•• en 2012 APICS
@
Version 3.0, 2012 Edition
Note that access to the online components in the CSCP Learning System Web
site is valid for one year after activation of your account. ••
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 http://www.LearnCSCP.com.
2. Click Log In to go to the APICS CSCP Leaming System login page. ••
3. Enter your login name and password.
4. 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 You may exit the program from most screens by clicking Log Out. This option ••
••
program allows you to leave the program and return at a later time to where you left off. All
current scores and your current place in the tests are saved. You may start any
activity over at any time. If you start over in a test, your current score is erased.
Upon completion of that test, your new score is saved and displayed on your reports.
••
Online help The Frequently Asked Questions option on the Login screen is available to answer
common questions related to enrollment and login. If you require additional assistance, ••
please contact APICS CSCP Leaming System Customer Support at 1-888-266-9079
(USA/Canada) or+ 1-651-905-2664 (worldwide), 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.
••
+ Completingthe Course
••
Increase your The APICS CSCP Leaming System is based on the APICS CSCP Exam ••
knowledge base with
this enjoyable and
complete program as
Content Manual (ECM). Using a blend of printed text and on line practice
testing and learning reinforcement activities, the course provides an enjoyable ••
you preparefor the
AP/CS CSCP
examination and
and complete preparation method for the APlCS CSCP certification exam.
••
••
develop your You may complete the course in any order. The following describes the
professional recommended, step-by-step method.
expertise.
@
Version 3.0, 2012 Edition ••
All rights reserved Priorcd on ml"'. po,;t-<'<>OSUOlC' W"-"C recycled paper.
•
••
••
•• Step 1: Review the "Introductionto CSCP" tutorial.
•• • The introduction
Once you have read the description of the course on the Overview screen and
become familiar with the online components, review the first item on the menu,
"Introduction to CSCP," which is a tutorial on the Certified Supply Chain
tutorial provides an
•• overview of the
CSCP program.
Professional program. This short presentation introduces the certification
program and includes a link to access the CSCP Exam Content Manual. The
••
CSCP exam and learning system were designed to follow the ECM outline .
•• You begin to 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
•• 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 .
•• reinforced by online
practice testing and
learning reinforce-
Based upon your individual study profile, study each of the three modules at
your own pace. The modules include the following topics, which correspond to
•• ment activities. those that constitute the APICS CSCP Exam Content Manual. The APICS CSCP
certification exam questions arc distributed equally among the three modules .
•• pertinent to each module. Each module is linked to the next, reflecting the need
••
••
Supply chain management
••
••
• Sustainability • Managing and balancing
• Network roles Design considerations supply and demand
• Processes, objectives, • Risk management • Efficiency vs.
benefits • Processes supporting strategy responsiveness
•
Financial impact • Technology • Continuous improvement
• CRM and SRM
Inventory
•• Each module
includes a
•
•
Supply Chain Dynamics
Managing Supply from Internal Sources
•• bibliography
referencing the
books used in the
•
•
Managing Supply from External Sources
Implementation of Demand Plans
•• development of that
module .
• Continuous Improvement
•• Section-specific tests
check your
Each module includes section-specific quizzes. You may take as many
•• understanding of
each module .
quizzes 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 a
•• quiz, you can reenter it and will have the option to either continue or
restart the quiz. You may also print any screen by using your browser's
•• print function .
•• The eF/ashcards
provide an
After you have studied each module and taken the section-specific
complete the eFlashcards for that module. The eFlashcards are drawn from the
quizzes,
•• opportunity to review
terms and definitions
by module.
glossary and represent the terms identified as key or supplemental by the
APICS Exam Content Manual. The eFlashcards present a definition of a tcnn,
•• and you supply the term. Click to "flip" the card to check your answer. You
may visit the Resource Center to download a printable version of the module-
•• specific eFlashcards .
•• The learning
activities are
After you have studied the print module, taken the section-specific
••
quizzes, and reviewed the module-specific ef'lashcards, complete the
exercises designed
to reinforce the main onlinc learning activities. These exercises reinforce the concepts
concepts presented presented in the text and allow you to apply that knowledge in a real-
•• in the modules.
world application .
••
•• <D 2012 APICS v
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V crsion 3.0, 2012 Edition
• All rights reserved l'rmtcd on I tlll"o I"" consumer \\C.S\c recycled popcr.
Course Overview
••
••
Step 7: Complete the post-test. ••
When you reach this point, you've studied all the components of the program
and are ready to measure your learning gain. The 50-question post-test draws
from a different bank than you saw in the pre-test, so all the questions are new.
• ••
••
Post-test questions After you answer each question, you will know immediately whether your
will be new. If you
don't pass the post- answer is correct or incorrect and will see the reasoning for the correct answer to
test, the program
••
help clarify your understanding. If you leave the test, you can reenter it and will
helps redirect your
have the option to either continue or restart the test.
study efforts, and
then you can take the
test again. Or use the
post-test as a
refresher to help you
After you finish the post-test, you may view a report that compares your pre-test
and post-test scores and your scores on questions related to each of the three
••
stay current. 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 new score is saved. ••
••
All attempts are recorded in the system and available to you on the reports.
As with the CSCP exam, you do not receive instructive feedback after each
question. However, the online reports allow you to see which questions you
answered incorrectly and provide source bibliography references for additional ••
information.
••
((} 2012 J\PlCS
All rights reserved
vi
@
V crsion 3.0, 2012 Edition
Printed on 100% post-consumer waste recycled paper. ••
••
••
•• Step 9: Review your reports.
••
request your Letter of
Recognition.
Upon successful completion of the course (a post-test score of at least 80
••
••
••
••
••
••
••
••
••
••
•• lD 2012APICS Vll
@
Version 3.0, 2012 Edition
•
Module
...
I
=
Module
.
2
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.:Module
• !;e;:
·tiiiiii!!!a
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29
3
••
••
••
Section - Section - Section -
i .
Specific Quizzes Specific Quizzes Specific Quizzes
...
I
,, ...
n
• ........
f~··J.
Module -
Specific
eFlashcards
~-·
/
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Module -
Specific
c Flashcards
Module -
Specific
el-lashcards
••
••
I
.,,
••
• 1;.,i~.
·--=-\ ••
Post - Test
I! . --
.,,
I
(-:.!---~:.ll_J
·.-..:.-\
Practice Exam
• ==
' t:.J~I
:~!!~~
:,~-
··.I .
Report
...
••
••
••
••
••
~) 2012APICS
All rights reserved
Vlll
@
Version 3.0, 2012 Edition
Printed on I 00% post .ccasuuwr waste recycled paper. ••
••
••
•••
••
••
••
••
•• Module 1: Fundamentals of Supply
•• Chain Management
••
••
••
••
••
••
••
••
••
••
••
••
••
••
•• 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
•• Friedman, in his book The World ls Flat, calls the "flattening of the globe."
There were supply chains when primitive hunters brought back skins for
••
transformation into garments for use or trade. Marco Polo went east in search of
trade routes to bring raw materials from "the Orient" to Europe. But the scope,
scale, and speed of supply chain processes have all gathered revolutionary
•• momentum-and businesses around the world hasten to catch up or, in the case
of leaders like Toyota, Walmart, 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 (SCM) may be a young discipline, but like those
other young disciplines, rocket science and brain surgery, it isn't a simple one .
•• both for the following modules in the course and for the continuous learning
you will do later to stay current with new developments .
•• management." It also presents the supply chain processes and the SCOR00
model, compares vertical and horizontal integration, and describes supply
••
•• This section is designed to
• Define and illustrate the supply chain in terms of entities, structures, and flows
••
• Describe the SCOR~ model and its use for improving supply chains
•• •
•
Define supply chain management and its objectives and benefits
Describe the stages of supply chain evolution globally and within companies
•• •
•
Identify specific ways in which supply chain management creates value for all stakeholders
•• • Explain key financial statements that are commonly used in supply chain management .
••
•• It's a World of Global, Complex, Interdependent Supply Chains!
•• When the 8.9 magnitude earthquake and resulting tsunami hit Japan in March
2011, initial concerns and the world's focus were on the people of Japan. As the
•• weeks progressed, it started to become clear in just how many ways we are all
connected and that the entire world was affected by this event. These are just a
•• sampling of the headlines and paraphrased news stories in the weeks that
followed:
••
I.
~) 2012APICS 1-3 Version 3.0, 2012 Edition
@
• All rights reserved Printed on I 00''" post-consumer waste recycled paper
Module 1: Fundamentals of Supply Chain Management
••
••
direct impact on production after the disasters .... Sony Ericsson, a
smartphone joint venture between the two companies, said its supply chain
would be affected, and German carmaker Volkswagen warned of a possible
••
medium-term components shortage.
••
• JP Morgan Insights newsletter, "Asia: The Impact from the Earthquake in
Japan." It is believed that the adverse impact of the Japanese earthquake on ••
•
Asia is primarily via a supply chain disruption due to reduced exports from
Japan given the interruption in power supply, factory closures, and
logistical challenges.
• Los Angeles Times, "Disaster Puts Kink in World Supply Chain." Concerns ••
are growing that the earthquake and tsunami could lead to a long-term
disruption in the world's supply of automobiles, consumer electronics, and
machine tools.
••
As millions of people around the globe extended their condolences to the people of ••
Japan for the lives lost and suffering, companies around the globe had to quickly
assess whether their business would be impacted by this tragedy thousands of miles ••
away. In many instances, those firms were not happy to learn how their supply
chains would indeed be affected by such an unpredictable natural catastrophe. ••
Even after major disasters like Japan's recent earthquake, the World Trade Center
attacks of September 11, 2001, in New York, the U.S. recession that was felt
••
worldwide in 2009 to 2010, and the volcanic eruption in Iceland in April 2010,
when aviation authorities closed the country's airspace due to a cloud of drifting
••
ash, some companies are hesitant to realize that with the global economy, actions
in one part of the world, whether planned, unplanned, human-induced, or naturally ••
occurring, seem to affect us. We are all connected.
••
••
That level of connectedness is impacting supply chain management and causing it
to evolve into a more strategic role. Managers now recognize that the actions taken
by one organization in the supply chain can influence the success of the rest of the
network. While in the past the strategic focus for many organizations was on
improving their internal quality and reducing costs, the new focus is on ••
implementing total supply chain solutions that require collaboration from partner
organizations both upstream and downstream. ••
These new global forces are being met by corresponding technological solutions in ••
••
supply chains in most nations. Collectively they are revolutionizing supply chain
management.
e ••
•..
2012 APICS 1-4 Version 3.0, 2012 Edition
All rights reserved @ Printed on 100% post-consumer waste recycled paper.
•• Section A: Supply Chain Management Concepts
••
••
We want you to be prepared and ready to handle the new powerful forces that will
impact virtually every supply chain:
•• •
claim to have, global exposure .
•• in larger amounts than ever, and more difficult than ever to manage manually
with the required speed and accuracy .
•• predict due to the increasing power and speed of information available to both
consumers and competitors .
•• Our goal is to prepare you to grasp these concepts, be confident in your actions,
and eventually thrive in the world of supply chain management. Remember that
•• chain network used to deliver products and services from raw materials to end
customers through an engineered flow of information, physical distribution,
cash." A supply chain, in this view, comprises a network of both entities and
and
•• corporations such as Walmart, Mitsubishi, Dell, and the clothing chain Zara-
are decidedly global in scope .
•• Exhibit 1-2 illustrates a very basic supply chain (one that isn't necessarily
global) with three entities-a producer with one supplier and one customer.
••
•• I[) 2012APICS 1~5 Version 3.0, 2012 Edition
o 2012 APICS
All rights reserved
1-6
@
Version 3.0, 2012
Printed "" 100% post-consumer
Edition
waste rccyckd l'·'l'"'· ••
•• Section A: Supply Chain Management Concepts
•• Structures
simple chain structure with a single strand, as shown in Exhibit 1-2, a complex
network, or any structure between those two extremes. No matter whether it is a
•• time striving to reduce their supply chain costs. They can improve operating
efficiency by employing the right supply chain structure .
•• Depending upon the type of industry, supply chain costs can be as high as 50%
••
of a company's revenues. According to research done by A. T. Kearney, a
global consulting firm, inefficiencies in the supply chain can total 25% of a
firm's operating costs. When a company is faced with thin profit margins, like
•• There are three main types of supply chain strategies: stable, reactive, and
•• efficient reactive .
••
The stable supply chain strategy is appropriate for chains:
• With a significant history of stability between demand and supply
• That are focused on execution, efficiencies, and cost performance
•• • That use simple connectivity technologies and have little need for real-time
information .
••
strategies
• The chain is perceived as a cost center by all involved
• The chain needs minimal connectivity technologies and capital assets to
•• •
respond to demand
Ensuring the throughput at any cost is the chain's primary goal.
•• An example of this strategy is a manufacturer of sports team apparel for the fans
1•
1•
learn, demand virtually disappears for their apparel.
•• CO 2012APICS l-7
@
Version 3.0, 2012 Edition
••
• Supports competitive positioning by serving as an efficient, low-cost, and
integrated unit
• Focuses efficiency and cost management on the total delivered cost of
•
finished goods
Places greater importance on connectivity technology and new equipment to ••
automate functions to reduce labor costs and improve capacity and
throughput. ••
An example of this strategy is the supermarket chains in the Netherlands, where ••
••
the shops, distribution centers, third-party logistics providers, and manufacturers
cooperated to replace what is sold in the shops within less than 24 hours.
All of these models are rather simplified in that they perceive the supply chain as
a cross-company cost center. Their metrics focus on the return on investment ••
(ROI) of the individual trading partners but not on the potential
value and collaborative payback. As you will learn in Module 2, the more
for joint strategic
••
••
sophisticated supply chains-those having network partners with highly
integrated and synchronized connectivity-focus more on value than on cost.
Four flows Four basic flows connect the supply chain 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
materials and products in the other direction. This topic is discussed in more
that carried
••
Supply chain
detail in Section E, "Logistics Fundamentals," in this module.)
••
••
This simple street vendor represents one end of a supply chain. The supplier is
probably a small wholesale food distributor that sells basic ingredients to many
one- or two-person food kiosks. The worker is the "producer" who turns the raw
•• ingredients into crepes, roasted nut mixes, or a variety of easy-to-eat tapas. The
stand, operated by one or two owners, is the retailer that sells the finished
•• delicacies to the customers or passersby who are cajoled into making a purchase .
•• Notice that even in this simplest of supply chains, the basic model needs
amplification. For instance, there are more suppliers than one. While flour and
•• nuts may be procured from the same supplier, water to warm the stainless steel
food containers comes from the employee's kitchen faucet, and the supplier of
that water may actually be a government entity rather than another business .
•• and drawers to hold various basic supplies, such as tongs and other utensils. There
is also wood to build the stand and a white board and markers for making signs to
•• advertise the day's offerings. Somewhere in the chain, though they remain
invisible in our model, arc suppliers' suppliers, who bring materials, components,
Manufacturing Exhibit 1-3 at least hints at the organizational complexity that appears in corporate
•• supplychain
model
supply chains by adding a second tier of suppliers and more distribution centers
and customers.
•• Information flow
•• '. 2 ma·t
I far.supp ..erials
I ier ·1 ·- .. ·-··-.
Tier I materials
Distributor
H~~::mer I
••
supplier
Tier 2 materials .., ; ~ Customer I
supplier
•• 1· I ier 2 service
I supplier
- .,. ·················-,;;:::----·
•• ! Tier 2 materials .. f
I
:
I_____
supplier
, Tier I service
---~····
Distributor
Customer
•• I'icr 2 service
supplier
c___s_u_pp_li:~__j
Customer
••
Primary Primary
product flow--+-...- cash flow
The exhibit also shows that Tier I suppliers have their own suppliers in Tier 2.
••
The wholesale food distributor that supplies the daily ingredients
materials for the menu items has its material and service suppliers-and they
and raw
••
have their suppliers, and so forth. The flour for the crepes, for instance, is not a
raw material but a product with its own supply chain that begins in a farmer's ••
••
wheat field and is processed in a plant, shipped to a wholesaler, and distributed
to the corner 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. (A ••
••
distributor is a business that does not manufacture its own products but
purchases and resells these products.)
Services also
have supply
Although the traditional supply chain model was developed in manufacturing,
the service industry, too, has supply chains. According to the AP/CS Dictionary, ••
chains 13th edition, a firm in the service industry is "in its narrowest sense, an
organization that provides an intangible product such as medical or legal ••
advice." In its broadest sense, service industries include "all organizations
except farming, mining, and manufacturing. It includes retail trade; wholesale ••
••
trade; transportation and utilities; finance, insurance, and real estate;
construction; professional, personal, and social services; and local, state, and
federal governments."
••
••
•..
~) 2012 Al'ICS 1-10 Version 3.0, 2012 Edition
All rights reserved @ Printed on I 00"'> post-consumer waste recycled paper.
•• Section A: Supply Chain Management Concepts
••
••
Service-oriented supply chains also require sophisticated management. Exhibit
1-4 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
~"""
·---· ·-~··- '·~--
"'"'~"~~, I .-..,-.J:•••••..••··
-.
.....~ ,,~~--O_th_e_r_u_til_it_ie_s_---"
~ Home customers
•• ; Facility maintenance
-
J ·
'/
/'
/
!' . . .r.: . --. ·---. ------·-·--·-,
· 1 Commerc1al customers I
•• l!_:~~ram1~~ng services
/
/
••
•• The flows in our street vendor example aren't quite as simple as might be
supposed, either. The "products" that move through the chain could include
•• users (eaters) of the product, by the distributor (the person on the street with the
cart) to the manufacturer (the person who assembles the ingredients), and by the
manufacturer to the supplier (the source of the food). There will be recipes and
•
••
you'll read more about that later in this module-exists to return any
unacceptable menu items, to recycle the vegetable waste into a composter, to
reuse utensils and other supplies after sterile cleansing, and to dispose
• All rights reserved Prmu-d ""]Oil''" post-consumer waste rvc yclcd paper
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••
Module 1: Fundamentals of Supply Chain Management
Supply chain structures vary based on demand history, business focus, and
••
needs for connectivity, technology, and equipment.
••
••
• 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. •
••
Supply chain expertise is so important in today's business world that an annual
survey is conducted to identify the 25 best supply chain leaders based on
specific criteria. It's a major accomplishment to be named to that list and an
••
••
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Section A: Supply Chain Management Concepts
•• even higher compliment when a company manages to remain in that top echelon
of supply chain performers for consecutive years. Check the on line Resource
Center for a link to those survey results and to see which companies are top-
•• Supply Chain Council (SCC), as the cross-industry standard diagnostic tool for
supply chain management" (APJCS Dictionary, 13th edition). It reflects the
••
management systems and practices. SCC membership is open to all interested
corporations, nonprofit organizations, government and military agencies,
consultants, and academicians .
•• 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. This is shown in Exhibit 1-5 on the next page .
•• •
•
At the center is "Your Organization."
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
••
The main focus of the model is on the chain's 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 .
•• All the processes are carried out by the central triad of chain members .
••
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Module 1: Fundamentals of Supply Chain Management
••
Exhibit 1-5: Supply Chain Operations Reference (SCOR) Model
••
••
••
••
••
••
••
Source: Adapted from Supply Chain Council, Inc.
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
only delivery and returns, while the customer's customer manages only
supplier handles ••
sourcing and returns). This model can also be applied to supply chains
containing many more linked firms.
••
SCOR Version IO.O 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
(The SCOR model assumes that the product has already been designed and
•• •
tested for production. However, 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 Section C of this module.) ••
••
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•• Section A: Supply Chain Management Concepts
•• SCOR does not address the following but assumes that they exist:
•• •
•
Training
Quality
•• •
•
Information technology (IT)
Administration (other than SCM administration)
•• You will be learning more about SCOR and its metrics later in this module and
•• in Module 2 .
Next we'll look at how supply chains have evolved over the years, moving from
•• vertical chains to the lateral supply chain management that is now widely
practiced around the globe .
