1

The role of supply chain

as a value driver

Introduction
In this chapter, the basic concepts of supply chain management are explained.
It is shown that supply chains in some shape or form are required to deliver
products and services we, or our organization need, or think is needed.
For every business transaction there is a supplier and a customer and there
are activities, facilities and processes linking the supplier to the customer. The
management process of balancing these links to deliver best value to the cus-
tomer at minimum cost and effort for the supplier is supply chain management.
You will experience supply chains everywhere, for example in running your
home, managing a manufacturing business, in health services, hotels, banks,
government, utilities, non-profit organizations, universities, entertainment, retail
and professional services. From the cradle to the grave there will be supply
chains involved.
Supply chains vary significantly in complexity and size but the fundamental
principles apply to all operations whether they be large or small, manufactur-
ing or service, private or public sector. Supply chain management is not just for
large big name businesses such as Dell Computers, Wal-Mart and Toyota
Motors. It is for all businesses and for all operations.
When Moira and Joy (our respective wives), visit a hairdresser they are the
customer and the hairdresser is the supplier. The hairdresser will have to ensure
the availability of materials (shampoo, conditioner and colouring), facilities
and equipment (e.g. chairs, driers, etc.). The hairdresser in order to provide the
service is involved with purchasing, inventory management and facilities man-
agement. In order to minimize customer queues there is also a need for demand
forecasting, capacity management, scheduling and quality management. In this
example of a basic service operation we can identify the key components of
supply chain management.
Take another example. Consider that you are checking in at Zagreb Airport
for a return flight to London. You are unhappy to find a long queue. You have
discovered that in addition to normal procedures the central computer was
down and a screening machine was installed to X-ray all types of luggage as an
extra security precaution. In this case, the supply chain is obviously more complex
4 Total Supply Chain Management

than the hairdressing service. For you the customer the initial focal point is
the check-in clerk, but there are many supporting links leading to this service.
The airlines have to sell tickets, ensure the availability of aircraft with all the
required fittings (including in flight entertainment systems) in an accept-
able condition, provide meals and have a stock of trained aircrew available.
Before you got to Zagreb Airport our administration manager will have pur-
chased a ticket from a travel agent who in turn may have made an electronic
booking. In this example, there are suppliers and suppliers of suppliers and
there are customers and customers of customers. However, the basic functions
of forecasting, capacity management, inventory management, scheduling and
quality management are present just as they were with the hairdresser, and just
as they are for any supply chain.
The key objective of supply chain management is to provide best value to
the customer by measuring, planning and managing all the links in the chain.
When Joy or Moira receive a hair style as per her requirements (specification)
and at an affordable price in pleasant surroundings from a helpful and skilled
hairdresser she will consider that she has received good value service. With a
coiffure (French for hair cut) the perception of whether a service is good or not
can be very subjective. Joy might have said what she wanted, and the hairdresser
has faithfully carried out her instructions, but once ‘madam’ sees the end result
she could well be dissatisfied. Not all aspects and outputs of a supply chain can
be precisely measured!

What is supply chain management?

In a typical supply chain, raw materials are procured and items are produced at
one or more factories, shipped to warehouses for intermediate storage and then
shipped to retailers or customers. If you asked people involved in business to
define the term supply chain you would get many different answers. Each def-
inition would reflect the nature of the business and the inputs and outputs pro-
duced. For some, supply chain is related to purchasing and procurement, to
others it is warehousing, distribution and transportation. Yet for others it would
be sources of capital and labour.
Melnyk and Swink (2002) provide a holistic definition of the supply chain
which is the entire network of organizations involved in:

1. converting raw materials and information into products and services,

2. consuming the products and services,
3. disposing of the products and services.

They further state that ‘this definition treats the supply chain as a product cradle-
to-grave concept, including all value-added activities required to plan, source,
make and deliver products and services that meet customer needs’. To this we
add the word process. We see the supply chain not as a series of separate oper-
ations and organizations but as a complete end-to-end process.
 The role of supply chain as a value driver 5

Another useful definition is provided by Simchi-Levi et al. (2003, p. 1)

Supply chain management is a set of approaches utilized to efficiently inte-

grate suppliers, manufacturers, warehouses and stores, so that merchandise
is produced and distributed at the right quantities, to the right locations,
and at the right time, in order to minimize system-wide costs while satisfy-
ing service level requirements.

What do these definition suggest? They suggest that supply chain management
must consider every organization and facility involved in making the product
and the costs involved in doing so. This also implies that the objective is to be
cost effective across the whole supply chain, which requires a system-wide
approach to optimization.

Supply chain in manufacturing

Supply chain management in a manufacturing and supply organization considers
demand, supply and inventory needs for each item of production and in particu-
lar looks at how inventory flows through the system to achieve output to the cus-
tomer’s specification on time and at least cost. With supply chain management,
customer service is increased through the reduction of lead times and the prod-
uct is always exactly as specified and it is always delivered on time. In Chapter 19,
we describe this as the delivery of a ‘perfect order’. Costs are reduced through
the elimination of any activity that does not add value and through the reduction
of inventories of material and associated holding and handling costs.
Activities and measures based on customer requirements, as explained in
Chapter 4, are very important in improving business performance. But externally
driven customer-based measures have to be matched by measures of what the
company can do (feasibility, capacity, know how and resources) to consistently
meet customer expectations. A high standard of customer performance derives
from planning, processes and actions integrated across the whole organization.
Supply chain management focuses on the critical measures of all elements
of the supply chain. Externally the measures include the suppliers at one end
and the customer at the other end of the supply process. These externals, the
supplier and the customer, are matched with the internal requirements of the
manufacturing process. The focus is twofold; to satisfy customer needs and to
keep costs to a minimum.
In reality the elements of supply chain management are not new – we all have
been managing parts of the supply chain for years (e.g. buying, planning, sched-
uling, stock control, warehousing, logistics, distribution, etc.) without realizing
the significance of the whole chain concept. Likewise, the cost of the various
elements of supply and distribution has been long recognized. ‘In 50 years
between 1870 and 1920 the cost of distributing necessities and luxuries
has nearly trebled, while production costs have gone down by one fifth – what we
are saving in production we are losing in distribution’ (Ralph Barsodi, 1929).
It is relatively new to view the supply chain as a process, that is a single inte-
grated flow across all the functions of the business. Traditionally activities
6 Total Supply Chain Management

within a supply chain were seen as separate and specialist functions such as
purchasing, planning, scheduling, manufacturing and distribution. With supply
chain management the flow of materials and flow of information across trad-
itional functional boundaries is seen as a single process. These flows are depicted
in a simplified model in Figure 1.1.

Physical flow

Receiving Manufacture Packing Distribution

Sourcing and supply

Supplier Customer

Enterprise resource planning

Master Demand
Purchasing Scheduling production management
plan

Information flow

Figure 1.1 Supply chain management.

In the past information flow was the domain of the commercial division
while the conversion process of materials flow was a manufacturing or techn-
ical division responsibility. With an integrated supply chain approach the respon-
sibility for all elements of supply is now with operations management or supply
chain management. In many businesses, the integrated approach is being
extended to include all suppliers (including ‘upstream’ first, second and third
tier suppliers) through the manufacturing process ‘downstream’ to each level
of customer (including distributors, wholesalers and retailers through to the
end user or consumer). This is known as the extended supply chain.

Supply chain in services

Thanks to ease of travel, the media and the ‘World Wide Web’ customers have
never been more informed than they are today. Customers know what they
want and know what can be done, they understand the concept of world class
and continuous improvement. This is especially true in service industries. As
a result of the heightened expectations of customers, operations managers in
service sectors have been forced to focus their attention on managing the com-
plete value-adding system using the principles of supply chain management.
 The role of supply chain as a value driver 7

But how can service industries apply supply chain management? The supply
chain of a service organization contains suppliers, products or services, customers
and their demand for products and service level agreements. Service inventory
can be in the form of information databases, stocks of consumables (as with the
hairdresser), stationery items (including brochures and promotional material)
and subcontractors (including facility managers, travel agents, caterers and
advertising agencies).
Swank (2003) described a successful application of supply chain management
and lean production principles in a typical insurance service company in the
USA; Jefferson Pilot Financial (JPF). JPF believed that the processing of their
almost tangible ‘service product’ was comparable to a car assembly process.
Swank explains that ‘Like an automobile on the assembly line, an insurance policy
goes through a series of processes, from initial application to underwriting or risk
assessment to policy issuance. With each step value is added to the work in
progress – just as a car gets doors or a coat of paint’.

Supply chain in not-for-profit organizations

The good practices of supply chain management can be adapted to provide
major practical benefit to not-for-profit organizations, such as charity organ-
izations, in meeting their objectives. International disasters have a huge impact
on the world’s population, increasing the need for aid organizations to improve
their logistics capability and capacity. Perhaps the biggest impact of supply
chain management in not-for-profit organizations is responding to unpre-
dictable demands through quick response supply and distribution.
The world events of 2005 have insinuated that humanitarian organizations are
yet to fully exploit supply chain optimization. For example, referring to the
Hurricane Katrina disaster in New Orleans, Waller (2005) was not surprised that
Wal-Mart, the world’s largest retailer, beat the Federal Emergency Management
Agency (FEMA) and the Red Cross to areas devastated by the hurricane. He
said the company delivered supplies quickly and efficiently because that’s what
it does every day. Wal-Mart is the master of supply chain management and the
company’s expertise in this area worked well during a natural disaster. How
Wal-Mart was able to do this is further explained in Chapter 10.
An example of the application of supply chain management in a not-for-profit
organization is the National Health Service (NHS) in the United Kingdom.

UK National Health Service: Excellence in supply chain management

The NHS in the United Kingdom spends £15 billion annually on purchased
goods and services. It was determined that there was enormous potential
for NHS organizations to save money through effective purchasing. As
a result, the NHS Purchasing and Supply Agency (PASA) was established
in 2000 as a significant part of the government’s modernization of NHS
8 Total Supply Chain Management

procurement activities to act as a strategic adviser to the NHS on all supply

issues. The primary goal of PASA is to improve the performance of the
NHS purchasing and supply system and become the centre of expertise,
knowledge and excellence in purchasing and supply matters of the NHS for
the benefit of patients and the public.
Some of the achievements of PASA include:

• Achieved savings for the NHS totalling £580 million over the 3-year
period of April 2000–2003.
• Implemented pilot supply ‘confederations’ as recommended in the
May 2002 policy document ‘Modernizing Supply in the NHS’ to
develop a middle tier between national (PASA) and local (individual
NHS trust) level purchasing.
• Produced an e-commerce strategy for the NHS through the develop-
ment of an e-procurement toolkit, which provides a framework
to help NHS trusts and confederations understand the benefits of
e-procurement and plan its implementation in a structured way.
• Developed a national set of purchasing and supply performance man-
agement measures to better assess the performance of NHS trusts
with respect to supply chain activities through benchmarking analy-
sis and strategic assessment of trust and confederation spending.
Source: National Health Service, UK (2004).

What about logistics management?

Is there a difference between ‘logistics’ and ‘supply chain’ management?
The Council of Logistics Management has recently changed its name to Council
of Supply Chain Management Professionals, which indicates that they see logis-
tics management as part of the supply chain process. The council when still the
council for Logistics Management defined logistics management as:

The process of planning, implementing and controlling the efficient, cost

effective flow and storage of raw materials, in-process inventory, finished
goods, and related information from point of origin to point of consumption
for the purpose of conforming to customer requirements.

There new definition is ‘Supply chain management encompasses the plan-

ning and management of all activities involved in sourcing and procurement,
conversion, and all logistics management activities. Importantly, it also
includes coordination and collaboration with channel partners, which can
be suppliers, intermediaries, third party service providers and customers. In
essence, supply chain management integrates supply and demand manage-
ment within and across companies.’

Council of Supply Chain Management Professionals (2007).

 The role of supply chain as a value driver 9

If we consider these definitions we see they are very similar to the earlier def-
initions we have provided (Melwynk and Swink, 2002; Simchi-Levi et al.,
2003), and can conclude that for our purposes, at least in a manufacturing and
supply organization, logistics and supply chain management are synonymous.
If one is inclined to separate the physical movement of logistics in a service
organization, we can see that there is but a fine border between logistics and
supply chain management in the service sector.
Taylor (1997) goes on to divide supply chain management into:

• Logistics and supply chain strategy

• Purchasing and supplies management
• Manufacturing logistics
• Distribution planning and strategy
• Warehouse planning and operations management
• Inventory management
• Transport management
• International logistics and international market entry strategies

Taylor’s definition infers that ‘Logistics’ is a subset of ‘SCM’. Each sub-topic

contributes to the performance of the overall supply chain process and, as
a consequence, to improved stakeholder satisfaction.

What are inbound and outbound logistics?

The flow of information and physical goods from both customers and suppliers
to the business or the conversion centre (e.g. a factory or a warehouse or an
office) is termed as inbound logistics. Likewise, the flow of information or
goods or service from the conversion centre to the customer constitutes out-
bound logistics. To put it more simply inbound logistics relate to demand and
procurement while outbound logistics relate to supply and service.
Figures 1.2 and 1.3 show examples of inbound and outbound logistics in a
foods factory.
Demand and supply planning capabilities enable companies to balance
inbound and outbound logistics and thus to maximize return on assets, and to
ensure a profitable match of supply and demand. Inbound and outbound logis-
tics are also described, as upstream and downstream processes. For example,
Christopher (1992) defines supply chain management as the management of
upstream and downstream relationships with suppliers and customers to deliver
superior customer value at less cost to the supply chain as a whole.

What is e-supply chain?

As shown in Figure 1.1, the traditional supply chain was concerned with a lin-
ear flow of information and products/services from customers to suppliers
10 Total Supply Chain Management

Farmers

Suppliers

Farmers

Packing material Packing

Foods factory
suppliers material store

Raw material Raw

suppliers material store

Figure 1.2 Inbound logistics: Foods supply.

Distribution Supermarket
centre

Consumer
Foods factory
Mail order

Factory Regional
Wholesaler Retailer
warehouse depot

Figure 1.3 Outbound logistics: Foods supply.

through various stages of processes while the information flow was the
domain of the commercial division and the conversion process of materials
flow was a manufacturing or technical division responsibility. During the
1990s, the concept of total supply chain management shifted the responsibil-
ity for all elements of supply to operations management or supply chain
management.
According to Basu (2002) the Internet-enabled integrated supply chain or
e-supply chain has extended the linear flow of the supply chain to an Ecosystem
or a supply web (see Figure 1.4). It now includes all suppliers and customers to
the end user or consumers suppliers’ customers and customers’ suppliers and
so on. The front runners of the new collaborative business model, such as Dell
and Toyota are sourcing materials and products in response to customer
demand and minimizing both inventory and dealers. The collaborative culture
has enabled these companies to become adept at managing relationships
between customers, suppliers and multidisciplinary company functions with
a sharing of transparent information and knowledge exchange.
 Integration through e-business

Physical
flow

Receiving Manufacture Packing Distribution

Sourcing and supply

The role of supply chain as a value driver 11

Supplier Customer

Enterprise resource planning

Master Demand
Purchasing Scheduling production management
plan

Information
flow

Integration through e-business

Figure 1.4 e-Supply chain or e-web.

12 Total Supply Chain Management

How do you balance the voice of customer and

voice of business in supply chain management?
In any business or operation, a manager has to find a balance between two con-
flicting objectives of demand from customer and supply from operations. The
voice of customer (VOC) is articulated as customer service. Customer service is
the primary objective of supply chain management. However, customer service
has to be sustainable and balanced with efficient use of resources. The secondary
objective of supply chain management is to reduce costs and to make effective
use of resources. For simplicity, three key parameters of customer service are
considered. These are specification, cost (or price) and timing. The customer
expects the goods or service to be delivered according to acceptable standards, to
be of an affordable price and that they arrive on time. The relative importance of
specification, cost and time could change depending on the market condition,
competition and the desirability of demand. The second objective, to efficiently
utilize resources to meet customer service requirements is the voice of business
(VOB). Given infinite resources, any system can provide adequate customer
service, but many companies have gone out of business in spite of possessing sat-
isfied customers (Wild, 2002; Wright and Race, 2004). To provide a sustained
and sustainable level of customer service efficient use of resource is essential. A
starting point of balancing VOC and VOB is resource utilization and customer
service (RU/CS) analysis which aims to determine gaps between what is desired
and what is feasible (Wright and Race, 2004).
The RU/CS analysis is a simple tool to establish the relative importance of
the key parameters of both RU/CS and to identify their conflicts.
Wild (2002) suggests the starting point of the RU/CS analysis with the oper-
ations objectives chart as shown in Table 1.1.

Table 1.1 Operations objective chart

Resource utilization Customer service

Machines Materials Labour Specification Cost Time

Operation

The relative importance of the key parameters for RU (i.e. machines, mater-
ials and labour) and CS (i.e. specification, cost and time) can be given a rating
of 1, 2 or 3 (3 being the most important).
When we study the apparently conflicting objectives of RU and CS, we real-
ize that they have one thing in common, that is cost and price. If we can reduce
the cost of production of goods or services down by improved resource utiliza-
tion then we are in a better position to reduce the price to the customer.
RU/CS analysis does not provide solutions to the conflicts but identifies
broad areas for attention. It is also important to note that the relative priorities
of RU and CS can vary within the same business depending on the product and
 The role of supply chain as a value driver 13

Consider a mail order company where customers are expecting good

value for money and do not mind receiving goods from catalogues
within a reasonable delivery time. The operations manager has focused
on the utilization of own resources to minimize operational costs.
Figure 1.5 shows the ratings of objectives, the actual performance and
highlights the misalignment. It is evident that further examination is
required for timing and material.

Machinery/Space People Materials

Utilization objectives 3 3 1
Actual utilization 3 3 2
Alignment
1  low, 2  medium, 3  high
Specification Cost Timing
Customer service objectives 1 3 2
Actual level of service 2 3 1
Alignment

Good

Issues to look at

Figure 1.5 The balance of objectives: Mail order company.

As shown in Figure 1.6, there is a conflict between cost and materials and
further attention or a change of policy is required to resolve this conflict.

Machinery/Space People Materials

3 High relative
importance 3 3 1

Specification Cost Timing

1 Low relative
importance 1 3 2

Machinery/Space People Materials

Specification
Cost
Timing

Figure 1.6 RU/CS conflicts: Mail order company.

14 Total Supply Chain Management

customer. To find solutions the supply chain manager will seek other tools,
techniques and processes of supply chain management which we shall explain
in later chapters. One such process is enterprise resources planning (ERP).

What is ERP?
The business objective is to convert customer demand by optimizing the
utilization of resources to deliver effective customer service applies to all
organizations regardless of whether they are in manufacturing or service sec-
tors. ERP systems provide a single up-to-date database incorporating manufac-
turing, finance and human resource applications extended to include tracking
of orders and inwards goods, work in progress and delivery of finished goods.
The system is accessible to all departments for planning and execution of
supply chain activities. Thus, ERP systems integrate (or attempt to integrate)
all data and processes of an organization into a single unified system to achieve
integration.
The term ERP originally implied systems designed to plan the utilization of
enterprise-wide resources. Although the acronym ERP originated in the manu-
facturing environment as a successor to MRPII (manufacturing resources plan-
ning) today’s use of the term ERP systems has much broader scope. ERP
systems typically attempt to cover all basic functions of an organization,
regardless of the organization’s business or charter. Businesses, not- for-profit
organizations, governments and other large entities utilize ERP systems.

How do you deliver value in supply

chain management?
The delivery of goods and services of expected standards on time at the ‘best
in class’ cost is creating value for money for customers and thus adding value
to the business. An effective supply chain management team can deliver value
by a value stream approach or total supply chain management approach.
The value stream approach transcends the traditional manner of department-
alizing stages of the business process. The value stream highlights the impor-
tance of the operations manager being involved in all aspects of the process,
from suppliers right through to the customer and if possible to the customer’s
customer. The ‘old’ approach was that one department or function would be
responsible for purchasing goods and services, another for planning. Scheduling
of activities was often a separate function, as was warehousing and distribu-
tion, and operations were just one step in the whole process of providing ser-
vices. With the value stream approach functional boundaries are ignored, and in
many organizations, it is now accepted that the operations manager has to con-
trol the total process from purchasing input goods and services to the final
stage of satisfying the customer. Marketing, accounting, human resources and
 The role of supply chain as a value driver 15

Firm infrastructure

Secondary Human resources management

activities Technological development
Procurement

Inbound Outbound Marketing

Operations Service
Primary logistics logistics and sales
activities

Figure 1.7 Porter’s value chain.

other support functions do not show up on the value stream as such but oper-
ations managers must be vitally interested and involved in these internal func-
tions of the organization.
The value stream approach in supply chain aligns well with Porter’s value
chain as shown in Figure 1.7. The idea of the value chain is based on the process
view of organizations, the idea of seeing a manufacturing (or service) organ-
ization as a system, made up of subsystems each with inputs, transformation
processes and outputs. How value chain activities are carried out determines
costs and affects profits.
Most organizations engage in hundreds, even thousands, of activities in the
process of converting inputs to outputs. These activities can be classified gen-
erally as either primary or support activities that all businesses must undertake
in some form.
According to Porter (1985), the primary activities are:

1. Inbound Logistics involve relationships with suppliers and include all the
activities required to receive, store and disseminate inputs.
2. Operations are all the activities required to transform inputs into outputs
(products and services).
3. Outbound Logistics include all the activities required to collect, store, and
distribute the output.
4. Marketing and Sales activities inform buyers about products and services,
induce buyers to purchase them and facilitate their purchase.
5. Service includes all the activities required to keep the product or service
working effectively for the buyer after it is sold and delivered.

Secondary activities are:

1. Procurement is the acquisition of inputs, or resources, for the firm.

2. Human resource management consists of all activities involved in recruit-
ing, hiring, training, developing, compensating and (if necessary) dismiss-
ing or laying off personnel.
16 Total Supply Chain Management

3. Technological development pertains to the equipment, hardware, software,

procedures and technical knowledge brought to bear in the firm’s transform-
ation of inputs into outputs.
4. Infrastructure serves the company’s needs and ties its various parts together,
it consists of functions or departments such as accounting, legal, finance,
planning, public affairs, government relations, quality assurance and general
management.