•• verticalto
lateral
vertical integration and lateral (or horizontal) integration.
•• (horizontal)
supplychain
management
bringing the supply chain inside one organization. For instance, in the early days of
the American automotive industry, Henry Ford pursued a strategy of owning and
•• • and trees, replanting for future harvests, owning the related equipment it used, and
managing all of its product processing, palletizing, and shipping. (The company
purchased only its chemicals from an outside source.) While this vertical structure
still persists in some companies, it is very challenging to be fully integrated end to
•• end .
•• Some companies have a blend of structures, for example, outsourcing supply chain
management but keeping other core competencies vertical. It's difficult for one
•• corporation to garner the expertise needed to excel in all elements of the supply
chain, and it increases their risk, so corporations around the globe have turned
instead to outsourcing those aspects of their business in which they judge themselves
•• components, as Chrysler Corporation shed its Mopar (motor parts) division and
General Motors turned loose its component supplier to become Delphi Corporation .
•• Now lateral supply chain management has replaced vertical integration as the
favored approach to managing the myriad activities in the supply chain. The lateral,
••
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Section A: Supply Chain Management Concepts
•• 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 .
••
loses control of these aspects of the supply chain and will deal separately with
integration
members of the chain as suppliers or customers. Each of them will focus on
their core competencies such as extraction or production and deal with each
••
forms around a bank and a trading company, but "distribution" (supply
chain) keiretsu alliances have been formed of companies ranging from
raw material suppliers to retailers .
•• Among the reasons for relying on a lateral supply chain, the following stand out:
•• businesses spread across international borders, time zones, and oceans. The
independent company that focuses entirely on its particular business can
••
develop more expertise than an in-house department, leading to more
attractive pricing, higher quality, or both .
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Module/: Fundamentals of Supply Chain Management
chat rooms. There are advantages to using already established companies that
know their local markets. Many apparel companies in Europe, for example,
work through Dutch logistics centers to take advantage of Holland's central
••
location and because a number of specialized firms have sprung up there with
well-developed capabilities in handling both the distribution and the return of
••
clothing.
••
Despite the benefits of the lateral chain, however, 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 sec and understand the
••
larger supply chain processes=-or to care about them.
Exhibit 1-7 hints at the complexity of a multitiered chain. 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.
Information flows
••
Raw
Components Plant Distribution
..
y· Retail
••
••
materials Customers
----- -----
..
.r > . .
Primary
• • Primary
••
product flows cash flows
Stages of
supply chain
The advances made over the past few decades in supply chain management are
generally reflected in each supply chain's development. Experts in the field
••
management
evolution
agree that there are typically between four or five sequential stages.
••
Supply chain evolution often includes the following:
••
••
• Stage 3-lntegrated enterprise. The firm breaks down silo walls and
brings functional areas together in processes such as sales and operations
planning (S&OP) with a focus on companywide processes rather than
•• individual functions .
••
efficiency, product/service quality, or both. The starting point is generally
one inside/outside partnership that points the way toward the completely
networked enterprise .
••
divided into these four states. Let's look at these stages in greater detail.
Stage 1: multiple It's possible for the nucleus firm in a lateral supply chain to lack any
•• dysfunction disciplined management for both its internal and external chains. Exhibit 1-8
illustrates the lack of coordinated flows of information or solid relationships
Exhibit1-8: MultipleDysfunction
•• • Gp~~ri) Purchasing
~
Marketin~\
sales
(~_:istome~)
•
••
(~~) Production
control
(customer~)
·--~- _.-~
- ~- ~
Logistics Distributioy
• Materials/
......... _
•• products/services Payments -----
•
••
In the dysfunctional
•
organization, this is what tends to happen:
Internal activities tend to be undertaken impulsively rather than according
to plan .
•• • Products are designed without advice from other areas that could provide
guidance, such as manufacturing or marketing .
:~ Supplier Customer
Materials/
products/services Payments ----
••
Reverse product flow ------------
••
In the second stage of supply chain evolution, an individual firm undertakes
initiatives to improve specific functional areas. Here are some examples: ••
• The largely manual operations in warehouses may be augmented by the
addition of basic materials-handling equipment. ••
• Inventory management may find ways to reduce levels of inventory
within the firm's own facilities. ••
•
•
Procurement might take advantage of new purchasing strategies to obtain
supplies and services at the lowest possible prices.
The traffic department may reduce transportation costs by strategic
••
•
selection of carriers and routes.
Some departments may institute more effective hard skills training and
••
adopt strategies for making jobs more challenging.
••
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••
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Section A: Supply Chain Management Concepts
•• •
•
Marketing may develop more reliable research and forecasting techniques .
Manufacturing resource planning (MRP If) software may be in place, and
the company may have cross-functional integration of planning processes .
•• 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
•• with product designers. And this lack of collaboration may play out repeatedly
among the departments. In this stage some functions may be automated-MRP
software, for instance, may put the bill of material in the computer to streamline
•• Stage 3: In the third stage of supply chain evolution, the individual firm begins to focus
•• integrated
enterprise
on business processes rather than compartmentalized functions. Historically,
this shift in supply chain strategy is associated with the late 1980s and early
•• 1990s-the same time that personal computers were becoming more powerful,
reliable, and affordable.
•• There are a few key milestones that mark this phase: introduction of
manufacturing and enterprise-wide software, increased cross-functional
••
••
••
•• Reverse product flow
A variety of initiatives reduce the time it takes to get an order from a supplier,
••
create the product, and deliver it to the customer, including MRP II and ERP:
• MRP has been upgraded to MRP II, a breakthrough development that
••
allows cross-functional communication between manufacturing and
finance. ••
• Enterprise resource planning (ERP) extends that process by adding
modules for each functional area until the most advanced versions tie ••
together entire companies. Further advances have reached through the
corporate wall to tie supply chain partners together. ••
• 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." This approach results in products
••
that are on target for customer desires and are ready to be manufactured
without making costly modifications in processes, equipment, or staffing. ••
• There are improvements in customer service due to astute segmentation of ••
markets and more efficient replenishment policies suited to each segment.
••
•
• Inventory is treated more strategically as Just-in-Time procedures, more
accurate demand planning, and improved logistics work together to make
fulfillment more efficient and reliable.
••
• Warehousing and transportation decisions arc carried out in tandem to achieve
the optimal balance of cost-effectiveness and customer service. ••
• Warehouse management benefits from more advanced equipment and
automation.
•••
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.
••
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••
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Section A: Supply Chain Management Concepts
•• Stage 4: extended
enterprise
The hallmark of this stage 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
•• overcome. Exhibit 1-11 shows how the supply chain has changed .
••
•• /-Suppliers''--<' S
l .
-. -"-~-.<> ----
.
) . llpp 1. rers
--
Internal ',<'c-
.
.
/
<; 'Customers'">,
ustorners , , )
••
'--·, s_upp 1. 1crs_,"''---. c 1 ram /'-- _,/·-~ustomcrs___,,
Materials/
products/services
-<11•1----- Payments ----+
•• Reverse product Ilow
•• Procter & Gamble and Walmart began (as we'll see later) with diapers. If
this first collaboration succeeds, it can lead to a more fully networked
•• integrated electronic networks and more formal team building and planning
across corporate boundaries, and so on. And that relationship
the model for other partnerships and, eventually, to multifinn collaborations
can become
•• that stretch from retailer through manufacturer into one or more tiers of
suppliers .
• All rights reserved @ Printed on I lllJ'!o po<t consumer waste recycled papor.
Module 1: Fundamentals of Supply Chain Management
••
••
synchronize their ERP systems across corporate boundaries 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. ••
• Cross-functional approaches are implemented with certain processes such as ••
••
CPFR (collaborative planning, forecasting, and replenishment). In place of
traditional "silo" production planning by sales, marketing, and production,
Stage 4 companies institute periodic sales and operations planning meetings
in which representatives of sales and marketing, production (or operations),
and other functions meet to coordinate demand planning and production ••
scheduling.
••
• In Stage 4, there are advances in e-commerce such as interactive sites where
customers can order products and services, track their shipment, and
communicate with customer service immediately upon their arrival.
••
Behind the scenes of such business-to-consumer e-commerce, there is also of
••
course increasing business-to-business e-commerce taking place on wired and
wireless networks. In the global arena, competition no longer takes place only ••
among individual companies; whole supply chains are now battling one another
for customers, for workers, and for capital in multiple countries across the globe. ••
••
Cooperation among companies is integral to competition among supply chains.
-t- Topic
APICS
4: Supply Chain Management Objectives
Before we discuss the objectives, it's important to define supply chain and
••
definition of
SU pply Chain
supply chain management. The definition of supply chain seems fairly solid
when you consider the chain as linked organizations-vsupplier, producer, ••
management 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 idcntify-s-let alone manage.
••
••
l() 2012 APICS
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••
Section A: Supply Chain Management Concepts
••
The AP/CS Dictionary, 13th 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,
•• Aside from the definition, there are some other aspects of supply chain
management that should be highlighted at this time .
•• 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 .
••
• There should be value-creatingactivities in the supply chain that
transcend the activities of particularentities in the chain. Supply chains
are generally organized by one strong firm called a channel master or
•• for more than one stakeholder in addition to generating value for the
consumers or investors .
•• European Union, the various sects of any world religion, and the divergent
cultures around the globe .
•• Other related Although many would assume that a supply chain is, in fact, a value chain-at
•• terms: value
chain and
least it is if well managed-others may draw a distinction between the two.
•• mapping
market demands for specific products or services. According to the AP/CS
Dictionary, 13th edition, the value chain is made up of "the functions within a
•• company that add value to the goods or services that the organization
customers and for which it receives payment."
sells to
•• «J 2012APICS 1-25
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••
•• Section A: Supply Chain Management Concepts
••
•
Now that everyone has the same understanding of supply chain management,
Key
let's look at its objectives. There are five primary objectives that supply chain
•• objectives
management can help a company or organization accomplish:
• Add value for customers and stakeholders .
•• •
•
Improve customer service .
Effectively use systemwide resources .
•• •
•
Efficiently use systemwidc resources.
Leverage partner strengths .
•• Objective #1:
Add value for
Supply chain management, like any other type of business management, aims to
create value through financial benefits, match the values of its various
•• customersand
stakeholders.
customers, and appeal to the social values of its customers, stakeholders, and
community. The APJCS Dictionary, 13th edition, defines value broadly as "the
•• worth of an item, good, or service." While this merely shifts the discussion
the meaning of value to the meaning of worth, it usefully includes both goods
from
•• and services .
•• the APJCS Dictionary defines value added as "the actual increase of utility from
the viewpoint of the customer as a part is transformed from raw material to
•• the bottom line. In order to be successful and have longevity, any organization
must have a positive cash flow. Making money definitely constitutes a measure
•• of success.
expenses .
Profit is money remaining from revenues after deduction of certain
•• Another related term, triple bottom line, coined by author and sustainability
•• advocate John Elkington in 1994, refers to the concept that corporate success
•• 2012/\PICS
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Module I: Fundamentals of Supply Chain Management
••
••
••
should be also measured in three dimensions--economic, social, and
environmental-and not only by the traditional bottom line of relative
profitability.
You will be learning more about financial statements and key terms at the end
••
of this section.
••
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.
••
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. ••
There are also stakeholders that are external to the supply chain's business
partners and 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 local governments may also feel the impact of supply chain
operations because they affect community members and their environment, both •• •
built and natural. 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
••
••
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•• Section A: SupplyChain Management Concepts
••
••
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.
•• 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 1-14 lists some typical supply chain stakeholders and various values
•• Stakeholders
Firms in the supply chain
Values
Profit margin, market share, revenues, expenses, image and
reputation
•• Investors
practices
Return on investment (capital growth, dividend income),
comprehensive and comprehensible communications
•• Lenders
Communities/
Interest rate, long-term stability, return of principal
Tax base enhancement, sustainable manufacturing practices,
•• environment
Governments
environmental impact (safety, esthetics, convenience, natural
resources), growth of attractive jobs
Legality, regulation, overall impact on community members and
•• Employees
environment
Job security, wages and benefits, opportunity, good working
••
brought to the forefront of most companies' strategic goals in response to
demands from consumers and stakeholders. This has become a global issue to
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Module 1: Fundamentals of Supply Chain Management
••
••
••
the extent that the United Nations developed a Global Compact to define
sustainability in a broad perspective:
The AP/CS Dictionary, 13th 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.
••
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
•• analysts. Green supply chain management is here to stay and adds important
stakeholder value. There is additional information in Module 2, Section A,
•• The discussion that follows focuses on three types of value that supply chains
should create-vfinancial, customer, and social=-regardless of whether they are
••
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Module I: Fundamentals ofSupply Chain Management
••
••
Initiatives
Exhibit1-15: Initiativesand the Green Supply Chain
••
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, which has legally binding carbon reduction
••
targets and commitments to reduce greenhouse gas emissions.
(Note: The U.S. did not sign the Kyoto Protocol.) Compliance
includes observance of country regulations such as the carbon
••
Education and training
auditing system in the U.K. or the U.S. Environmental Protection
Agency's regulations.
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 ••
Green manufacturing
fleets, and sea transport; relocated warehouses; and
reconfigured distribution centers.
There are initiatives to move away from traditional and wasteful
••
practices 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 eco-friendly alternatives. ••
Sourcing Initiatives include overseas consolidation, more sourcing of
goods to local suppliers, and "near sourcing" (which
encompasses a variety of strategies that attempt to bring ••
Innovative technologies
sourcing and distribution centers closer to final markets).
New technology and product solutions abound: 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. Large cargo ships are now using
320 square meter kites to cut consumption of dirty bunker fuel by
up to 35% in ideal sailing conditions.
••
Information sharing Organizations collaborate to build databases of information about
environmental improvement initiatives across supply chains. ••
Renewable energy sourcing Many companies around the globe are researching and investing
in renewable energy sources such as solar, wind, hydroelectric,
nuclear power, and geothermal. In spring of 2011, Forbes ranked ••
Intel, Kohl's Department Stores, Staples, Walmart, Whole Foods
Market, Starbucks, and Cisco Systems highest in their use of
renewable energy. ••
••
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•
••
•• Section A: Supply Chain Management Concepts
•• Financial value
One method of increasing the financial value is to reduce costs. Take these
considerations into account when looking for opportunities to lessen expenses
•• • Cut costs to yield net gains at the bottom line. One danger in pursuing
cost reductions is the possibility that spending less in one area of the
•• bottom line. In the functional stage of supply chain evolution, this sort of
self-defeating 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
Changes at any one point in the system will create changes elsewhere;
•• 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 justified .
•• an improvement in the supply chain brings in more revenue than the cost of
the investment, then it's justified. Purchasing automated machinery to
•• 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 .
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•• V 2012 APICS 1-35 Version 3.0, 2012 Edition
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 AP/CS Dictionary, 13th 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." ••
• Gains should be equitablydistributed.Be careful when pursuing ••
increases in chain efficiency or effectiveness that might result in 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.
••
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. The maintenance and upgrades to
the chain's infrastructure 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. For instance, a powerful nucleus
finn can rake in the benefits of an alteration in the placement of inventory
(or any other process change) at the expense of its suppliers. This has the
potential to be self-defeating if it drives away quality suppliers. Teamwork ••
among supply chain entities can create improved 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
AP/CS Dictionary, 13th edition. The ultimate goal of market-driven supply chain
management, therefore, must always be to deliver products and services that the
customer values-e-and, of course, will pay for. ••
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••
Depending upon the market being served, a supply chain may be managed
so that it delivers one or more of these values to its end customers .
•• managers who are operating with those types of goals must develop
collaborative design processes that result in specifications for products
••
and effectively within a well-defined supply chain process .
••
For example, the process of delivering a vehicle to a customer is
intertwined with related services-financing, dealer preparation, sales,
warranty agreements, and repair and replacement services at the
•• the team will implement an efficient reverse chain that takes a vehicle
or its parts back for repair, replacement, or recycling .
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Social values
••
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 by delivering socially desirable 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. Sometimes the connection ••
••
between private business and public need is very direct. For 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 speedy, public transportation .
••
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, which
•• handles products being returned by customers and those 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 can create
environmental value by reducing, reusing, and recycling resources rather
than simply using them up and putting them into landfills .
•• supply chain management. As you will recall, SCOR includes the major
processes of plan, source, make, deliver, and return. Before 2000, research
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•• Section A: Supply Chain Management Concepts
••
Exhibit1-16: Buildinga Sustainable Supply Chain
•• Carbon footprint analysis Quantifying a product's or service's carbon footprint-the total amount
of carbon dioxide and other greenhouse gases emitted over the life
•
••
(such as methane and nitrous oxide) from production, use, and
disposal of the product. Consumers and businesses often use carbon
footprint figures in their decision-making process when they select
products and services.)
•• Optimal plant locations Potential actions such as choosing a supplier closer to the customer
and greater collaboration with suppliers; understanding how to reduce
the carbon impact of manufacturing through alternative sourcing
•• Information technology
(IT) network design
Applying the "green" approach to IT to reduce consumption and
storage costs (e.g., reducing file formats and data storage that
consume inordinate amounts of space and the associated costs that
•• Product or process
design
"Greening" the supply chain through actions such as forward planning
or decision analysis; evaluating design alternatives based on
••
environmental criteria applicable to the supply chain; rating products,
for example, as x-list (items that must be phased out), gray list (items
that are problematic but not urgent to phase out), and p-list (positive
items that are safe for use); rating products and services based on
•• Logistics design
energy consumption, least pollution, and materials used
Looking across the supply chain structure for inbound and outbound
Sustainable building
Applying the waste reduction methods: reduce, reuse/recover, repair,
remanufacture, redistribute, recycle, and reverse logistics
Using environmentally friendly practices in the design, construction,
••
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Module J: Fundamentals of Supply Chain Management
••
••
Examples abound of companies changing their supply chains to become more
sustainable. Consider the following examples of changes that affect the triple
bottom line and how they can build more sustainable supply chains.
••
Example: A company produces a product that goes into a plastic bottle. By ••
••
reducing the amount of plastic used to make the bottle by 15%, the company
not only reduces its cost for raw materials, it also reduces the amount of
pollution created by the supplier of the plastic and the amount of waste going
into a landfill. Another alternative for the company would be to switch to a
more recyclable type of plastic. This could reduce further the amount of
material going to the landfill. ••
Example: A company postpones the last steps of its manufacturing process
and completes them in its distribution center after the order is received. This
makes the process more sustainable in several ways. The shipping process
••
can be more efficient because the components being shipped can be
consolidated to fit more on a truck than the corresponding finished goods,
thus reducing freight costs and transportation pollution. Also, finished goods
••
inventories can be reduced and replaced with smaller quantities of
component inventories, thereby reducing the need for space and money tied
up in inventory. ••
Example: Whether a company manufactures a product or provides a
service, it uses energy. This may be in the form of gasoline for transportation,
electricity for the facility, or natural gas for heating and processing. To
••
become more sustainable a company could use more fuel-efficient vehicles
for transportation; develop more effective shipping schedules to reduce the
amount of miles traveled by its fleet; use alternative, replenishable fuel
••
sources such as wind or solar energy; or improve the efficiencies of its
processes to use less fuel to create more product. ••
Objective #2:
Improve customer
The second overarching goal of supply chain management is to improve customer
service. In terms of supply chains, customer service, according to the APICS
••
service.
Dictionary, 13th edition, is "the ability of a company to address the needs,
inquiries, and requests from customers." Tt can also be explained as a "measure of ••
the deli very of a product to the customer at the time specified."
As part of supply chain management, a company will develop and use its
••
customer service strategy to identify and prioritize all activities required to
fulfill customers' logistical requirements at least as well, or better, than the
••
competition does. The strategy will include the fundamental
customer service: availability, operational
attributes of basic
performance, and customer ••
satisfaction. By implementing a strategy that takes these factors into account, a
company can target the measures that are weak and improve its customer ••
service.
•
Let's take a closer look at each of these attributes.