The success of a supply chain could be synonymous to the success of the value
stream approach or the total supply chain approach underpinned by the inter-
action between three key group of players, viz. customers, external suppliers
and the departments involved with the primary and secondary activities of the
organization.
The customer is the central focus for any organization. Churchill once said
that war its too important to be left to the generals, and the same can be said of
marketing. Marketing is too important to be left to the marketing department.
Everyone in an organization should be vitally interested in marketing the
organization. Nonetheless it is the function of the marketing department to
know what the customer wants and what the competition is doing or is likely to
do. Marketing specify the product and its attributes. Attributes may range from
the essential down to the desirable and perhaps include extras that the customer
does not even want. As well as defining the product or service to be offered,
marketing has to establish the price, forecast demand, have a say in how the
product or service will be distributed or delivered, and finally marketing is
responsible for promotion with the aim of stimulating demand. Marketing also
has to sell the product/service internally within the organization to the opera-
tions and other functions of the organization. Marketing is the link with the
market and customers and operations.
In some organizations suppliers are treated with distrust, and the business
strategy adopted is to shop around and to get the best deal on each occasion. In
these types of organizations information is not shared with suppliers. When
orders are placed the supplier is not told what the purpose of the order is, and
thus are not in a position to advise, even if they were so inclined, of alternative
products or new technology. With this approach little loyalty is shown to any
supplier, and the supplier is almost treated as an adversary. The value stream
approach is to treat key suppliers of goods and services as part of the team, and
to share information and to seek advice. Key suppliers are those that are import-
ant to the smooth operation of the system. In some cases, the supplier can
become involved in the day-to-day operations of the organization and might
also be expected to advise and to assist in product development. Cost no longer
becomes the key issue. Instead of price alone, suppliers will be judged on their
loyalty and ability to deliver goods and services to the required standard and on
time. Suppliers can also become part of the information-gathering arm of the
organization; often suppliers have a different perspective as to what the com-
petition are up to (changes in buying patterns, timetables, new packaging, use
 The role of supply chain as a value driver 17

of new materials and so on). Suppliers are also in a good position to offer tech-
nical advice regarding new technology and alternative materials.
Communication between departments (especially marketing, operations and
logistics) within an organization has to be two-way and has to be aimed to help
rather than as a means of apportioning blame or criticizing. With traditional
hierarchical organizations a bunker mentality can develop whereby each func-
tion is walled off from the other, and any suggestion, no matter how helpful, is
taken as a threat or a challenge. World-class organizations are noted by the
manner in which the figurative brick walls that separate functions have been
broken down, and by the teamwork that exists between all functions to achieve
the common goal. This requires that everyone in the organization knows what
the goals and objectives are and that the culture is conducive to the enthusias-
tic pursuit of the goals for the common good of the whole, rather than for the
specific interests of one department. Information is open to all and there are no
secrets.

Summary
The primary purpose of this introductory chapter was to provide an overview
of supply chain management principles and to indicate how an effective supply
chain management process adds value to all types of businesses, whether in
manufacturing or service sectors, public and not-for-profit organizations. It
also aims to initiate the understanding of some core concepts of the book
including ‘it is people, not processes or technology, that makes things happen’.
It is critical to have data sharing and interaction between all stakeholders in the
total supply chain using a value stream ‘total supply chain’ approach.
2
Why total supply chain
management?

Introduction
In the 1960s and 1970s the manufacturing and supply strategy of multinational
companies focused on vertical integration. One of the earliest, largest and most
famous examples of vertical integration was the Carnegie Steel company. In
the 1890s the company expanded to have a controlling interest beyond the mills
where the steel was manufactured to include the mines from where the iron ore
was extracted, the coal mines that supplied the coal, the barges and ships that
transported the iron ore, the railroads that transported the coal to the factory,
the coke ovens where the coal was coked, etc. One hundred years on vertical
integration was still in vogue, for example in the 1980s Unilever, originally a
soap manufacturer, had grown to own businesses and investments in forests,
timber milling and refining, paper manufacture, board and plastics manufac-
ture, chemicals, fast-moving consumer products manufacture and packaging,
marketing and advertising, computer services, distribution warehouses, ship-
ping and retail outlets. Vertical integration of a supply chain was not always
successful. The New Zealand company, Feltex in the 1980s expanded from
making carpet and furniture into owning a national retail chain. The next step
in vertical integration was to buy a timber mill and a forest. At the time the car-
pet Feltex produced was world famous and exported all round the world.
Expansion downstream in the supply chain to owning the retail stores, due to
lack of retail experience and management, did not improve profits but resulted
in a financial drain on the company. Expansion upstream to own the supply of
timber (mill and forest) for the furniture factory proved to be a disaster. The
forest was in remote rugged country and road access was poor. The cost of log-
ging and transportation to the mill proved to be prohibitive. As a result of
falling profits and share prices the company, once the largest manufacturer and
exporter of manufactured goods in New Zealand and the darling of the share
market, went through a series of ownership changes and downsizing back to
the stage where it was only manufacturing carpet. Feltex finally went into
receivership in September 2006.
 Why total supply chain management? 19

In the 1980s (and subsequently) large organizations started to concentrate on

their ‘core business’ and rather than to vertical integrate began divesting non-
core arms of the business. The gradual privatization of the public sector also
helped to create many supporting service industries. In the beginning of the
twenty first century we are witnessing the explosion of outsourcing and the
emergence of competent but lower cost manufacture in Eastern Europe, China
and other states in South East Asia, India and South America (in particular
Brazil). It is now recognized that in the global marketplace that a whole systems
supply/value chain approach has to be taken embracing service and manufac-
turing as a whole. This chapter describes a total supply chain management con-
cept and the analysis of the supply chain process. Management of the activities
making up a supply chain are described in later chapters.

Trend towards service

In the UK statistics show that 78 per cent of the work force are engaged in service
industries (www.statistics.gov.uk), and in the USA 80 per cent are employed in
service industries (www.census/gov/). Although a shift back to manufacturing
has been identified (Basu and Wright, 1997), it is obvious that the greater
percentage of the work force of developed nations will continue to be employed
in service activities. There are two reasons for this:

1. Continual advances in technology mean that manufacturing is considerably

less labour intensive than previously. Automation, robotics, advanced infor-
mation technology (IT), new materials and improved work methods all
have led to the reduction of manual labour.
2. For larger organizations, manufacturing has become internationalized. For
example, a company (such as Nike) might outsource its manufacturing to
overseas contractors or allied companies and itself concentrate on design,
marketing and distribution.

Additionally, organizations can no longer regard themselves as being purely in

manufacturing and hope to survive. The market first and foremost now takes
for granted reliability of product and expects good service.
Market expectations of the level of quality are driven by perceptions of what
technology is promising and by perceptions of what the competition is offer-
ing. Organizations now operate in a global market where national barriers, tar-
iffs and customs duties no longer provide protection for a home market. Any
manufacturer, even if the focus has been on supplying a local market, is in real-
ity competing on the world stage. Competition is no longer limited to other
local organizations, and the fiercest competition in the home market will be
from goods and even services produced overseas or provided by overseas
organizations. For example, a bus service in New Zealand is owned and oper-
ated by the Scottish company ‘Stagecoach’ based 20,000 kilometres away.
20 Total Supply Chain Management

And McDonald’s for over 30 years have competed, and indeed set the bench-
mark, for fast food providers all around the world.
This overseas involvement in a home market means that manufacturers (and
service providers) can no longer make products just to suit their engineering
strengths, but must now be aware of what the market wants and what global
competition is offering. In manufacturing what the competition is offering,
apart from well-engineered products, is service in the form of delivery on time,
marketing advice, training, installation, project management, or whatever else
is required to provide a total service as well as a reliable product.
Never before has the customer been better travelled, more informed and had
higher expectations. Many of these expectations began with the quality movement
of the 1980s where it was trumpeted that the customer was king, and these
expectations have been kept alive by continuously improved products and
services, global advertising and for the last decade the World Wide Web.
If they are honest with themselves most organizations realize that their products
actually differ very little from those of their competitors, and any technological
improvement is soon copied; thus the difference – the ‘competitive edge’ – comes
from service.

Service separated from production operations

If no serious operation can ignore market demands for service and world class
quality, why bother to try and separate manufacturing from service in the study
of supply chain management? Indeed for a manufacturing organization aspir-
ing to world class status we would most emphatically agree that management
of such organizations must concern themselves with service and quality if they
are to compete on the world stage.
But managers in service industries such as health, retail, distribution, educa-
tion, travel, real estate, consultation, brokering, law, accounting, administration
of central and local government, transportation of goods or people – where no
direct manufacturing is involved or where the manufacturing is light and simple
(such as in a restaurant) – do not have to know much about manufacturing.
Naturally all the above industries are reliant on manufacturers to varying degrees
for the equipment they use, or in the case of a retailer for the goods they sell, but
the physical heavy work of making the goods is not their concern. The analogy
is that of a driver of a car: one can be a very good driver without knowing much
about what happens under the bonnet. In some cars a knowledge of when to
change gears, and understanding the danger of overheating due to lack of oil or
water will be of advantage, but in other models the car will even ‘tell’ the driver
when tyre pressures are low, turn the headlights on and off depending on light
conditions and the driver need not worry about gear changing. Likewise, a retail
sales person of washing machines does not need a detailed knowledge of high-
tech mass production line balancing. For the sales person some knowledge of
lead times for deliveries, operating instructions and the capacity of the washing
machine will be sufficient as a basis for good service to the customer.
 Why total supply chain management? 21

Thus, there can be a separation of operations management into two broad

streams: the management of production including service, and the manage-
ment of operations in service industries where only some rudimentary know-
ledge (if any) of manufacturing is required. But irrespective of whether a
manager is involved primarily in production or service, a total system approach
is needed based on the supply or value chain philosophy.
For organizations involved directly in production and manufacturing, man-
agement needs to be well versed in strategies, tactics and methodologies of
production operations management and also has to be very aware of what con-
stitutes service and quality from the customer’s point of view. A total oper-
ations approach to providing a quality product coupled with the service
required is essential.
Managers of service industries will benefit from some basic knowledge of
production systems and methodologies.

Shift from enterprise to network

A little more than a decade ago, companies were urged to attain ‘world class’
performance within the enterprise. The departments within a company were
striving for islands of excellence and then with a succession of operational
excellence initiatives (e.g. TQM, BPR, MRPII and Six Sigma) the fences
between departmental turfs were gradually demolished. The organizations
started to become customer focused and with established performance metrics
in all areas of the business (e.g. ‘Balanced Scorecard’) began to emerge.
However, it is fair to say that both the business model and the performance
metrics were site-centric or at most were confined within the company or
enterprise. Today with web-based technologies now accelerating the collabo-
rative supply chain, it is becoming imperative to rethink the selection and
implementation of the external metrics. This shift is not only in the measure-
ment criteria, but also in the mind-set of business practices. Collaboration
requires a capacity to work in association, sometimes, with the ‘enemy’ and
does not achieve its business success at the competitor’s expense. To maximize
the advantages of collaboration, the buy-in and commitment of employees to
the new mind-set is essential. The following are a few reasons for this funda-
mental shift from a site-centric linear supply chain to a collaborative network
or web of supply:

1. Demands for flexibility of partnerships: In today’s marketplace consumers

have degree of choice and greater ability to make a comparison. As a result
their expectations are rising and needs constantly changing. Value in this
environment is a moving target. Organization must be flexible to be able to
adapt to these changes. It is very difficult for a single organization to pos-
sess all the capabilities required to keep up. Organizations now look for
suppliers who can provide the skills and capabilities needed as and when
they require them. A firm can easily form partnerships with appropriate
22 Total Supply Chain Management

skilled suppliers to last as long as the need exists. As demand changes so do

partnership arrangements.
2. Advances in technology: The merging of information and communication
technologies (ICT) has supported the growth in supply chain partnerships.
These technologies have enabled extensive connectivity. Today’s computer
networks, open systems standards and the Internet enable people working
in different areas of the supply chain to maintain constant contact. Since
information transactions have become so easy, there is less of a need to
restrict operations within traditional organizational boundaries. The new
capabilities of e-supply chain offer the ability for supply chain partners to
share information in real time. This enables the partnering firms to hold
lower inventories and incur fewer transactions costs. These lower costs can
in turn be passed on to the customer in the form of lower prices and better
value, or alternatively retained as increased profit.
3. Collaborative networks: Companies have now recognized that great improve-
ments in value can be attained by co-ordinating the efforts of partners
along the supply chain. When firms focus only on their internal operations
they are making decisions in isolation and as a result this can lead to the
overall performance of the supply chain deterioration. As we will see later,
firms who work together and share their plans and other information are
actually able to improve the overall supply chain performance to their
mutual benefit.
4. Recognition of core competencies: Recently, there has been a shift away
from focusing on markets and products towards considering what the
organizations capabilities are. A focus on core competencies allows a firm
to concentrate on those few skills and areas of knowledge that make the
organization distinct and competitive. These competencies are what pro-
vide the firm with its competitive advantage. Recognizing what processes
they are best at allows the firm to concentrate on these processes. This has
led to firms rationalizing what they do and the emergence of supply chains
where each of the partnering organizations focuses on what individually
they do best.
5. Growth in outsourcing: The dynamic growth in the large emerging
economies, especially China and India, especially of manufacturing, supply
and service capabilities has provided opportunities for new outsourcing
partners. When a specific process moves from a competitive advantage to a
commodity and/or when a supplier’s operation performance is superior to
organization’s own performance, outsourcing must be considered. A well-
documented example of business process outsourcing (MCA, 2002) is the
Coca Cola Corporation. For over 100 years Coca Cola has been producing
syrup but the actual production of Coca Cola is the responsibility of its
global network of business partners. A recent study by IBM (IBM Global
Services, 2006) demonstrates that companies engaged in IT outsourcing
realize improved financial health and performance in comparison to their
sector peers.
 Why total supply chain management? 23

Increased complexity of processes

The processes in the supply chain are becoming more and more complex both in
terms of variety of products and variability of operations. In a preferred condi-
tion, high volume and low variety of products and low variation in manufactur-
ing processes will deliver products at a lower cost in comparison to a situation
with low volume, high variety and high variation. Increase in customer contacts
and choice has led to the need for complex supply chains with many variables.
The impact of this increased complexity is challenging the stability of supply
chains. This challenge is compounded by the multiple stages and stakeholders
in the supply chain from the demand point to the source of supply. The variabil-
ity in demand increases as it moves along the supply chain away from the retail
consumer. Small changes in consumer demand can result in large variations in
orders placed upstream. This variation can oscillate further in larger swings as
each stakeholder in the supply chain attempts to solve the problem from its own
point of view. This phenomenon is often cited as ‘the bullwhip effect’ (see
Figure 2.1) and has been experienced in most industries following linear supply
chain principles resulting in increased cost to organizations and poorer service
to customers. The bullwhip effect is discussed in greater detail in Chapter 14.

Consumption Customer Retailer Wholesaler Manufacturer Supplier

Figure 2.1 The bullwhip effect.

Case example: Collaborative forecasting

The case example involves three individual companies representing a
brand owner (manufacturer), a first tier supplier and a second tier supplier.
The target is to build a lean and transparent business model in a three-entity
demand chain.
24 Total Supply Chain Management

In the traditional process the purchase order is the key impulse for the
supplier whereas in this model the key input is the rolling forecast.
The challenges of the implementation come from forecasting capabilities,
openness and trust. The utilization of modern ICT technology also cre-
ates both challenges and advantages.
A selected starting point for this example is that the collaborative
forecasting model exists already between two parties and this model is
extended one step further. In a two-entity chain the forecast of the customer
affects the supplier. In this example, where the second tier supplier is
included the initial forecast of the brand owner affects another step
higher in the upstream. Furthermore, the planning process of the first tier
supplier, where the manufacturer’s forecast is processed into raw material
forecast to the second tier supplier, plays a key role. A general descrip-
tion of the model is shown in Figure 2.2.
Rolling forecast Rolling forecast
Second tier First tier Brand
supplier supplier owner
Goods delivery Goods delivery

Figure 2.2 Collaborative forecasting model.

The production processes in all three parties involved are different – it
varies from process industry to manufacturing. The process industry is
capital intensive and the profitability depends more on capacity utiliza-
tion. In manufacturing the production cycles are shorter and the working
capital tied to the process has higher impact on the profitability. Hence,
the key drivers for effective planning in each party are not the same.
As the collaborative forecasting between the manufacturer and the
first tier supplier is already in place, the key metrics between them is
treated as the best practice when defining the targets for the second tier
supplier with the first tier supplier.
The new business model reduces the inventory levels and increases
the inventory turnover in the second tier supplier/first tier supplier part
of the demand chain. Other expected benefits are less out-of-stocksitua-
tion, less non-optimal transports, better planning and production effi-
ciency at the second tier supplier and increased customer satisfaction.
In order to sustain these results, a thorough commitment based on trust
is expected from each partner. In practice, it also means implementing
new ICT tools to share data and monitor the supply chain.
Adapted from Lukka and Viskari (2004)

Supplier partnership
Reviewing the impact of new technologies on supply chain provides an interest-
ing development of partnering with suppliers. In the past many manufacturers
 Why total supply chain management? 25

regarded their suppliers with some suspicion, almost as adversaries. Little

loyalty was shown to the suppliers and consequently the supplier was never cer-
tain as to their future relationship with an organization. Often the purchasing or
procurement department would see their role as screwing the best deal possible
from a supplier. The huge growth in outsourcing and more importantly the on-
line access to information by Internet have changed that. Companies have real-
ized that achieving world class excellence in their own sites is not enough. It is
important to raise the standards of suppliers as well as learn from them by working
in partnership with them. The tightly controlled service level agreements are
being replaced by joint service agreements with free exchange of data and
knowledge. However, the success of the benefits will depend on mutual trust, a
highly developed commercial relationship and an efficient system of data
exchange. In order to improve the effectiveness of data exchange, companies
are sharing with their suppliers (and customers) common systems such as EAN
(European Article Numbering) standards, EDI (Electronic Data Interchange)
and web-based Extranets. For example, EDI enables companies to communi-
cate with each other. Purchase orders to suppliers can be eliminated by using
customers’ order schedules. And by EDI and Extranets, the supplier could be
authorized to link directly into the manufacturer’s MRPII (manufacturing
resource planning) or ERP (enterprise resource planning) system. The emer-
gence of the Internet protocol has helped the interaction between powerful
supply chain systems such as i2, Manugistics, Ariba, Oracle and SAP/R3.

Total supply chain management?

Our above analysis of the key factors and new developments in supply chain
management clearly indicates that focusing on the conventional practices of
supply chain management within the organization, such as forecasting, cap-
acity planning, inventory management, scheduling and distribution management,
may achieve operational excellence within the confines of an individual busi-
ness organization but will offer only a partial solution to optimizing customer
service. It can be compared to sitting in a high-performance motorcar in a traf-
fic jam, the sound system and air conditioning might be state of the art but the
overall travel experience is not great. Likewise, what is the point of having a
perfect stainless steel link in a rusty chain? Unless the whole process is effi-
cient the individual unit cannot achieve its potential.
It is therefore vital for any organization, being more and more dependent on
both local and global outside resources and information, to work in harmony
with all stakeholders of the supply chain including customers and suppliers.
We need a holistic value stream approach to supply chain or a total supply
chain management approach.
In ‘Total Manufacturing Solutions’ (Basu and Wright, 1997), we defined
total manufacturing to include all the interactions between the conversion
process inside a ‘factory’ with all other business processes including marketing,
research and development, supply chain management, financial and information
26 Total Supply Chain Management

management, and human resource management – also with external factors

such as environmental concerns, customer care and competition. The method of
analysis which in effect determined strengths, weaknesses and gaps in perform-
ance was developed around 200 questions designed for self-benchmarking
against world class standards. The structure of the benchmarking was to meas-
ure the performance of the business against 20 defined areas of the business
which were described as foundation stones. There were 10 questions for each
foundation stone. The aim being to get the right balance of foundation stones to
support the pillars of the business. Over a period of 8 years we refined the six
pillars and the 20 foundation stones of Total Manufacturing Solutions to give a
greater emphasis on service and relationships with suppliers, and customers.
Partnering and alliances were also included in a new model which we named
‘Total Operations Solutions’. In Total Operations Solutions (Basu and Wright,
2005), we continued to provide a process of self-assessment to systematically
measure all aspects of an organization, be it manufacturing or service. This
includes both internal functions and external relationships. We show how the
concepts of Six Sigma as further developed in ‘Quality Beyond Six Sigma’
(Basu and Wright, 2003) can be used without too much fuss to determine
strengths and weaknesses. Quality Beyond Six Sigma is written around ‘Fit
Sigma’. Fit Sigma was developed by Ron Basu to build on strengths and to
understand where weaknesses are so that corrective action can be taken to gain
a competitive advantage.
Building upon the experience of the holistic models for Total Manufacturing
Solutions and Total Operations Solutions we have now developed a model for
Total Supply Chain Management comprising six building blocks, viz.:

1. Customer focus and demand

2. Resources and capacity management
3. Procurement and supplier focus
4. Inventory management
5. Operations management
6. Distribution management

These building block are integrated by three cross-functional process, viz.:

1. Sales and operations planning

2. Systems and procedures
3. Performance management

The importance of total supply chain approach can be evaluated by value

stream mapping (VSM) (Basu, 2004, p. 118). VSM is a visual illustration of all
activities required to bring a product through the main flow, from raw material
to the stage of reaching the customer. According to Womack and Jones (1998),
the initial objective of creating a VSM is to identify every action required to
make a specific product.
 Why total supply chain management? 27

Case example: The value stream of a cola can

Consider a cardboard case containing eight cans of cola chosen at ran-
dom in the beverages aisle at a Tesco store.

Reduction
Mine Smelter
mill

Hot roller

Can
Can maker Cold roller
warehouse
Remelter

Recycle centre

Bottler Tesco
Bottler Tesco RDC Homer
warehouse store

Figure 2.3 Value stream for cola cans.

Figure 2.3 shows a VSM of cola, from the mining of bauxite (the
source of aluminium of the cans) to the user’s home. Bauxite ore is
mined in Australia and then transferred in trucks to a nearby chemical
reduction mill to produce powdery alumina. Bulk alumina is then
shipped by boat to Norway with cheap hydroelectric power for smelting.
The molten aluminium is cast into ingots which are then shipped by
trucks, boat and trucks to Germany. The ingot is heated to 500°C and
then passed through successive rollers to reduce the thickness from 1
metre to 3 millimetres and stored as coils. The coils are then transferred
by trucks to a cold rolling mill where the aluminium sheets are reduced
from 3 millimetres to a thickness of 0.3 millimetre suitable for can mak-
ing. The thin coils are then shipped to a can maker’s warehouse in
England. Cans are manufactured and then stored. From the can maker’s
warehouse cans are then transferred to the bottler’s warehouse in pallets.
They are then de-palletized and loaded into the can filling line where
they are washed and filled with cola. At the end of the filling line cans
are then unitized in stretch wrapper and stored in the warehouse on pal-
lets. They are then transported on trucks to Tesco’s Regional
Distribution Centres around the UK and then distributed to Tesco’s
supermarkets. When cola is taken home it is typically stored again and
chilled and finally consumed. Empty cans are then recycled to reintro-
duce it into the production process at the smelting stage.
28 Total Supply Chain Management

Table 2.1 Quantitative data of cola cans

Cumulative Incoming Process Finished Process Days

storage time storage rate

Mine 0 20 minutes 2 weeks 1000 tons/hour 319

Reduction mill 2 weeks 30 minutes 2 weeks – 305
Smelter 3 months 2 hours 2 weeks – 277
Hot rolling mill 2 weeks 1 minute 4 weeks 10 feet/minute 173
Cold rolling mill 2 weeks 1 minute 4 weeks 2100 feet/minute 131
Can maker 2 weeks 1 minute 4 weeks 2000/minute 89
Bottler 4 days 1 minute 5 weeks 1500 minutes 47
Tesco RDC 0 0 3 days – 8
Tesco store 0 0 2 days – 5
Home storage 3 days 5 minutes – – 3
Totals 5 months 3 hours 6 months – 319

The quantitative data related to the activities in the value stream are
summarized in Table 2.1.
It is evident from the details in Table 2.1 that value added activities
take only 3 hours compared to the total time (319 days) from the mine to
the recycling bin. This proportion is surprisingly small when one consid-
ers the alarmingly lengthy overall duration of the process.
Adapted from Womack and Jones (1998, pp. 38–43).

We believe that the above example of the value stream for a carton of cola
firmly establishes the need for a total supply chain management approach. It is
important to note that most of the 40,000 other items in a typical supermarket
would produce similar results. The impact of the value stream or total supply
chain approach in the service sector is not so dramatic as fast-moving con-
sumer goods (FMCGs), but highly significant all the same.