•
•• Section A: Supply Chain Management Concepts
••
••
using supply chain management, a company can achieve high levels of
availability while keeping its investment in inventory and facilities to a
minimum. It is less likely to have products out of stock over time and is
•• more able to ship complete orders. (If a customer order is only missing one
item out of several, the order is considered incomplete.)
•• In Module 2, you will learn more details about the three performance
•• when the customer places an order until the product is delivered and ready for
use is reduced. Well-designed logistical systems facilitate a speedy delivery
•• but may also result in higher costs. Ideally, operational performance also
means that the supply chain is flexible in that it can accommodate unexpected
•• or unusual customer requests and that there are contingency plans in place if
there is a service breakdown or malfunction occurs .
••
and opinions based on the customer's experience and knowledge. With
supply chain management in action, customer expectations are discussed and
clarified based on real supply chain data. So once the completed products and
•• Objective#3:
Effectivelyuse
For a supply chain to be effective in its use of resources, it must be using them in
a manner that helps the organization achieve its business objectives. Resources
•• systemwide
resources.
can be in the form of employees, raw materials, equipment, etc. Being effective
means that the supply chain gets the right product and the right amount to the
•• get the order to the customer on time if it sends the headlights via air instead. Air
is more costly, but it does contribute to the company'seffectiveness in meeting its
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Module I: Fundamentals o_{Supp!yChain Management
••
••
••
Exhibit 1 ·17: Balancing Effectiveness with Efficiency
Thrive
••
••
Low High ••
Efficiency
I
••
Companies use a variety of tools and metrics to measure effectiveness, such as
••
benchmarking and comparing the company's actual performance against its
organizational strategies for growth, increased sales, increased customer
••
satisfaction ratings, or improvements on SCOR metrics. Supply chain
management enables an organization to be more effective in reaching these types
••
of strategic goals.
••
Objective #4:
Efficientlyuse
systemwide
As shown in Exhibit 1-17, efficiency is typically weighed against effectiveness.
Efficiency is defined, according to the APJCS Dictionary, 13th edition, as a ••
••
measurement (usually expressed as a percentage) of the actual output compared
resources.
to the standard output expected. It measures how well something is performing
relative to existing standards. Efficiency is inward-focused, in that a company
looks internally to determine how a supply chain process can be done less
expensively, in less time, and with fewer resources. ••
Efficiency is one of the measures of capacity in a supply chain environment. ••
Capacity is all about what can be accomplished by employing all the resources in
the supply chain network. That includes work centers, storage sites, people, and
equipment. Capacity, according to the APJCS Dictionary, has a few meanings:
••
( 1) The ability of a system to perform its expected function.
••
(2) The ability of a worker, machine, work center, plant, or organization
to produce output per time period.
(3) Required mental ability to enter into a contract.
••
Supply chain management can increase the efficiency of any mix of ••
manufacturers (or service providers), suppliers, and customers in a supply chain.
When a supply chain is operating at high efficiency, it means that it's utilizing its ••
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••
Section A: Supply Chain Management Concepts
•• resources well to produce the level of output in a production plan within the time
allowed .
•• Objective#5:
Leverage partner
Supply chain management enables an organization to leverage the strengths of
its partners. According to the AP! CS Dictionary, 13th edition, a partnership in a
•• strengths. supply chain is "a relationship based on trust, shared risk, and rewards aimed
toward achieving a competitive advantage."
•• The selection of the "right" partners means that their corporate culture,
•• operating styles, and business practices are similar enough for the benefits of an
alliance to outweigh the negatives. Well-chosen partners will benefit from a
high level of mutual trust, respect of each other's expertise and contributions,
•• •
•
•
Improving market access, such as providing new market channels
Building financial strength through increased income and shared costs
Adding technological strength if there is internal expertise in use of more
•• •
advanced software and systems
Strengthening operations by lowering system costs and cycle times
••
select the appropriate sales partners and support them by:
• Providing timely and accurate information
• Helping them deal successfully with channel customers
•• With a strong partner, both members in the relationship can pool their resources
•• and work together to continually search for ways to improve sales, productivity,
and competitiveness .
Improved
market
With supply chain management in place, partners in the supply chain begin to
share their knowledge about the marketplace and in particular about their
••
knowledge customers. It may take some time for the organizations to build trust before they
share their key account information, but with time, it docs often occur. ••
Although market intelligence can be purchased from outside sources, it's most ••
advantageous (and less expensive) to gather it from your partners. There are a
myriad of sources and documents containing valuable customer information
that can be shared between supply chain partners, including transaction records,
••
customer survey results, sales and service representative knowledge,
information from distribution points such as retailers, Internet sites, or kiosks.
and
••
If this kind of market information is not forthcoming when needed from a
supply chain partner, there is always the option to purchase data from survey •• •
companies and database marketing companies. Service or finance bureaus can
provide broad information about the customer pool. Such data, as opposed to ••
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Section A: Supply Chu in Management Concepts
•• the other sources of data listed above, do not necessarily paint a picture of a
business's own customers. Purchased data may be more useful in acquiring new
customers than in managing relationships with existing customers .
•• The three Vs Often called the three Vs of supply chain management, visibility, velocity, and
•• variability are key elements of successful supply chain strategy. No matter what
the specific competitive priority, the goal of supply chain management is to
•• increase visibility and velocity while reducing variability, as seen in Exhibit 1-18 .
The future of supply chain management lies in continued pursuit of that goal.
•• ~ ~
•• L
v:.
~·
~- (}_
+
L
%c;_.
:-;_
••
••
•• Increased
visibility
Visibility is "the ability to view important information throughout a facility
or supply chain no matter where in the facility or supply chain the
Increased visibility along the supply chain is a benefit for supply chain partners
•• and the end customer. With better visibility, a supply chain manager or employee
can see the results of activities occurring in the chain and is made aware of
•• partners can realize savings in cost and time. Better visibility has resulted in
greater velocity .
•• Increased
velocity
As noted earlier in this module, there are four types of flows in a supply chain:
•• physical materials and services, cash, information, and returns (or reverse flow)
of products for repairs, recycling, or disposal. Supply chain management impacts
the velocity of these four flows in a positive manner. According to the APICS
Dictionary, 13th edition, velocity is ••
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-to-delivery response for customers.
••
Velocity, like visibility, is enhanced by supply chain management. 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.)
••
Reduced Variability is the natural tendency of the results of all business activities to ••
variability fluctuate above and below an average value, such as fluctuations around average
time to completion, average number of defects, average daily sales, or average ••
production yields.
Unlike visibility and velocity, variability decreases with good supply chain
••
management. Supply chain management works to reduce variability in both
supply and demand as much as possible. The traditional offset 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 can get ••
••
off to a faster start to meet the demand.
Supply chain management serves to reduce both demand and supply variability.
Demand variability has many sources, but a primary source that can be
controlled is the bullwhip effect. The bullwhip effect is an extreme change in the ••
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Section A: Supply Chain Management Concepts
•• Exhibit1-19: BullwhipEffect
••
••
•• Customer
•• Inventory can quickly move from being backordered to being in excess due to
the serial nature of communicating orders up the chain with the inherent
•• Supply variability can also be better managed with supply chain management
practices. Supply variability typically increases in waves down the chain starting
•• with small amounts at the resource extraction sites and culminating 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
•• 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, while variability increases at
••
each point in the chain. The accumulating excesses can in tum trigger
underpurchasing .
•• Two additionalVs 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
•• enough to expand and contract volume to meet changes in demand for mass-
customized products and services. These concepts will be discussed in more
•• detail in Module 2 .
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Module I: Fundamentals 4 Supply Chain Management
••
••
Integrated
operations
Earlier in this module, we discussed the stages of supply chain evolution.
third stage is the one in which the enterprise and its operations become
integrated. Why is this so important? Supply chain management fosters
The
••
integrated operations by requiring everyone in the supply chain to form
partnerships with suppliers or customers.
••
Integrated networks, like intranets, extranets, and the Internet, play an important ••
role in forming these partnerships. Supply chain management uses networks to
tie together the various software applications associated with specific activities ••
within supply chain processes. Enterprise resources planning software packages
enable companies around the globe to not only manage their operations in one
plant but to facilitate enterprisewide integration and even cross-company
••
functionality.
••
In addition to automation and networking, made possible by the computer
revolution, integrated operations use other technologies that can feed information ••
into the networks for instant access by all supply chain users. Bar codes on
products and radio frequency identification (RFID) devices 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 serial numbers
anywhere in the world to provide customers with information about the progress
••
of shipments and to alert shippers and consignees to any difficulties
actions (perhaps using supply chain event management software). The hardware
that require
••
to run these complex applications continues to advance in power and speed, and
it has become more affordable. ••
Improved
management
All investments involve risk, including those made in any supply chain. Risk is
generally defined as a hazard, a source of danger, or a possibility of incurring loss,
••
of risk misfortune, or injury. In the supply chain context, it is the chance that something
will happen within the chain, positively or negatively, that will affect business ••
goals and objectives. Risk management is the process of identifying risk, analyzing
exposures to risk, and determining how to best handle those exposures. ••
With supply chain management, the organization develops a risk management
strategy in advance that describes how it will address the vulnerabilities it has
••
identified throughout the supply chain by avoiding, accepting, transferring, or
mitigating risk. Managing risk proactively gives an organization a competitive
••
edge over its competition.
••
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•• Section A: Supply Chain Management Concepts
••
••
An organization's strategy to address supply chain risk includes a risk response
plan and risk response planning. A risk response plan is a written document
defining known risks, including description, cause, likelihood, costs, and proposed
• ••
responses. It also identifies the current status of each risk. (This is also known as
business continuity planning.) Risk response planning is the process of developing
a plan to avoid risks and to mitigate the effect of those that cannot be avoided .
•• With a risk strategy and plan in place, a supply chain can keep goods,
information, and payments flowing through the network and arriving everywhere
•• in the right numbers at the right time and in good shape, because of its careful
preplanning for the unexpected. Specific types of risks that can be avoided or
•• • It helps keep the supply chain flexible so that it can continue functioning
despite disruptive events, which in turn helps balance the costs of
contingency planning against the potential economic, facility, resources, and
•• •
inventory losses.
Risks are shared among supply chain partners who will be prepared to work
•• in concert and play their parts responsibly. For instance, 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 was ready to roll into stricken
areas with supplies. A strong supply chain is more than good business; it
•• •
yields another advantage: good citizenship .
It prepares the employee workforce and chain partners with valuable,
actionable information and confidence to handle nearly any situation with a
•• You will be learning more about risk management and other factors to consider
in developing a plan in the following module .
•• Increased Earlier in this module green supply chain management was explained as the
•• sustainability expansion of the traditional supply chain focus of cost, quality, and service to
include environmental performance. "Sustainability" and "green" are often used
••
as synonyms in discussions of corporate obligations that go beyond the
traditional emphasis on bottom-line profits. Both terms refer to the need for
economic activity to operate within limits imposed by natural resources .
•• Business (and consumer) practices that rely upon energy derived from fossil
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••
of such energy resources. Supply chain management incorporates sustainability
efforts such as the replacement of resources as they are used (as in the planting ••
••
of seedlings as part of forest management) and increased usage and reliance on
wind and solar energy to generate power for manufacturing processes.
As you recall from the supply chain model illustrating the different types of
••
The flow of
funds flows within a supply chain, the flow of money or funds goes upstream from
customer to producer and from producer to supplier as intermediate or final
••
products or services are paid for. This funds flow is not linear since some
upstream payments may occur long before the final good or service is even ••
purchased. Although there are other funds flows in a company, such as those for
equipment purchases and payroll, we will focus attention at this time on just the ••
cash flow along the supply chain.
While the flow of funds is mandatory for a supply chain to exist, it is often an
••
uncoordinated and suboptimized flow in many supply chains. Many mid-size
and even some large corporations still work with paper invoices and checks.
••
However, this practice appears to be declining given that many international
transactions require the buyer to pay up front with a credit card, wire transfer, or ••
letter of credit.
••
0 2011 AP/CS l-52 Version 3.0, 2012 Edition
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••
•• Section A: Supply Chain Management Concepts
•• Why is it critical to improve the flow of funds within a supply chain? There are
several advantages to better flows:
•• What is considered a normal duration for cash-to-cash cycle time will differ
by supply chain, industry, and organizational strategy. For example,
•• according to data from Morningstar.com at the time of this writing, the cash-
to-cash cycle time for the retailers Walmart and Target were seven and 42
days respectively. However, Walmart may own less of its inventory than
•• its inventory for much longer than one in a horizontal supply chain. Therefore
it is not necessarily possible to compare cycle times without understanding
•• • Improved cash flows tend to reduce imbalances between the larger and
smaller players in the supply chain. Consistent rules for integrated cash
flows across the supply chain help avoid the situation in which sizable
•• Spend The initial efforts in supply chain management focused primarily on cutting costs
•• management because the supply chain constituted one long cost center. It was all about removal
of waste, time, unnecessary motion, defects, and extra costs .
•• acti vi ti es."
•• Spend management often deals with consolidating internal demand across business
functions, divisions, or extended partners and/or consolidating suppliers to find
••
areas for purchasing and transportation quantity rate discounts. Relative to financial
performance, spend management involves managing the outflow of funds in order
••
••
to buy goods and services. Spend management may also need to coordinate closely
with accounts payable because payment timing is vital to spend management
execution.
If supply chain management can reduce the amount spent on inventory or increase ••
the speed with which inventory is converted into cash without reducing customer
service or revenue, then it certainly contributes to the company's financial
••
••
performance. Saving money will always be a priority; organizations realize a more
direct gain when costs go down than when revenues go up. This is because when
revenues go up all variable expenses also go up. When sales increase, some costs,
such as material and labor costs (called variable costs), increase right along with the
sales increases. Accounts receivable also increase, and organizations have more ••
control over inventories than over receivables.
••
••
While spend management is used by supply chain managers to control external
costs, many organizations use a system such as standard costing to control internal
costs related to the goods or services being produced. Standard costing is discussed
next.
••
Standard
costing
According to the A PICS Dictionary. 13th edition, standard costs are "the target
costs of an operation, process, or product, including direct material, direct labor, ••
and overhead charges." Standard costing or a standard cost accounting system is
"a cost accounting system that uses cost units determined before production for ••
••
estimating the cost of an order or product. For management control purposes, the
standards are compared to actual costs, and variances are computed." Standards
are targets that the organization sets to show the expected or desired outcome of
an activity. These arc periodically reviewed and changed as needed.
••
To understand standard costing, some additional
Dictionary, 13th edition, should also be introduced.
terms from the APICS
••
Cost of goods sold (COGS): An accounting classification useful for
determining the amount of direct materials, direct labor, and allocated
overhead associated with the products sold during a given period of time.
••
Current price: The price currently being paid as opposed to standard
cost. (A related tennis market price, which is the going price for an item ••
on the open market.)
Usage variance: Deviation of the actual consumption of materials as
compared to the standard.
••
Cost variance: Jn cost accounting, the difference between what has
been budgeted for an activity and what it actually costs. ••
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••
••
Section A: Supply Chain Management Concepts
••
Standards are set for each of the clements of the cost of goods sold. Each cost
has two components that are set as standards: volume and rate .
•• Volume is how many units of a resource is purchased or used, and rate is the cost
•• per unit of that resource. When volume has variances from the standard, it is a
usage variance; when the rate has variances, it is a cost variance. Both variances
•• are tracked separately, and their sum should equal the total variance. Variances
can be positive or negative. Negative variances occur when costs arc greater than
•• expected; positive variances occur when costs are less than expected .
•• Note that the quantity of materials for an operation has standards both for what
should be purchased and what should be used, since these quantities may differ
due to factors such as scrap in an operation or quantities for bulk discounts .
•• Note also that overhead costs are allocated costs based on a cost driver. A cost
•• produced. The rate is the total expected overhead for the period divided by the
total of the expected cost driver for all operations at that site for the period. A
••
frequently used cost driver is direct labor hours. For example, during a given
period:
• An operation to make 40,040 units is expected to use 1,400 direct labor
•• •
hours .
All operations in the plant are expected to use 14,000 direct labor hours .
•• •
•
Total overhead costs for the plant are expected to be US$400,400 .
The overhead rate is US$400,400/14,000 hours= US$28.60/per direct
•• •
labor hour .
The standard overhead cost for the 40,000-unit operation is 1,400 hours x
,. •• {) 1012 APICS
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Module I: Fundamentals ofSupply Chain Management
••
••
••
To continue this example, if the following actual results occurred during the
period, the variance would be calculated as follows:
• Actual overhead cost for 40,000-unit order: 1,300 hours x US$29.60/hour (a
•
rate determined only at the end of the period)= US$38,480.
Variance: US$40,040 - US$38,480 = US$1,560 positive overall variance
••
(less cost than expected), made up of a large positive variance from lower
labor hours than expected and a smaller negative variance (higher cost than ••
expected) from the higher actual overhead rate.
••
Standard costs and variances for direct materials and direct labor would be
similarly calculated and accounted for, except that the actual costs may be
known during or before production.
••
Uses of standard Standard costing is used to estimate the cost of goods sold before all costs are
••
costing known with certainty. It also provides benchmark targets for use during
production. Thus it is a method of controlling a process during production rather ••
than only being applied by accounting after production is complete. When
variances arc detected as they occur, process controls can sometimes keep
negative variances from continuing to expand or can prevent the problems from •••
••
recurring in a later operation. Management and accounting should exercise a
high level of control over variances because this is the key to avoiding period-
end surprises that impact financial results.
Many of the concepts discussed in these modules make use of standard costing.
••
Inventory can be valued using standard costing (although other methods also
exist). Inventory is discussed more in Section D: "Inventory Management." ••
Efficiency was discussed earlier. If standard costing is used at an organization, ••
••
efficiency can be calculated using a formula:
••
For example, a work center that produces 110 standard hours of work while
operating for only I 00 hours has an efficiency rate of 110 percent. This is
••
where supply chain management comes into play. It is used to bring a synergy
to all the entities in the chain and enable them to operate and produce more
••
efficiently, whether this means optimizing production, storage, or movement
capacity. ••
••
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••
••
Section A: Supply Chain Management Concepts
•• Financial Financial statements help managers and investors track the financial results of an
•• Next, we'll take a closer look at each of these statements, define some key terms,
•• and discuss some key relationships among the elements of the statements .
•• Balance sheet The balance sheet is often called a "snapshot" of the company's financial
position, because it is a static view of financial value or net worth at a point in
•• time, usually the last day of the fiscal or calendar year, though it could also be
for the end of any reporting period, such as a month or quarter. It gets its name
from the fact that it has two major sections that have to be in balance-e-assets on
•• the one hand and liabilities and owners' equity on the other. The accounting
equation defines this balance; it states that:
•• The balance sheet sections are always in balance because owners' equity is
•• bank debt) to acquire assets that are expected to generate a return greater than the
amount invested. Owners' equity can increase or decrease if the organization
•• generates a positive return or negative return. The balance sheet shows the
increases or decreases in assets, liabilities, and owners' equity from year to year .
•• Exhibit 1-20 on the next page shows a sample balance sheet for a publicly traded
company .
••
Exhibit 1-20: Sample Balance Sheet Showing Two Years of Results
514
437
562
••
TOTALCURRENTASSETS 1,697 1,907
••
--·· - ·-··--···
••
Funds from owners j LONG-TERM DEBT 600 600
and operations (what\ TOTAL LIABILITIES c___ 1 264 1 335
is left after liabilities Assets =
j-w
are deducted)~
·
hat owners have
- OWNERS' EQUITY
Liabilities+ Owners' Equity (
•• •
••
••
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••
•• Section A: Supp!» Chain Management Concepts
•• One purpose of the balance sheet is to show whether the organization has
increased or decreased its owners' equity during the year. This is done by
••
comparing the current year's amounts to the amounts in prior years. Note that
in Exhibit 1-20, the size of the owners' equity has increased in 2011 from
2010, based entirely on profits that were reinvested (retained earnings) rather
•• than from new owner investments (common stock and additional paid-in
capital are unchanged) .
•• The balance sheet can also be used as a source for a number of financial
••
payable. According to the A Pf CS Dictionary, 13th edition, accounts
receivable are "the value of goods shipped or services rendered to a customer
on which payment has not yet been received and usually includes an
•• allowance for bad debts." Accounts payable arc "the value of goods and
services acquired for which payment has not yet been made." These two
•• balance sheet amounts are used to calculate the cash-to-cash cycle time (sec
Module 2, Section E, "Managing the Supply Chain," for details), which
••
minus its current liabilities." Both of these amounts can be found on the
balance sheet. Working capital is important to the supply chain because these
are the funds the organization has readily available to invest in normal
•• operations .
•• Income statement In contrast to the balance sheet, the income statement is cumulative and
dynamic, meaning that the statement covers business results over a period of
•• time, such as a quarter or a year, rather than being a static snapshot. The income
statement shows managers, investors, and creditors whether the company has
••
made or lost money during the given period of time. The basic equation for the
income statement is:
•• These arc the key terms to he familiar with, all of which can be impacted by
the effectiveness and efficiency of a supply chain:
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••
••
Module I: Fundamentals of Supply Chain Management
••
Exhibit 1~21: Sample Income Statement Showing Two Years of Results
••
period of time
For the Years Endina 1
2010 2011
I Ex~enses from j REVENUE (SALES) 2,769 3,026
•• providinq goods/ --
services that -
~ne~ate revenue1
LESS: COST OF GOODS SOLD
(COGS)
DIRECT LABOR
2010
380
2011
410
•• ! Revenue-COGS I,
DIRECT MATERIALS
FACTORY OVERHEAD
990
311
1,120
300
•• =Gross Profit \
Gcne;~~i~:.~~~~1 [ .
TOTAL COGS
•• business that
cannot be directly
linked to specific
SELLING EXPENSES
GENERAL AND ADMINISTRATIVE 166
249 272
182
•• units of good~
services s~
---- --
1 LEASE EXPENSE
TOTAL OPERATING EXPENSES
83 91
-498 -545
••
Lowers fixed asset
value for ~axes _, \
LESS: DEPRECIATION -40 -46
----
,--------- ·-·
LESS: INTEREST EXPENSE -39 -39
Paymen_~s on debt/ J.
•• Shows effect of
taxes on profits
NET INCOME (PROFIT) BEFORE TAXES
INCOME TAXES
LThe "bottom line" \
512
-169
567
-300
•• Gross Profit
- Operating Ii
,
NET INCOME
NET INCOME (PROFIT)
(AS A PERCENTAGE OF REVENUE)
343 $ 267
'-\F====$==================~
12% 9%
ExpensesV11--_:_:_::::_:_'-'--'-';:_;;;;_-'-'-==--'-'-'-"'-'--'-'--=--'--"--""-'-'-'-'--'-==---"-'----'--=--'--=---'--"--=--~___.~~~--'=-'-"-~~_____::__:_::__i
•• - Depreciation
- Interest Exp,
- Income Taxes
=Net Income
•• i~~-------
•• Statement of
cash flows
The statement of cash flows shows the sources of a company's cash flows and how
these cash flows are used. Cash flow is the net flow of money into or out of the
••
organization. It is the sum, in any time period, of all cash receipts, expenses, and
investments. There are three factors that determine cash flows: sales, after-tax
operating profit margins, and capital requirements. Some organizations consider
•• • cash flow to be a better long-term indicator of financial health than net income.
•• dividends to owners because cash, not net income, is needed to make these
payments. The after-tax net income on the income statement is not the same as
•• cash flow, but it is the starting point for the statement of cash flows. The statement
adjusts this amount by increases or decreases in certain accounts to show whether
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••
••
Module 1: Fundamentals of Supply Chain Management
Being able to read and understand a cash flow statement is important because it
enables you to assess if the firm is:
• Generating enough cash to fulfill its minimum obligations to lenders,
••
•
investors, and governments (taxes)
Generating extra cash that can be used to repay debt, purchase additional assets
••
for growth, or invest in new products.
••
This information is particularly helpful for financial managers, who use it along
with a cash budget when forecasting their organization's cash positions. ••
Exhibit 1-22 shows a sample statement of cash flows. ••
Exhibit 1-22: Sample Statement of Cash Flows Showing Two Years of Results
••
I
A viable firm needs
positive cash flow,
from operations in
most years 1(
IChange in cash
balance over a period In Thousands (000)
••
- -----
Depreciation i s 11
educted on the
-- .
OPERATING SECTION
Year
--tofti_~
-~
2010 2011
••
, income statement '. AFTER-TAX NET INCOME
but doesn't reduc
cash (added back)e ·DEPRECIATION ADD-BACK
$ 343
40
$ 267
46 ••
••
· 1
••
IN ACCOUNTS PAYABLE 102 56
reduces cash
·I CASH FLOW FROM OPERATIONS 330 285
Increase i
.- accounts payabl
increases cashe "/ /INVESTING SECTION
r' CAPEX SPEND (CAPITAL EXPENDITURES) (100) (100) ••
••
l
Increase i
n [ii CASH FLOW FROM OPERATIONS AND INVESTMENT 230 185
bu sines s i
investment s
i
i
dec~eases cash
Increase in ne ~·-v
debt or equit y /
1 FINANCING SECTION
ADDITIONAL EQUITY CAPITAL
LESS DIVIDENDS PAID
-
(50)
-
(75)
••
provides cash
Net lncom e, I
INCREASE/(DECREASE)
INCREASE/(DECREASE)
IN LONG-TERM
IN SHORT-TERM NOTES
DEBT -
{15)
-
15
••
+/- Change in (ti
Operatin 91
)
•• Note the depreciation amount that is added back on the statement of cash flows .
Depreciation is a predetermined incremental reduction in the value of fixed assets,
•• such as property, plant, and equipment, on the income statement to account for
their deterioration over time. This provides organizations a tax benefit to offset the
investment in fixed assets. However, while depreciation is calculated and expensed
•• on the income statement as the cost of using an asset over its life, this cost is a
noncash charge (i.e., no one is paid). Since depreciation reduces net income on the
•• income statement but doesn't reduce actual cash levels, depreciation is added back
on the statement of cash flows to determine the actual cash flow .
•• Tax savings One relatively new aspect of supply chain management is tax planning to reduce
•• and the
supplychain
the global tax liability of the extended enterprise. Paying less in taxes around the
world translates into increased earnings per share.
• ••
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,
••
countries .
•• taxes 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 low-tax
region, the tax savings will magnify the 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 planned 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 rccngineering 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
•• 0 2012 APICS
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••
Module 1: Fundamentals ofSupply Chain Management
••
liability by closing facilities in high-tax jurisdictions and moving them to
countries with lower tax rates. ••
Taxes and
information
A particularly intriguing tax-saving strategy is the purchase of supply chain
software to improve planning and responsiveness. This could be an enterprise
••
technology resources planning (ERP) 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 time, the ••
software is earning a tax break for itself. Such systems can also be useful in
complying with corporate governance laws, such as the Sarbanes-Oxley Act, and ••
••
can locate all justifiable tax credits and deductions.
Competing Whenever you are discussing supply chain financials, remember that each
values department in an organization has its own particular priorities based on its
activities. And those priorities may compete with each other. For instance, the ••
primary objective of marketing is to maintain and boost revenue, and it strives
toward that by providing great customer service. Although the finance function ••
is also interested in increasing revenues, its primary focus is on keeping costs
and investment expenses low. Production wants the lowest operating costs it can
achieve. Those conflicting viewpoints may spill over into how each function
••
views financial documents and metrics.
••
In summary, in many ways supply chains are like living organisms striving for
dynamic growth, trying to find a healthy balance of nutrients or inputs into its ••
increasingly complex system. These chains function according to specific
objectives and provide benefits to others when their activities and movements ••
are purposeful and planned. In the next section of this module, you will learn
how the supply chain aligns with business strategy to have an even greater and
focused impact.
••
••
••
••
••
••
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•
••
•• Section A: Supply Chain Management Concepts
•••
references appear on the page following the progress check questions .
•• (
(
)
)
a.
b.
Any network of suppliers
Two suppliers and a customer
•• (
(
)
)
c.
d.
A supplier, a nucleus firm, and a customer
Two manufacturers and a distributor
•• 2.
( ) e. All of the above
True or false? Supply chain management can be applied only to supply chains with a manufacturing
•• 3.
( False
•• (
(
)
)
a.
b.
Customer relationship management
Design
•• (
(
)
)
c.
d.
Return
Marketing
•• 4. When Henry Ford organized Ford Motor Company to include raw materials extraction and
dealerships as well as his assembly lines, he created which of the following?
•• (
(
)
)
a.
b.
Vertical supply chain
Lateral supply chain
•• (
(
)
)
c.
d.
U.S. equivalent of a keiretsu
Monopoly
•• 5. Which of the following is the primary benefit of a vertical supply chain strategy?
( a. Multiorganization connectivity along the chain
•• (
)
b.
c.
Economies of scale at each supply chain node
Control
•• 6.
) d. Focus on core functions
•• (
( )
a.
b.
To improve business focus and expertise
To leverage communication and production competencies
•• (
(
)
)
c.
d.
To achieve economies of scale and scope
All of the above
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••
••
Module 1: Fundamentals a/Supply Chain Management
7. Which of the following is the supply chain evolution stage in which a nucleus firm begins initiatives
to improve efficiency, effectiveness, and quality within functional areas?
( ) a. Extended enterprise
••
(
(
)
)
b.
c.
Semifunctional enterprise
Multiple dysfunction
••
( ) d. Integrated enterprise
••
••
8. True or false? The following graphic illustrates the extended enterprise.
( True
( False
••
••
••
••
Reverse product flow
10. True or false? The three Vs are velocity, visibility, and volume. ••
(
(
) True
False
••
11. True or false? One of the benefits of supply chain management is increased visibility of flows.
) True ••
) False
12. True or false? An income statement shows the net income over a given period of time.
••
(
(
)
)
True
False
••
13. Which of the following is a primary purpose of the cash flow statement? ••
••
( a. To show net profit or loss
( b. To show key stakeholders if the company has sufficient cash to pay debts, bills, and
dividends to owners
( )
)
c.
d.
To show the cash-to-cash cycle time
To show dollars tied up in inventory ••
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••
•• Section A: Supply Chain Management Concepts
•• Progresscheckanswers
1. c (p. 1-5)
•• 2.
3.
False (p. 1-6)
c (p. 1-13)
4 . a (p. 1-15)
•• 5.
6.
c (p. 1-17)
d(p.1-17)
•• 7.
8.
b (p, 1-18)
True (p. 1-23)
•• 9 . a (p. 1-29)
I 0. False (p. 1-4 7) It refers to visibility, velocity, and variability .
•• 11. True(p.1-47)
12. True (p. 1-57)
13. b (p. 1-61 )
••
••
••
••
••
••
••
••
••
••
••
••
•• ((j 2012 APICS 1-67 Version 3.0, 2012 Edition
•
the supply chain strategy
Explain the factors used to select strategic partners
••
•
•
Enumerate the building blocks of collaborative relationships
Identify the features and benefits of collaboration ••
•
•
•
Describe how to overcome obstacles to collaboration
Define four types of organizational strategies and how they are used
Explain how strategic decisions are made concerning customers and markets, technology, key
••
••
processes, and sourcing
• Discuss the trends in outsourcing and its potential consequences (positive and negative) for the
organization
•
•
Identify competitive priorities for gaining customers for a company product or service
Describe how each supply chain's capabilities are based on its design, processes, systems and
technology, human resources, and metrics
••
• Identify three factors that can cause an organization to alter its supply chain strategy.
There's a kind of magic in some words, "strategy" and "strategic" being key
•
examples. Place "strategic" in front of the name of any business process and
suddenly that process acquires an aura of great importance. 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. 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.
It's really the same in the business world. Each company has a business strategy
that paints a broad picture of how they will compete in the marketplace. ••
Since business strategy is like military strategy in that it requires the marshaling ••
•
and organizing of all its resources, then it becomes clear that the business's
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••
•• Section B: Supply Chain Alignment with Business Strategy
•• supply chain can be its most potent strategic resource. Designing and building
the right supply chain, one that promotes the business strategies, 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. The supply chain strategy is a complex and evolving means that
•• As illustrated in Exhibit 1-23, you can see how the direction of a firm or
••
••
•• If these strategies arc not aligned, the direction and fit will be askew. All three
•• strategies are linked and dependent. The AP JCS Dictionary, 13th edition,
differentiates between business and organizational strategy (listed as "strategy"
•• financial objectives .
•• Supply chain strategy is then a strategy for how the supply chain will function
in its environment to meet the goals of the organization's business and
organization strategies. Prior to discussing organizational and supply chain
•• strategy in more detail, the first topic in the section addresses business strategy
and competitive advantages. Competitive advantages are closely related to
•• business strategy because they outline the advantages the organization should
realize once it has decided how it will compete .
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Module 1: Fundamentals of Supply Chain Management
••
Other concepts covered in this section include
• Organizational and supply chain strategy
• Prioritization options
•
•
Organizational capabilities
Alignment of capabilities and strategy
••
• Resolving misalignment or gaps.
••
+Topic 1: Business Strategy and Competitive Advantages ••
Business
strategy
Typically a business strategy will outline how to grow the business, how to
distinguish the business from the competition and outperform them, how to ••
achieve superior levels of financial and market performance, and how to
create or maintain a sustainable competitive edge. ••
As per the definition provided previously, business strategies include least
cost, differentiation, and focus. Least cost relates to a lower cost than the
••
competition for an otherwise equivalent product or service. Differentiation
relates to a product or service with more features, options, or models than the ••
competition. Focus relates to whether the product or service is designed for a
broad audience or a well-defined market segment or segments. There are ••
many ways that these generic strategies can be combined or made into
hybrids. For example, common business strategies that are generic to many ••
••
industries and manufacturers include the following variations:
• Best cost--creates a hybrid, low-cost approach for providing a
differentiated product or service
• Low cost-focuses on delivering low price and no-frills basics with prices
that are hard to match ••
• Broad differentiation--creates product and service attributes that appeal
to many buyers looking for variety of goods ••
• Focused differentiation--develops unique strategies for target market
niches to meet unique buyer needs ••
• Focused low cost=-designed to meet well-defined buyer needs at a low
cost ••
Competitive
advantages
Competitive advantages mirror the strategies used to create them: A competitive
advantage exists when an organization is able to provide the same benefits from a
••
product or service at a lower cost than a competitor (low cost advantage), deliver
benefits that exceed those of a competitor's product or service (differentiation ••
advantage), or create a product or service that is better suited to a given customer
segment than what the competition can offer (focus advantage). The result of this ••
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•• Section B: Supply Chain Alignment with Business Strategy
•• competitive advantage is superior value creation for the organization and its
customers. If this advantage is successfully implemented and marketed, it should
result in improved profits and market share .
•• Low-cost
next.
•• advantage
strategies
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 finn may be able
•• A low-cost strategy should not be confused with target cost. Target costing is
defined in the APICS Dictionary, 13th edition, as
•• In many cities, this strategy had resulted in the opening of numerous "dollar
stores" where the majority of the products are only one dollar and the
•• selection is huge .
•• Note that providing a product or service at the lowest price is generally not
compatible with either differentiation or focus (niche marketing) strategies .
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
•• Product or service
reputation .
•• differentiation
advantage
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. According
to the A P!CS Dictionary, 13th edition, competitive analysis is "an analysis of a
•• strategies
competitor that includes its strategies, capabilities, prices, and costs."
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Module 1: Fundamentals of Supply Chain Management
Once a firm has analyzed the offerings of competitors, it may differentiate its
products and services in a number of ways. The following are some types of
differentiation:
••
• High quality-durability,appearance, performance, type of materials, and
so on (Quality is often an order "qualifier," or an element necessary to even
••
consider the purchase of a particular product.)
• 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.) ••
• Greater reliability (which could be considered a type of quality)
• Special features not available from competing products or services ••
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 of the base model to prevent obsolescence and expand ••
the inventory of options
• Collaboration with suppliers to develop innovative designs, numerous ••
Focus advantage
options appealing to different customer tastes, artistic design, and so on.
The following discussion is divided into two ways to create a focus advantage:
••
strategies • Niche marketing (versus mass marketing)
• Responsiveness ••
Niche marketing (versus mass 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.
•
••
••
Section B: Supply Chain Alignment with Business Strategy
•• Depending upon the niche, sourcing may focus more on finding special
expertise or high-quality materials rather than on low-cost labor.
•• Responsiveness
•• fine restaurants will happily wait half an hour for their specially cooked steak,
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 Toyota Prius
•• Volkswagen "Beetle" first came to the United States, where it was both highly
differentiated and a low-cost option.) But businesspeople or diplomats on
•• 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 .
•• Choosing
business
While some firms may focus primarily on one business strategy, others may
pursue a mix of strategies. Note, however, that making one strategy the priority
•• strategies
may make other strategies 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
•• drive the organizational strategy and eventually the supply chain strategy.
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Module I: Fundamentals of Supply Chain Management
Goals of
organizational
Whatever strategy the corporation adopts to satisfy customers, grow, compete,
organize itself, and make money, the supply chain has to operate in a manner
••
strategy
that furthers 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 sourcing lower-cost
materials in emerging markets would be on target for accomplishing that goal. ••
Low-cost sourcing is probably the best option for this strategy because
purchasing machines involves a high capital investment and lower labor
expenses could help offset the investment costs. However, you might also look
••
into investing in equipment, as the high investment is covered by lower labor
costs and increased revenue. (It is possible for an organization to do both-
••
invest in automation and move into a geographic area where labor costs are
less. That decision would be based on volume, payback period, product life ••
cycle, etc.)
••
Horizontal supply chains 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
••
organizational strategy, we are referring to the strategies of a channel master or
nucleus firrn. 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. ••
However, ifa supply chain has a dominant firm with a dominating strategy (one ••
that is dictating its requirements to others), for example, a large retailer, then
supplier and manufacturer strategies and goals must align with that retailer's
••
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•• organizational 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
•• Strategy:
number of supply chains .
When it comes to supply chains, it's what's good for the customer that counts-
•• customerfocus
and alignment
not what's good for the nucleus company or even what seems to be good for the
supply chain itself. Supply chain management needs to be focused on 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
How does one determine what is the right amount of each of those factors? There
•• isn't a simple formula that will help the supply chain manager with this decision .
But there are some basic premises that will help you get started in determining the
•• appropriate balance:
• Serving the end-user customer is the primary driver of supply chain decisions.
•• • Organizations in the supply chain have to make a profit and stay in business
to serve the customer .
•• Functional teams in the organization will provide their input and research on the
••
optimal balance for the supply chain to meet customer needs. 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
••
Decisions are not just about product features or price or speedy delivery. They arc
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.
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The term "customer" can be 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 usually 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. rf 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.
•• on. For instance, if a manufacturer was guaranteed that its wholesale or retail
customers were going to need 1,000 SKUs (stockkeeping units) every
Wednesday afternoon, then getting those 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 Walmart to plan for demand and replenishment of
diapers.) The chain of demand 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. The traditional way of attempting to satisfy this demand is to forecast it.
•• In this retail example, forecasting along the chain works like this:
•• •
•
The retailer forecasts demand from parents who purchase diapers .
The wholesaler forecasts demand from all its retailers.
•• •
•
The manufacturer forecasts demand from the wholesale distributors.
The component suppliers forecast demand from manufacturers.
••
• The raw materials suppliers forecast demand from the component
manufacturers.
•• How effective is this strategy? Let's say you don't want to be placing large bets on
the accuracy of all those forecasts. Here's what actually happens:
•• • Meanwhile the retailer had already ordered enough to allow a little extra
"safety stock" to put in its storeroom. (For retailers, safety stock is a quantity
•• the distributor, thus resulting in needing a larger order than was previously
forecasted. 'These fluctuations impact forecasting for the distributor.