Summary
The key issues of supply chain as discussed in this chapter emphasizes a need
for a total supply chain management approach. With the expansion of outsourcing
and Internet driven e-supply chain, it is essential that key players and stake-
holders understand the importance of the accuracy and transparency of data for
collaborative management for mutual benefits. Improved forecast accuracy
and the real-time exchange of data not only reduces the ‘bullwhip effect’, but
also reduces processing cost, inventory level and improves customer service.
We have also discussed the trend towards the service-based economy and the
 Why total supply chain management? 29

importance of total supply chain management in the service sector. The building
blocks of the supply chain underpinned by the total supply chain management
approach as explained further in this book will assist in the improved under-
standing and management of a collaborative supply chain.
3
Understanding total supply
chain management and its
building blocks

Introduction
In Chapter 2, we discussed the need for a total supply chain management
approach and introduced the concepts of building blocks. The importance of
each building block is explained in this chapter. No block stands alone, each
is a component of the whole. In combination the blocks show activities, stages
and processes of the extended supply chain. The sequence of processes creates
a flow between different stages to fulfil a customer’s need for a product or a
service. The processes of making things happen within a supply chain can be
viewed as a sequence of progressive cycles (e.g. planning cycle) or the nature
of response to a customer order (e.g. push or pull). There are debates between
supporters of make to order policy and make to forecast policy as if one policy
is better than the other regardless of customers, demand patterns, products or
organizations. Therefore, we aim to explain in this chapter:

• What are the process views of a supply chain?

• What are the building blocks of a supply chain?
• Are all the building blocks suited to all organizations?

What are the process views of a supply chain?

Chopra and Meindl (2003) describe the two views, viz.:

1. Cycle view: The processes in a supply chain consist of a series of cycles,

each performed at the interface between two successive stages.
2. Push/pull view: Pull processes are initiated by a customer order and push
processes are initiated and performed on the forecast of customer orders.
 Understanding total supply chain management and its building blocks 31

Cycle view
The cycle view of a supply chain consists of several stages of process cycles
and form the components of MRPII (manufacturing resource planning) or ERP
(enterprise resource planning) systems and are shown in a simplified form as
three process cycles as shown in Figure 3.1 These cycles are discussed in more
detail in Part 2 (Chapters 4–9).

Planning and
Demand cycle procurement Supply cycle
cycle

Figure 3.1 Simplified process cycles in supply chain.

The demand cycle is the cycle of time covering from when a customer buys
or orders from a retailer or wholesaler. The demand cycle can also be based on
the forecast of demand. If the retailer holds the product in stock then the
demand cycle will comprise of order request, order fulfilment and order receiv-
ing. However, if the product is not readily available then the customer order
request will form a part of demand forecast which also includes predicted
demand, market intelligence and promotion of the product.
The planning and procurement cycle covers short- and longer-term require-
ments. The demand of the product and its components (bill of materials) are
compared with the inventory and capacity and the replenishment requirements
are planned. Planners will decide what to buy and what to make. This make or
buy decision process also applies to a service organization leading to either in-
house or outsourced services.
The supply cycle typically occurs with a production schedule if the product
is to be manufactured, or a purchase schedule if the product is to be procured
from an external supplier. Once finished goods are manufactured or received
the next stage of the supply cycle is direct delivery to customers or storage in
the warehouse and subsequent distribution to customers.

Push/pull view
A push process conforms to a conventional supply chain management system
going through typical stages in sequence. As shown in Figure 3.2, orders arrive
at or after the demand cycle but always before the planning and procurement
cycle and process is activated by a forecast or demand plan. Both raw and pack-
aging materials are stored before production and products are manufactured to
stock. The order fulfilment is achieved from the inventory of finished products.
A pull process is activated in response to a confirmed order from a customer.
This includes make to order or a just-in-time (JIT) manufacturing process. As
shown in Figure 3.3, in a pull process the supplier does not stock finished prod-
ucts but holds higher quantity of semi-finished materials and often higher supply
32 Total Supply Chain Management

Customer
order arrives

Planning and
Demand cycle procurement Supply cycle
cycle

Materials Finished
stock products stock

Figure 3.2 Push process in supply chain.

Customer
order arrives

Planning and
Demand cycle procurement Supply cycle
cycle

Materials
stock

Figure 3.3 Pull process in supply chain.

capacity so that order fulfilment can be achieved rapidly. The orders arrive at
or after the planning cycle as if bypassing a few steps of the traditional ERP
process.
A pull process is also associated with Kanban1 and Lean Thinking or Lean
Manufacturing which are covered in more detail in Chapter 13. In essence, lean
manufacturing requires materials to arrive into each stage of production just
1
Kanban literally means ‘card’. Originally developed by Toyota in the 1980s, a Kanban was
usually a printed card in a transparent plastic cover that contained details of specific information
such as part number and quantity. It is a means of pulling parts and products through the
manufacturing or logistics sequence as needed ‘just-in-time’. Most Kanban systems are now
computerized. Kanban is fully explained in Chapter 13.
 Understanding total supply chain management and its building blocks 33

when required and no buffer stocks of inwards or outwards stocks of materials

are held. The lean approach is also referred to as JIT. Pull processes control
the flow of resources in the production process by replacing only what has
been consumed. Production schedules are based on actual demand and con-
sumption rather than forecasts. With lean manufacturing there is no room for
errors in specification, production or late delivery.

Case example: A pull system implementation

A heating and ventilation company in Canada employs 250 people and
supplies products to new homes and for property renovation. The declining
Canadian dollar was increasing costs and competition was getting tougher.
Customers were more demanding and margins were eroding.
Customer requirements were met by scheduling production based on a
forecast using an MRP (materials requirement planning) system. Although
the finished goods warehouse was full and storage was becoming a prob-
lem, on time deliveries to customers were under 80 per cent. Lead time was
3 weeks from quote to shipment to customer. Part of the warehouse was
set aside for returned goods (for when a unit or units were returned because
they did not meet customer specification).
Led by their manufacturing team the company started an improvement
strategy based on Lean principles and shared it with all the employees
including administration office staff. All employees were then trained in
the principles of Lean and they started to change by thinking about the
improvement strategy. The key initiative was to convert from a scheduling
system based on sales forecast to a ‘pull system’ (Kanban) based on cus-
tomer demand.
The results were remarkable. For example:

• Lead time reduced from 3 weeks to 2 days.

• On time delivery was increased to 96.5 per cent.
• Stocks of finished goods were reduced by 60 per cent.
• The return area was converted into R&D where new products were
developed to fill the released warehouse capacity.
• Daily production meetings were reduced from 1.5 hours to half an hour.
• Employees were more involved and empowered.

Despite the dollar continuing to decline and customers becoming more

demanding, margins started to improve.

What are the building blocks of a supply chain?

From the pull system used in the Canadian company one might be tempted to
believe that forecasting and making to stock is inefficient and old fashioned.
34 Total Supply Chain Management

Further, in the well documented model of Dell Direct (see Basu and Wright,
2005, pp. 334–337), where the traditional retail channels are bypassed through
the manufacturer selling and delivering direct to customer, it might be con-
sidered that wholesalers, distributors and retailers are redundant. These are good
examples but are isolated approaches to suit particular circumstances and prod-
ucts. For example, some products are best processed in batches and stocked in
bulk (e.g. food processing and cool stores). In the course of this book we aim
to establish the appropriateness of each model in the context of a big picture
approach.
It is therefore important that a ‘total supply chain management approach’ is
applied and all the building blocks of the supply chain are examined. The synergy
that results from the benefits contributed by all elements as a whole far exceeds
the aggregate of benefits achieved for an individual elements. The integrated
approach is truly more than the sum of its elements. If one concentrates exclu-
sively on isolated areas, a false impression may be inevitable and inappropriate
action taken.
This maxim can be illustrated by the Indian folk tale of four blind men who
were confronted with a new phenomenon, an elephant! The first man, by
touching its ear, thought that the elephant was a fan. The second was hit by the
elephant’s tail and concluded that it was a whip. The third man bumped into
a leg and thought it was a column, while the fourth on holding the trunk decided
that it was an over-sized hose. Each man, on the evidence he had, came to a
logical conclusion, but all had made an erroneous judgement by failing to deduce
that the total object was an elephant. As with all feedback devices where a basic
message is given, inferences and decisions may be drawn from isolated data
which will be false and misleading.
A story in the business context will further underline the limitation of tackling
only a part of a total problem. The technical director of a multinational company,
having been to a conference, decided that line performance improvement must
be the best thing in manufacturing. So he organized his technical team, called in
experts from the corporate headquarters, and set up a line efficiency exercise.
The team did an excellent job on two production lines by systematically elimin-
ating all machine-related downtime problems (with the aid of video recording
analysis). As a result the production efficiency of the lines increased by 20 per
cent. However, it soon transpired that the product for one of the lines was going
to be discontinued and the other line, despite its excellent standard of reliability
and efficiency, encountered a severe long-term shortage of materials due to plan-
ning and procurement problems. Therefore, in isolation the line efficiency pro-
grammes did not improve the overall business performance.
As we mentioned in Chapter 2 our model for total supply chain management
comprises six building block configurations, viz.:

1. Customer focus and demand

2. Resource and capacity management
3. Procurement and supplier focus
4. Inventory management
 Understanding total supply chain management and its building blocks 35

5. Operations management
6. Distribution management

And three cross-functional integrating processes, viz.:

1. Systems and procedures

2. Sales and operations planning
3. Performance management

This model is illustrated in Figure 3.4. The composition of building blocks by

supply chain configuration and supply chain integration is shown in Figure 3.5.
Each of the supply chain configurations will be covered in more detail in Part
2 and the integrating processes in Part 4.

Customer focus and demand

Customers are both at the start and the end of the supply chain. A customer is
the one who is paying for the goods or services or is most affected by the out-
come of the process. In a supply chain a customer could be a consumer, whole-
saler, distributor or retailer. The demand for a product or service is created by
customers.
The basis of all supply chain planning and decisions is underpinned by the
forecast of future demand. A supply chain process cannot exist without the
knowledge and planning for future. All push processes are executed in antici-
pation of customer demand and all pull processes are carried out in response to
customer demand. It is a misconception that demand forecast is not required in
a pull or JIT process. Without a forecast of future demand in a pull system
a manager cannot plan the capacity and have the resources required to respond
to a customer order. For a traditional push process a manager plans the level
of production and capacity based on the forecast of future demand. Even in
a service industry, where the demand is not discrete, business planning will be
unsatisfactory without an estimate of future demand. In a not-for-profit organ-
ization demand is unpredictable but it has customers and it has a core budget
based on demand forecast.
In all instances of a supply chain the first step is to forecast what the cus-
tomer demand will be in the future. It is important to note that is not possible
to produce a perfect forecast as there are so many variables affecting a future
demand, such as past demand, promotion and advertising of the product, mar-
ket share, state of the economy, price discounts, competition and new products
introduction. Peter Drucker once said ‘the best way to predict future is to cre-
ate it’. There are also some recognized characteristics of forecasts, for example,
there will always be a forecast error, longer-term forecasts are less accurate
than short-term forecasts and aggregate forecasts are usually more accurate than
individual forecasts.
This building block of customer focus and demand including forecasting
methods is covered in more detail in Chapter 4.
36 Total Supply Chain Management

Resource and capacity management

A primary objective of supply chain management is to optimize supply capacity
to fulfil demand in time. In the real-world resources are not infinite. Satisfying
customers on time can be crucial. An increase in capacity, be it machines and
equipment, warehouse space, transport, stocks of input materials and finished
product, and of course people, is expensive. Therefore, a supply chain manager
must make decisions regarding capacity levels and buffer it to meet the variation
in demand either by adjusting capacity or producing to hold output stocks of
goods. An organization may provide excess capacity to satisfy demands for peak
period or set an upper limit of the capacity based on the average demand and bal-
ance the cost of holding excess inventory on one hand or losing sales on the other.
There are a few options of capacity optimization open to a manager and
there are proven processes to assist him or her. One such process is aggregate
planning where an organization determines levels of capacity, production and
inventory over a planning horizon to maximize the profit. The optimization can
be attempted either in theory by a mathematical model (e.g. linear program-
ming) or in practice by a cross-functional continuous review process (e.g. sales
and operational planning, S&OP). Our preferred and practical option is S&OP
which is covered in Chapter 18.
Another proven process is ERP which has evolved from MRP and MRPII.
ERP is closely linked with S&OP and comprises a series of sequential processes
by using a single set of databases, viz. demand planning, rough-cut capacity
planning, master operations scheduling, MRP, detail capacity planning, pur-
chase scheduling and production scheduling. Number crunching is done using
a computer system such as SAP R/3. The success of ERP depends on the structured
review process by planners, managers and users.
This building block of resource and capacity management including ERP is
covered in more detail in Chapter 5.

Procurement and supplier focus

The optimization of internal capacity can be supplemented by buying in external
capacity and resources. As Reid and Sanders (2002, p. 56) say ‘make or buy is
a type of backward integration decision, where the company decides whether
to purchase certain materials or tasks or perform the operation itself. Often this
is called outsourcing. Many companies routinely out-source certain services,
such as janitorial services, repair, security, payroll, or records management’. For
the supply chain procurement of external capacity and resource could include
packaging materials, part built-up assemblies, contracting out utilities and
maintenance, hiring contract or casual labour, selecting approved suppliers and
outsourcing. An example of part built-up assemblies is where an American car
typically consists of 25,000 components to be assembled on the manufacturing
line, a Japanese car of a similar class might only consist of 12,000.
In a typical manufacturing organization the cost of bought in resources
accounts for 60–90 percent of the cost of goods sold (COGS). Thus, a powerful
 Understanding total supply chain management and its building blocks 37

way to improve shareholder returns is to address reduction of purchasing costs.

A proper purchasing and supply management can give a network of suppliers
capable of delivering service quality beating competitors at the same time secur-
ing cost reduction over time. In a market driven competitive world, businesses
are continuously seeking new suppliers and partners, including outsourcing.
The Internet has provided new challenges and potential solutions and has
enabled extensive connectivity. As Wright and Race (2004, p. 210) say ‘today’s
computer networks, open systems standards and the Internet enable people to
working in different areas of the supply chain to maintain constant contact.
Since information transactions have become so easy, there is less of a need to
restrict operations within the traditional organizational boundaries. These new
capabilities offer the ability for supply chain partners to share information in
real time. This enables the partnering firms to hold lower inventories and incur
fewer transaction costs. These lower costs can be passed onto the customer in
the form of lower prices and better value. Or, alternatively retained as increased
profits. Companies have now recognized that great improvements in value can
be attained by co-ordinating the efforts along the supply chain. When firms
focus only on their internal operations they are making decisions in isolation
and as a result this can lead to the overall performance of the supply chain deteri-
orating’. In short firms that collaborate, share plans and information are able to
improve the overall supply chain performance to their mutual benefit.
The development of a professional service industry has also in recent years
increased considerably; however, as observed by Mitchell (1998) purchasing
teams appear to have made less effort to reduce costs by outsourcing services.
Nonetheless the importance of service level agreements and supplier partner-
ships are growing in the global supply chain. A survey by Wade (2003) showed
that 31 per cent of total procurement cost is for bought in services.
The selection of appropriate or preferred suppliers should involve alternative
and complementary attributes between the suppliers and the receiving organiza-
tion. Slack et al. (2006) suggest four basic capabilities to make sensible trade-
offs, viz.:

1. Technical capability: The product or service knowledge to deliver sustainable

quality.
2. Operations capability: The process knowledge to ensure effective supply.
3. Financial capability: The financial strength to fund the business.
4. Managerial capability: The management talent to develop future business.

It is important to raise the standards of suppliers as well as learn from them by

working in partnership with them. Tightly controlled service level agreements
are being replaced by joint service agreements with free exchange of data and
knowledge. Success will depend on mutual trust, a highly developed commer-
cial relationship and an efficient system of data exchange.
This building block of procurement and supplier focus including outsourcing
is covered in more detail in Chapter 6.
38 Total Supply Chain Management

Inventory management
The purpose of inventories or stocks is to buffer against the variations in demand
and supply. Inventories usually reside in three stages of a process, viz. input
stocks (e.g. raw and packaging materials), in process stocks (e.g. semi-finished
products) and output stocks (e.g. finished products). Wild (2002) introduced
the concept of consumed and non-consumed stocks. Consumed items (e.g.
materials or products) are used by the process or customers and must be
replenished in shorter cycles. Non-consumed items (e.g. capital equipment and
labour) are repeatedly used by the process needing repair and maintenance and
are replaced in longer intervals.
Inventories could be allocated either by design or can accumulate as a result
of poor planning and scheduling. Generally, inventory is viewed as a negative
impact on business incurring costs of capital (interest paid or interest fore-
gone), storage space, handling, insurance, increased risk of damage and theft,
and obsolescence. On the other hand, lack of inventory leads to lost production
in the factory and lost sales at the end of the supply chain. Holding inventory
of materials and finished products can be seen as an insurance against uncer-
tainty of supply and to overcome unforeseen variations in demand.
Inventory management is a good indicator of the effectiveness of supply
chain management. It is relatively easy to achieve higher levels of customer
service by accumulating excessive stocks. It will also obscure short-term oper-
ational problems. But this is a costly and risky option in terms of cash flow.
Obsolete inventory, be it for changes in technology, fashion or in foodstuffs past
the use by date has little salvage value. It is vital to optimize the inventory level.
In optimizing inventory levels two types of stocks are considered: cycle stock
and safety stock. Cycle stock depends on costs associated with ordering, trans-
portation, quantity discount, lead times from suppliers and customer demand.
Safety stock is the buffer against the variation of demand during the lead time and
depends on forecast accuracy, reliability of suppliers and customer service level.
In service industries operations managers might have a nonchalant attitude
towards inventories but not so the accountants. Differences between services
and physical goods are addressed both from operations and marketing. Among
the differences identified within marketing and operations literature are intan-
gibility, heterogeneity, inseparability and perishability (Grönroos, 2000). It is
perceived that services are one-off and cannot be stored. There are of course
consumed stocks (e.g. stationery) in service industries for conventional inven-
tory management. However, in the service sector more emphasis should be
focused on managing non-consumed stock (viz. database and skilled people).
This building block of inventory management is covered in more detail in
Chapter 7.

Operations management
In a supply chain operations management is the building block that makes things
happen. This is where plans are executed in factories and facilities to produce
 Understanding total supply chain management and its building blocks 39

goods or services for customers. Operations management is the activity of man-

aging resources and processes that produce goods and services. Input resources
(viz. information, materials and utilities) are transformed by three converting
components (viz. people, process and technology) into desired outputs. Along
with distribution management, operations management accounts for the phys-
ical flow of the supply chain. Most texts on operations management give scant
coverage of supply chain management.
Operations exist in all types of supply chain whether it is for delivering
a product or a service. A popular perception of an operation is where physical
activities or transformations are involved (e.g. manufacturing). If you think,
that you do not have an operation if you are in sales and marketing, or banking
or insurance, or health service or charity organizations, you are incorrect. You
will always have an operation as long as you use resources to produces prod-
ucts, services or a mixture of both. In other words if you have input, process and
output you have an operation. During 1960s and earlier operations management
was exclusively the domain of manufacturing industries. Since 1970s oper-
ations management is used in both manufacturing and service sectors, and it also
implies a service operation can be decoupled as repetitive and non-repetitive
operations and manufacturing principles and techniques can be applied to repeti-
tive service operations. More recently the term operations and process manage-
ment has been used to cover all parts of the organization. In this book, operations
management will include all types or parts of organizations.
This building block of operations management will be covered in more
detail in Chapter 8.

Distribution management
There is no doubt that supply chain order fulfilment is the Achilles heel of the
e-business economy. At the end of every e-commerce, on-line trading and vir-
tual supply chain there is a factory, a warehouse and a transport. Internet has
elevated the performance of information accessibility, currency transactions
and data accuracy, but the real effectiveness of supply chain from the source to
customer cannot be achieved without the physical efficiency of the supply
chain. Web-based software and e-market places are increasing the alternatives
available to e-supply chain managers in all operations including the service
industry. More opportunities may also mean more options and complexity.
Therefore, it is vital that a process is in place to ensure the performance of
e-supply chain for both virtual and physical activities.
Many organizations outsource distribution activities to third parties and do
not employ in-house expertise to manage distribution which directly affects the
customer service. If there is a failure in order fulfilment whether it is due to
quality, quantity or time or even the attitude of distributor then the organiza-
tion, not the distributor, bears the consequence. The problems or returned
goods or reverse logistics are becoming a growing concern in supply chain
management.
40 Total Supply Chain Management

This building block distribution management addresses this challenge under

two headings:

1. Physical distribution
2. Strategic alliances

In the same way that ERP is concerned with information flow, suppliers and
inbound logistics, distribution management is likewise concerned with mater-
ials flow, customers and outbound logistics.
With the management of distribution, that is the physical transportation of
goods from the factory to the customer, invariably some stock is held to buffer
the variability of demand and supply lead times. The focus on outbound logistics
is to balance customer service level against cost. Cost of distribution is not just
transportation costs but also includes warehousing including special require-
ments such as refrigeration, insurance and financing of stock, and stock slippage
(deterioration, damage, pilfering and obsolescence). The more stock that is held
the greater the cost of storage and the greater the chances of losses.
The main components of distribution management are:

• Distribution strategy
• Warehouse operations
• Stock management
• Transport planning

As regards strategic alliances in order to achieve an integrated supply chain

the various players need to work together. The four most important types of
distribution management strategic alliances are third-party logistics (3PL),
retailer–supplier partnerships (RSP), distributor integration (DI) and customer
relationships management (CRM).
This building block of distribution management is covered in more detail in
Chapter 9.

Systems and procedures

Systems and procedures are essential components to integrate the building
block configurations of the total supply chain. There are three major categories
of systems and procedures:

1. External regulatory and internal quality standards

2. Financial and accounting procedures
3. Information and communication technology (ICT)

The activities of a supply chain is affected by both national and international

regulatory requirements on packaging, storage, pallets, vehicles, working hours,
tariffs and many other issues. In addition an organization maintains its own
quality standards and service level agreements with suppliers and partners.
 Understanding total supply chain management and its building blocks 41

Another important issue is improving the financial performance of the company.

Under pressure to participate in fashionable improvement activities, or to become
involved with the newest business wisdom, management may lose sight of the real
issue – improving profitability. In response to pressures from stakeholders there is
a risk of overemphasis on short-term financial performance. Consequently, this
myopic approach results in over investment in short-term fixers and under invest-
ment in longer-term development plans. There is a need for a balanced approach.
The Internet, now taken for granted, has seen the use of technologies to cre-
ate electronic communication networks within and between organizations and
individuals. The implementation of ERP, websites, e-commerce, electronic
data interchange and e-mail systems have allowed individuals within organiza-
tions, and business to business and business to customer to communicate freely
together and to share data in ‘real time’. Information technology (IT) has now
grown into ICT. In this ICT domain we consider two broad areas:
1. Information technology and systems
2. e-Business

There is a visible absence of a dedicated chapter on systems and procedures in

the published books on supply chain management. This building block of sys-
tems and procedures is covered in more detail in Chapter 17.