•• • The wholesale distributor had forecasted demand based on past orders from its
retailers. But now those demand patterns have a wider variability than the
demand pattern at the retailer's checkout c.ounters due to that safety stock the
•• retailer held on to. Sometimes the safety stock accumulates because demand is
•• When a supply chain works in response to forecasts, it's called a "push" chain,
and it entails the following:
••
• In production, the production of items at required times based on a given
schedule planned in advance.
• In material control, the issuing of material according to a given schedule or
•• •
issuing material to a job order at its start time .
In distribution, a system for replenishing field warehouse inventories where
•• Everything in a push system is pushed downstream from one point to the next
•• products to the distribution center or the retailer, where they await an order from
downstream.
•• enhance customer service while reducing costs. But stockouts are a risk.
•• • In the forecast-push process, the risk is related to the build-up of inventory all
along the chain. Not only does inventory cost money while it sits in a retail
•• 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
•• and destroy compared to their retail price, the distributors would rather
destroy ten copies than miss one sale.) Those are the results of producing to
• Provide access to real demand data along the chain for greater visibility of ••
the end customer. 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 firms. The other partners lack "visibility"--one
supply chain principles promoted by APICS. They simply cannot see what's
of the main
••
going on with the end customer. But visibility is a necessity for building a pull
system, and pioneers like Walmart 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 of the preceding day.
They produce just enough to replace the sold items.
••
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Section B: Supply Chain Alignment with Business Strategy
•• orders going out without 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
••
can run a larger volume of each product to send to inventory. But when
making 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
•• Strategy:number
of supply chains
The last strategy we'll cover is based on a company having more than one supply
chain, depending upon the number and types 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
•• • materials giants larger than the manufacturer. Some are key accounts; some might
be occasional buyers. The finished products may be sold through several 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. Next we'll explore how product types, fi.mctional versus innovative, often
require different supply chain strategies .
•• In "What Is the Right Supply Chain for Your Product?" Marshall L. Fisher
•
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••
Functionalproductsthat change little from year to year have longer life cycles
(perhaps more than two years), relatively low contribution margins, and little
variety. Because demand for them is stable, they are fairly easy to forecast, with
••
a margin of error of about I 0 percent, 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 ••
However, make-to-order functional products, such as replacement parts for
customized equipment, usually have long lead times (six months to a year).
••
Innovativeproducts 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 I 0 to 25 percent of regular price. The margin of error on forecasts for ••
innovative products is high-40 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 performance 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 ••
Innovative products, with their high margins and unpredictable demand, justify
the 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 reducing lead times and
••
producing products to order rather than for inventory.)
••
Here is a conundrum ... What happens when a product can fall into either
category? Fisher says that some products can be either innovative or functional. ••
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••
•• 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
•• 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
•• Byrnes breaks products into three categories: staples, seasonal products, and
fashion .
•• • Staples (which are much like Fisher's functional products) have steady,
year-round demand and low margins. White underwear is an example .
•• Byrnes advises stocking staples only in retail outlets in small quantities and
transporting them in truckload quantities. (A full truck, as you'll see in
•• 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.
••
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••
••
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. •••
Business and organizational strategies are formalized and clearly specified within
an organization's business plan, so this is discussed next. ••
Business plan A business plan is a written document that describes the overall direction of the
firm and what it wants to become in the future. The APJCS Dictionary, 13th
•
••
edition, defines a business plan in part as follows:
The business plan provides general direction regarding how the firm plans on
••
achieving its long-term objectives. Key functions such as finance, engineering,
marketing, and operations typically have input into the plan. As illustrated in
••
Exhibit 1-24, the overall strategic plan cascades down to those same functions.
••
••
Exhibit1-24: Impact of the Business Plan
Business ••
Plan
•• •
•
••
Finance Engineering Marketing Operations
••
••
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Section B: Supply Chain Alignment with Business Strategy
•• The finance function manages and tracks the sources of funds, amounts
available for use, cash flows, budgets, profits, and return on investment.
Engineering is responsible for research and development and the design and
•• products. (You will learn more about the role of marketing in the next section.)
The goal of the operations function is to meet the demands of the marketplace
•• These functional roles collectively support the success of the supply chain .
The business plan is based on and aligned with the business strategy and with
•• formation of and changes to the business plan come from top management's
modifications to the business strategy and organizational strategy. But in
•• Supply chain The supply chain has the overarching goal of providing customers with goods
strategy and services when they want them, at a competitive price, while being
consistent with the organization's and extended supply chain's strategies. If
•• the supply chain cannot successfully execute this strategy, the business, or
product line, may cease to exist.
•• When you think about the role the supply chain plays in the bigger context or
•• your company, remember the model shown in Exhibit 1-24, which showed
that the functional strategies underlying supply chain management must
••
articulate with the business plan, and remember also that the purpose of
supply chains is to be globally competitive. Time, distance, and collaboration
arc basic elements in modem supply chains that impact the chain's ability to
•• chain strategy .
•• partnerships are being forged both across thousands of miles and with local
suppliers, creating virtual organizations that extend beyond the physical
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••
••
boundaries of a company. In these virtual corporations and the virtual networks,
we can-and therefore we must-share ideas and data to be competitive.
••
What do these strategic partnerships look like in action? Suppliers,
manufacturers, and customers all come together on design teams to create
••
products that will not only satisfy customer demand but will be efficient to
produce, assemble, transport, and store. Planners gather from all functional areas ••
and-by way of software-from multiple supply chain partners to discuss
anticipated demand, demand planning, and appropriate forecasting methods. ••
Operations plans and manages manufacturing priorities, capacity, and inventory.
Logistics determines the most effective warehousing and the appropriate means
of transportation to optimize customer satisfaction and profits.
••
Partnership But how docs a business select its strategic partners? Jordan Lewis, author of ••
criteria Partnershipsfor Profit, has developed a comprehensive framework of
criteria for evaluating potential partners for strategic alliances. Seven factors ••
need to be carefully researched and considered when forming a supply chain
strategy.
••
• Add value. Can a company add value to your firm's existing products?
Does the potential partner create products that are complementary to those ••
••
.i•
of your firm? An example would be if your firm produces computer
hardware and the potential partner company manufactures software that is
used on your computers. This can actually add value to both companies'
products. Other examples of value-added benefits include partners that
••
shorten time to market, speed up distribution times, or enhance the product
repair process: these all contribute to a higher perceived value of the finn.
••
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••
••
• Add technological strength.Does the company use the same technology or
is it willing to share new technology with your firm? Does the potential
partner have internal expertise to facilitate the transition between new and
•• this firm? Will its strategy align with your organization's? ls the firm
heading in the same general direction? Pooling expertise and resources from
•• •
both firms can provide new opportunities for growth .
Share insights and learning.Is the company willing to share its insights
•• and key learning with your company? Alliances where that can occur yield
a wealth of information that can be used by both organizations. It also
•• administrative costs for shared activities? ls the firm willing to share in the
risk? Sometimes administrative costs can be reduced due to the expertise of
••
one or both partners, and strategic alliances can limit investment exposure if
the other firm will agree to share in the risk .
•• happen if the firm's resources are diverted from its strengths. It can also occur if
the firm's strategic or technological strengths are compromised in the process of
•• making the partnership successful. Remember that it's only a successful strategic
a11iance if the partnership results in a "win-win" for both parties .
•• risks, resources, rewards, vision, and values. Without each of these elements,
strategic alliances often are unbalanced and unaligned. The more unbalanced a
•• Building
partnership is, the more likely that key objectives will not be met.
So once you have analyzed potential partners according to these criteria and have
•• collaborative
relationships
chosen those that objectively match your needs in a strategic alliance, how do you go
about building a collaborative relationship? How will you generate a supply chain
•• strategy that can develop and grow trust, manage risks, overcome barriers,
communicate and collaborate effectively?
••
I.
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••
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 ••
• 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
•
•
Sharing of knowledge, not just 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 ••
In order to build the foundation of the collaborative partnership, the partners must: ••
••
• Initiate management tasks.
• Overcome barriers to collaboration.
• Build levels of communication.
•
•
Determine levels of collaborative intensity.
Examine strategic importance versus difficulty to determine product
••
categories.
••
Initiatemanagementtasks.
Once the collaboration is official, it's critical that top management demonstrate ••
••
their enthusiastic commitment to the partnership. Since actions speak much louder
than words, management should publicly model efforts of relationship building.
The managers of both firms need to work together from the start: share
information with external parties and with internal staff, modify incentives to
match collaborative goals, enforce agreements by departments and staff, stabilize
••
pricing and ordering, and improve operations. They must develop good working
relationships and strive for personal communication to develop mutual trust. They ••
need to develop supportive relationships that foster team spirit between the
partner companies. ••
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Section B: Supply Chain Alignment with Business Strategy
•• Division managers throughout the network must place the interests of the whole
above their local interests. These managers may be asked to make major changes
in how they operate to facilitate collaboration. Top management may need to
•• during which senior management enumerates the benefits of the collaboration and
discusses the negative impact of the di vision managers not being on board with
•• designating relationship goals and planning the steps necessary to reach them .
This process begins with 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
•• emphasize equity in profits among all parties. Equity will help motivate all
parties to work toward the good of the whole .
•• The next 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
••
include CPFR (collaborative planning, forecasting, and replenishment), which you
will learn more about in Module 2. Although mutual interdependence is more
complex to manage, it can also yield much greater rewards .
•• Since no contract can cover all contingencies, the next task is to create a policy for
••
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,
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Module 1: Fundamentals of Supply Chain Management
••
•• • Workingwith competitors.Supply chain management books tout the
success of collaborations among competitors, but many of these ventures
also fail. This is partly 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
•• 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
•• or more companies use very old legacy or ERP systems that do not adapt
well to the newer integration solutions such as process-oriented
••
middleware (like business process management [BPM], or Web services,
discussed in Module 2). Incompatible and/or antiquated hardware
infrastructures can also prove a barrier to collaboration .
•• upon trust and mutual benefit, the nucleus firm may use its leverage to
dictate the terms 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.
•• reduced cost and cycle time rather than return on investment, which is a
better long-term indicator. Simply measuring efficiency increases will
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•• industry. Although mergers would seem to provide the deepest level of trust
and communication, the sudden clash of business, regional, and national
••
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
••
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 .
•• • Complexity. The next factor is the complexity of the item and of the
process steps required to produce it. Strategic alliances may he needed
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Module l : F11nda111c11ra/s 0JS11pp~v Chain Management
Exhibit 1-25 shows how this creates four basic categories of goods.
••
••
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•• Section B: SupplyChain Alignment with Business Strategy
•• i Bottleneck Materials
1
Direct/Core Competency Materials !
•• ~
:c:
• Suppliers have strong bargaining power. •
•
There are one or a few suppliers.
There is a high impact on value to the
customer.
••
• Price is a large percentage of the total
system/product cost.
•• I
I ~OI
.;;modi;;·Mot.,fal<. ···· Leveragable Materials
Suppliers' relative bargaining power is
not strong.
1·
••
• Supplier competition is ample .
• A small percentage of cost savings over
a broad base of items can have a large
impact on profitability .
•• Low High
••
Strategic Importance (Profit Impact)
Source: Adapted from Designing and Managing the Supply Chain, 3rd edition, Simchi-Levi et al.
•• This model can be used to determine which suppliers are most appropriate for
•• provide the best cost reduction on the commodity items you need?
••
• Leveragable materials are of high strategic importance but low
difficulty levels. They call for collaboration to maximize both cost savings
and reliability through means such as bulk purchasing by multiple members
••
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
••
knowledge
• Jointly developed performance metrics
• Open two-way communications
• Improved quality
• Better customer service
• Reduced inventories ••
• Networkwide visibility
• Clear roles and responsibilities
• Joint problem solving
• Rapid project results
• Reduced cycle times and lead times
More effective working relationships
I:
••
• Commitment to the relationship Enhanced commitment to one another
[________ ······--· - ·- ••
••
Strategic
decisions and
After developing business, organizational, and supply chain strategies, the
firm-or the trading partners collectively-need to support the broad ••
prioritization
options
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.
••
It's tempting to say that all decisions affecting the supply chain should be based
on organizational and supply chain strategies. But it's more realistic to say that ••
the decisions and strategy should be consistent, because this is analogous to the
"which came first-the chicken or the egg" puzzle. Whichever way you look at ••
the matter, however, priorities must be set strategically.
that strategic decisions are made in regard to customers and markets,
technology, key processes, and sourcing.
We'll look at the way
••
••
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•• Customerand
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
•• Technology
decisions
Since technology has become the powerful force that extends supply chain
visibility across multiple tiers while providing world-shrinking velocity, it
always deserves serious consideration as an aid to achieving strategic
•• should look for packages that meet at least 80 percent of your needs "out of the
box" by way of standard configuration. The remaining 20 percent can be met
through customization of the product by your company. Realize that most
•• vendor packages are built based on best-known industry methods, so look hard
at your own business processes and whether they need to be changed prior to
There is a lot to choose from, including technology that can increase the
•• 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 .
•• payments if they will just be sent speeding into a bottleneck (or constraint) that
will stop their progress. Most importantly, each organization needs the right
•• technology applied to the right process by the right people. You will learn more
about technology available for supply chains in Section F of Module 2 .
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
region best suited by climate, culture, resources, tax policy, etc., to support each ••
specific activity. At this time, it remains to be seen whether rising fuel and
transportation costs will put a limit on the length of supply chains.
••
Outsourcing was initialJy 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.
You will learn more about outsourcing later in Section I of this module.
••
Organizational Every supply chain is made up of organizations, people, processes, and ••
capabilities information. Each supply chain's capabilities
• Organizational design
are based on its
••
•
•
Processes
Systems and technology ••
••
• Human resources
• Metrics (measurement techniques).
•• The success of any supply chain in achieving its goals of creating value for
customers as well as financial value requires thoughtful, strategic planning
•• Organizational
design
Organizational design refers to the creation of an organizational structure to
support the strategic business plans and goals of an enterprise (in both for-
•• looked at the stages of supply chain evolution; each stage was linked to a
significant alteration of organizational design. Here we will focus on the
In the first stage, decisions about matters related to supply and distribution
•• ensconced in its own silo and focused on meeting its own goals. Supply
chain decisions, such as number and location of warehouses, inventory
•• needs-based sales, laying the groundwork for more strategic and innovative
approaches to marketing and operations .
••
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•• Section B: Supply Chain Alignment with Business Strategy
•• Supplychain
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) has evolved from control
of discrete business functions like procurement, manufacturing planning, and
•• Systems and
technology
Being able to implement and manage sophisticated software that can automate
various supply chain activities is a critical capability. Organizations that have
•• developed integrated networks, like intranets and cxtranets as well as those that
can harness the power of the Internet, will be prepared to handle the complex
•• If an organization decides it needs the capability to pick up sales data and send
it instantaneously throughout a network for use in revising forecasts and
•• triggering operations along the chain, then it may purchase the technology to
use bar codes on products and radio frequency devices. These companies might
then further employ such data to be fed into databases for marketing analysis to
••
This plethora of technological advances does not come without its challenges,
however-for any organization. There have been, and still are, technological ••
••
hurdles to surmount in this evolution, such as the incompatibility of
programming languages and 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 and user-friendly electronic linkages, some departments or users may ••
question its usefulness and related costs. New users of this technology have to
be trained, and, in some cases, they also have to be converted from a skeptical ••
to an accepting attitude toward new technologies.
The most significant challenge might be a 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.
••
Human resources An organization is significantly impacted by the manner in which it creates and
organizes its functions and how the people within the departments manage the ••
business operations and key processes. Admittedly, very few organizations
a department called "supply chain management." Horizontally organized chains
typically have no unified ownership or management structures (unlike vertically
have
••
integrated supply chains). 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 have the capability to develop ••
expertise in hiring and training and to properly deploy highly skilled, process-
oriented, and knowledgeable supply chain specialists to design and monitor
supply chain processes. Of necessity, supply chain management sometimes
••
draws upon personnel attached to multiple functions, yet they may be available
only part-time to the supply chain team.
••
Unlike specialists in traditional functions-production, logistics, procurement, ••
etc.-an organization needs supply chain personnel with 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
••
••
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••
•• Section B: Supply Chain Alignment with Business Strategy
••
diplomatic go-between when mistrust and misunderstanding prevent team
members from cooperating with one another .
•• will contribute to the success of supply chain initiatives. For instance, a team
member with cost-management skills comes in handy when planning an
••
managed to keep costs in line and avoid driving up product prices. Modeling
the process in advance with data from supply chain partners can help increase
efficiency when the real work begins. In addition, supply chain management
•• Finding and developing the level of talent required to manage supply chains
••
human resources policies may work against, rather than in conjunction with, the
supply chain strategy. This further underscores the rationale of the supply chain
being the responsibility of an executive-level champion .
•• •
•
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 transform the data into information for use in real-time
•• Supply chain
metrics
Finally, an organization must be capable of measuring key supply chain indicators
and must have its metrics in place. Metrics, also known as performance
If asked questions such as "How well is the supply chain performing?" or "Is our
supply chain helping or hurting corporate objectives?" the answer should include
a meaningful measurement of some sort. There are a number of obvious measures
for assessing an organization's current performance: •••
•
•
Past performance (to show how much it has improved)
Future desired performance (to show how close or distant from goals) ••
•
•
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-to-
••
cash cycle, for instance, you might say "We've got it down from 50 days to 20,
and that's better than the industry average." ••
And there's also a checklist to measure performance. 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 is the Oliver Wight supply
chain excellence checklist, compiled by the consulting firm whose name it bears.
••
Summing up Taken together, the five elements just discussed determine the capabilities of ••
organizations within a supply chain. In the ideal world, each organization in the
supply chain would have the following:
• Integrated organizational design with a process orientation
••
• Key supply chain processes already in place and functioning at
competitive velocity
••
• Systems and technology sufficiently advanced to tie all processes together
and allow the supply network to operate from the same, simultaneously ••
•
available data
Educated and skilled employees who have a process focus, can see the ••
•
end-to-end chain as a single entity, and manage accordingly
Metrics that are in place to assess performance against a relevant standard ••
••
and identify strengths to encourage and weaknesses to amend
•
••
••
Section B: Supply Chain Alignment with Business Strategy
•• Let's look at an example of when this alignment is in place and working well.
One major international petroleum company, for example, instituted
information technology to convert from a forecast-driven to a demand-driven
advanced
•• enterprise. Demand data from filling stations and large industrial customers
became instantly available throughout the supply and distribution networks for
•• use in marketing, logistics, planning, and refining. These shared demand data
fed into virtually every decision made along the supply chain, from spot-market
•• purchases to scheduling of refill runs. When all supply chain processes operated
from the same base of data, the partners functioned 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.
•• Alignmentof All of these organizational capabilities should be aligned with one another and
•• capabilities
and strategy
with the supply chain strategy. Whatever type of supply chain a company
establishes internally across functions and externally with trading partners,
•• chains) .
When it comes to aligning organizational and supply chain strategies, it's useful
•• I
Market and external environment I
.
analyses ,
I
•• Organizational strategy
•• T
'
••
Future direction (global Competitive priorities
strategy, new products (cost, quality. time.
and services, etc.) price, etc.) [___ ~ '. Must develop th«
! Capahilities- supplv chain
••
>- capabilities required
... current, needed, plans
... I to plan and execute
1
.s·1rall!K)'
Functional area stratcgics-
finance, marketing. supply chain, i
•• and others
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••
••
••
This flowchart shows that
• The management of the organization must first identify its customers,
products, competition, and socioeconomic environment and then determine its
mission and overall goals that support those factors. The organization needs
to be able to identify and leverage its distinctive competencies and note the
••
areas where it lacks expertise since those capabilities can later be outsourced
if deemed appropriate. ••
• These decisions feed into the organization's market and external environment
analysis as well as its organizational strategy. ••
• They in tum drive the future direction and competitive priorities, which then
help determine the appropriate strategies of the various functional areas like ••
••
finance, marketing, other departments, and, of course, the supply chain.
• Those strategies drive the supply chain capabilities of the present, the
immediate future, and the long term.
• These supply chain capabilities feed into a continuous loop and help the
organization determine how to continuously adjust its competitive priorities
••
of cost, quality, time, and price to support its dynamic organizational strategy.
••
Once the organizational strategy is in place and there is confirmation that it is
properly aligned with supply chain strategy, the organization will likely need to ••
be flexible and change that strategy when circumstances
direction.
warrant taking a new
••
"*- Topic 3: Resolving Misalignment or Gaps ••
Changing
strategy:
What could be better than having an excellent supply chain strategy in place with
the interests of all firms in the chain aligned and focused on the customer? The
••
when and
why
ability to change strategies in response to the inevitable changes in the
competitive environment, for one thing. There are at least three important factors ••
that can cause an organization to alter its supply chain strategy:
• Change in market conditions ••
••
• Change in business direction
• Anticipated change in market
We'll look at examples of each factor and the role played by innovation.
••
Change in market
conditions
Changes in market conditions can happen with stunning rapidity. But they also
can evolve steadily and incrementally over periods of time. The key is for supply ••
chains to be prepared to spot these changes early and adapt quickly. A classic
example of failure to respond quickly to change was Cisco Systems' disastrous ••
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•• Section B: Supply Chain Alignment with Business Strategy
••
•• experience when the dot-com bubble burst. For years Cisco had been the very
model of supply chain excellence with its automated workflows and cross-
company 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
•• suppliers kept on sending product into inventory. Their interests had slipped out
of alignment with Cisco's, with disastrous results .
•• 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
•• this program. As it turns out, a chain can become so lean it starves to death when
its food source moves away. Efficiency can turn rapidly from a market
•• 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
•• design decisions and the start of manufacturing until real data come in .
•• Change in
business
direction
Another reason to modify a supply chain strategy arises 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
As the case of the Prius indicates-and to a degree the strategies of Zara and
••
change in market Mango-supply chain strategies can be modified in anticipation of 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 ••
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••
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Section B: Supply Chain Alignment with Business Strategy
••
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
•• 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
•• technologies that will 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
••
changes to their strategics. Also, supply chain efficiency can become a serious
liability if the chain loses its flexibility from having removed all the buffer from
inventories and having pared process times down to the Just-in-Time delivery
•• velocity. A supply chain that has become so fast and so Jean may just keep right
on running 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 some of the
lessons they've learned:
•• • Pursue cost efficiencies and increased velocity but not at the exclusion of
•• •
at the dock when it should be on the road to a stocked-out facility downstream .
Develop multiple supply chains that are appropriate 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
••
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Module J.· Fundamentals of Supply Chain Management
••
mix, it may be highly inefficient for others. Take the high-dollar, lightweight
items out of the truck, train, or container and fly them to their destination. ••
Choose suppliers that give you what each product line nceds=-speed to
market, quality at a higher price, or ability to change direction rapidly. ••
• Watch trendsin 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 trendsin 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.
••
• 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. ••
••
••
••
••
••
••
••
••
••
••
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•• Section B: Supply Chain Alignment with Business Strategy
••
•• +Progress Check
The following questions are included as study aids and may not follow the format used for questions in
•• the APICS CSCP examination. Read each question and respond in the space provided. Answers and page
references appear on the page following the progress check questions .
•• 1. Which of the following strategies is the one that guides the others into alignment?
( ) a. Business strategy
•• (
(
)
)
b.
c.
Supply chain strategy
Marketing strategy
•• ( ) d. Operations strategy
•• ( ) False
3. What factors should an organization consider when selecting its strategic partner?
•• (
(
)
)
a.
b.
Docs it improve market access?
Will it enhance strategic growth?
•• (
(
)
)
c.
d.
Does it strengthen operations?
a and b
•• ) e. a, b, and c
•• 4. True or false? Suboptimization often occurs in global planning and transportation costs .
( ) True
••
( ) False
5. True or false? Communication between supply chain partners can't take place on different levels
•• ( ) False
•• 6. If you have a product with a complex bill of materials and components that range from low-priced
commodities to fragile or sophisticated materials that require special shipping and handling, a best
••
practice is to develop
( ) a. internal capabilities for all components.
( ) b. multiple supply chains.
•• (
(
)
)
c.
d.
a supply chain that emphasizes bulk transportation.
a supply chain that emphasizes rapid delivery .
••
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Module l: Fundamentalsof Supply Chain Management
••
••
••
7. Place the name of the type of good in the appropriate quadrant below.
s:
••
0)
I
:i"
rn
ii:
::!'
~
Q.
Q.
::i
·········-·-------· -- --· ···---··· ----··--·
••
~
..,::i
;:
Cl
••
~0
--'
••
Low
Strategic Importance (Profit Impact)
High
••
8. Put these forecasting activities in the sequential order (1 to 5) in which they normally occur.
••
(
(
)
)
a. The raw materials suppliers forecast demand from the component manufacturers.
b. The manufacturer forecasts demand from the wholesale distributors. ••
(
(
)
)
c.
d.
The retailer forecasts demand from young parents who purchase diapers.
The wholesaler forecasts demand from all its retailers. ••
( ) e. The component suppliers forecast demand from manufacturers.
9. True or false? According to the demand-driven strategy, product is turned out based on actual orders.
••
(
(
)
)
True
False
••
10. All of the following apply to functional products except ••
(
(
)
)
a.
b.
they have longer life cycles.
there is high variety. ••
(
(
(
)
)
)
c.
d.
e.
there are no end-of-season markdowns
they are fairly easy to forecast, with only about a I 0 percent margin of error.
demand for them is fairly stable.
••
11. True or false? Innovative products, with their low margins and unpredictable demand,justify extra
••
expense for holding costs.
( ) True ••
( ) False
••
••
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•• Section B: Supply Chain Alignment with Business Strategy
••
••
12. True or false? Cars and coffee shops can be both functional and innovative .
( ) True
( ) False
•• (
(
)
)
a.
b.
the framework within which operational and management activities are performed.
how internal and external communication flows .
•• (
(
)
)
c.
d.
an organizational structure to support strategic business plans and goals .
how employees view the structure of a firm .
•• 14. Which of the following is not a valid reason for an organization to alter its supply chain strategy?
( ) a. Change in business direction
•• (
(
)
)
b.
c.
Anticipated change in market
Change in company management
••
••
••
••
••
••
••
•• •
••
••
••
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Module I: Fundamentals o{Supply Chain Management
Progress checkanswers
1.
2.
a (p. 1-69)
True (p. 1-85)
••
3.
4.
e (p. 1-86)
True (p. 1-90)
••
5. False (p. 1-92)
6. b (p. 1-95) ••
7.
8.
Compare your answers to Exhibit 1-25 on page 1-95.
c, d, b, e, a (p. 1-77) ••
9. True (p. 1- 78)
10. b(p.1-82) ••
••
11. False (Innovative products have high margins.) (p. 1-82)
I 2. True (p. 1-82)
13. d(p. l-99)
14. c (p. 1-106)
••
••
••
••
••
••
••
••
••
••
••
••
(0 2Dl2APICS l-114 Version 3.0. 20 I 2 Edition ••
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••
••
•• Section C: Supply Chain Design and
Improvement Considerations
••
••
•• This section is designed to
•
•
Describe the importance of understanding the marketplace as it relates to the supply chain
Explain the considerations in the design of a supply chain
•• •
•
Define continuous improvement and its role in total quality management
Describe the key aspects of continuous improvement
•• •
•
Explain each of the stages in the continuous improvement model
Diagram a simple process or flowchart using the correct symbols
•• •
•
Explain the rationale for adopting continuous improvement
Describe the balanced scorecard used to track improvements in business performance
•• •
•
Identify Level I SCOR metrics and performance attributes
Describe potential process improvement initiatives
•• •
•
Identify the purpose of common continuous improvement tools
Describe and distinguish between the approaches to benchmarking: competitive, best-in-class,
•• •
and process
Identify the steps for managing change and incremental improvements within the supply chain
••
and its partners .
••
•• *Topic 1: Understandingthe Marketplace
Marketing's [n order to design a supply chain that can meet its ultimate goal of delivering the
•• role right product at the right place and time and at the right price, it's important to
understand the marketplace .
•• As you recall from the previous section, the strategic business plan drives several
•• we're going to focus on the marketing function and how it provides foundational
information about the marketplace.
competitors,
Knowing your market, customers,
and product are critical in setting a strategic business plan to
•• CO 2012APICS 1-115
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The marketing function develops its own strategically oriented plan based on the
••
strategic business plan. Once again, these plans must be in alignment and there
should be consistency between them. As seen in Exhibit 1-28, the marketing
strategy is based on a number of key elements.
•• by research firms. Of course the internal marketing department staff can also do
research about potential markets, products, etc. A tool commonly used for this
•• SWOT analysis
Exhibit 1-29, the SWOT analysis is usually in the form of a quadrant in which
distinctions are made between internal versus external focus and positive versus
•• negative points .
•• I ! I
•
•• +
•• Threats External focus
•• Positive
···~~~·
Negative
•• • External opportunities and threats are based on market trends and risk
analyses. Environmental scanning may be required to assemble data on
•• pricing and offerings, current and emerging technology, new taxes, laws and
regulations, and social, political, and economic conditions .
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••
Opportunities can be acted upon to help move an organization toward achieving ••
its goals. However, if those opportunities are ignored or improperly developed,
they can transform into threats (like IBM giving Bill Gates the green light to
market his disk operating system [DOS] because they weren't in the "software
••
business"). Other opportunities may arise from competitors' activities or
products, new markets, or from other data seen during environmental scanning.
••
Threats are defined as risks that can impact a firm negatively if they are not ••
handled appropriately. External risks include unforeseen events outside the
control of an organization that can diminish productivity, profits, or market ••
share, for example, the 2011 Japanese earthquake and tsunami, which resulted in
losses for many multinational companies around the globe. Of course there can
also be internal threats that arise due to a firm's actions such as overzealous
••
geographic expansion or excessive outsourcing.
••
This valuable market information and reconnaissance feed into a written
document called the market plan. ••
Market plan
components
The market plan (shown in Exhibit 1-28) is defined in the AP/CS Dictionary, ••
13th edition, as including "the current market position, opportunity and issue
analysis (SWOT results), marketing objectives and strategies, action plans,
programs, projects, budgets, and pro forma profit and loss statement and
••
management controls." Current market position information may include data
and findings about demand patterns, products and pricing, customer satisfaction,
••
and service level agreements with partners, distributors, and retailers.
••
From the supply chain perspective, what is key to remember about these
marketplace factors is that they may evolve over time and, if they do, that may ••
require modifications to the design of the supply chain and its organization. Let's
now take a closer look at the elements of the design, also known as the design
considerations.
••
••
*Topic 2: Supply Chain Design Considerations
It's important to initiate this discussion by defining supply chain design. The ••
AP/CS Dictionary, 13th edition, defines it as "the determination of how to
structure a supply chain. Design decisions include the selection of partners, the ••
location and capacity of warehouse and production facilities, the products, the
modes of transportation, and supporting information systems." ••
••
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•• Section C: Supply Chain Design and Improvement Considerations
•• When it comes to designing a supply chain, there are standard factors to take into
••• consideration:
• Balancing efficiency with responsiveness
• Network configuration
•• •
•
Inventory location and levels
Product design
•• •
•
Information technology
Support systems
•• Collectively, the decisions made regarding each of these factors should always
support the organizational strategy and the supply chain strategy and should
•• Balancing
efficiency with
Organizations often need to balance efficiency (least-cost manufacturing
chain) with responsiveness (ability to be flexible in response to changing demand).
and supply
•• responsive-
ness
Organizations that serve markets with relatively stable demand and that can forecast
with reasonable accuracy tend to focus primarily on efficiency and may select a
make-to-stock manufacturing strategy (goods are produced and held in
•• forecasts and are assembled when customer orders are placed) if sales volume is
high .
•• • As supply chains strive to improve their performance based on the metrics that are
important to their key audiences, they should also be evaluating their ability to
strike the right balance between efficiency and responsiveness. Being solely focused
•• on one or the other has proven fatal for some companies. Instead, the supply chain
management needs to research and identify how to optimize the supply chain based
•• on the type(s) of products or product groups that are manufactured within the chain .
What exactly do the customers value in terms of each purchase they make? Is it
••
based on low price, convenience, or customizable features?
••
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•• Section C: Supply Chain Design and Improvement Considerations
•• Issue Considerations
•• Port facilities, airports Specific details on the size and quality of port facilities
and airports
•• Highway conditions
Rail lines
The size and condition of roads as well as the extent
of the highway system
The availability of routes that will minimize any delay
•• in movement of products
••
Source: AP/CS Global Sourcing Workshop Series
•• The condition and capacity of port facilities, airports, and roads can be major
factors in getting goods and supplies shipped reliably and on a timely basis .
•• Different rail track gauges and capacity issues can adversely affect lead times .
Additionally, crossing borders involves high volumes of paperwork .
•• Inventory
locationand
In addition to determining the number and location of warehouses, supply
chain managers in manufacturing enterprises must also consider the
•• 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 to achieve is the fluctuation in demand that occurs all along
the supply chain, beginning with the ultimate customer. Unpredictable
•• demand, along with other factors such as accidents and adverse weather
conditions, means that maintaining some levels of inventory at various
•• In the next section of this module, you will learn more about planning and
controlling inventories, the related cost categories, and how inventory
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Module I: Fundamentals of Supply Chain Management
••
Product
••
•
Jn the ideal supply chain, product design has an impact on the supply chain
design design. Ideally it's a collaborative process involving a11 the functions and
partners that are impacted by the product's design. The design process is
enhanced by the input 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.
••
••
However, in reality, sometimes the design of a product or service is carried out
in isolation by one or two departments and without involving supply chain
partners. This is when problems are sometimes unknowingly built into the
product design. For instance, certain product designs may increase inventory
holding or transportation costs relative to other design options, while other
••
designs may require a shorter manufacturing lead time. Since product redesign is
usually expensive and an unplanned cost, it's best to strive for the optimal ••
product design from the very start of the process.
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 used to make the
••
products). Environmental life cycle analysis looks at the environmental
a product (or service) up and down the supply chain-starting from raw material
impact of
••
extraction through manufacturing, use, and final disposal. Multiple supply chain
processes are involved, such as sourcing, material handling, manufacturing, ••
••
packaging, and transportation. Along the way, process improvements often result.
Ideally, managers across the supply chain cooperate with each other to extend the
benefits beyond "green" to include reduced costs and improved customer support.
Information Since technology has become such a powerful force that can extend supply chain ••
technology visibility across multiple tiers while providing world-shrinking velocity, it is a
critical aspect of the design. The primary concerns today in this area are ••
determining which data should be transferred, which data are significant to the
effective management of the supply chain, and which data are not of importance
and can therefore be safely ignored. Some important considerations in this area
••
are:
• Determining how frequently data should be transferred and analyzed
••
•
•
Deciding how data will be analyzed and used
Determining the impact of the Internet and e-commerce ••
• Designing and setting up infrastructure internally and between supply chain
partners ••
••
• Integrating lT and decision support systems into competitive strategy.
•• Decision
support
systems
Investing in decision support systems (DSS) is also a consideration in supply
chain design. What systems will the supply chain design need to support
efficient and effective functioning once it's up and running? A decision support
•• system is a broad term for any software application used to help management
make better, more informed decisions, particularly about tradeoffs between two
•• DSS can be used to help identify the best solutions for a breadth of supply chain
challenges: from strategic decisions such as network planning, as mentioned
previously, to tactical issues such as assigning products to manufacturing
•• application. If another firm identifies that it will need a support system to help
manage its high demand variability and complex manufacturing processes that
•• require setups when switching between products, it would likely choose to invest
in systems that provide decision support on demand planning and production
•• Exhibit 1-31 on the next page shows the typical components of a DSS .
You will be learning more about the details of DSS and how they are
••
•• ((J 2012/\PJCS 1-123 Version 3.0, 2012 Edition
••
Exhibit 1 ~31: Decision Support Systems (DSS)
•• words in this definition are process, never-ending, root causes, and small-step
improvement:
•• value to the customer, but it doesn't always focus directly on the goods
produced for customers. Instead, it looks for ways to improve the
processes that result in customer value; and it approaches process
•• That's why it fits so well with supply chain thinking, which also
emphasizes the search for ways to improve the functioning of a whole
•• system .
•• • Never-ending. The search for perfection {and that's the way TQM
defines its goal) has no endpoint, only successive approximations
••
moving toward a goal that is itself redefined over time. The idea is to
keep raising the bar, setting ever-higher standards. But that isn't the only
implication of "never-ending."
••
• Root causes. Quality initiatives always include an analysis phase that
specifies all the steps in a process and pinpoints the underlying causes of
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Module I: Fundamentals of Supply Chain Management
••
troubled processes. It is not about blaming people involved in processes
but rather helping them identify and resolve what is really at the core of ••
••
the process glitch.
•• Stage 1:
Process analysis
••
•• Stage 4:
Implementation and
Stage 2:
i
1
•• change management
\.._
Process assessment
__,)
I
••
•• Stage 3:
Project planning
••
•• • Stage 1: Process analysis. The initial step in continuous improvement
requires taking a hard look at the supply chain (internal and external) to
•• Analysis of a specific process requires breaking the process down into each
••
supplier-input-process-output-customer (SIPOC) diagram .
•• in a process, how they are related, and areas for possible improvement.
Also known as a flow chart .
•• Exhibit 1-33 illustrates a simple process chart and the appropriate use of
symbol shapes:
•• •
•
Arrow: to show dircction(s) in the flow of the process steps
Oval: used for the start and end of a process
•• •
•
Rectangle: used to indicate a process step
Diamond: used to indicate a decision point
Start
••
Process
••
step
••
••
Stop ••
The SIPOC diagram, as shown in Exhibit 1-34, also serves to visually
••
depict the flow of a process.
••
Suppliers
Exhibit1-34: SIPOC Diagram of Demand Management Process
Customer
••
••
Last month's
performance:
••
Clean,
meaningful
data
Sales and
marketing
accuracy, bias,
and assumptions
••
••
-·-~~-~~
Customer
process plan
planning
••
Develop
u nconstrained
demand plan
••
••
Customer
' relationships
lnterplant Sales planning
demand
1·-·-·---
Distribution
I
Review with
supply and
constrain Master ••
••
requirements production
planning schedule
· •
••
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•
••
•• Section C: Supply Chain Design and Improvement Considerations
•• The SIPOC diagram is one of the tools used in six sigma (a continuous
improvement philosophy which you will learn more about in Module 3) .
•• Whatever technique is used, once the current process has been mapped, the
••
documenting the process on a factual basis. TQM provides analytical tools
to aid in fact gathering, and we'll look at some of them presently .
•• Assessing the current state of a process and determining the goal of the
improvement initiative can be accomplished by using another
••
organization's performance as a benchmark. In previous sections you've
looked at various key performance indicators (KPis) such as the SCOR
metrics that provide a basis for assessing current performance and
•• there are process benchmarks that describe the qualities that make up
process excellence .
This step also requires flexibility such as rethinking the goal and perhaps
even moving the benchmark. Sometimes you start down one road only to
encounter a roadblock, a shortcut, or an intersecting path that leads to a
•••
better destination that wasn't marked on the original map. Even the
improvement process itself is subject to improvement.
••
• Stage 4: Implementation and change management. After the team has
identified a problem, selected a benchmark, and devised a series of steps to ••
reach it, they can involve other supply chain partners who are stakeholders
in the process. The hard work may have only begun at that point. ••
Implementing process improvement ideas can send shock waves through
the firm and rattle the supply chain if the change isn't managed carefully. It
takes strong leadership and committed participation from employees who
••
understand the potential benefits for the customer and are confident in their
ability to play their roles successfully.
••
Reasons for The reasons for taking a continuous improvement approach to supply chain ••
adopting
continuous
management can be boiled down to the following.