Sales and operations planning

S&OP is a cross-functional management review process to integrate the activ-
ities of the total supply chain. The classical concept of S&OP is rooted to the
MRPII process. In the basic S&OP, the company operating plan (comprising
sales forecast, production plan, inventory plan and shipments) is updated on a
regular monthly basis by the senior management of a manufacturing organiza-
tion. The virtues, application and training of the S&OP have been promoted by
Oliver Wight Associates (see Ling and Goddard, 1988) since the early 1970s.
In recent years the pace of change in technology and marketplace dynamics
have been so rapid that the traditional methodology of monitoring the actual
performance against pre-determined budgets set at the beginning of the year is
generally no longer valid. It is fundamental that businesses are managed on cur-
rent conditions and up-to-date assumptions. There is also a vital need to establish
an effective communication link, both horizontally across functional divisions
and vertically across the management hierarchy to share common data and deci-
sion processes. Thus, S&OP has moved beyond the operations planning at the
aggregate level to a multi-functional senior management review process. The trad-
itional S&OP is a senior management review process of establishing the oper-
ational plan and other key activities of the business to best satisfy the current
levels of sales forecasts according to the delivery capacity of the business.
Ling and Goddard (1988) summarize a ‘capsule description of the process’:

It starts with the sales and marketing departments comparing actual

demand to the sales plan, assessing the marketplace potential and projecting
42 Total Supply Chain Management

future demand. The updated demand plan is then communicated to the manu-
facturing, engineering and finance departments, which offer to support it.
Any difficulties in supporting the sales plan are worked out … with a formal
meeting chaired by the general manager.

This building block of S&OP is covered in more detail in Chapter 18.

Performance management
Performance management acts both as a driving force of improvement and
a fact-based integrating agent to support the planning, operations and review
processes. The foundation of performance management is rooted to quality
management principles supported by key performance indicators.
There are many different definitions and dimensions of quality to be found in
books and academic literature. Basu (2004) defines quality with three dimen-
sions, such as design quality (specification), process quality (conformance) and
organization quality (sustainability). When an organization develops and defines
its quality strategy, it is important to share a common definition of quality and
each department within a company can work towards a common objective. The
product quality should contain defined attributes of both numeric specifications
and perceived dimensions. The process quality, whether it relates to manufactur-
ing or service operations, should also contain some defined criteria of acceptable
service level so that the conformity of the output can be validated against these

Performance management

Inventory
Operations management Distribution management
management

Supplier Sales and operations planning Customer

Procurement and Resource and Customer focus

supplier focus capacity management and demand

Systems and procedures

Figure 3.4 Total supply chain building blocks.

 Understanding total supply chain management and its building blocks 43

Total supply chain building blocks

Supply chain configuration Supply chain integration

• Customer focus and demand • Systems and procedures

• Resource and capacity • Sales and operations
management planning
• Procurement and supplier • Performance management
focus
• Inventory management
• Operations management
• Distribution management

Figure 3.5 Total supply chain building blocks composition.

criteria. Perhaps the most important determinant of how we perceive sustainable

quality is the functional and holistic role we fulfil within the organization. It is
only when an organization begins to change its approach to a holistic culture
emphasizing a single set of numbers based on transparent measurement with
senior management commitment that the ‘organization quality’ germinates.
A good reference line of key performance indicators of a supply chain is the
‘Balanced Scorecard’ by Kaplan and Norton (1996). Kaplan and Norton argue
that ‘a valuation of intangible assets and company capabilities would be espe-
cially helpful since, for information age companies, these assets are more critical
to success than traditional physical and tangible assets’. The Balanced Scorecard
retains traditional financial measures, customer services and resource utilization
(internal business process) and includes additional measures for learning (people)
and growth (innovation). This approach complements measures of past perform-
ance with drivers for future development.
Performance of the supply chain is covered in more detail in Chapter 19.

Are all the building blocks suited to all

organizations?
Although the objectives of supply chain management, that is to balance the
demand and supply for the right product or service on time and at an affordable
price, remain the same for all businesses it is also true that supply chains serving
different markets should be managed different ways. Both Fisher (1997) and
Christopher (2000) have drawn the distinction between ‘lean supply chain’ and
‘agile supply chain’. Agility should not be confused with lean or leanness. Lean
is about doing more with less often with minimum inventory with the emphasis
on efficiency. Key characteristics of an agile supply chain include responsiveness
and flexibility.
44 Total Supply Chain Management

As shown in Figure 3.6, the approaches for an agile or lean supply chain are
determined by the volume and variety/variability. An agile supply chain responds
quickly to changes in demand whether caused by a low volume for high vari-
ety products or unpredictability of demand. A lean supply chain works very
efficiently when the volume is high and variability is low. The occasions for a
pure agile or a pure lean supply chain are likely to be infrequent. It is a popular
perception, though not always validated, that functional or commodity products
need a lean supply chain and innovative and new products require agile supply
chain management. As Christopher (2000) points out that there will often
be situations for a ‘hybrid strategy’ where a combination of the two may be
appropriate.

High

Agile
supply chain
Variety / Variability

Lean
supply chain

Low
Low High
Volume

Figure 3.6 Agile or lean supply chain.

Source: Adapted from Christopher (2000).

Our building blocks of the total supply chain will apply to both lean or agile
supply chains but their end objectives require different ways of using the build-
ing blocks. In a lean supply chain emphasis will be on accurate demand and
capacity planning, keeping the inventory low and running the plant efficiently.
In an agile supply chain the emphasis will be on high service levels by respond-
ing rapidly to end customers. This will require flexibility in process and plant
capacity and a higher inventory, usually of semi-finished products, nearer the
demand point.
The supply chain in the service sector will also need all the building blocks
of the total supply chain although they should be used and managed differently
depending on services. For example, in an insurance service industry the
approach to inventory management would be different to that in an automobile
 Understanding total supply chain management and its building blocks 45

manufacturing business. In the service sector the variation in demand is buffered

by managing ‘non-consumed’ stock (such as people and database) while in the
manufacturing sector the emphasis is on consumed stock (such as materials).

Summary
In this chapter we have explained the characteristics and roles of supply chain
building blocks in total supply chain management. The building blocks consist of
nine components out of which six components are for supply chain configuration
(e.g. customer focus and demand management, resource and capacity manage-
ment, procurement and supplier focus, inventory management, operations man-
agement and distribution management) and three components are for supply
chain integration (e.g. systems and procedures, S&OP and performance manage-
ment). These building blocks will be applicable, to a varying degree, to all types
and strategies of supply chains whether they are primarily pull or push processes,
whether agile or lean supply chains or whether they are in manufacturing or
service sector.
Part 1: Introduction

Questions
1. How would you define supply chain management in a business environment?
Describe in brief the major impacts of supply chain management in both
manufacturing and service industries.
2. What are inbound and outbound logistics? Are there any differences
between logistics and supply chain management? Discuss.
3. What is the primary goal of supply chain management? Explain the role of
resource utilization/customer service (RU/CS) analysis as a first step in
achieving this goal.
4. Consider the over the counter service of a fast food restaurant like
McDonald’s:
(a) What are the present objectives (RU/CS) for the operation? Highlight
the relative importance in a scale 1–3 (3 being most important and 1
being least important).
(b) Identify conflicts between parameters, if any, in a combined RU/CS
matrix.
5. Explain the concept of delivering value by supply chain management.
Comment on the link between supply chain management and Porter’s
value chain.
6. Explain what you understand by ‘total supply chain’. What are the compon-
ents or building blocks of supply chain management?
7. What are new challenges and opportunities in supply chain management?
Explain why it is necessary to consider the management of the total supply
chain.
8. Describe with appropriate examples the cycle and push/pull views of
a supply chain.
9. Describe the appropriate applications of supply chain strategies and
processes to achieve competitive advantage:
– The use of inventory to improve customer service.
– How transportation can be used to increase the efficiency of product
supply?
– The increase of capacity to meet customer demand.
– The use of information and planning to increase the responsiveness of
the supply chain.
 Part 2
Building Blocks of
Supply Chain
This page intentionally left blank
4
Customer focus and
demand

Introduction
Customer focus and demand is the first of our six building blocks for supply
chain management. In Chapter 3, we say customers create demand. Marketing
and sales personnel and advertising agents might argue that through advertising
and promotion they create demand. It is true that marketing will create interest and
might initially generate some sales. But no matter how clever or entertaining
advertising and other forms of promotion might be, unless the product is wanted
or needed by the customer, demand will soon evaporate. A customer could
be a consumer (end user), retailer, wholesaler or distributor, but ultimately
the demand for a product or service is determined by the end user. An example
of promotion creating interest can be seen in two West End shows opening on
the same night in London. Although both might have similar sized casts and has
well-known ‘stars’ and have the same type of promotion, one will run for several
months and one will close after a few weeks. Whether a show is successful or
not will be determined by the number of people who buy tickets for the show, in
other words customer demand. The difference will be due to customer percep-
tion of the show not on the quality or amount of promotion. Indeed a flagging
show is likely to have more spent on advertising than a successful show. Thus,
although advertising and other forms of promotion can arouse initial interest if
the product does not closely meet customer expectation, marketing alone can-
not maintain demand. Our rule of thumb is that unless a product or service
meets 80 per cent of customer needs, the customer will be lost. Why only 80 per
cent? Should we not be aiming for 100 per cent and the answer is yes, but it
might not be economically feasible for us to exactly meet every customer’s
needs or expectations, even if we knew exactly what they wanted. As a cus-
tomer if we were continuously to receive service and product at 80 per cent of
what we want, taking into account what we are prepared to pay, most of us
would be reasonably satisfied. Organizations know this, and instinctively strive
to give important customers service at a greater level than they do to less impor-
tant customers, and the less important customers either through necessity or
lethargy accept the rules of the game, providing the service or attributes of the
product do not fall too far below what they want. Airlines do not hide the fact
that first class and business class passengers get priority at check in, better serv-
ice and food in flight and even better choice of movies than do economy class
50 Total Supply Chain Management

passengers. In reality, the reason people travel business class is for more leg
room and to be able to sleep on long haul flights, rather than for the quality of
the food or for the choice of wine. When was the last time that you checked the
menu before buying an airline ticket? Economy class passengers all of whom
would prefer to travel business class tradeoff service to reduce their cost and
although the economy class passenger will have but limited expectations if their
perception is that the service is poor they will, often without complaining, sim-
ply go to another airline for their next journey even if it means paying more. The
lesson here is that customers do not always bother to complain or give you a rea-
son, they just fade away.
This chapter considers how to get closer to the customer to determine what
they really want and how to keep customers. In particular, the concept of cus-
tomer relationship management (CRM) is explained. We begin with short sec-
tion on the need to estimate demand and conclude with a short introduction to
techniques for forecasting. As explained in Chapter 3 without some form of
forecast of demand, management will have difficulty in establishing what the
capacity of the operation is and what it should be.
What can be provided is limited by our capacity. Capacity is measured in
terms of outputs, and capacity is limited by availability of resource, be it mater-
ials, people, equipment, storage space and transportation. In retail outputs will
be measured by the number of items sold but sales volume might be limited by
how many customers can be served in a given period. This might depend on the
number of staff, the number of cashier points and the availability of stock on
hand. For the West End show or for an airline the capacity will be limited by
how many seats in the theatre or in the aircraft and for a hospital the limitation
might be the number of hospital beds. On the other hand, for the hospital it
could be that there are empty beds but the limitation might be the availability
of surgeons and nursing staff, for the airline the limitation might not be the
number of aircraft but the availability of aircrew. In supply chain management
outputs are important and, as the words supply chain imply, the concern is with
the movement of material from one component of the chain to another and
finally out to the end user. The amount of material that can be held at each level
will depend on physical limitations such as storage space, handling equipment,
people for handling and processing, and the efficiency of the processing, infor-
mation and recording systems. Likewise, how much can be handled and when
it will be delivered is dependent on all of the above (stock on hand, ability to
handle and process, and transport capacity and availability).
Accountants and management become agitated when they detect slow stock
turns and excess capacity in the form of idle resource of space, handling equip-
ment and people. On the other hand, not being able to meet demand and losing
sales is also frowned upon! Efficient use of resource is the hallmark of a just-
in-time or lean systems. The danger is when just-in-time becomes just too late.
Just too late results in lost sales and lost opportunities. Successful supply chain
management equates to efficient use of resource and satisfied customers.
Needless to say the achievement of a balance between customer service and
resource utilization is not easy. Resource and capacity planning is covered in
 Customer focus and demand 51

Chapter 5. Sufficient to say the decision on how much money to invest in

stockholding, materials handling equipment, people for unloading, stacking,
picking, loading and despatching together with processing, information and
recording requires some form of estimate of the likely demand.
Future demand can only truly be known if the customer (and we mean all of
the customers) orders in advance and the orders are firm and not speculative. It
is difficult to get customers to commit to forward orders beyond the short term
and consequently it is highly unlikely that we can know what the demand will
be in the mid- to long term and thus a forecast will be necessary if we are going
to have sufficient capacity in place to meet demand when it occurs.
It is obvious that the closer we are to the customer, the easier it will be for us to
be in a position to meet their needs and to deliver on time. The effect of fluctuat-
ing demand through the supply chain, including the bullwhip phenomenon, and
how to overcome and/or smooth demand fluctuations is covered in Chapter 14.

Customer focus
Our first rule is that a world class organization aims not to just make sales but
to build relationships. Customers are at each stage of the supply chain and each
want to receive materials that meet their needs in terms of specification, on
time and at a reasonable cost … , that is right thing, right time and right price.
Assuming goods delivered meet specification of each component of the supply
chain, from manufacturer or processor, to distributor through wholesalers to
retailers and ultimately to the end user, aims to minimize their cost of stock-
holding. The ideal for each component is to hold no stock and to receive goods
on demand. For each downstream customer to receive such a service each
upstream component, unless they in turn are getting dramatically perfect ser-
vice from their upstream supplier, must hold stocks of all the stock keeping
units. If a stock of every stock keeping unit is held the cost in storage, handling
and funding (interest on capital invested) will be high. (In the USA, the num-
ber of goods available in supermarkets is 300,000, imagine the cost for any
wholesaler who aimed never to have a stock out.) The cost of stock holding as
detailed in Chapter 7 includes interest, insurance, storage space, materials hand-
ling, damage, theft, obsolescence, past used by date, fashion changes and of
course the wages of staff involved in handling, counting, checking and raising
orders. Thus, what the customer would like and what an organization can eco-
nomically provide has to be a tradeoff between great service with high stock
holding, small deliveries and high transportation costs, or lower stockholding
and transportation cost with diminished customer service, longer lead times
and inflexibility.
It should also be noted that at each level of the supply chain there will be
additional and different needs. Downstream from the retailer, the end user will
not only expect the basics (goods meet specification, available when required),
but they will also appreciate after sales service and the opportunity to return
goods. At the retail level of the supply chain, retailers will expect the basics
52 Total Supply Chain Management

(goods meet specification, available when required) plus will appreciate shar-
ing the risk of stock holding such as provided by a vendor managed inventory
system. Sharing of risk, such as using a vendor managed inventory system is
explained in more detail in Chapter 14.
Determining what the customer wants means more than asking them to fill
out satisfaction questionnaires, or taking them out for a cup of coffee.

Customer relationship management (CRM)

Remember the aim is to build relationships not just to sell commodities.
CRM is a relatively new term. CRM did not begin to be covered in market-
ing textbooks until 2002, but in effect the concept was well known for decades
before this. In essence, it is a proactive approach to understand who your cus-
tomer is, their strengths and weaknesses as well as their direct needs with your
organization.
From an accountants approach information is gathered to determine which
customers are profitable and which are not including how much is being given
away in discounts, transportation costs and the profit margin per line item. Basu
and Wright (2005) relate that in one organization they encountered that the top
5 per cent of customers accounted for 40 per cent of the sales, and because of
their perceived importance were able to negotiate volume discounts and special
delivery agreements. When these special conditions were examined it was
found that the balance of the customers were providing the company with a true
40 per cent gross profit on sales and that the top five per cent of customers were
only providing a gross margin on 10 per cent. Thus, overall the gross margin for
the company was reduced to 28 per cent. This had not been apparent as the
annual accounts had shown discounts and transport costs as general expenses
and not as costs of sales. From a marketing point of view CRM is used to identify
needs of customers, demographics and market segmentation, and to promote
customer loyalty. From a supply/operational aspect CRM provides information
of past demand, trends and seasonal patterns. In short from past history CRM
indicates when periods of heavy demand are likely to occur.
The CRM system requires information to be gathered and stored on a data-
base for each customer, and for the database to be readily accessible across the
whole organization. Thus, each function will be using and making decisions
based on common data. The database will have records of what each customer
is buying and when (seasonality of demand). For retail customers such infor-
mation can be gathered through loyalty cards (see Chapter 14). Information
collected can show individually or for a group of customers what they are buy-
ing and when and if sales to a particular customer, or group of customers, is
profitable. Direct marketing information is gathered through sales staff from
call reports, quotes and orders lost. And of course the customer should directly
be canvassed as to what they want from their supplier. In some circumstances
important customers can be involved in research and development for new
products. Other information for the CRM database can be gathered, without
 Customer focus and demand 53

the customer’s awareness that a database is being built, from customer annual
reports, media statements, and comments by analysts in the business pages of
newspapers and journals. For large (important) customers this would include
tracking the share price.
The CRM database system allows information to be retrieved quickly and is
invaluable in forecasting demand and seasonality of demand. It also helps if the
customer can be enlisted in providing early advice as to what their own budgets
and forecast of demand are likely to be. If a supplier can get close to a customer,
and if there is mutual trust, the customer and supplier can jointly plan for fore-
casted demand. A component half-way up the supply chain, such as a distribu-
tor should be working closely in the guise of being a customer with their major
suppliers in much the same manner as they are working with their major cus-
tomers. It is not enough to know the strengths and weaknesses of your direct
customers, but a supplier should have market intelligence right out to the end
user, and in the CRM file for each customer, information regarding their cus-
tomers should also be gathered. A macro and micro approach is needed.

Not one sided

CRM if properly applied allows us to know our customers and to know their
market. The aim is to get close to the customer so as to build a long-term rela-
tionship. But gathering information should not be one sided! We need to share
information with our customers. Long-term partnerships take time to build and
require trust and respect. A full trusting partnership would include sharing
technical information and market intelligence. Instead of the old, almost adver-
sarial, approach with customers driving a hard bargain and with suppliers hid-
ing material prices and labour costs and adding on hidden margins where they
could, benefits can be gained for both supplier and customer through jointly
working to reduce costs and to improve relations.

Pestle
In forecasting knowing your direct customer and your direct supplier is a start,
knowing their suppliers and customers is also important, but understanding exter-
nal factors as normally covered in the strategic managers PESTLE analysis is
also important. PESTLE stands for Political, Economic, Societal, Technological,
Legal and Environmental aspects which could impact on the organization, and
each is examined as a threat and as an opportunity:

• Political, legal and societal factors: Laws and regulations might seem to be
tiresome limitations, but they do provide protection and a measure of stabil-
ity. For our home market we will know what is legally acceptable, hours and
conditions of employment, health and safety issues, taxation and regulatory
requirements. When operating overseas, it is wise to understand that what is
54 Total Supply Chain Management

acceptable in one country may not be acceptable in another. With overseas

trading partners stability of government has to be taken into account when
importing or exporting. At home it is necessary to understand the policies of
the government of the day and of the major opposition parties.
• Economic factors include the state of the economy in general including interest,
unemployment, inflation and foreign exchange rates and likely movements.
• Socio-cultural includes the movement towards triple bottom line account-
ing for environmental and sustainability including social issues as well as
the traditional economic and financial bottom lines. The impact on the sup-
ply chain of pressure from the environmental green movement with their
concerns, real or imagined (such as global warming) is given in Chapter 15.
• Technological changes: In the supply chain technology plays an important
part. It is true to say that the supply chain of today would not function with-
out information technology to provide point of sale, electronic data interfaces,
electronic funds transfer, manufacturing resource planning, enterprise resource
planning and of course the focus of this chapter, CRM. The e-supply chain
is fully explored in Chapter 13.
• Technology includes more than information technology, it includes hand-
ling and stacking equipment, packing material, storage, tracking with radio
frequency identification (RFID) and bar coding. In manufacturing it includes
computer aided design, automation and robotics. All these areas are touched
on in elements of Chapters 5, 7–9 and 14.
• Competition: It is not normally shown in a PESTLE but is very important.
Competition is where your customers can go! Identifying and understand-
ing the competition, what they are doing and what they are threatening to do
is essential. However, it is dangerous to overreact, what the competition
says it can do, or will do, may not be quite the same as what actually hap-
pens. In essence, the very least an organization can do is to meet the service
level provided by the competition, and to recognize that your performance
is judged against customers perceptions of world class standards and, rather
unfairly, customers will be swayed by hyperbolic claims of the competition.
The following questions are designed to help an organization to understand
threats and weaknesses of the competition. These questions are adapted
from Basu and Wright (2005):

1. How well do you know the true market size and share for your product/
service?
2. Who are your three main competitors?
3. How good is your knowledge of the strengths and weaknesses of your top
three competitors?
4. How well do you know and compare the service level your competition
provides?
5. Do you actively monitor your competitor’s acquisitions, expansion and
divestments?
6. Do you know the capacity of your competitors manufacturing and distribu-
tion centres?
 Customer focus and demand 55

7. Do you regularly benchmark your performance against the competition?

8. Do you have a dashboard of key performance indicators for your supply
chain?

Performance measures in supply chain management can include return on

assets employed, stock turn, on time delivery, transportation costs and other
costs and measures as explained in Chapter 19.

Techniques for forecasting demand

The three approaches for forecasting are:

1. Qualitative
2. Quantitative (mathematical or time series approach)
3. Causal

In reality, all three approaches are interlinked and should be taken into account
when determining a forecasted demand figure. Invariably, all forecasts will
also have an element of subjectivity associated with them.

Qualitative forecasting
Qualitative forecasting uses judgement, past experience, and existing past and
present data. However, if forecasting on past results and based on current con-
ditions was easy, the bookmakers would soon be out of business and the
weather forecast would always be right! Relying on past information alone to
forecast the future is like driving a car forward by looking back through the
rear view mirror.
The best-known methods of qualitative forecasting are:

• Expert opinion (including scenario planning and the Delphi method)

• Market surveys
• Life cycle analysis

Expert opinion
Individuals or groups can undertake this method. If we think about it, man-
agers use expert opinion all the time as they plan and make decisions every day.
Scenario planning consists of creating hypothetical circumstances that may
happen in the future, and then formulating solutions to each scenario. Trend
analysis and understanding causal factors is essential to good scenario plan-
ning (Getz, 1997).
Imagination is required, as the event manager should then determine the
impacts on forecasts using these different scenarios.
56 Total Supply Chain Management

As explained in Tum et al. (2005), another method of using expert opinion

is the Delphi model. Delphi is named after the city in ancient Greece, which
was the site of the most famous and powerful oracle in the temple of Apollo,
noted for giving ambiguous answers. The approach was that if the supplicant
asked the right question they got the right answer. A priestess spoke the oracu-
lar messages whilst in a frenzied trance, and sitting on a golden tripod. A priest
would interpret these sounds to the supplicant usually in verse. People seeking
help would bring gifts to the oracle, and the shrine became very wealthy.
Nowadays, the Delphi method is considered by many to be the most success-
ful of the qualitative methods, although it could hardly be considered useful if
it were ambiguous. It is time consuming and costly, and is best used by large
organizations. The method uses a set of questions to a group of managers
or ‘experts’ who, working without collusion, give their individual opinions.
A coordinator then tabulates the opinions, and if individual results differ sig-
nificantly then the results are fed back anonymously to the panel with a further
set of questions. The process is repeated until consensus is reached. Questions
and feedback generally continue for four rounds, with the questions becoming
more specific with each round. The benefit of the method is that a group opin-
ion can be achieved without the team meeting. This overcomes one of the
weaknesses of a face-to-face group meeting, where it is possible for members
to be swayed by a dominant member, or perhaps an ‘expert’ member may be
embarrassed to back down from a publicly stated opinion.

Market surveys
Market surveys are generally not used to forecast demand for capacity manage-
ment. They are best used to determine why a product or service is not perform-
ing as well as expected. Market surveys collect data from a sample of customers
and potential customers, analyse their views and make inferences about the
market at large. Wright and Race (2004) advise that surveys can be carried out
by telephone, personal interview, surface mail or e-mail. Market surveys use two
approaches: structured and unstructured. With the structured approach the sur-
vey uses a formal list of questions. The unstructured approach enables the inter-
viewer to probe and perhaps guide the respondent. The survey enables the
manager to learn why people did not buy, and gives the potential for attracting
new segments in the future. Framing of questions is an art, and when the ques-
tions are completed they should be tested to check ambiguity and relevance.
The key is to establish from the outset exactly what information is wanted, and
then to design questions that will give the required information. Questions that
are not relevant to the issue are a waste of time and money. A weaker form of
market survey includes group interviewing or focus groups. With the focus
group approach, six to ten people are invited from a market target group to a
meeting. The conditions are relaxed with refreshments and so on, and after the
interviewer has set the scene it is hoped that group dynamics will bring out
actual feelings and thoughts. At the same time the interviewer attempts to keep
the discussion focused on the subject of the research. The concern with this
 Customer focus and demand 57

approach is that too much can be read into the opinions of a small and possibly
non-random sample. Holding several focus group meetings on the same subject
and then pooling the results can to some extent overcome this problem.

Life cycle analysis

It is generally accepted that products and services have a time-based life cycle.
The stages of the life cycle are development, launch, growth, maturity and
decline. In preparation of the launch stage it will be necessary to have stocks of
product at each level of the supply chain to make the launch a success, and like-
wise for the growth stage where there might be a rapid growth in demand. Once
a product reaches the maturity stage, the demand will be relatively stable. For
most types of products life cycles are readily predictable and the rate of
growth/decline will not be unexpected. Experienced marketing managers can
often, with some degree of accuracy, forecast how long a product will stay in
each stage of the life cycle. In the fashion industry in particular the demand will
be seasonal and for each new season product will be manufactured and stocked
in the previous season. In Chapter 14, the example is given of a chain of retailers
having to order 11 months in advance.

Quantitative

Time series forecasting

Time series forecasting uses mathematical analysis of past demand trends to
forecast future demand. However, the accuracy of a forecast will not be known
until after the event, and this is usually monitored by the deviation of the actual
result from the forecast result. Short-term forecasting involves taking historical
data of demand patterns from a few past periods and projecting these patterns
into the future. The simplest method is to take the last period’s actual demand
and use it for the next period(s) forecast, this method gives a quick response to
a trend; if the trend is upwards then the forecast will be upwards, but may lag
behind. If, however, there are marked annual fluctuations, with this method,
following a buoyant year, forecast higher demand. An example of forecasting
using seasonal trends is given in Table 4.1.
This method gives a quick response to a trend; if the trend is upwards then the
forecast will be upwards, but lagging behind. If, however, there are marked sea-
sonal fluctuations then this method, following low winter sales, would forecast
low spring sales although it is well known that for this product spring sales will
always be higher than winter demand. In the above example, based on actual
results, the forecast for period 5 (spring) is 18 although past history shows that
spring sales are always about 33 per cent above winter demand.

Forecasting by past average

This method is to average all of the past results (see Table 4.2).
58 Total Supply Chain Management

Table 4.1 Forecasting using seasonal trends

Period Forecast demand Actual demand Deviation

(based on last period)

1 No prior data 20
2 20 22 2
3 22 23 1
4 (winter) 23 18 5
5 (spring) 18 24 6

Table 4.2 Past average

Period Forecast Actual Deviation (forecast

to actual)

1 – 20 –
2 20 22 2
3 21 24 3
4 22 23 1
5 22 13 9
6 20 9 11
7 18 8 10
8 17 6 11

A refinement is to take a moving average. In Table 4.3, the last three periods
are averaged. This method provides a response to trends, and also dampens fluc-
tuations. Although there are still significant variations shown in Table 4.3, the
forecasts for periods 7 and 8 are more accurate than those shown in Table 4.2.
Total absolute deviation (TAD) is the sum of all the deviations ignoring plus
or minus signs. Mean absolute deviation is the average of the deviations. In this
example, although there are five forecasts and five deviations (actual to forecast),
the sum of all the deviations ignoring plus or minus is 35. Plus or minus is
ignored as it is just as serious to over forecast as it is to under forecast demand.
In this example after the first forecast which was reasonably accurate the vari-
ations are significant. For example, for period 6 the forecast is 222 per cent
of actual demand. Although using averages of past actuals ‘dampens’ rapid
responses when there are fluctuations, the method is slow to respond when there
is a definite trend, either up or down.
The number of periods used for averaging is a matter of judgement. If there
are definite cycles the number of periods in the cycle can be used to determine
the number of periods used for averaging.

Seasonal adjustments
Where there are distinct seasonal trends then the forecast can be further refined
by adjusting for seasonality.
 Customer focus and demand 59

Table 4.3 Three period average forecast

Period Forecast Actual Deviation (forecast

to actual)

1 – 20 –
2 – 22 –
3 – 24 (66/3  22) –
4 22 23 (69/3  23) 1
5 23 13 (60/3  20) 10
6 20 9 (45/3  15) 11
7 15 8 (30/3  10) 7
8 10 16 (33/3  11) 6
Total absolute deviation 35
Mean absolute deviation 35/5 7
Deviation spread  11 to 6  17

In Table 4.4, we can see that on average the first three quarters each year
have accounted for 82 per cent of the total demand for the year. Therefore
based on the previous years history the actual demand of 30  55  60 which
totals 145 will likely be 82 per cent of the full year. Thus the full year will be
176.8 and quarter four will be 31.8. This can be checked for trend. Each year
the total demand has increased; from 2004 to 2005 by 17 per cent, 2005 to
2006 by 16 per cent, 2006 to 2007 by 9 percent and if our forecast for 2008 is
correct the increase will be 8 per cent.
However is the forecast of 176.8 sensible? 176.8 is a very exact figure and
we must remember that a forecast is seldom exactly correct. We should there-
fore forecast 175 or if the omens are goof 180. We would need to take into
account market and economic trends and indicators such as unemployment
rates, interest rates, currency exchange fluctuations, the political situation and
of course what the competition is doing or threatening to do.

Table 4.4 Seasonal adjustment

Year 2004 2005 2006 2007 2008

Quarter One 15 (14%) 22 (17%) 25 (17%) 28 (17%) 30

Quarter Two 35 (32%) 40 (31%) 45 (30%) 52 (32%) 55
Quarter Three 40 (36%) 45 (35%) 50 (33%) 54 (33%) 60
Quarter Four 20 (18%) 22 (17%) 30 (20%) 30 (18%) ?
Full Year 110 129 150 164 ??

We now have a forecast for the next 12 months (four quarters) which is
seasonally adjusted and which has allowed for growth based on the past trend.
Naturally as each new ‘actual’ comes to hand we recalculate our moving forecast.
60 Total Supply Chain Management

The main weakness of using past averages is that equal weight is given to each
of the historical figures used, and it is also necessary to have, or to build up, a
history of information to test against and to forecast from.
In general there are two frequently used models for time series forecasting:

1. Moving averages
2. Exponential smoothing

The moving averaging model, as shown in the example in Table 4.3, uses the
average of the past period data in a time series to forecast future activities. In
another simple example, assume the sales of the last 4 months of a mobile
handset is 10,000, 12,000, 11,500 and 13,000. Then using a 4-month moving
average, the forecast for the fifth month would be the average of the past 4
months, that is (10,000 12,000 11,500 13,000)/4 or 11,625.
Exponential smoothing is similar to the moving average methods but it elim-
inates some of the calculations. The model uses a smoothing factor (less than 1)
for forecasting the next period activity. The mathematical formula is
Fn1  aAn  (1  a)Fn
where Fn1 is the forecast for next period,
Fn is the forecast for the current period, a is the smoothing factor and
An is the actual data for the current period.

Causal
Causal forecasting is when an event (such as sales) is caused by some other event.
For example, the demand of small cars increases with the increase of the petrol
price. In forecasting, it is easy to get caught up with the method of calculating and
to overlook the purpose. The purpose is to get the best possible forecast of what
might happen in the future. Past results must be examined to understand why fluc-
tuations in past demand occurred. For example, what was the state of the econ-
omy, noting key indicators such as interest rates, inflation rates, currency
exchange rates, employment rates and factors such as the entrance of new com-
petitors, new technology and materials, fashion trends, and marketing drives.
Knowing the past causes for changes in demand is important when making fore-
cast for the future. Although the information used has a quantitative source, the
application and usage of the data relies on a qualitative interpretation.

Common sense
Finally, the commonsense approach with forecasted figures is to test by asking,
are these figures sensible, what happened before and what is likely to happen
in the future? This approach shows the link between the use of quantitative
data and a qualitative approach, and uses the experience, knowledge and
expertise of the management team. As Wright and Race (2004, p. 161) say
‘the commonsense approach with forecasted figures is to test them by asking
 Customer focus and demand 61

“Are these figures sensible, what happened before and what is likely to happen
in the future?” Once the future demand forecast has been agreed then we must
determine the future capacity of the organization, and anticipate what changes
might be needed to meet the level of forecasted demand’.

Factors affecting forecast errors

Forecasting is a multi-function review process and marketing should own the
responsibility of agreed forecast data. There are many factors as shown below
affecting the accuracy of a forecast and marketing is involved in most of them.
The key factors are:

• Internal organization factors

– Historical sales performance of the product
– Product marketing and promotion
– Introduction of a new product
• Macroeconomic factors
– Interest rates, exchange rates and inflation
– Political climate and government regulations
– Employment rate and industrial relations
• Market intelligence factors
– Competitors’ performance and strategy
– Market share and market saturation
– Reputation for quality

Case example: Reputation for quality

Ford Motor Company’s Explorer sports-utility vehicle had a huge recall in
the middle of 2000 primarily because of faulty tyres used. The recall was
a consequence of many fatal accidents linked to Firestone tyres used in
those vehicles. Firestone tyres, supplied by the Bridgestone company of
Japan, directly suffered a loss of confidence in all ranges and resulted in
poor sales of Ford’s sales also suffered.
Adapted from Waller (2002, p. 266)

Summary
In summary, we conclude this chapter with questions derived from Basu and
Wright (2005) designed to enable an organization to understand their customers
and their customers needs:

1. How well do you know the relative importance of your main customers?
2. Is your CRM database up to date and is it readily accessible to all key
members of your organization?
62 Total Supply Chain Management

3. How often do you conduct market research of trade and customer needs
out to the end user?
4. How well are customer complaints handled and recorded?
5. How is customer satisfaction measured (on time delivery, accuracy of
delivery, lead time, order fill, after sales service)?
6. How close is your link with internal functions of marketing, planning and
operations?
7. How close are your links and sharing of information with other components,
upstream and downstream in the supply chain?
8. Are staff other than sales and marketing encouraged to meet with customers?
9. How well are you aware of opportunities and constraints of the emerging
markets such as India and China?
10. How closely is your operations manager involved with customers to achieve
a good understanding of customers needs?
11. Do you have a serious partnership with customers to help them gain a
competitive edge?
12. How frequently do you analyse channels of distribution up- and downstream
in the supply chain?

To be world class we have to know our customers and know what they want,
remember we are building relationships not selling commodities. Without cus-
tomers any organization, profit or non-profit will not survive. We also have to
understand that for any commercial organization profit is necessary for survival.
The level of customer service provided must be affordable and sustainable. Our
final comment, the objective should be to build long-term relationships, not to be
just making sales and short-term gains.
5
Resource and capacity
management

Introduction
This chapter shows why resource and capacity management is an important build-
ing block in supply chain planning and management. We begin by explaining
what effective capacity is as opposed to theoretical capacity. The objective for
capacity management is to meet demand, and thus we show that the effective
capacity for a complete supply chain is how many units could be supplied in a
specific time period such as a daily basis to end users if required. The supply
chain consists of many stages from preparing the ground and sowing the seed
out to the final consumer, and from seed to mouth might take 12 months or
longer. Unless you are a supermarket group such as Tesco’s or Sainsbury’s it
would be rare for any one player to be able to control the complete supply chain;
therefore, it is more practical to consider how each component can manage
their part of the supply chain while working closely with immediate supply and
customer partners. In this chapter we consider how any one component of the
supply chain can efficiently manage their level of the supply chain.

• Capacity forecasting and planning

• Materials and manufacturing requirement planning
• Production scheduling
• Enterprise resource planning (ERP)
• Capacity adjustment to meet demand
• Demand manipulation
• Operations scheduling

Theoretical capacity
In supply chain management capacity refers to the amount of inventory that can
be held in the supply chain. The aggregate capacity is the sum of the total inven-
tory that could be held simultaneously at each stage. In theory this total is the
capacity of the entire chain. However, a supply chain does not stand still, material
is constantly moving into the factories and food processing plants, is being trans-
ported by road, rail, sea and air, sometimes in large amounts (e.g. a 100,000-tonne
oil tanker or other bulk carrier) and through successive stages out to the end user.
64 Total Supply Chain Management

Effective capacity
The effective capacity can be defined as the amount of material or product
available at each upstream stage of the supply chain. Beginning with the end
user, how much could the upstream supplier provide at any given time to cus-
tomers and so on up through the various tiers of the chain? Some texts measure
capacity in the supply chain based on the capacity of warehouses, in the sense of
how much can physically be stored. While storage space might be a concern if
you are the manager or owner of a warehouse the effective capacity is how
much can pass through your warehouse in a given period, rather than how much
you can physically store. Movement through the warehouse will be limited by
the speed and reliability of inward supply and by the availability of outward
transport. The objective of good warehouse management is not to have huge
amounts of material, but to have a high rate of throughput. Dangers and costs of
large stocks of slow-moving stock at any stage of the supply chain are:

• Cost of premises
• Cost of capital (interest on cash tied up in stock holding)
• Handling costs
• Insurance
• Damage and deterioration of materials
• Stock shrinkage due to miscoding and theft
• Loss due to obsolescence, fashion changes and passed used by dates

Thus, the effective capacity is measured in terms of throughput for each stage
of the supply chain. At the end of the supply chain effective capacity is the amount
of finished product that can be supplied to end users on a daily basis. For
example, in the military capacity could be measured by the number of rounds
of ammunition, or the number of ration packs that could be supplied daily to
the front line. Capacity is not the number that is supplied, but the number that
could be supplied if required.

Capacity forecasting and planning

Wild (2002) says ‘Capacity management is concerned with the matching of
the capacity of the operating system and the demand placed on that system’.
Planning to match demand and capacity begins with the forecasting of what the
demand is likely to be.
Capacity decisions are based on forecasts of demand at several different levels.
Long-range capacity planning needs forecasts to be made several years ahead
and includes facility planning. Short- and medium-term forecasts span 2–3 years,
and generally are used to determine people requirements, leasing of premises,
machines and equipment, and product details. In the more immediate short-term
forecasts are used to plan, order and schedule resources on a monthly, weekly and
daily basis. The shorter the time frame, the more precise the forecast must be.
 Resource and capacity management 65

As discussed in Chapter 4, in long-term forecasting past experience and

trends will be factored into the calculations. In considering the past numbers
alone are not sufficient, as the numbers will merely reflect a variety of circum-
stances that influenced or determined the outcome. Establishing circumstances
or events that shaped past demand will not be easy as it cannot be certain that
all the facts will be remembered or that they will occur again in the same way.
The danger for statisticians and forecasters relying on the past is not knowing
the circumstances and on relying on the numbers. Obviously, for some indus-
tries and products seasonal trends might well provide a reasonably accurate
forecast.
In the short term if orders are made in advance, if market trends are apparent
and if all components of the supply chain are sharing information actual demand
should be readily known. In Chapters 2 and 14, we discuss the bullwhip effect
which refers to poor information sharing resulting in panic ordering and over
reaction with wildly fluctuating demand. Assuming that the bullwhip effect
can be mitigated, and this is discussed in Chapter 14, knowing what the actual
demand will be a week, a month or even 3 months in advance gives little scope
to substantially adjust capacity. Machinery cannot be added over night, it takes
time to recruit and train new staff, additional warehouse space takes time to
find and to fit out, etc., and often transport has to be booked well in advance.
Short-term adjustment of capacity is often more reactive than proactive.

Types of forecasts
As discussed in Chapter 4, there are three ways of looking at forecasts: the
qualitative approach, the mathematical or time series approach, and the causal
approach. In reality, all three are interlinked and should be taken into account
when determining a forecasted demand figure.

Example: Qualitative forecast

Past history shows that it is unlikely that England will win the next Football
World Cup. This does not prove that they won’t!
Last quarter (spring) the demand was twice that of the previous (winter)
quarter. Further examination might show that the trend for the last few
years that demand in the spring quarter has always been double that of
the previous quarter (winter). However, the circumstances existing each
previous spring might have influenced the results. For one year demand
might have been high due to a new product launch, another year the high
demand was due to a successful TV promotion, and on another occasion
a major competitor might have failed and we got the business by default.
The figures cannot stand alone but need to be supported by information
as to the circumstances at the time.
66 Total Supply Chain Management

Example: Life cycle analysis

The product life cycle curve of develop, launch, growth, maturity and
decline is shown in Figure 5.1. It is generally accepted that products have
a life cycle which is time based. At the launch stage demand is low, the
growth stage shows a rapid demand increase and relatively stable demand
at the maturity stage. Most product life cycles are predictable and for a
product such as petrol the life cycle has extended over many decades
but for some fast-moving consumer goods and fashion items the rate of
growth/decline can be dramatic. Some consumables only reach the decline
stage if there is a dramatic change in technology. An example is the
replacement of canned vegetables such as peas by frozen vegetables.
However, once the decline has steadied there is still a demand (easily fore-
cast) for canned vegetables. Managers who have a history of experiencing
the introduction of new products can be expected to forecast with a reason-
able measure of accuracy how long a fashion will take to pass though each
stage of its life cycle. Where there is an obvious life cycle capacity deci-
sions can be made, such as ordering and holding materials during the
growth stage in anticipation of a high demand in the growth stage.
Sales

Launch Growth Maturity Decline

Time

Figure 5.1 The product life cycle.

Example: Time series forecasting

Forecasting by time series employs analysis of past demand and trends
of demand to anticipate future demand. Any forecast or method of fore-
cast can be tested for past accuracy. Accuracy is usually monitored by
the deviation of the actual result from the forecast result.
Short-term forecasting considers historical data patterns (of demand)
from past periods and projects these patterns into a forecast. Thus, if last
 Resource and capacity management 67

period demand was 50,000 the forecast for the next period would be
50,000. If for each period the trend is upwards then the forecast will fol-
low the trend but always lag behind (see Table 5.1).
Table 5.1 Short-term forecasts

Period Forecast Actual Deviation

1 45,000 50,000 5000

2 50,000 55,000 5000
3 55,000 45,000 10000
4 45,000 40,000 5000
5 40,000 45,000 5000
Total absolute deviation 30,000
Mean absolute deviation 6000
Deviation spread 15,000
(from 10,000 to 5000)

The method gives a quick response to a trend, depending on the length

of time of each period. If the trend is upwards then the forecast will be
upwards but lagging behind. The total absolute deviation in the above
example. This indicates that having a higher forecast than actual is as
serious as having a lower than actual forecast. In the calculation of total
absolute deviation the symbols for plus or minus are ignored. The mean
absolute deviation in Table 5.1 is the average deviation of forecast from
actual and in this case the forecast on average is 6000 wrong on each
occasion. If the forecast is too high it is likely that too much resource
will be provided, and if too low there will not be sufficient resource to
satisfy demand. If the periods shown above are daily forecasts and the
resource is not perishable the damage in poor forecasting might not be
great. If however each period represents a year the damage done could
be serious. If the industry is seasonal then this method would, following
a buoyant autumn, forecast high winter sales, when in fact past history
shows that winter sales will always be lower than autumn sales. This is
better illustrated in Table 5.2.

Table 5.2 Seasonal trends (figures in $ ‘000,000)

2004 2005 2006 2007 2008

Quarter One 20 (11%) 22 (11%) 21 (15%) 26 (11%) 31

Quarter Two 40 (22%) 45 (22.5%) 18 (13%) 52 (22%) 62
Quarter Three 40 (22%) 44 (22%) 28 (20%) 52 (22%) ?
Quarter Four 80 (45%) 89 (44.5%) 75 (52%) 105 (45%) ?
Total 180 200 142 235 ?
68 Total Supply Chain Management

In Table 5.2, it can be seen that apart from 2006 there is a very obvious
seasonal trend. Quarter One is 11 per cent of the total demand for a year,
Quarter Two 22 per cent, Quarter Three 22 per cent and the fourth
Quarter is on average 45 per cent. Obviously, something went terribly
wrong in 2006. As we are now only in the first half of 2008 it should be
easy to find the reason for the 2006 aberration. It could simply be due to
the product life cycle and that the competition was able to steal a march
on us with an updated product, and it was not until the end of the year
that our new product came on line. Or if we were in an overseas market
there might have been a natural disaster such as a tsunami or earthquake
in 2006 which disrupted our supply lines. Once we understand what went
wrong in 2006 we can with some confidence predict that the first two
quarters of sales will be 33 per cent of the full year and thus the full year
forecast will be 281.8. We would never forecast 281.8, as this suggests an
exactitude that could not happen. Thus we would either say 280, or if the
economy was buoyant we would say 285, but never 281.8!

Supply chain management is distinguished by its role to provide a strategic

and integrating function at all levels of logistics including the suppliers. Ideally,
the supplier becomes part of the team and is involved in the planning process, not
only for scheduling of deliveries when required, but also in the design stage for
new products. The business objective to convert customer demand by optimizing
the utilization of resources to deliver effective customer service applies to all
organizations regardless of whether they are in manufacturing or service sectors.

Materials requirement and resource planning

In most manufacturing companies the focus is on a reliable flow of inwards mater-
ials. This is achieved through a materials requirements plan (MRP) for inbound
logistics so as to achieve an appropriate balance of stock and to satisfy demand.
MRP is the set of techniques which uses bills of material, inventory on hand
and on order data, and the production schedule or plan to calculate quantities and
timing of materials. Such a plan is incomplete if it does not take into account
whether manufacturing resources (e.g. plant, people, energy and space) will be
available at the desired time.
Manufacturing resource planning (MRPII) arose from an appreciation of the
need to time and phase materials with resource availability so as to achieve a given
output date. MRPII is an integrated computer-based system. A computer-based
approach is essential due to the amount of data required. Various software
systems are available, each based on the same principles. MRPII is depicted in
Figure 5.2.
With MRPII, the planning process arises from the innovation of new prod-
ucts and the strategic marketing plan. Starting with this information a business
 Resource and capacity management 69

Innovation
Business planning
Strategy
Top management
planning
Sales and
Forecasting
operations planning

FP inventory Master planning

Rough-cut
Bill of resources
capacity planning

Resources OK?
Operations
management
Bill of materials planning
MRP II
RM/PM inventory

Detailed capacity
Available capacity
requirement planning

Planning OK?