••
improvement • 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 arc the processes that flow along the chain
••
among functions and partners.
••
• Supply chains are dynamic. A supply chain 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
••
••
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••
•• Section C: Supply Chain Design and Improvement Considerations
•• expensive, but the costs of poor quality are often greater. The AP/CS
Dictionary, 13th edition, defines the cost of poor quality as follows:
••
(I) Internal failure costs ... associated with defects found before
the customer receives the product or service;
(2) External failure costs ... associated with defects found after
•• (4) Prevention costs ... incurred to keep failure and appraisal costs
to a minimum .
•• philosophies, like lean, six sigma, and the theory of constraints, as well as basic
and new quality tools, in Module 3 .
••
keep functioning at an acceptable level while you improve poorly functioning
process steps. Often what's more challenging to change are the actions and
habits of the people involved in a process. They need direction, explanation,
•• follow-up, and reinforcement for executing process changes and ensuring that
the processes don't revert to the previous state .
•• 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
You will be learning more details about the balanced scorecard and how it's
••
used in Module 3, Section C, "Managing Supply from External Sources."
••
Level 1 SCOR
metrics
The Supply Chain Operations Reference (SCOR) model, which was introduced
earlier in this module, was developed specifically to measure cross-functional, ••
cross-company supply chain processes. It includes metrics to calculate
numerical values for performance attributes, and this allows it to be used to ••
••
compare performance against industry-best or best-in-class performance as well
as against a company's own previous performance and future goals. The model
has been developed and refined by dozens of major firms and applied in
initiatives available to Supply Chain Council members as case studies.
••
To measure performance, the SCC has developed a system of metrics. We're
limiting this discussion to Level 1 metrics, the highest level. This provides a ••
taste of the SCOR measurement system, but beyond Level I are several deeper
levels with hundreds of more-specific, related measurements. The Level 1 ••
metrics explained here are not tied to the specific SCOR processes in the plan,
source, make, deliver, and return model. Instead, they may cut across multiple
SCOR processes.
••
Exhibit 1-35 identifies the Level 1 metrics in the right-hand column. Jn the left-
••
hand and middle columns, it names and explains the supply chain performance
attribute measured by each metric. These attributes include: ••
• Supply chain 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.) ••
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•• Section C: Supply Chain Design and Improvement Considerations
•• •
improve if the overall strategy focused on customer loyalty.)
Supply chain agility, which refers to the supply chain's ability to respond to
•• •
the customer .
Supply chain costs and supply chain asset management, which bring the
•• returns .
•• Performance
Attribute
Performance Attribute
Definition
Level 1 Metric
•• Supply chain
reliability
The performance of the supply chain
in delivering the correct product, to
Perfect order fulfillment
••
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
Supply chain The speed at which a supply chain Order fulfillment cycle time
•• responsiveness
Supply chain agility
provides products to the customer
The ability of a supply chain to
respond to marketplace changes to
Upside supply chain flexibility
Upside supply chain adaptability
•••
working capital
Once the supply chain has a percentage score for a particular metric, it can then
•• The selection of metrics depends upon the supply chain strategy; there is no
requirement that all Level 1 metrics have to be applied simultaneously. In fact,
••
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••
Module l: Fundamentals ofSupply Chain Management
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 underperfonn 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 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. You will learn more
••
about the specific definitions of the Level 1 metrics along with their formulas in
Module 2, Section E, "Managing the Supply Chain."
••
Now that you have a solid understanding of SCOR Level 1 metrics and ••
performance attributes, let's explore some other process improvement
initiatives and other measures. ••
Process
improvement
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 ••
initiatives processes for improvement, to map a process accurately, and to measure the
progress of your process improvement initiatives toward their goals. ••
Teams will be directed by top management toward potential initiatives that they ••
••
deem important. A continuous improvement team may want to do preliminary
research to determine which issues or areas will be on the simpler side to fix.
Team members can analyze improvement opportunities based on the
perspectives of key stakeholders such as customers, suppliers, employees, etc.
Success in small-scale improvement projects will help build momentum. For ••
instance, a team may work on improving a subprocess in a particular place in
the manufacturing flow, such as improving a component of a product. As teams ••
build their expertise and confidence in themselves, they will become more
proficient at using continuous improvement philosophies and tools and they ••
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•
••
••
Section C: Supply Chain Design and Improvement Considerations
•• will take on more extensive and complex supply chain processes that require
more sophisticated skills .
•• •
•
Perfect customer orders
Performance improvement (by supply chain, function, teams, supplier
•• •
groups, etc.)
Increased productivity
•• •
•
Strategic and financial alignment
Asset management
••
• System infrastructure
• Demand planning
• Logistics
•• Regardless of the type of initiative, decisions must be made as to how progress will
be measured by selecting the appropriate metrics for an initiative. That way everyone
•• Metrics
will share the same vision of how success will be measured and documented .
•• is being measured. 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 or team
•• decides to measure, it's a virtual certainty that it won't achieve what it fails to
measure. Once the objectives and metrics have been selected, they need to be
•• Since it's not feasible to measure and monitor every supply chain goal or activity,
choose a reasonable number of key performance indicators that are related to the
•• strategic objectives. The discussion that follows briefly reviews the nature of
KP ls .
•• Key
performance
We've discussed a number of strategic attributes of supply chains, among them
velocity, visibility, variability, collaboration, trust, customer focus, and
•• indicators (KPls)
flexibility. We could add other attributes such as security (risk management),
compliance with all regulations, and environmental excellence due to a well-
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••
If an improvement initiative is supposed to increase the velocity with which
••
••
information flows from the end customer back through the chain, we could
develop technology-related objectives, assess the current state of the system,
and identify metrics to measure progress toward a velocity 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 tiers. 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.
••
In addition to the commonly used KPis of profitability and customer
satisfaction, supply chain managers have developed others that practitioners can ••
adapt to their own purposes. Here are just a few examples:
• For product introductions-internal failure rate, scrap, external failure rate,
warranties, returns, and introduction lead time
••
• For merchandizing products-market share, volume growth, and total
supply chain inventory turns (Note that inventory has to be aggregated
••
•
across the supply chain.)
For replenishment--order fill rate, on-time delivery, forecast accuracy, and
••
order fulfillment lead time
••
The key point about KPis is that they have to be applied to supply chain
processes that are derived from the organizational 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, increased production at one plant.
••
Without data, you don't know what customers value, so you can't design ••
processes with any assurance that you're targeting their needs. 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 can only guess at what needs to be improved.
••
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•
••
•• Section C: Supply Chain Design and Improvement Considerations
•• The next sections cover supply chain visibility and the analysis phase that
initiates an improvement project. The two are closely related .
•• Optimizing
visibility
Visibility means being able, figuratively, to see what's happening in the supply
chain. In traditional, functionally oriented firms, silo walls obstruct "horizontal"
•• 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.
•• 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
•• ability to react to difficulties long before they could have just a few years ago .
One obstacle to visibility along supply chains has been the unwillingness of
•• 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. They are accountable for the strategic direction of the firm, and so
it is they who decide the priority order of process improvement. Projects must
••
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Module 1: Fundamentals ofSupply Chain Management
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 members' intimate knowledge is
required to define the process, analyze weak points, suggest improvements, and
••
implement solutions. The team's first step is to describe the process in depth
and then analyze the process to find the root causes of inferior performance- ••
the fundamental reasons it isn't contributing to achieving supply chain goals.
••
Cl tools CI teams use a number of techniques and methods for continuously improving
supply chain processes: ••
••
• Process mapping--describes a process in depth and then analyzes the
process to find the root causes of inferior performance-the fundamental
reasons it isn't contributing to achieving supply chain goals
•
•
Pattern identification-pinpoints a pattern of variability within a process
Control chart analysis--compares performance data with predetermined
••
•
control limits
Defect measurement-identifies the number of defects that represent ••
•
product or service failures
Pareto diagram-identifies the small percentage of factors that account for ••
•
the largest impact
Cause-and-effect diagram-helps organize causal factors that affect a ••
••
problem or process being investigated
• Root cause analysis-identifies the root cause (versus the symptoms) of a
problem with an unacceptable rate of defects
• Benchmarking-sets goals at specific levels by reference to an outside
performance standard
••
You will be learning much more about these tools and how they are used in ••
supply chain improvement initiatives in Module 3, Section E, "Continuous
Improvement." For now, let's take a closer look at benchmarking. ••
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 performance 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 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 ••
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••
••
Section C: Supply Chain Design and Improvement Considerations
•• rather than measuring the outcome of the process in amount of time, number of
errors, production quantities, etc.). Each approach has its merits .
•• 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.
•• means the enterprise has improved its competitive position. Ford Motor
Company used competitive benchmarking to make a truly remarkable
••
20 percent reduction in personnel. For a second pass at improving the
process, Ford benchmarked its performance against Mazda and was able to
cut personnel from 500 to 75 .
•• enterprise know that change is possible. And yet, despite the dramatic
example from the automobile industry, restricting the search for
••
advantages .
•
•• Section C: Supply Chain Design and Improvement Considerations
••
••
It's worth noting that Bannister himself did not use another runner's
performance as his benchmark. He reached beyond any other current 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
•• time .
Here are some guidelines for teams working with KPis and benchmarks:
•• •
•
Limit the KPJs 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
•• Let's take a look at the next stcp--how you and your team implement the
improvement and manage the changes brought about by these CJ initiatives .
•• Managing
change
The following are some steps to take as you put your process improvement
initiative into action and track progress made over time .
••
You need two implementation plans, each identifying milestones, tasks, and
resources:
• The master plan contains all improvements in sequence and delineates the
•• • Project plans schedule all steps required to achieve the targets for each KPI,
set deadlines, and assign accountability for achieving results .
1•
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••
••
••
Communicate plans and measures to all participants in the process.
You can't change one part of a system without affecting other parts. All firms
and functional areas involved in the process must know precisely what the
improvement initiative involves so they can develop their own objectives and
strategies to contribute to a synchronized effort.
••
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.
••
• 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.
••
financial goals as well as other scorecard goals .
Work underthe The most successful continuous improvement programs rely on more than one
•• improvement
umbrella
technique. And you will be learning much more about these other quality
philosophies in Module 3, Section E, "Continuous Improvement":
•• •
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 .
The theory of constraints (TOC) has a different focus than the other quality
•• the constraints, which may seem to be incompatible with lean and JIT, hut
as the buffers are added only just before the current constraint, the other
parts of the system could have reduced buffers .
•• Summing up In competitive markets, success goes only to those organizations that are
•• 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,
Number the following stages of the continuous improvement model from 1 to 4, with 1 being the first
••
(
stage.
) a. Project planning
••
(
(
)
)
b.
c.
Process assessment
Implementation and change management ••
( ) d. Process analysis
••
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• •
••
••
Section C: Supply Chain Design and Improvement Considerations
••
7. What symbol signifies a decision point in a process map or flowchart?
( ) a. Rectangle
( ) b. Two opposite-pointing arrows
•• (
(
)
)
c.
d.
Diamond
Oval
•• (
(
)
)
a.
b.
Subprocesses within a larger supply chain process
Supply chain revenues from various product lines
•• (
(
)
)
b.
c.
those incurred to keep appraisal costs to a minimum.
those associated with the customer's receipt of the product .
•• ( ) d. those associated with defects found before the customer receives the product.
••
I 0. True or false? The balanced scorecard is intended as a tool for tracking business performance without
reference to financial impact.
( ) True
•• ( ) False
•• (
(
)
)
b.
c.
Supply chain's ability to respond to unplanned decreases in customer orders
Supply chain's ability to develop competitive sales strategies
12. Which of the following might be a supply chain KP! for product merchandizing?
•• (
(
)
)
a.
b.
Scrap
Holding cost
•• • ( )
)
c.
d.
Total supply chain inventory turns
Visibility
•• 13. Which of the following is true of a supply chain process key performance indicator (KPI)?
(
(
)
)
a.
b.
It should promote collaborative behavior across functions .
It should focus on one area or department.
•• (
(
)
)
c.
d.
It should be disconnected from overall strategies .
It should ignore interrelationships and interdependencies .
••
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Module I: Fundamentals of Supply Chain Management
14. True or false? Visibility should be low in a supply chain in order to help synchronize operations and
increase value.
( ) True
••
( ) False
••
15. If a financial services firm designs an initiative to improve its sales process to the point that its
closing ratio at least equals a best-in-class benchmark, it wants the average ratio to be equal to which ••
of the following?
( ) a. Ratio of the best salesperson in the firm ••
••
( ) b. Ratio of the best salesperson in the financial industry
( ) c. Ratio of the best firm in the financial industry
( ) d. Ratio of the best firm in any industry
••
••
••
••
••
••
••
••
••
••
••
••
•• •
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••
••
Section C: Supply Chain Design and improvement Considerations
•• 2.
3.
4.
e(p. 1-119)
False (p. 1-122)
True (p. 1-124)
•• 5. e (p. 1-124)
6. d, b, a, c (p. 1-127)
•• 7. c (p. 1-127)
8. a (p. 1-129)
•• 9. d (p. 1-131)
10. False (p. 1-132)
••
••
••
••
••
••
••
••
••
••
••
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••
••
Section D: Inventory Management
••
••
This section is designed to
• Define inventory and inventory management
••
•
•
Identify key supply chain performance indicators relevant to inventory management
Describe the factors that must be weighed when setting an inventory policy ••
•
•
Identify the reasons why inventory would be managed in aggregate and at the item level
Identify the main types of inventory ••
•
•
Describe valid reasons for holding inventory
Differentiate between inventory cost categories ••
•
•
•
Describe the effects of inventory on financial statements
Understand the use of inventory turnover as an inventory control tool
Comprehend that inventory can be given different values on the balance sheet based on how
••
it is valued by accountants.
••
••
*Topic 1: The Need for Inventory ••
Inventory
basics
The AP!CS Dictionary, 13th edition, defines inventory as follows:
•• Inventory
management
The APJCS Dictionary, 13th edition, defines inventory management as "the
branch of business management concerned with planning and controlling
•• inflows and outflows at each stage, from the ordering of raw materials to
customer handoff of finished goods. Therefore this area can benefit strongly
•• ~--...__
Purchasing and materials management: adequate raw
_
•• materials at low inventory cost
•• (~- ~~~~imiii~~~iiiiiiiiiiiii
•• >~
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Inventory
management
KP ls
From the supply chain management perspective, there are two key
performance indicators for inventory:
• Reduction of inventory costs related to holding, ordering, and
••
transporting materials, supplies, and finished goods at various points
along the chain
••
• Achievement of customer service targets related to the quality,
availability, and on-time delivery of products and services (which may ••
depend upon availability of supplies)
••
••
Since inventory represents such a large investment, improving inventory
management promises a significant boost in return on investment. It also
means that poor inventory management can lead to very large problems.
Keeping too little inventory in the system can result in such dilemmas as
frustratingly long lead times or broken orders, which in tum could lead to ••
lost customers and lower market share. On the other hand, too much
inventory could have a negative financial impact and greater risk of a ••
reduction in inventory value or write-offs of obsolete inventory. In some
businesses, obsolescence sneaks up on a product so fast that an inventory
overhang can actually cause the products to become outmoded before they
••
ever get sold.
••
The tightrope you walk with inventory management is to reduce the cost of
holding and transporting goods while meeting or exceeding customer service ••
goals. Setting and regularly updating an inventory policy is one way
organizations perform this balancing act. ••
Inventory
policy
Inventory policy is a way of formalizing the results of strategic inventory
decisions so that they can be implemented consistently. Inventory policy
••
codifies both broad and specific inventory management decisions. On a broad
level, inventory policy could specify centralized or decentralized inventory ••
planning and/or warehousing, frequency of communications and coordination,
or a geographical inventory positioning strategy such as postponement. On a ••
••
more specific level, inventory policy can specify rules for order quantities,
order timing, when to act on exceptions to rules, and amounts of specific items
to purchase versus produce.
•• locations in the supply chain is a key inventory policy input, especially for
long or highly variable lead times .
•• •
in this section .
•• safety stock per item and location that balances minimizing failure to fill
customer orders within an acceptable time (e.g., stockouts) against
•• Some of these factors are discussed more later in this section, while others are
discussed elsewhere in these modules .
•• Aggregate Aggregation is "the concept that pooling random variables reduces the
•• inventory
management
relative variance of the resulting aggregated variable. For example, the
relative variance in sales of all models of automobiles sold by a firm is less
••
than that for a single model" (APICS Dictionary, 13th edition). Aggregate
inventory management is primarily concerned with the financial impact of
inventories, which means getting to an optimal level of inventory that can
•• produce the greatest overall profit for the organization and the supply
chain. The objectives of aggregate inventory management are shown in
•• Exhibit 1-37 .
/\ ••
Supportorganizational strategyand operations.
'
••
Supportfinancial objectives.
••
/
Balance: ' ••
• Customerservice
• Operationsefficiency ••
• Inventoryinvestmentcost objectives .
I \,\
••
••
Aggregating, or grouping, inventory helps inventory managers determine the
costs and benefits of a particular group of inventory. Inventory can be
•••
aggregated by:
•
•
Demand pattern (e.g., women's running shoes versus men's running shoes)
Production process (e.g., men's and women's running shoes produced on
••
•
the same production line)
Stage of production flow (e.g., raw materials, finished goods)
••
• Relative value to the organization (e.g., ABC inventory analysis, which is
discussed in Module 2, Section J, "Inventory Planning and Control") ••
• Product or SKU family or type (e.g., finished goods with similar functions
but variations in models, packaging, colors or styles) (The AP JCS ••
Dictionary, 13th edition, defines stockkeeping unit as "an inventory item
[or] in a distribution system, an item at a particular geographic location.") ••
••
• Distribution pattern (e.g., products that originate at the same source and/or
are to be delivered to the same location or customer zone).
Inventory is aggregated prior to analysis not only because the large number of
individual items in some organizations would be impractical to analyze ••
individually
aggregate-level
but also because when forecasting supply and demand patterns,
forecasts are more accurate than item-level forecasts. This is ••
••
because, as noted in the definition, aggregation reduces the variability in data.
Note that aggregation is performed only to the level that the groupings provide
effective analysis.
••
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••
•• Section D: Inventory Management
••
• Optimize the flow of inventory and provide suitable buffers between stages
• Match supply with demand
• Set inventory objectives and inventory policy
•• •
•
Calculate inventory costs by category
Perform sales and operations planning, including demand management and
•• Item inventory
management
Item inventory management is used in short-term operational decision making .
Management specifies rules to follow for individual inventory items using
•• •
•
How to determine order size per order
Relative importance of each inventory item
••
• Inventory control procedures for individual items .
•• Types of
inventory
Classification of inventory type depends on the point of reference, meaning that
a raw material supplier's finished good becomes a manufacturer's raw material
•• upon transfer.
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••
Module 1: Fundamentals of Supply Chain Management
••
inventory. In-transit inventory is measured by the average annual inventory
in transit, which is a function of transit time in days and annual demand.
Reducing this cost requires finding ways to reduce transit time because less
volume needs to be in transit at a given time.
••
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••
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•
••
•• Section D: Inventory Management
•• In summary, inventory can pile up at all stages along the supply chain, from
harvested raw materials, through work in process, to finished goods waiting to
••
be purchased.
•• •
•
Reduced variability in the quality, amount, and timing of supply deliveries
Shorter production cycle times
•• •
•
Careful maintenance of production equipment
Improved demand forecasting and/or use of actual demand orders
•• inventory? or purposes, of inventory answer the question "Why have inventory in the
supply chain?"
•• demand plan. The demand plan will include anticipation of demand peaks
and valleys due to promotions or changes in seasonal demand. In a level
•• away. If a supplier goes bankrupt suddenly, for instance, safety stock can
be used to continue production while looking for a replacement supplier.