Purchasing
(supply planning)
Execution
planning
Production
Available resources
scheduling

Figure 5.2 Manufacturing resource planning.

plan is constructed to determine and communicate estimates of the sales

volume of each product range. The business plan should be developed at least
once a year and during the year periodic updates will be required.
From the business plan, an operations plan is formulated which covers the
materials and other resources needed to translate the business plan into reality.
It follows that to keep the operations plan in line with updates to the business
plan, regular communication is required between the various functions involved.
This updating process is best achieved by face-to-face meetings which we rec-
ommend should take place at least once a month and always with all parties
present at the one time. There is a very real danger of misunderstandings and
ambiguities if meetings are not face-to-face and if all concerned are not present
at the same time. Meetings need not be long drawn out affairs. From experi-
ence we believe that any planning meeting that takes longer than an hour is
70 Total Supply Chain Management

wasting time. The key managers at these meetings will be from sales, operations
and planning. The issues that will be agreed will include time and availability of
resources, and conflicting requirements and priorities will be resolved. Above all
demand is the crucial issue, and as future demand can never be certain there
should be a formal mechanism of forecasting using the best combination of his-
torical models, past results from promotions, data from customers and market
intelligence. Likewise, the inventory data system has to be up to date and accu-
rate with details of raw materials (RM) on hand, goods on order, lead times and
finished goods on hand.
Only with up-to-date information, and with the continuous review and manage-
ment of information, can an organization hope to achieve a balance of resources
and stocks of inventory to meet planned service levels. The master planning and
production scheduling process therefore has to be continuously monitored and
updated to ensure that this occurs.

Production scheduling
The master production plan or master schedule is at the heart of MRP where both
the timing and quantity of orders are determined from offsetting from the current
stock the demand during the lead time to meet the master production plan.
As shown in Figure 5.3, the concepts of MRP underpinned by the master
plan can be extended also to the distribution channel to allow integrated sched-
uling throughout the supply chain. The approach of distribution requirements
planning (DRP) is compatible with MRP as used in the factory.

Customer Warehouse
Customer Ware-
order order Factory
house
stock stock

Master
production
schedule

Purchase Production
Supplier order order
Materials Work in
stock process

Figure 5.3 Order flow in MRPII.

 Resource and capacity management 71

The next stage is to follow a rough-cut capacity planning process to assess

to what extent the capacity of manufacturing facilities could meet the master
schedule. The feedback loop at this level tests the master plan against problem
areas such as known bottlenecks and other critical resource areas. Often, as this
is a short- to medium-term approach, action has to be taken to make the best
use of existing resources rather than to add extra long-term resources. The
company should decide which alternative to follow if the existing resources are
not adequate, for example review the schedule, increase resources, work extra
shifts, delay maintenance, outsource to third parties and so on. With computer
systems it is relatively straightforward to simulate using ‘what if’ scenarios to
evaluate alternative courses of action.
Having established that the resources are sufficient, or having adjusted the
plan to fit the resources, then the next step is the detailed MRP and the detailed
capacity requirements planning for day-to-day operations. This stage includes
the production of detailed bills of materials for each product or batch of prod-
ucts. With the revised master schedule for each product and for each stock
keeping unit (SKU) and bills of material for each SKU, the materials required
for each item of raw materials (RM) and packaging materials (PM) are then
matched with the current inventory levels to derive the additional procurement
requirements. The requirements are modified, if required, after comparing with
the detailed capacity planning process.
The execution of the planning process then commences with the final pro-
duction scheduling and purchasing (supply planning) processes.
We have outlined a generic description of the MRPII process. There are of
course variations – more significantly between batch production processes and
continuous production processes and between so-called ‘push’ and ‘pull’ demand
systems. With the ‘push’ system stocks of materials and of finished goods are
used to ensure maximum plant capacity utilization by having level production.
The ‘pull’ system is driven by customer orders and just-in-time principles which
can result in some under utilization of capacity. It is said that just-in-time
requires greater flexibility and reliability of plant plus a multi-skilled workforce.
In its simplistic form just-in-time is reactive (demand pull), whereas MRPII can
be described as proactive. MRPII looks forward and determines what will be
needed to achieve a desired output date. Internally MRPII is a push system;
inventory is driven through the process by the schedule. Thus, the customer
requirements are linked to the resources and materials necessary so as to pre-
cisely meet a just-in-time delivery date. From a customer’s point of view it could
be argued that as long as the goods arrive on time and meet the specifications, the
system used by the manufacturer is irrelevant!
To be effective, MRPII has to be an integrated computerized system and
should be on-line and accessible to all interested parties. It follows therefore
that data has to be kept up to date on the system. For example, if engineering
changes are made to the design of a product the MRPII database has to be
updated otherwise the bill of materials for procurement purposes will not be in
line with the new design. It is clear that MRPII cannot be effective unless a
‘single set of numbers’ is used by all functions (i.e. marketing/sales, finance,
72 Total Supply Chain Management

manufacturing, human resources (HR) and information technology) of the

organization or enterprise. This has led to the migration of MRPII to ERP.

Enterprise resource and operations planning

ERP replaces the old standalone computer systems for finance, manufacturing,
HR, and distribution and replaces them with a single integrated software system
divided into software modules that approximately represent the old standalone
systems. The growing market of ERP systems is dominated by SAP R/3 and fol-
lowed by Oracle, PeopleSoft, Baan, JD Edwards and MfgPro. It is fundamental
to note that if you simply install the software without rationalizing the processes
or changing the way people do their jobs you may not see any value at all.

ERP in service enterprises

There are five major factors why companies undertake ERP systems:
1. Integrate financial information
2. Integrate customer order information and demand plan
3. Standardize and speed up supply processes
4. Reduce inventory
5. Standardize HR information
It is true that ERP is basically a second-generation MRPII system which is pre-
dominantly in manufacturing organizations. However, if we consider the above
five reasons from the standpoint of a service organization we see that all fac-
tors, arguably with the exception of ‘reduce inventory’ are applicable to justify
an ERP system. More importantly if you consider the ERP process rather than
the software it is evident that the interaction between all functions with a ‘single
set of numbers’ is equally important for an effective service enterprise.
The second and third factor of applying ERP relate to resource planning. Every
service company has customers, demands, in-house resources and suppliers, and
therefore requires resource planning to deliver an effective customer service. We
call this operations resource planning (ORP) as illustrated in Figure 5.4.

Operations resource planning

It is evident from Figure 5.4 that although ORP is not so detailed as MRPII the
key steps of the process are similar. From the business plan, a sales and oper-
ations plan which covers key products and resources needed to deliver the busi-
ness plan. The monthly sales and operations planning meeting by senior
managers approves the master operations plan. The operations team will
review the product portfolio, supplier status and the capacity of own resources,
and ensure that purchase orders are raised to procure appropriate resources or
services from suppliers. If the capacity of own resources are adequate then an
internal control document for the customer order is processed. But a partnership
with customers and with suppliers can and will achieve very obvious benefits to
 Resource and capacity management 73

Top Business planning

management
planning Sales and operations
planning

Resources No
OK?
Yes

Lines of material Master scheduling

Operations

FEEDBACK
management Inventory status Materials planning
planning
Routings Capacity planning

Planning No
OK?
Yes

Purchasing
Operations
management Shop floor control
execution
Performance measures

Figure 5.4 Operations resource planning.

all. A partnership with suppliers and a partnership with customers are the
beginnings of a radical change in supply chain management. As a result, the
service provider, the supplier and the customer achieve benefits in:

• lower operating cost,

• improved service level,
• a greater certainty of a continued relationship.

The boundaries between companies will blur as they view themselves as part
of an ecosystem, supply chain, or value chain.
Hasso Platner, Co-founder and Vice Chairman, SAP

Managing capacity
There are two approaches to managing capacity: one is to adjust capacity and
the other is to manipulate demand. Generally, organizations will seek to match
capacity and demand using both approaches.
74 Total Supply Chain Management

Adjusting capacity
The first step is to know what your effective capacity is and what is the constraint
that limits the throughput for your operation. The constraint could seemingly
be lack of space, lack of handling equipment, lack of people and lack of reli-
able supply. Once the constraint that limits your capacity to serve your customers
is identified then corrective action can be taken. However, what at first might be
seen as a constraint might in fact be disguising a lack of planning and vision. For
example, lack of space might not be the basic issue. If a warehouse is running out

Table 5.3 Sample self assessment questions

Poor Excellent

1. How effective is your master 0.1 0.2 0.3 0.4 0.5

scheduling process to ensure
sufficient resource (materials,
stocks of finished goods,
people) to support the sales
plan and expected demand?
2. How good is your capacity 0.1 0.2 0.3 0.4 0.5
planning? Do you use a
rough-cut capacity plan to
develop a detailed capacity
requirement plan?
3. How well is your purchase 0.1 0.2 0.3 0.4 0.5
scheduling managed? What
controls are there in place?
4. How well do you pursue a 0.1 0.2 0.3 0.4 0.5
make-to-order policy with an
emphasis on material velocity
(stock turn)? (Large stocks of
RM, work in progress and
finished goods  0.1, just-in-time
philosophy with little or no buffer
stock  0.5.)
5. How effective are your business 0.1 0.2 0.3 0.4 0.5
processes supported by an ERP
system (e.g. SAP R/3)
6. How good is your integrated point 0.1 0.2 0.3 0.4 0.5
of sale system?
7. How effective is the inclusion of 0.1 0.2 0.3 0.4 0.5
key suppliers in the planning
process?
8. How effective have you been in 0.1 0.2 0.3 0.4 0.5
the sharing of common coding
and database facilitated by
Internet or electronic data
interchange (EDI) with suppliers
and customers?
 Resource and capacity management 75

of space to hold materials/finished goods the issue might be overstocking and

lack of planning. Indeed all of the possible constraints listed above; lack of space,
lack of handling equipment, lack of people, lack of reliable supply could well
be eliminated by co-ordinated planning within the organization and by working
in closely with suppliers and customers.
Basu and Wright (2005) provide a set of questions which will help to identify
where the true constraints are. The questions in Table 5.3 are a sample taken from
200 questions designed to enable an organization to reach world class standards.
Once demand is known or forecast, and once the constraints are identified
resources might have to be added or perhaps reduced to meet the expected
demand. If demand changes capacity will need to be adjusted to meet the new
demand. If there is insufficient capacity, customers must either wait for delivery
or if they are not prepared to wait they will be lost. If there is too much capacity,
then resources will be under utilized, and stock holding with all the attendant
costs of stock holding will increase. For many organizations under utilization of
resources and holding of buffer and reserve stock might be considered more
profitable than the loss of customers.
Where there is a change in demand the two basic strategies are:

• Strategy 1: Variation or adjustment of capacity

• Strategy 2: Elimination/reduction of the need to adjust capacity

Strategy 1: Variation or adjustment of capacity

This strategy has a short-term approach and a longer-term approach.
In the short-term capacity can to some extent be adjusted. Overtime/double
shifts can be worked, unskilled people can be employed to make better use of
trained people, people can be re-deployed, jobs or deliveries can be prioritized,
and supply and production expedited, subassemblies subcontracted, non-essential
maintenance delayed.
In the longer-term facilities, machines and equipment and people can be added.
Production can be made in advance and stockpiled. Adding extra people will
not immediately add to effective capacity. All organizations rely heavily on
people, and a strong corporate culture with the goodwill of people will in the
short-term ease the burden of increases in demand. Likewise, the longer people
have been with the organization their experience will increase their ability to
respond positively. This is referred to as the learning curve. On the other hand,
the addition of a new piece of machinery or equipment once it has been set up
will immediately add to the effective capacity.
In the above paragraph we have considered adding to capacity in the face of
growing demand. But when demand is falling it is often difficult to sell or dispose
of capital assets such as buildings, machines, equipment, and vehicles. Generally,
disposal of assets will not realize book value. Often an expensive piece of
equipment will be valuable when demand is high, but if demand is low might
only have scrap value if sold. Thus, when considering adding new capital assets,
it is important to understand the effect of demand and product life cycles.
76 Total Supply Chain Management

Sadly reducing the number of people is the quickest way of reducing unwanted
capacity. Again before new people are added, it is important to be sure that the
demand will continue at the current or expected level. Adding new people
takes time to recruit and to train, intellectual capital once lost is hard to recover.

Strategy 2: Elimination/reduction of need to adjust

If the objective is never to keep the customer waiting, then it follows that there
must always be sufficient amount of all the required resources available at any
given time.
It is more likely, however, that it will not always be possible to have suffi-
cient capacity to meet every demand. Therefore, it has to be accepted that there
will always be surplus resource in the system, which in a supply chain gener-
ally relate to buffer stocks of materials or finished goods, and the holding of
reserve stocks. Thus, capacity of every constraining resource will be set at
above the expected/forecasted demand level.
On the other hand, if the policy is not to adjust capacity even when demand
exceeds capacity it has to be accepted that from time to time customers will
have to wait for delivery. The danger is if customers have to wait too long that
the organization will get a reputation for poor service and customers will be
lost to the system.
Strategy 2, elimination/reduction of the need to adjust capacity has several
sub-strategies which we have labelled 2a, 2b, 2bi and 2bii. Also see Wright and
Race (2004) and Wild (2002):

• 2a: Surplus capacity of key resources held.

• 2b: Sufficient capacity to meet normal demand, but
– 2bi: It is accepted that customers might have to wait and it is likely that
some customers will be lost.
– 2bii: Stocks of materials/finished goods are held to meet changes in
demand.

Manipulation of demand
With this approach demand is manipulated to match the available capacity.
Recognized ways of demand manipulation are advertising campaigns, special
promotions, discounts, two for one deals and so on. The travel industry is adept
at demand manipulation with high, shoulder and low season fares and tariffs.
Where demand exceeds capacity prices are raised, or customers might be
allowed or even encouraged to go elsewhere.
If demand is known in advance and is stable, the operations manager’s job is
to plan and make the best use of resources to meet the demand. In Chapter 2
the bullwhip effect was introduced, Chapter 14 shows how early sharing of
information can reduce major and misleading demand fluctuations. Minor
fluctuations cause only minor problems. Where demand cannot be accurately
 Resource and capacity management 77

predicted then, although the aim has not changed, operations management
problems can become extremely complex.

Summary
Resource and capacity management is all about planning. Planning is not possible
without information. Resource and capacity planning begins with knowing what
our effective capacity is. Effective capacity is the amount of material or product
that can be delivered in a given period of time to customers. Having the capacity
to meet customer demand requires advanced knowledge of what the demand will
be. The chapter began with the need to forecast demand and moved onto planning
of resources to meet demand. The chapter concluded with strategies for capacity
management and also considered how demand might be manipulated. Chapter 14
deals with sharing of information flowing up through the supply chain beginning
at point of sale. Early supply of information allows quicker response to demand
fluctuations and reduces the bullwhip effect introduced in Chapter 2.
6
Procurement and supplier
focus

Introduction
Procurement and supplier focus is the third building block of supply chain
management. Procurement includes:

• Purchasing raw materials and packaging

• Contracting out utilities and maintenance
• Hiring contract or casual labour
• Selecting approved or dedicated suppliers
• Outsourcing
• Use of professional services

The Industrial Marketing and Purchasing Group (IMP) in the 1970s developed a
dynamic model of buyer–supplier relationships in industrial markets (the inter-
action model) and illustrated its applicability through comparative studies of
buyer–supplier relationships within and across a number of European countries
(France, Germany, Italy, Sweden, UK). The main conclusion of these pan-
European studies was that buying and selling in industrial markets could not be
understood as a series of discrete and serially independent transactions. Instead,
transactions could only be examined as episodes in often long-standing and com-
plex relationships between the buying and selling organization (IMP, 2007).
Procurement or buying is the act of purchasing. Within an organization the
purchasing or procurement department is often seen as a less than glamorous
department that buys things as cheaply as possible to meet specifications set by
more glamorous and important departments such as Marketing and Operations.
However, as Porter found purchasing is a key activity in determining the com-
petitive advantage of an organization (Porter, 1985). Lysons and Farrington
(2006) rather simplistically say the purchasing process consists of a chain of
processes. The chain consists of:

• Receive requisition
• Solicit quotations
 Procurement and supplier focus 79

• Vendor selection
• Negotiate with suppliers
• Place order
• Receive supplies
• Make payment

Setting specifications, inspection and quality assurance are all included in the
overall process.
We contend, as does the IMP Group, that purchasing is more than looking
for the right product at the right price and at the right time. We say that a world
class company will be aiming to build alliances and long-term relationships
with key suppliers. Ideally key suppliers to an organization will be involved in
design and development of new product and services. They will be able to pro-
vide advice on new technology and methods, they can suggest alternative
materials, they will observe and report market trends, and in short they will
become an additional source of market intelligence. Gone are the days when
we simply placed an order on a supplier and the supplier was not told what or
how the product was going to be used. The point being if the supplier knew to
what purpose the materials ordered were going to be used that they could well
provide suggestions of alternative products and technical advice on how to use,
etc. It could be argued that organizations are not purchasing materials but look-
ing for solutions. Lou Gerstner recognized this when he became CEO of IBM
in 1993. Up until then IBM developed and built computers. Gerstner came out
with a new mission statement that said in effect that IBM would lead the world
in the development of information technology (IT) and would provide solu-
tions for their customers. Fifteen years on the Mission statement is largely
unchanged and reads:

At IBM, we strive to lead in the invention, development and manufacture of

the industry’s most advanced information technologies, including computer
systems, software, storage systems and microelectronics.

We translate these advanced technologies into value for our customers

through our professional solutions, services and consulting businesses
worldwide.

The big change in 1993 being that IBM moved from selling technology to get-
ting alongside customers, understanding their needs and developing a solution
customized to the customers’ needs. For sales staff of IBM this required a
major change in thinking, from selling a box not fully knowing what the cus-
tomer was going to use it for, to understanding the customers business and to
finding a solution to the customers needs. As Gerstner (2002) said this required
a major change in culture.
An example of how IBM works to find solutions for customers is given in
the following mini case reported by IBM global services (April 2004).
80 Total Supply Chain Management

Case example: IBM Global Services

Toyota teams with IBM to drive system performance
To handle significant growth in product volume and variety while main-
taining service levels, Toyota looked to IBM Business Consulting Services
to help improve its inventory position.

Business need
A process focused organization, Toyota continually seeks to implement
key business practices that will help the company enhance performance
and customer service at the lowest cost.

Key challenges
Toyota was experiencing significant growth both in product volume and
in the variety of products required to meet customers’ needs. Company
IT staff faced challenges in integrating new components with the inter-
connected legacy systems to make system improvements. Old code had
been edited frequently over the years and was inconsistently docu-
mented, and as a result could be deciphered only by selected IT team
members. To respond to dealer needs, Toyota required a resilient supply
chain management solution to help ensure delivery of the right part to
the right dealer at the right time. The solution had to enable Toyota to
perform the correct calculations to accurately predict inventory levels
for more than 100,000 service parts and more than 1 million part/location
combinations.

Solution
IBM Business Consulting Services
Believing that custom development to improve legacy system perform-
ance was too expensive and time consuming, Toyota selected software
from i2 Technologies. IBM Business Consulting Services provided exten-
sive i2 Technologies implementation experience and skills to develop
a state-of-the-art enterprise architecture and infrastructure strategy that
included capabilities for performance measurement, data warehousing,
demand forecasting, service parts planning and business process and
organizational design change.
IBM worked with Toyota associates and i2 to develop an integrated
solution that connects Toyota’s legacy systems to i2 software to facilitate
service parts planning across the Toyota service parts supply chain.
Toyota is using i2 Demand Planner for core business forecasting and i2
Service Parts Planner for slow moving spare parts forecasting, inventory
optimization and replenishment planning. A data warehouse enables
users to access both i2 and legacy system information via drill-down,
self-directed activities or a series of reports.
 Procurement and supplier focus 81

Results
Through improved demand and order forecasting, and better calculation
of safety stock requirements, Toyota has reduced over US $46 million in
inventory as a result of the implementation. The IBM and i2 solution has
enabled the division to eliminate less-critical work, thereby improving
efficiency. Better inventory planning also has helped Toyota boost its
customer fill rate, limiting rush orders and reducing airfreight expenses.

Thus purchasing is more than simply buying a product. Nonetheless the basic
objective of purchasing is to have available the correct materials in manufac-
ture or processing or product in warehousing and retailing when required and
to ensure continuity of supply. Thus in true operations management parlance
the basic objectives are right thing (meeting specification) at the right time and
at the right price.
For key products these objectives can best be met by developing partnerships
with suppliers, and for suppliers as shown in the IBM case study to be pro-
active in forming relationships with customers.

Requisition, vendor selection, negotiation, placing

an order
Once a requisition or order has been received by the Purchasing department the
customary approach is to check the order or the bill of materials for accuracy
and for conformance to the specification and to check records to determine if
this is a repeat purchase or a new requirement. For everyday consumables, if it
is a repeat buy and there have been no problems in the past (supplier provided
product to specification on time and the price is competitive) a repeat order
will be placed. If the order is for a new product, or if there were problems in the
past which cannot be resolved, then the following steps will be taken:

1. Possible suppliers will be identified: Identification of suppliers includes

gaining intelligence on their reputation and financial stability. There is no
point dealing with an organization that might not be in business in the next
few months. Ideally we will be aiming to build up a long-term relationship.
2. Seek quotations: Provide to a short list of suppliers, details of specification,
quantities and dates. At this stage it might not be wise to be too forthcom-
ing as to the purpose of the purchase. We do not want to be providing too
much information in the market place which could help our competitors.
3. Quotations: It will be received and a decision made as to who our first pref-
erence is.
4. Negotiations entered into: At this stage we can provide more detail as to
what the product will be used for and seek advice from the supplier. If the
product is going to be repeatedly used and ordered and or is an important
82 Total Supply Chain Management

item such as a new piece of expensive equipment, and we are seeking a

long-term relationship the cementing of a relationship can be more impor-
tant than a contract written in legalize. McDonalds claim that with their key
suppliers a shake of the hand is more important than a contract.
5. Ongoing re-orders: For fast-moving consumer goods, such as in supermar-
kets ideally re-orders will be automatically triggered at point of sale, once
stock levels drop to a predetermined level. For details of bar coding and
point of sale re-ordering systems (e-procurement) (see Chapter 14).
6. Ordering: Each order will have an order number. The importance of order
numbers are explained in the following section of this chapter.

Receipt, inspection and quality assurance

When goods are received they should be immediately booked into the inventory
system and married to the order number. No material or product should ever be
issued until it has been booked in. Failure to do so will lead to confusion and
inaccuracy in the stock records. In a lean, or just-in-time operation materials
are delivered just as required direct into the production line. In a cross docking
operation materials will arrive at one side of the warehouse be broken down
and sorted into despatch lots for on forwarding. For details of cross docking
see Chapter 14. In other operations materials will be received in bulk and
stored in warehouses. No matter how received an order has to be booked in and
subsequently when despatched or issued must be booked out.
The traditional way of ensuring quality and quantity was to inspect and count
goods as received. If suppliers are trusted then only a sample check should be
necessary, and in a just-in-time system the test will be as the product goes into
production, either a component fits or it doesn’t!

Quality inspection and quality control

Quality inspection and control rely on supervision to make sure that no mis-
takes are made. The most basic approach to quality is inspection on receipt of
materials. The next recommended stage is following inwards goods inspection
and the detection of problems to work with the supplier in a non-confrontational
way investigate and find the causes of problems and to jointly take actions to
prevent errors reoccurring.

Quality assurance
Quality assurance includes the setting of standards with documentation and
also includes the documentation of the method of checking against the speci-
fied standards. Quality assurance can also include a third-party approval from
a recognized authority, such as ISO. With quality assurance, inspection and
control are still the basic approach, but in addition one would also expect a
comprehensive quality manual jointly agreed by the supplier and the purchaser,
 Procurement and supplier focus 83

perhaps including use of statistical process control and the use of sampling
techniques for random checking and the overall auditing of quality systems.
Quality inspection, control and assurance are aimed at achieving an agreed
consistent level of quality, first by testing and inspection, then by rigid conform-
ance to standards and procedures, and finally by efforts to eliminate causes of
errors so that the defined accepted level will be achieved. As Wright (1999) says
‘this is a cold and often sterile approach to quality. It implies that once a suffi-
cient level of quality has been achieved, then, apart from maintaining that level
which in itself might be hard work, little more need be done’. Where a genuine
alliance/partnership has been forged between the buyer and supplier both will
continuously be working together to improve the product and the service.

Purchasing ethics, fraud and environmental issues

The golden rule of doing unto others as you would have them do unto you is
for most people an easily understood code of ethics. Likewise in the medical
profession the easily understood Hippocratic oath was for over 2000 years seen
as being sufficient (the modern version which removed references to Greek
deities and allowed for abortion was written in 1964). However, in today’s
changing environment and with conflicting requirements it has been found by
many organizations and professional bodies such as lawyers and accountants
that a more detailed code is required. Likewise increasingly commercial organ-
izations feel it necessary to have code of ethics and some also have a specific
code of ethics for Purchasing Management. The Purchasing Management
Association of Canada is an example of a detailed code. It states that:

A. Values

Members will operate and conduct their decisions and actions based on the
following values:

1. Honesty/Integrity
Maintaining an unimpeachable standard of integrity in all their busi-
ness relationships both inside and outside the organizations in which
they are employed.
2. Professionalism
Fostering the highest standards of professional competence amongst
those for whom they are responsible.
3. Responsible Management
Optimizing the use of resources for which they are responsible so as to
provide the maximum benefit to their employers.
4. Serving the Public Interest
Not using their authority of office for personal benefit, rejecting and
denouncing any business practice that is improper.
5. Conformity to the Laws
84 Total Supply Chain Management

In terms of:
(a) The laws of the country in which they practice.
(b) The Institute’s or Corporation’s Rules and Regulations.
(c) Contractual obligations.

B. Norms of Ethical Behavior

1. To consider first, the interest of one’s organization in all transactions

and to carry out and believe in its established policies.
2. To be receptive to competent counsel from one’s colleagues and be guided
by such counsel without impairing the responsibility of one’s office.
3. To buy without prejudice, seeking to obtain the maximum value for
each dollar of expenditure.
4. To strive for increased knowledge of the materials and processes of
manufacture, and to establish practical procedures for the performance
of one’s responsibilities.
5. To participate in professional development programs so that one’s pur-
chasing knowledge and performance are enhanced.
6. To subscribe to and work for honesty in buying and selling and to
denounce all forms of improper business practice.
7. To accord a prompt and courteous reception to all who call on a legit-
imate business mission.
8. To abide by and to encourage others to practice the Professional Code
of Ethics of the Purchasing Management Association of Canada and its
affiliated Institutes and Corporation.
9. To counsel and assist fellow purchasers in the performance of their duties.
10. To cooperate with all organizations and individuals engaged in activ-
ities which enhance the development and standing of purchasing and
materials management.

Case example: Purchasing ethics

In the USA in 1980s Jim Locklear was known as a first rate buyer of house
ware products in 1987 he joined JC Penny with a significant salary cut. As
a buyer Locklear controlled the spending of millions of dollars a year and
also sold crucial information, such as the amount of competitors’ bids, to
suppliers. Over the years he supplemented his salary with as much as $1.5
million in bribes and kickbacks. After a little over a year at JC Penny a cut-
lery supplier of the firm blew the whistle. However the firm was unable to
establish any substantial proof of bribery. Locklear enjoyed the trust of
management by dint of his sparkling performance as the sale of tabletop
merchandise at JC Penny nearly doubled during Locklear’s tenure.
 Procurement and supplier focus 85

In July 1992 an anonymous letter informed a Penney official of a spe-

cial relationship between Locklear and Charles Briggs, a Dallas manu-
facturers’ representative, from whom Locklear later admitted to taking
$200,000 in bribes. Penney subsequently launched a second investiga-
tion and uncovered Locklear’s front companies. As a result he was fired
by JC Penny and after a trial by Federal authorities he was prosecuted.
Locklear faced up to five years in prison and a maximum fine of twice
his financial gain.
Adapted from Waller (2002, p. 497)

Rules of Conduct
In applying these rules of conduct, members should follow guidance set out
below:

A. Declaration of Interest
Any personal interest which may impinge or might reasonably be deemed
by others to impinge on a member’s impartiality in any matter relevant
to his or her duties should be immediately declared to his or her
employer.
B. Confidentiality and Accuracy of Information
The confidentiality of information received in the course of duty must
be respected and should not be used for personal gain; information
given in the course of duty should be true and fair and not designed to
mislead.
C. Competition
While considering the advantages to the member’s employer of maintain-
ing a continuing relationship with a supplier, any arrangement which
might prevent the effective operation of fair competition should be
avoided.
D. Business Gifts and Hospitality
To preserve the image and integrity of the member, employer and the pro-
fession, business gifts other than items of small intrinsic value should not
be accepted. Reasonable hospitality is an accepted courtesy of a business
relationship. The frequency and nature of gifts or hospitality accepted
should not be allowed whereby the recipient might be or might be deemed
by others to have been influenced in making a business decision as a con-
sequence of accepting such hospitality or gifts.
E. Discrimination and Harassment
No member shall knowingly participate in acts of discrimination or
harassment towards any person that he or she has business relations with.
86 Total Supply Chain Management

F. Environmental Issues
Members shall recognize their responsibility to environmental issues con-
sistent with their corporate goals or missions.

Purchasing Management Association of Canada (2007)

However, well thought out a code might be it cannot cover every eventuality. For
example, under values they say ‘Optimizing the use of resources for which they
are responsible so as to provide the maximum benefit to their employers’. Their
Norms’, clauses 1 and 3, reinforces the need to put the employers interests ahead
of all else in gaining the maximum value for each dollar. The final section envir-
onmental issues could well be in conflict to such an approach. Likewise gaining
the maximum value for each dollar, in the short term, might not be in the best
interests of building up a long-term relationship with a supplier.
The more detailed a code the easier it will be for a member to find a way
around the code to fit a particular set of circumstances. The best any individual
can do is to understand the spirit of the code and to do their best to act as they
would have others do unto them.
Having said this, sadly not all people are honest, or even if in the past have
been honest can still be tempted. Thus there will always be a need for checks
and balances.

Fraud
Every organization has to be mindful of the possibility of purchasing fraud.
The ingredients of fraud are intent, capability and opportunity. Fraud is not the
same as making an error. Errors are mistakes and not intended to happen, fraud
is intentional and will include deception. Errors should be found by normal
checks and audits. With fraud the perpetrator or perpetrators will do their best
to hide what they are doing. Fraud in purchasing often includes collusion. But
what is fraud? Does a supplier who offers a free holiday to secure an order
commit a fraud? If the holiday is advertised widely, for example an advertise-
ment that says all purchasers of a particular model of a car this month will have
a free weekend at a holiday resort is legitimate for the advertiser, but if our pur-
chasing manager takes advantage of this offer when a cheaper car of another
make was available would this constitute a fraud? It does not take much
thought to see that the purchasing manager was putting his own interest ahead
of the company, and has acted unethically however, this would not constitute
fraud. Fraud is more devious and is often hard to detect. Much fraud is only
detected by outside information including disgruntled junior staff reporting on
their managers, or by ex-wives and in many cases discarded mistresses.
Some signs of possible fraud are:

• Employees not taking holidays

• Overstocking, over ordering from one supplier
• Stock shortages at stock take
 Procurement and supplier focus 87

• Sudden affluence of an employee

• Falling profit margins
• Missing files and documentation

The best protection against fraud is to have a culture of trust and integrity sup-
ported by internal and external audits. No code of ethics is going to prevent
large-scale fraud. A code of ethics can help people to understand the difference
between a business (free) lunch and a bribe.

Environmental purchasing
Environmental purchasing is a most important step in the war against global
warning and pollution. Sustainability and accountability for waste and pollu-
tion cannot be ignored. At the very least organizations need to be aware of
environmental issues and to make their concerns and needs known to their sup-
pliers. This will begin by management establishing a policy, communicating the
policy internally, and to their key suppliers. Although the USA has not signed
the Kyoto Treaty nonetheless Americans as a whole are very conscious of envir-
onmental issues and several State Governments have published environmental
purchasing codes. For example, in Minnesota the purchasing ordnance state
‘From copy paper to cleaners, automotive fluids to printing services, every
product purchased can have an impact on human health and the environment. To
reduce the quantity and toxicity of waste in Minnesota, state law requires state
agencies and other public entities to purchase recycled, repairable, and durable
goods’. Tools and resources are provided to incorporate environmental con-
siderations into standard purchasing practices (2007, www.pca.state.mn.us).
For further detail see ‘Green supply chain’ in Chapter 15.

Make or buy
Make or buy decisions: The fundamental objective of a sourcing strategy is to
determine where to make or buy a product or service and why. The sourcing
strategies for both manufacturing and service organizations are discussed sep-
arately although there are many obvious common features between them. The
sourcing strategy goes hand in hand with supply chain management.

Manufacturing
There has been considerable hyperbole regarding world class manufacturing
(WCM) and many articles and books have been written on the subject. There
have been a number of interpretations of WCM.
Some people associate WCM with working practices influenced by Japan’s
‘quality movement’. Others understand WCM to be manufacturing at the high-
est level of performance.
88 Total Supply Chain Management

We define WCM as the term applied to organizations who achieve dom-

inance in their segment of the global market and who sustain this dominance
against world class competition. Up until about 1990 manufacturing strategy
tended to focus on the local area, for example for manufacturers in the UK the
concern was the domestic market and the near neighbours of Europe. The
emphasis has now moved to the determination of either a global strategy or
regional strategy, not only for marketing, but for sourcing.
Sourcing includes materials and labour, and also includes the basic decision
of whether to make or buy. The globalization of manufacturing began with
sourcing and a search for low labour costs. Manufacturing was transferred
from the Western nations and Japan through the establishment of manufactur-
ing facilities in Asia, the Indian Sub-Continent and Latin America. However, it
soon transpired that once overseas investment is made in a country the cost of
labour creeps up. Additionally as other overseas companies with similar prod-
ucts follow the lead (and move to a country where labour is cheaper) the initial
competitive edge of cheap labour gained by the ‘pioneer’ company becomes a
diminished advantage. There have been significant changes in the global mar-
ket place, demanding a sound sourcing strategy for the manufacturing com-
pany as the changes accelerate. These changes include:
Newly industrialized countries (the ‘little dragons’, now not so little, such as
Korea, Taiwan and Malaysia) and the big dragon of the People’s Republic of
China are acquiring WCM capabilities. Investors wishing to set up manufac-
turing in these countries will find labour is not as cheap in real terms as it was
even 5 years ago. But more importantly these countries are now, without doubt,
competitors of world class standing. Other Asian countries which show longer-
term potential to achieve WCM in some areas of endeavour include India,
Pakistan and Indonesia. Regions which are emerging as WCM contenders
include South America and South Africa.
The gradual elimination of tariff barriers and the regional pacts for ‘common
markets’ (e.g. Mercosur, NAFTA, Andina, EU, CER, etc.) are encouraging
competition from regionally based groupings of countries. The ‘new’ markets
of what was the East European Communist bloc has provided new opportun-
ities in the global market. Additionally manufacturers in this region are close
to achieving the status of WCM.
Improved logistics and electronic communication systems are assisting the
implementation of sourcing strategies. The growing similarity of what people
want to buy across the world is encouraging global product/process develop-
ment and marketing. Investment costs for innovation and new technology are
becoming too expensive to concentrate in one local market.
A sound sourcing strategy for a manufacturing company will be a require-
ment for future survival. Catching up with the manufacturing performance of
the competitors is not enough. The sourcing strategy of the company must
move in step with the corporate strategy and reflect the marketing strategy and
innovation programmes of the company. The sourcing strategy should be
dynamic in a relentless pursuit of value to customers in a changing market
place. As Hamel and Prahalad (1994) accurately forecast 14 years ago, ‘the
 Procurement and supplier focus 89

market a company dominates today is likely to change substantially over the

next 10 years. There is no such thing as “sustaining” leadership, it must be
regenerated again and again’. In order to develop a sourcing strategy for manu-
facturing it is necessary to have a formal strategic planning process. The
process should be flexible and simple to follow and it should be incorporated
with other corporate planning processes. Our strategic planning process for
sourcing for manufacturing can be found in ‘Total Operations Solutions’, Basu
and Wright (2005) and consists of the eight steps described below:

1. Project brief
The process is best carried through by setting up a project team of about 10
people and defining the brief of the project. The project team should con-
sist of a project director (e.g. head of manufacturing), manufacturing staff
(e.g. industrial engineer, plant engineer, manufacturing manger, quality man-
ager), logistics staff (e.g. planning manager, distribution manager), market-
ing staff (e.g. brand managers) and commercial staff (e.g. accountant,
purchasing management and human resources staff).
When preparing the project brief it is useful to have those documents that
cover current company activities such as capital investment, annual operat-
ing plans and long-term plans. In addition, any other relevant reports (such
as information on competition, market place, economy and government regu-
lations) of the countries covering the scope of the strategy will help with
this activity. The project brief should clearly state the scope, time scale, deliver-
ables and resources required for the project.
2. Operational mission and objectives
The manufacturing mission defines the aim of manufacturing in the corpo-
rate strategy or the business plan. The mission statement must fit the cap-
abilities of the manufacturing function. Unless the mission is feasible it will
be no more than mere words or rhetoric. Usually the mission statement is
described in broad terms as illustrated by the following example:

The manufacturing mission is to achieve the lowest unit manufacturing cost

relative to competition without sacrificing high standards of quality, service
and flexibility to the customer.

This mission statement has a priority on low cost. Alternative priorities could
include one or more of: quality, customer service, rapid introduction of prod-
uct, visible presence in emerging markets, combating a dominant competitor,
etc. The point to note is that the mission has to be sufficiently specific for a
clear objective or objectives to be readily distinguished.
Manufacturing objectives consist of performance measures that the company’s
manufacturing must achieve as part of the annual operating plan. Achievement
of the objectives will result in the achievement of the mission.

3. Strategic factors
The understanding and analysis of strategic factors can determine the
success of a sourcing strategy. Strategic factors relate to the longer-term
90 Total Supply Chain Management

implication of both the external and internal factors to project manufactur-

ing into the future. These factors are competition, customer preferences,
technology, environment, economic conditions and statutory regulations.
To develop a sourcing strategy for manufacturing, so as to gain a competi-
tive advantage, a detailed competitive position analysis will be necessary.
This analysis determines how the strengths and weaknesses of the com-
pany’s manufacturing position relate to major competitors (both current and
potential competitors). The dimensions for this analysis can be cost, qual-
ity, dependability, flexibility and innovation. Following this analysis the
company should be able to identify any gaps in manufacturing competence
and establish priorities for a future strategy so as to gain a competitive
advantage. It is critical to determine what should be made and whether to
make or buy. Such decisions depend on the long-term volumes of the prod-
uct and of the level of technology required. To identify the preliminary
grouping of the sourcing of products. The project brief may be reviewed
and restated after the analysis of all strategic factors.

4. Data collection and data analysis

Once the revised project brief has been finalized, the next stage is the col-
lection of data and the analysis of data. Although the need for data will vary,
the following areas will need to be considered:
• General information
– Internal information of the company regarding annual plans, long-term
plans, R&D and marketing.
– External information regarding competition, economic and political fac-
tors of countries involved, social and cultural aspects and environmental
(green) issues.
• Product information
– future, 10-year sales forecast by products
– past, 5-year sales history
• Plant information
– present capacity of own plants
– investment plan to increase capacity
– present levels of efficiency
– other manufacturing alliances (e.g. subcontractor capabilities)
• Stock information
– stock policy of materials and finished products
– warehousing area (space and capacity) and method of storage
– method of distribution to customers
• Personnel information
– projection of people availability and skills
– industrial relations of manufacturing sites
– amenities required
• Cost information
– manufacturing costs of products by site
– distribution cost elements
 Procurement and supplier focus 91

– cost of warehouse building per square metre

– cost of office building per square metre
– cost of an employee per year (total cost, i.e. wages, benefits and training).

The purpose of this stage is to calculate the capacity of plant and services for
the projected volume and estimate the space required for each activity for each
manufacturing site. It is normally sufficient to carry out these analyses for the
current year, and at the mid-stage and at the completion of the plan or when a
significant event (e.g. the manufacture of a new product) occurs. The utiliza-
tion of assets as determined at this stage should help to establish what to manu-
facture and where, and the profitability of each site.

5. Strategic options
Strategic options determine how sourcing or own manufacture is going to
meet the objectives of the mission. It is useful to reiterate that the objectives
refer to performance measures (such as cost, flexibility, quality, etc.) and
strategy refers to how these objectives will be achieved. Strategic options
are normally expressed in a number of sourcing scenarios. These are
derived from the understanding of the competitive strengths and weakness
from the foregoing stages. As a general rule there should not be more
than eight scenarios. Eight scenarios are manageable and enable adequate
attention to be given to each scenario. A critical analysis of each scenario
is then carried out against the criteria of manufacturing objectives and
strategic factors. Two or three scenarios are then short listed for quantitative
evaluation.
6. Options evaluation
The aim of this stage is to evaluate two or three main options in order to
select the best strategy for the future. The analysis should take advantage of
simulation modelling tools to select a strategy by optimizing the total oper-
ating cost. Costs only need broad estimates for the evaluation of options.
The strategy should then be further tested by comparing the investment
costs of alternative development plans with quantitative tools such as dis-
counted cash flow (DCF) analysis.
7. Implementation plan
The success of a sourcing strategy for manufacturing will depend on how
effectively the changes have been implemented. There should be a struc-
tured implementation plan describing the phasing, responsibility, costs and
obstacles that have to be overcome.
The strategy itself should not have major changes every year or there will
be little chance of maintaining the strategic goal. Tactics should be continu-
ally adjusted to meet changing circumstances.
8. Review
As stated above, there is a need for regular evaluation and review of
progress to implement the strategy. In addition to the regular review the
entire strategy should be formally reviewed on an annual basis.
92 Total Supply Chain Management

Service sector
In the service sector the sourcing strategy buzzwords such as ‘outsourcing’,
‘off-shoring’ and ‘in-sourcing’ have gained currency. Outsourcing is the col-
laboration with a partner to manage a part of your business. An example is
IBM supplying and managing on-site the information and technology function
for Toyota. There are distinct categories of outsourcing in the service sector:

• IT outsourcing (e.g. programming)

• Business process outsourcing (e.g. handling all administration)
• Managed services (e.g. call centres)

Background of outsourcing
A well documented example of business process outsourcing, albeit in manu-
facturing, is provided by the Coca-Cola Corporation. For over 100 years Coca-
Cola has been producing syrup and marketing bottled products. The actual
production and bottling of the product (to Coca-Cola’s strict standards) is done
locally by its global network of business partners. A huge explosion of out-
sourcing can be attributed to the concept of ‘core competence’ popularized by
Hamel and Prahalad (1994). The principle is fundamentally simple. For example,
by analysing and understanding Porter’s value chain (1985) an organization
can focus on the elements that are core to its business and outsource others
while maintaining strategic control. The examples of successful outsourcing
companies include Dell and CISCO. Dell Computers Company has focused on
its key activity as sales and outsourced non-core functions such as logistics and
maintenance. CISCO has identified design and network solutions as its core
activity and outsourced the manufacturing of infrastructure components.

Rationale of outsourcing
A particular advantage of outsourcing is cash flow, flexibility and releasing key
management resources, but other benefits include external expertise and cost
savings. There are several external factors driving the growth of outsourcing:

• The rapid change in the technology landscape, especially in information

and communication technology (ICT); external vendors are often in a pos-
ition to provide more effective solutions support in the new technology.
• Globalization is a strong catalyst in outsourcing by enhancing the transparency
in financial reporting, wider choice of suppliers and more competition.

Outsourcers offering service level guarantees have a powerful proposition.

Basu’s outsourcing matrix.

Basu’s model (2004, p. 270) as shown in Figure 6.1 provides a useful frame-
work in make or but decisions. The model shown below uses the core strength
 Procurement and supplier focus 93

(technology and/or patent life) as the x-axis and product volume as the y-axis.
Sourcing strategy is determined according to the location of products on
the grid:

1. High technology/high volume: These products are suitable for own manu-
facturing. It will be appropriate to invest to retain the core strength.
2. High technology/low volume: When the volume is low the preferred strat-
egy is to ‘in-source’. This means that either the global manufacture of prod-
uct is centralized at a single site, or the capacity of high technology are
utilized by gaining orders from outside companies.
3. Low technology/high volume: After a period the technological advantage of a
product reduces and it becomes a mere commodity. If the volume is high then
a supply partnership can be considered with a dedicated third-party supplier.
4. Low technology/low volume: If demand is low and there are more than one sup-
plier available long-term supplier agreements/partnerships are not important.

Dedicated third
High Own manufacture
party

Volume

Flexible third
In-source
party

Low
Low High
Core strength/patent life

Figure 6.1 Basu’s outsourcing model.

Off-shoring
Off-shoring is a form of outsourced managed services where skilled labour is
cheaper. Cost savings are primary benefits. Other benefits include time zone dif-
ferences enabling 24 hour services and access to more willing well-qualified
workers to tackle boring jobs. An example is call centres located in India serving
callers (customers) in England. There are some risks of off-shoring. These include:

• Services going down because of telecommunication problem and inad-

equate training.
• Data and physical security are in potential danger.
• Excessive foreign travel.

The ways to minimize these risks include minimizing foreign travel, keeping
your software code and using a third-party broker.
94 Total Supply Chain Management

In-sourcing
In-sourcing means centralizing multiple, distributed operations into a semi-
autonomous unit. This is managed separately and accountable to the business,
like an outsourcer, but remains under the organization’s control.
The advantages of in-sourcing include:

• The business maintains strategic control.

• It avoids third-party margins.
• It is reversible.