•• Safety stock helps meet customer service targets and reduces stockouts
costs. Use of safety stock to satisfy unplanned demand should be
••
considered normal to a point. Inventory policy can be used to set an
acceptable frequency for use of safety stock; increased frequency of use ••
over this target is an exception indicating there may not be enough
inventory. Decreased frequency of use under this target may indicate there
may be too much inventory. Infrequent or non-use of safety stock is a red
••
flag that there is too much inventory.
••
• Lot-size inventory or cycle stock. Lot-size inventory is the purchase or
manufacture of inventory in quantities greater than needed to receive ••
••
quantity discounts or full truck discounts or to match batch sizes for
production. A more general term that encompasses other types of
reordering systems other than in full lots is cycle stock. The AP/CS
Dictionary, 13th edition, defines cycle stock as inventory that "depletes
gradually as customer orders are received and is replenished cyclically
••
when supplier orders are received."
••
• Hedge inventory. Hedge inventory is not a commonly used term in
organizations, but many organizations do practice hedging when it comes
to inventory. Hedging involves managing risk by building, buying, or
••
contractually guaranteeing additional inventory at a set price if supply
could be threatened or prices could be rising. These decisions involve
••
speculating on events such as the weather, the economy, labor strikes, civil
strife, or political events. ••
• Buffer inventory.Buffers are materials maintained to keep production
throughput steady at work centers. It is a term related to the theory of
••
constraints discussed elsewhere in these materials.
••
• Decoupling. The APJCS Dictionary, 13th edition, defines decoupling as
follows: ••
Creating independence between supply and use of material.
Commonly denotes providing inventory between operations so that ••
••
fluctuations in the production rate of the supplying operation do
not constrain production or use rates of the next operation.
•
••
•• Section D: Inventory Management
•• Since many products arc produced in batches when there are competing
uses for the same work centers, decoupling also allows scheduling use of a
work center so that some production may occur earlier than needed to
•• chain managers look for ways to achieve the same goals without the
holding costs by reducing variability in quality, quantity, or delivery time .
•• backorder, lost sale, and lost customer costs; and capacity variance costs .
•• Acquisitioncosts The AP/CS Dictionary, 13th edition, defines acquisition cost as "the cost
required to obtain one or more units of an item. It is order quantity times unit
••
Landed costs According to the APICS Dictionary, 13th edition, landed costs include "the
product cost plus the costs of logistics, such as warehousing, transportation, and
handling fees." Landed costs for purchased inventory are the sum of all direct
•• costs, including the price paid (i.e., acquisition cost), transportation to the site,
customs, and insurance. Landed costs for internally sourced inventory include
•• Carryingcosts
(holdingcosts)
Carrying cost is "a percentage of the dollar value of inventory per unit of time
(generally one year)" (APICS Dictionary, 13th edition). It is a variable cost that
•• as the following:
•• • Storage costs. Storage costs include allocations for rent, operating cost,
taxes, material-handling costs, lease payments for equipment, depreciation,
•• power, and operating costs. These material, labor, and overhead costs for
storing and transporting inventory are allocated to individual SKUs based
on their volume (called cube), weight, or density. Large, dense, or difficult-
••
• Capital costs. Inventory requires financing, and capital costs refer to the
return expected by creditors and investors because the money could be
invested elsewhere (called opportunity cost). Companies get financing from
••
debt or equity sources. Debt sources include borrowing arrangements that
charge interest and require repayment; equity sources include money from
••
investors (who get an ownership stake in the organization) plus retained
earnings (past profits). The relative proportion or weight of each of these ••
sources is called the weighted average cost of capital (W ACC). W ACC can
be used as a required percentage return on inventory sales that must be ••
•
exceeded.
Ordering costs are all those costs that do not vary due to quantities ordered but
••
only vary by the frequency of ordering.
••
Ordering costs include costs incurred when ordering inventory and setup costs
resulting from the process of preparing to go into production to fill the order. ••
For purchased materials, ordering costs include all the costs associated with the
purchasing process. Use of electronic fonns and payment transfers can reduce
ordering costs. Less frequent ordering can also reduce these costs but at the
••
price of additional inventory holding costs.
••
Setup costs, which are all those expenses incurred when preparing machines
and processes to manufacture an order, include labor for cleaning machinery ••
and making any necessary adjustments or modifications. This requires shutting
down the machines, but it is sometimes possible to reduce the shutdown time by
doing some preparation work off the work site while the machines are still
••
processing previous orders.
••
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•• Section D: Inventory Management
•• Backorder, lost
sale, and lost
customercosts
The cost of backorders, lost sales, and lost customers are costs related to
customer service. A backorder (also known as a stockout) is "an unfilled
customer order or commitment. .. an immediate (or past due) demand against an
•• difficult to quantify financially but can be measured using various means such
as percentage of orders shipped on schedule (see Module 2, Section H,
•• Capacity variance
risk at acceptable levels.
Capacity variance costs arc the costs of changing capacity beyond a "normal"
•• costs range, including the costs of overtime, additional shifts, layoffs, or plant
closings. Capacity variance costs can be minimized by production leveling
•• strategies (producing a consistent amount throughout the year), hut this strategy
increases inventory holding costs during periods of low demand .
•• Cost Inventory managers aim to determine order amounts and timing with an eye to
•• balancing reducing acquisition, carrying, and ordering costs without sacrificing customer
service. (Remember, an order schedule is necessary for managers all along the
chain=-the retailer and the distributor order more finished goods, the
•• manufacturer orders more components and supplies, the supplier orders its own
materials and supplies, and so on.)
•• inventory with available for sale or used in the production of things available for sale,
cash flow inventory can also be viewed as all the money currently tied up in the supply
•• While inventory can be seen as the buffer that hides the flaws in the supply
chain, it can also be seen as the lubricant that keeps a supply chain flexible. A
•• In order to keep the cash flow turning over, the goal is to efficiently manage the
company's inventory level and cost while maintaining and improving customer
••
satisfaction. If a company has fast delivery and strong customer satisfaction
because it keeps a large inventory, it can also face financial failure because of
all of the capital tied up in inventory. On the other hand, if a company does a
••
great job at reducing its inventory and associated costs down to next to nothing,
it may run the risk of being unable to deliver the requested products. This may
••
cause customers to take their business elsewhere. Balancing cost, inventory
level, and customer service are vital. ••
Use of the financial statements for inventory management is an exercise in ••
inventory management at the aggregate level. As noted earlier, aggregate
inventory management views inventory in total to determine if the flow of
materials through the various inventory classifications is efficient and
••
effective enough to maximize profits. Discussions surrounding the financial
impacts of inventory are generally framed around reducing inventory,
••
reducing inventory costs, or increasing the number of times per year that
cash is invested into inventory and returned in the form of revenue, called ••
inventory turnover.
••
The financial statements introduced in Section A, "Supply Chain Management
Concepts," are revisited here with an emphasis on inventory. ••
Balance sheet Recall that the balance sheet has two major sections that have to be in balance as
per the accounting equation:
••
Assets = Liabilities + Owners' Equity ••
Exhibit 1-38 on the next page displays a sample balance sheet for a publicly ••
traded company. Inventory is a current asset that is broken down in this example
by raw materials, work-in-process inventory, and finished goods inventory. ••
Note that most externally available balance sheets will only list total inventory,
while internal reports made for management purposes often have more details
such as these.
••
Inventory as an Raw materials, WlP, and finished goods are carried as current assets on the
••
asset balance sheet. However, maintenance/repair/operations (MRO) inventory is a
period expense. As such, it is expensed on the income statement during the ••
period in which it is purchased. The balance sheet items do not impact the
income statement until the inventory is sold, reduced in fair market value, or ••
••
written off (sometimes called junked inventory).
•
••
•• Section D: Inventory Management
•• . Unsold
mventory on ASSETS
the books at 1.
December 31-;- ~ -~n
. Statement of financial
value at a point in
d of year)
I
In Thousands 000
2010
i----------"=-'-'"------"O:::....:.~ 2011
•• I
:
the given date ;· CURRENT ASSETS
is a curren~·- '
asset on the
CASH AND CASH EQUIVALENTS
INVENTORY 2010 2011
$ 783 $ 908
•• I balance sheet.
=·~-~~=-==
Direct materials, !
fl
l
RAW MATERIAL INVENTORY
;/ l
WORK-IN-PROCESS INVENTORY
FINISHED GOODS INVENTORY
$ 85
105
210
$
115
230
92
••
direct labor, and ·
// TOTAL INVENTORY 400 437
overhead costs of i.
these assets will>// PREPAID EXPENSES
become an i ACCOUNTS RECEIVABLE Average Inventory:: 514 562
••
LIABILITIES
CURRENT LIABILITIES
ACCOUNTS PAYABLE 604 660
•• LONG-TERM
LONG-TERM
TOTAL LIABILITIES
LIABILITIES
DEBT 600
1 264
600
1 335
•• OWNERS' EQUITY
COMMON STOCK (PAR VALUE) 10 10
•• While it sounds good that inventory is an asset, what this means to finance is
•• that some amount of the organization's current assets arc less liquid than
others. (Liquidity is how quickly assets can be converted into cash.)
•• Therefore, optimum inventory holdings are those that equal projected sales
in the organization's demand plan (plus an optimal amount of safety stock),
••
Another reason too much inventory is not good is that the value of the
inventory on the balance sheet includes the costs involved in producing the ••
••
inventory. When the inventory is sold, the portion of inventory value that
comprises direct materials (the raw materials), direct labor, and factory
overhead will become an expense on the income statement that offsets
revenue and reduces cash (an asset). In other words, inventory is an asset on
the balance sheet until it is sold, at which point only its profit margin
••
contributes to net income.
••
Unnecessary inventory can also magnify quality issues. If a defect or other
quality issue is discovered, more inventory with the same defect will magnify ••
••
the quality issue and quality costs for scrap, repair, and/or replacement.
•
•
•• Section D: Inventory Management
•• inventory over time to be more or less in alignment with the actual market value
•• accounted for at the period end and would be reflected in the financial
statements .
•• Other reasons that the reported level of inventory on the balance sheet could
•• differ from the actual market value of the inventory is that this reported amount
of inventory may include inventory that is reserved, obsolete, damaged, or
otherwise unsalable. Some of this obsolete or damaged inventory will be written
•• Since changes to inventory levels can affect accounting values of inventory and
financing needed to sustain the inventory, supply chain managers should consult
•• with financial managers with enough advance notice so the organization can
determine how to change inventory levels while keeping the organization
••
solvent and in good standing with creditors and investors .
Income Recall that the income statement shows the cumulative, dynamic
•• whether the company has made or lost money during some period of time,
such as a quarter or a year. An income statement measures profitability in
•• more than one way. Gross profit is determined by subtracting cost of goods
sold (COGS) from revenues. COGS includes inventory costs of direct labor,
direct materials, and factory overhead for all goods that sold that year.
•• lowering costs. It also shows that lowering variable costs in the supply
chain can strongly impact profits .
••
•• V 2012 APICS
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1-163
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••
Module I: Fundamentals of Supply Chain Management
••
Exhibit 1-39: Sample Income Statement Showing Two Years of Results
'
booked when the
related units of
' inventory are sold.
r
_
- - -, LESS: COST OF GOODS SOLD
(COGS)
DIRECT LABOR
2010
380
2011
410
••
DIRECT MATERIALS
FACTORY OVERHEAD
990
311
1,120
300 ••
••
TOTAL COGS -1 681 -1 830
GROSS PROFIT 1,088 1,197
Pe~~d-e~~~~;es: 1
These expenses t., -r LESS: OPERATING EXPENSES 2010 2011
••
I
are booked in the SELLING EXPENSES 249 272
period in which -
, they are incurred. I GENERAL AND ADMINISTRATIVE 166 182
LEASE EXPENSE
TOTAL OPERATING EXPENSES
83 91
-498 -545 ••
••
LESS: DEPRECIATION -40 -46
LESS: INTEREST EXPENSE -39 -39
NET INCOME (PROFIT) BEFORE TAXES 512 567
INCOME TAXES
NET INCOME (PROFIT) $
-169
343 $
-300
267
••
NET INCOME (AS A PERCENT AGE OF REVENUE) 12% 9%
••
COGS is an expense that is matched to the revenue being generated. Strategies
••
that build inventory far in advance of actual sales can defer accounting for
expenses that make up COGS until that inventory is sold. However, supply ••
chain managers should understand that operating expenses (see Exhibit 1-39)
are expensed on a periodic basis. These immediately booked expenses could ••
cause problems with maintaining financial ratios at the proper levels. However,
the actual cash outflows for both the product (depending on payment terms) and
period costs would occur as the inventory is being built up (e.g., salaries,
••
utilities, maintenance), so cash flow could be an issue without proper advance
planning for the inventory build-up on the part of finance.
••
Statement of Exhibit 1-40 on the next page shows the statement of cash flows. Insufficient ••
cash flows cash can cause an organization to fail quickly if it cannot raise funds in some
other way. Note that an increase in inventory lowers the cash position, while a ••
••
decrease in inventory increases the cash position (the parentheses show which
actions reduce cash).
•
••
••
Section D: Inventory Management
•• Exhibit 1-40: Sample Statement of Cash Flows Showing Two Years of Results
•• I --
positive cash flow \ .--------1
from operations in ~\.
most years_J \
· -~---·· --- ·. Year
Change in cash
balance over a period
. ---, of time
In Thousands 000
2010 2011
•• I
I
_ lncrea~e in I
inventory or
~accounts receivable :
OPERATING SECTION
AFTER-TAX NET INCOME $ 343 $ 267
•• reduces cash;
decreases in either
increase cash. tJ
~=--- ----·
1 1
DEPRECIATION ADD-BACK
j\. (INCREASE)/DECREASE IN INVENTORY
I (INCREASE)/DECREASE IN ACCOUNTS RECEIVABLE
40
(68)
(87)
46
(37)
(48)
•• Increase in
accounts payable
increases cash,
INCBJ:_,l\SE/(DECRE_.8SE)
IN ACCOUNTS PAYABLE
CASH FLOW FROM OPERATIONS
-----
102
330
56
285
•• while a decrease
reduces cash.
INVESTING SECTION
CAPEX SPEND CAPITAL EXPENDITURES
Investments in extra ·
· capacity reduce cash.
1
100 100
•• issued; reduced
cash means debt (
was paid down or ,
FINANCING SECTION
ADDITIONAL EQUITY CAPITAL
••
dividends were paid LESS DIVIDENDS PAID (50) (75)
to owners.
INCREASE/(DECREASE) IN LONG-TERM DEBT
JNCREASE/(DECREASE) IN SHORT-TERM NOTES (15) 15
••
Net Income . 1
CASH FLOW FROM OPERATIONS, INVESTMENTS AND
+/- Change in (ll.)
Operating . FINANCING 165 125
+1- ll. Investing \
•• 1
l~~
+1-ll. ~inancing r<\
+ Beginning Cash , \
= Ending Cash
BEGINNING CASH BALANCE
ENDING CASH BALANCE $
618
783 $
783
908
••
•• Changes to
inventory affect
cash flows
Inventory can strongly affect cash flows, which in tum can affect covenants
with lenders (contractual agreements that may include lender requirements that
the borrower maintain certain financial ratios at certain levels). Even a
•• reduction in inventory can create one-time adjustments for finance that impact
reporting. However, once the adjustments are made, the long-term financial
••
held for long periods of time. He suggests that reducing these types of inventory
will allow the organization to reduce inventory by €60 million (m). However,
the organization's chief financial officer raises a major concern. The
•• organization's bank has a financial covenant on its loans that requires the
organization to maintain a ratio of 2: 1 between owners' equity and liabilities
The ratio implies that this average amount of inventory was bought and sold 4.4
times throughout the year to support that amount of sales. Higher inventory ••
turnover ratios are preferred and can result from increasing sales and/or
decreasing average inventory. Increasing this ratio means that there is lower ••
investment in inventory relative to sales volume, lower risk of obsolescence,
and greater liquidity. It is expressed as higher inventory velocity. The AP/CS
Dictionary, 13th edition, tells us that inventory velocity is "the speed with
••
which inventory passes through an organization or supply chain at a given point
in time as measured by inventory turnover." ••
••
D 2012 APICS 1-166 Version 3.0, 2012 Edition ••
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•
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••
•• Section D: Inventory Management
•• converted to cash .
•• The appropriate level of this ratio depends on the organization's industry. For
example, in a French bakery, the turnover of baguettes is close to 365 times per
•• Cash-to-cash Cash-to-cash cycle time is a metric that can be used as a continuous measure of
•• cycle time how many days the organization's working capital is invested in managing the
supply chain. The data needed to calculate cash-to-cash cycle time (average
•• inventory portion of the calculation on more current data such as dividing the
current inventory level by average daily demand. Cash-to-cash cycle time is
••
••
••
••
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••
•• I[) 2012 APICS 1-167 Version 3.0, 2012 Edition
••
-t- Progress Check
The following questions are included as study aids and may not follow the format used for questions in ••
the APICS CSCP examination. Read each question and respond in the space provided. Answers and page
references appear on the page following the progress check questions. ••
1. Which of the following is a definition of inventory? ••
••
( ) a. Items to support production, supporting activities, and customer service
( ) b. Speed at which items pass through an organization
( ) c. Branch of management concerned with planning and controlling items
( ) d. Cost roll-up as a part goes through a manufacturing process
••
2. Which of the following is an objective ofaggregate
( ) a.
inventory management?
Perform master scheduling at optimum efficiency and effectiveness. ••
(
(
)
)
b.
c.
Translate strategic inventory goals into tactical plans for execution.
Balance customer service, operations efficiency, and inventory investment cost ••
••
objectives.
( ) d. Determine the relative importance of inventory by placing it in categories.
3. True or false? Customer service requirements play very little role in setting inventory policy.
( ) True ••
( ) False
••
4. True or false? Item inventory management is used in short-term operational decision making rather
than aggregate inventory management.
( ) True
••
( ) False
••
5. Which of the following would be classified as work-in-process
( ) a.
inventory?
A lubricant intended to keep production equipment running ••
(
(
) b.
c.
A component part that has just been received at the factory
An item that is on its way to a customer in a truck ••
( d. A completely processed item awaiting inspection
••
••
6. Which of the following is an example of holding inventory in anticipation of future demand?
) a. A retailer who orders inventory based on what marketing thinks will be sold
) b. A manufacturer who builds up inventory to reduce the risk of supply failures
)
)
c.
d.
A retailer who purchases more now because the price is going up
A manufacturer who buys in bulk to get a discount ••
••
0 2012 APlCS 1-168 Version 3.0, 2012 Edition ••
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•
•• Section D: Inventory Management
••
•• 7. Define the inventory function called decoupling and state briefly why it's a benefit for the partner
holding the inventory as well as for the supply chain .
••
••
••
•• 8. Which of the following inventory costs is a variable cost that increases as the level of inventory
•• increases?
( ) a. Ordering costs
•• ( ) b. Backorder costs
( ) c. Capacity variance costs
( ) d. Carrying costs
•• 9. Which of the following costs will increase if a retailer requests the same amount of inventory to be
•• (
(
)
)
b.
c.
Item costs
Backorder costs
•• ( ) d. Carrying costs
•• (
(
)
)
a.
b.
Gross profit
Inventory turnover
•• (
(
)
)
c.
d.
Cost of goods sold
Standard costing
••
••
••
••
1•
•
•• V crsion 3 .0, 2012 Edition
Z<J 2012 APICS 1-169
l:
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••
••
Module 1: Fundamentals of Supply Chain Management
Progress checkanswers
1. a (p. 1-148) ••
2.
3.
c (p. 1-151)
False (p. 1-151) ••
••
4. True (p. 1-153)
5. d (p. 1-154)
6. a (p. 1-155)
7. Decoupling is the inventory function that allows two supply chain partners or functions in the same
company to operate at two different rates. For example, a manufacturer can produce product at level ••
rates while distributors are purchasing in choppy periodic batches. (p. 1-156)
8. d (p. 1-157) ••
9. a (p. 1-158)
10. b (p. 1-166) ••
••
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••
••
© 2012 APICS 1-170 Version 3.0, 2012 Edition
••
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