Service level agreements and joint service

partnerships
In a service level agreement (SLA) all three words carry equal importance. The
document should define what services are to be delivered and the levels of per-
formance expected. It is also an agreement between the customer and the sup-
plier and not a unilateral declaration. For simple functions like catering fixed
price contracts by SLAs are easy to implement. However, they are highly limit-
ing and inappropriate for strategic partnerships. The agreements (also known
as joint service partnerships) should include:

• Shared gains or structured incentives based on added value beyond core

services.
• Shared risks.
• Best practices, training and cost-effectiveness initiatives are freely shared.
• Forecast data and planning processes are shared.

e-Procurement
The influence of the Internet in the supply chain and electronic transfer of informa-
tion and funds is detailed in Chapter 12 and also in Chapter 14 the ‘Retail’ chapter.
The key aspect is that the Internet enables systems to communicate across
organizational boundaries. The various e-procurement models are:

• EDI networks: Providing communication between a few trading partners

(buyers and sellers).
• B2E: Allowing transfer of information within an organization between
departments and employees. For example, templates of documents, auto-
mated approvals for routine requisitions and standardization of procedures.
• B2B: A website sometimes where business ‘meet’ to buy and sell. A closed
exchange is open only to members. An example is Compuware’s Covisint
exchange for automotive and healthcare industries, see www.Covisint.com/
about (2007).
 Procurement and supplier focus 95

A public exchange sometimes referred to as a portal allows almost anyone

to enter and to trade on-line.
• B2C: An e-mail address or web page that allows customers to buy on line
(e.g. airline bookings and e-tickets).

Other expressions used in e-procurement are e-catalogues, e-auctions and

reverse auctions.

• e-Catalogues: These provide on line and up to date lists, photographs,

sometimes video clips of products, specifications, price, etc. Amazon is a
good example (see www.amazon.com).
• e-Auctions: Here a seller can display a product on-line and buyers can make
bids until a price is reached and a sale agreed. The bids might be public or
sealed. With sealed bids the various buyers are in fact tendering as they can-
not see what the other bids are.
• Reverse auctions: Here the buyer advises the product and quantity they
want, and suppliers complete on line by offering lower prices. In a reverse
auction it would not be regarded as ethical for the buyer to lodge proxy bids.

Summary
In this chapter, we began with a discussion as to why procurement and a sup-
plier focus is an important building block of supply chain management. The
advantages of developing long-term relationships with key suppliers were
explained. It was shown that cost is only one aspect. When selecting suppliers,
reliability, delivering to specification on time and to the right quantity in short
reliability and stability are key issues. The advantages of outsourcing and
issues to consider when deciding whether to make or buy were also explained.
Other issues covered were ethics, fraud and e-procurement.
7
Inventory management

Introduction
Stocks of materials (inventories) are kept as a buffer against variations in
demand and to overcome uncertain supply. This buffer can be regarded as
safety stock. Inventory is held along the supply chain in various warehouses,
factories (work in process) and retail store shelves. These inventories can cost
from a minimum of 15 per cent up to 40 per cent of their value per year (stor-
age space, handling costs, energy costs including heating and refrigeration,
stock slippage and insurance). Therefore, careful management of stock levels
makes good business sense.

Location of inventory
As explained in Chapter 3, inventories usually reside in three stages of a process,
viz. input stocks (e.g. raw and packaging materials), in process stocks (e.g. semi-
finished products) and output stocks (e.g. finished products). Within each stage
there can be a number of stock locations, each holding a base stock. The ‘base’
stock is the amount of inventory essential to meet normal or planned demand.
Also at each location it is likely that there will be buffers of safety stock. Buffer
stock is held to meet the above average demand and to overcome uncertain deliv-
ery lead times. The more stock locations the greater will be the amount of stock
held. Consider a supply chain that has one factory, two warehouses, three distrib-
utors each holding base stock and buffer stock and compare to a situation where
the factory distributes direct to retailers. It does not take much imagination to see
that the greater number of stages in the supply chain, the greater amount of base
and buffer stock will be held. The ramifications of number and location of distri-
bution points and warehouses is considered more fully in Chapter 9.

Holding cost
Inventories can accumulate as a result of poor planning and scheduling or by
design. Generally, inventory is viewed as a negative impact on business as it
incurs costs of capital (interest paid or interest fore gone), storage space, hand-
ling, insurance, increased risk of damage and theft, and obsolescence.
 Inventory management 97

Risk costs

• fashion changes (style, colour and texture),

• past ‘use-by-date’ for foods,
• deterioration,
• obsolescence due to new technology or to model changes which make ‘old’
models out of date,
• damage,
• pilfering/theft.

Storage costs

• buildings,
• racking,
• special storage such as refrigeration or secure storage of dangerous goods,
• handling costs (specialised equipment, wages, etc.).

Finance costs

• Interest on money invested in stocks of materials, either the organization

has had to borrow money to pay for the stock held or the money ‘invested’
in the stock could have been used elsewhere in the organization.
• Insurance.

Most of the above require no explanation, it is readily apparent that old stock
whether it is old technology or simply no longer fashionable is hard to sell, and
in some cases scrap value will not even cover the original cost. On the other
hand, lack of inventory leads to lost production in the factory and lost sales at
the end of the supply chain. Holding inventory of materials and finished prod-
ucts therefore can be seen as an insurance against uncertainty of supply and to
overcome unforeseen variations in demand.
Inventory management is a good indicator of the effectiveness of supply chain
management. It is relatively easy to achieve higher levels of customer service
by accumulating excessive stocks. It will also obscure short-term operational
problems. But this is a costly and risky option in terms of cash flow. Obsolete
inventory, be it for changes in technology, fashion, or in foodstuffs past the use-
by-date has little salvage value. It is vital to optimize the inventory level.

Consumed and non-consumed inventory

Wild (2002) introduced the concept of consumed and non-consumed stocks.
Consumed items (e.g. materials or products) are used by the process or cus-
tomers and must be replenished in shorter cycles. Non-consumed items (e.g.
capital equipment and labour) are repeatedly used by the process needing repair
and maintenance and are replaced in longer intervals. This chapter considers
98 Total Supply Chain Management

inventory of stocks to be consumed at the next level of production or inventory

held to meet the demand of (i.e. supplied to) the next stage of the supply chain.
Wild refers to this as a single stage inventory.
In service industries operations managers might have a nonchalant attitude
towards inventories, but not so the accountants. Differences between services
and physical goods are addressed both from operations and marketing. Among
the differences identified within marketing and operations, literature are intan-
gibility, heterogeneity, inseparability and perishability (Grönroos, 2000). It is
perceived that services are one-off and cannot be stored. There are of course
consumed stocks (e.g. stationery, brochures, catalogues, etc.) in service indus-
tries which require inventory management. However, in the service sector
more emphasis should be focused on managing non-consumed stock (viz.
database and skilled people).

Inventory management tools

In traditional inventory management there are two basic approaches: the pull
approach and the push approach. In a pull system as shown in Figure 7.1, a ware-
house is viewed as independent of the supply chain and inventory is replenished
with order sizes based on a predetermined stock level for each warehouse.
The stock management model for the pull system is normally geared to establish
re-order level (ROL) and re-order quantity (ROQ).

ROL  Re-order level

ROQ  Re-order quantity
LT1/LT2  Lead time
Stock

ROQ ROQ
ROL

Safety
stock

Time
LT1 LT2

Figure 7.1 A basic ROL/ROQ model for a ‘pull’ system.

That is, when the stock drops to a certain level, a re-order is triggered of a pre-
determined amount. The ROQ takes into account past demands and the lead
times for a re-order to be satisfied. The aim is to have as small amount of inven-
tory as possible on hand at any one time, and the ROQ should likewise be as
 Inventory management 99

small as possible. However, in some processes, such as a batch system, there

will be a minimum amount that can be produced and in other cases there can be
economies of scale which will determine the optimal size of an order. The push
method is used when economies of scale in procurement outweigh the benefits
of minimum inventory levels as achieved in the pull method (see Figure 7.2).

Maximum
level

T  Review period
Q1 Q2 Q 1/Q 2  Order quantity
LT1/LT2  Lead times
Stock

Time
LT1 LT2
T T

Figure 7.2 A basic fixed interval model for a ‘push’ system.

That is, the warehouse does not decide the quantity of the order, but will
receive a delivery as determined by the production schedule. Normally a fixed
interval review model with a forecast demand for manufacturing planning is
used in a push system.
With the support of information technology, businesses are moving towards a
virtual inventory system with a single stock concept which can be held any-
where in the system, be it on order with the supplier, in production or at the
point of sale (POS). This is the concept of virtual inventory management (VIM)
or electronic inventory. Thus, instead of considering stocks of raw materials,
work in progress at the various stages of production and finished goods in ware-
houses as separate stocks of inventory, purely because of their physical location,
inventory is now considered as being part of one single stock.

Economic order quantities

The economic order quantities (EOQ) system is a push system that can be used
when there is an advantage in buying in bulk rather than making several small
purchases. The EOQ system calculates re-order amount using a formula known
as EOQ – Economic Order Quantity. The EOQ assumes that:

• Demand is constant and known.

• Deliveries are to specification, the right quantity and on time.
100 Total Supply Chain Management

• There is no slippage of stock due to theft or damage. This means that what
the computer shows as being in stock is correct.

The formula for EOQ is

Q  The square root of 2  DO/PH
where Q is the EOQ, D is the annual demand (in units), O is the cost of raising
an order, P is the price per unit and H is the holding cost.

Example: Economic order quantity

Demand 60,000 units per annum
Order cost £100 per order raised
Price per unit £75
Holding cost 12% per annum
Thus, 2  60,000  100  12,000,000
Divided by 75  0.12  9
12,000,000/9  13,333,333
Square root of 13,333,333 is 3651

However the supplier might only deliver in packages of 100, thus each
order would be for 3600 rather than 3651 or may be 3700. As the total
demand is 60,000 per year if each order is 3600 there will be 16 or 17
orders per year.

Cost of ordering
Cost of ordering might not seem to be a big cost (order form, an envelope and a
stamp). However, consider the savings made when the British Stock Exchange
implemented an electronic share transfer system in the mid-1990s. Prior to this
share transfer cost 30 pounds per transaction, once share transfers were on-line
or ‘paperless’ the cost was reduced to 30 pence per transfer. Many organizations
have made savings of a similar magnitude by adopting an on-line purchasing sys-
tem. For example, in the supermarket bar coding at the checkout can trigger an
automatic on-line re-order when stock of a particular item drops to a preset level.
This will save on staff numbers which would in a manual system be required to
physically count stock, calculate forecasted usage, and raise order forms, etc.

Calculation of safety stock

Safety stock is the buffer inventory to cover the variation of demand and
supply during lead lime. There are many uncertainties of demand and supply,
 Inventory management 101

for example, customers may increase an order, machinery might break down,
or supplier might be unable to deliver on time due to transport problems.
There are key parameters affecting the calculation safety stock:

– forecast accuracy
– lead time
– expected service level

Example: Re-order level with safety stock

Consider a given data for a garden centre selling sacks of fertilizer:

– Average demand 10 sacks per day

– Service level required 95 per cent
– Lead time 15 days
– Standard deviation of daily demand 3 (for a normal distribution)

Determine safety stock and re-order level

For 95 per cent service level safety stock  1.64  standard deviation of
demand during lead time
Standard deviation of demand during lead time
 Square root of (15  32)
 11.6
Safety stock  1.64  11.6  19
Reorder level  Average demand during lead time  safety stock
 10  15  19  169 sacks
Adapted from Wild (2002, p. 600)

EOQ and lean production

It might be considered that the lean or just-in-time approach where items are pur-
chased to arrive just when required is not compatible with the bulk ordering
approach of EOQ system. It is true that EOQ is not applicable for ordering most
components in a just-in-time system. None the less some items will be consumed
in such quantities that buying one item at a time would not be sensible, that is the
purchase of 1 meter of cable when several dozen metres are used daily.

Vendor-managed inventory
The use of a third party (3PL) to take over some, or all, of a company’s logis-
tics responsibilities is becoming more prevalent. 3PL is simply the use of an
outside company to perform all or part of the firm’s materials management and
102 Total Supply Chain Management

product distribution function. 3PL relationships are typically more complex

than traditional logistics supplier relationships. Modern 3PL arrangements
involve long-term commitments and often multiple functions or process man-
agement. As organizations focus on their core competencies they are looking
for other specialist organizations to partner with.
As customer satisfaction becomes more imperative and margins get tighter
it makes sense to create cooperative efforts between suppliers and retailers in
order to leverage the knowledge of both parties. The types of retailer–supplier
partnerships can be viewed on a continuum. At one end is information sharing.
At the other is a consignment scheme of vendor-managed inventory (VMI),
where the vendor completely manages and owns the inventory until the retailer
sells it. In a simple quick response strategy, suppliers receive POS data from
retailers and use this information to synchronize their production and inventory
activities with actual sales at the retailers. In this strategy the retailer still pre-
pares individual orders, but the POS data is used by the supplier to improve
delivery performance and hence reduce supply variability. In a continuous
replenishment strategy, sometimes called rapid replenishment, vendors receive
POS data and use this data to prepare shipments at previously agreed upon
intervals to maintain specific levels of inventory.
With a VMI system, the supplier decides on the appropriate inventory levels
of each product and the appropriate policies to maintain these levels. The goal
of many VMI programmes is to eliminate the need for the retailer to oversee
specific orders for replenishment. The ultimate is for the supplier to manage
the inventory and only receive payment for it once it has been sold by the
retailer; in essence the retailer is providing an outlet for the supplier!

Distributor integration (DI)

Modern information technology has enabled this strategy in which distributors
are integrated so that expertise and inventory located at one distributor is avail-
able to the others. DI can be used to address both inventory-related and service-
related issues. In terms of inventory, DI can be used to create a large pool of
inventory across the entire distributor network thus lowering total inventory
costs while raising customer service levels. Similarly, DI can be used to meet
the customer’s specific needs by directing those requests to the distributor best
suited to address them.

Balance date/stock-takes, or ‘Where did the

stock go?’
Wright and Race (2004, p. 199) from bitter experience consider the problems that
occur when physical stock takes reveal that the computer records are incorrect:
The only true way of knowing what is really on hand is to physically count
it. The problem at balance date is that when the auditors count the stock and
 Inventory management 103

compare it to stock records generally there will be a discrepancy. Stock dis-

crepancies only occur for a limited number of reasons:

1. The stock was never received (short deliveries or over-invoiced).

2. The stock was sold but the sale was not recorded.
3. Stock has been stolen.
4. Stock has been damaged or disposed of but disposal has not been
recorded.
5. Stock has been miscoded on receipt or when sold (e.g. 200 hoses booked
in, but actually 200 hose-clips received).
6. The stock was sold before it was booked in.
7. Stock has been ‘borrowed’ (in the sale representative’s van for display/
demonstration purposes).

The generally accepted methods to maintaining the integrity of stock records is:

1. Stock orders entered into the computer system.

2. Stock booked into the system when received. The system will compare
and verify that what was ordered is the same as what is received
3. The system will not allow stock to be sold before it is booked in.
4. Sales must be entered through the system.
5. The system triggers payment advices. Payment is not triggered by sup-
pliers’ invoices. In this manner you will only pay for what you ordered
and actually received.
6. It is advisable to have weekly, fortnightly or monthly rolling stock-takes
on a portion of the inventory. ‘This should overcome the drama of an
annual stock-take, and should also reduce your audit account’ (Wright
and Race, 2004).

The above system relies on a standard computerized system.

With an integrated supply chain approach a heavy reliance is placed on the
information technology system. Thus, if goods are bar coded as they pass over
the sensor at POS, the customer’s statement is updated, a delivery docket and
invoice raised, stock records of the retailer are updated, sales figures and mar-
gins calculated and recorded, and a re-order is triggered. If suppliers are tied
into the system then the supplier will also be automatically notified of a
replacement re-order.

Activity-based costing analysis

Activity-based costing (ABC) analysis is an adaptation of Pareto analysis.
Wilfredo Pareto was a 19th century economist who determined that 80 per cent
of the wealth was held by 20 per cent of the population. This axiom can be
adapted to most circumstances, for example 80 per cent of car accidents are
caused by 20 per cent of the drivers (young men between the ages of 17 and 25).
104 Total Supply Chain Management

In inventory management using the Pareto approach, the assumption is that 20

per cent of the items held will account for 80 per cent of the value of materials
on hand. A further refinement is ABC analysis. Using the ABC approach
inventory will be categorised as high value, medium value and low value. The
high value “A” items will require the greatest control, the “B” items will
require lesser attention, and the low value “C” items (nuts and bolts) will
require minimal control. A breakdown of ABC items might look something
like that shown in Table 7.1.

Table 7.1 ABC analysis of inventory

“A” class items (%) “B” class items (%) “C” class items (%)

Number held 11 29 60
Value 54 41 5

ABC analysis facilitates cyclical rolling stock takes whereby a series of

‘mini’ stock-takes are made during the year. For example all “A” class items
might be counted weekly, and a percentage “B” items might also be counted on
a weekly basis.

Performance measures
Chapter 19 is our measurement chapter, but as each chapter is designed to
stand alone inventory measurements are discussed here. Performance meas-
ures are needed to drive continuous improvement, if we do not know how well
we are performing, if we do not have measurements, how can we know if we
have improved, in terms of client satisfaction, stock outs and stock turns.
Measurement is also necessary to set directions and targets for the future. The
criteria for performance measures should cover a balanced approach to all key
parameters of the supply chain and should provide operational measures rather
than purely financial measures. Measures should be simple, easy to define and
easy to monitor. In determining what should be measured it is useful to get
away from standard accounting measures. Supply chain management require-
ments are different from those of the accountants. In determining our own
measurements we should ask:

• What should be measured and why?

• What is the benefit of this measure, how does it help us to achieve our goal?

Once we decide what should be measured, then we can determine how it

should be measured. Measurements are of any use only if they are fed down to
the workers and if the workers understand what the measurements mean. Ideally
if a worker receives a measurement, then that worker should be encouraged to
 Inventory management 105

become involved in finding ways to improve the system so as to achieve

improved results. Measurements should never be used as a means of levelling
blame to one department or to criticize any one individual. Measurements
should be aimed at finding where problems occur so that action can be taken so
as to prevent future mistakes. After all, no one section or department works
alone; we are all in this together. If the company goes down we all go down!
Without upsetting the accountants we believe that no measurement is sacro-
sanct and each measurement should be challenged. A measurement that does
not help to improve the system is an unnecessary cost. Figure 7.3 shows basic
measurements needed in inventory management.

Planning Operations Delivery Post-delivery

Stock turn Assets turn Order fill Invoice accuracy

Planned versus Order cycle time On-time delivery Returns
actual

Figure 7.3 Inventory measurements.

Stock turn
‘Stock turn’ is the ratio of the total sales (or throughput of a product) and the
actual stock at any time, both being expressed in either money or volume. The
objective is not only to maximize the stock turn (i.e. minimize average stock
level), but also to maintain stock availability. Stock availability (the percentage
of demand that can be met from available stock) is another measure of per-
formance; availability can also be measured by the number or percentage of
orders satisfied within a given target time frame.
The unit of stock turn is a number or ratio. It is also a common practice to
express stock profile in terms of equivalent weeks or days of stock. For example,
if the cost of goods sold (raw materials plus direct labour and other manufactur-
ing costs but not overheads) is £25,000 and the amount of stock of finished goods
on hand totals £5000, then the number of days of finished goods equals 73 days
(5000/25,000  365  73). That is, on past performance it is going to take just
two and half months to sell all the finished goods we have on hand. Assuming
that we have already paid the suppliers and have paid our workers’ wages and
paid the other costs of production, this obviously means that our inventory of fin-
ished goods is putting pressure on our cash flow. The same types of calculations
can be made for stocks of raw materials and work in progress.
One company we visited was proud of the fact that in their high street stores
they only ever had 7 days of retail stock (own product) on hand. Their re-order
system to their central warehouse was on-line and re-orders were delivered
within 24 hours. The warehouse of finished goods held 6 months’ stock, and
the stockpile of raw materials for production amounted to 7 months’ supply.
106 Total Supply Chain Management

Assuming suppliers were paid within 1 month of supply, this meant that this
company was waiting 13 months and 7 days to recover the cost out-laid for
stock! Not really anything to be proud of when looked at in this fashion.
The share of stock by primary materials (i.e. raw materials and packaging
materials), work in progress and finished products varies according to the
products and method of manufacturing as illustrated in Figure 7.4.

7% Finished goods

42%

65%
Work-in-progress 6%

52%

28% Raw materials

Engineering Fast-moving
batch consumer goods

Figure 7.4 Stock profile: percentage of total stock.

‘Planned versus actual’ (also known as planning efficiency) is a simple

measure of whether the plan is being achieved. This measure can be for any
period, that is this month we planned to produce 80,000 units, but our actual
production was 70,000 units. Therefore, we were 87.5 per cent efficient. This
measure is of little use if we cannot trace back to why production was short of
the plan, not with a view to criticize but with a view of correcting the system
so that we will be more efficient in future. It is more meaningful when planning
efficiency is expressed for each product or stock keeping unit (SKU) rather
than for total volume. Sometimes this measurement will be more hard-hitting
if it is expressed in lost sales.

Planned versus actual

Figure 7.5 shows a ‘Pipeline map’ of an fast-moving consumer goods (FMCGs)
product. It is a common practice to express both the planned and actual production
 Inventory management 107

(21)

(12)
(10)

(5)
(3) Finishing
Preparation and (3) (3)
and process packing
(11) (5) (1) (2) (2) (3) (2)
Suppliers Customers

Raw materials Packing materials Wholesalers

In-process Distribution
stores stores
stock centre
Finished products Regional
warehouse (site) depots

Figure 7.5 Pipeline map of an FMCG product.

of each week in graphs and calculate planning efficiency figures for the week
and cumulative year-to-date. But all this effort is only of any use if the infor-
mation, however expressed, leads to corrective action being taken. Too many
measures too often will only serve to confuse the real issues. Scott and
Westbrook (1991) introduced the concept of a pipeline map, to present a snap-
shot of the total stock in a supply chain. In Figure 7.5 the supply chain of an
FMCG product is mapped by a series of horizontal lines representing the aver-
age time spent in major processes between stock-holding points, and a series of
vertical lines showing in the same scale (e.g. days), the average stock cover at
each point. Pipeline volume is the sum of both the horizontal and vertical lines
and represents the time needed to ‘flush’ the inventory in the supply chain at an
average rate of throughput.
Pipeline mapping is a useful tool to understand the planning performance of
a supply chain, in particular inventory management, but additional analytical
techniques should be used to identify the key areas of improvement.

Cycle times
‘Asset turn’ is the ratio of total sales and fixed assets. It is important that the
value of fixed assets is updated by taking into account the depreciation rate for
the type of asset according to a defined accounting policy of the company.
Assets utilization (time-based) is more relevant to all manufacturing perform-
ance. However, the measure of assets turn (value-based) provides an indication
of investment in the supply chain. In the short to medium term this measure-
ment is of little use as the investment in the assets has already been made and
the measurement is against a past decision. In biblical terms the sins of the
fathers are being visited on the next generation.
108 Total Supply Chain Management

‘Order cycle time’ (also known as lead time) is the elapsed time from the
placement of an order by the customer to the receiving of delivery (see Figure 7.6).
It is important to state standards to suit customer requirements and analyse the
total cycle time into relevant components. Lynch and Cross (1991) claim that
only 5 per cent of cycle time is devoted to adding value. In many cases the
product is waiting to be worked on 95 per cent of the time. (This excludes raw
materials in stock and finished goods in the warehouse.)

Order cycle time

Order received Received Delivery Ready for Received by

by sales at the planning despatch customer
distribution complete
centre

Figure 7.6 Cycle lead times.

‘Order fill’ is the percentage of first time satisfied orders. From the cus-
tomer’s point of view this is probably the most important measurement. The
order is the correct quantity and quality. The next most important measure as
far as the customer is concerned is if the delivery is on time! ‘On time delivery’
can be expressed as a percentage of full orders delivered on time. ‘On time’
may be determined by the standards of order cycle time set for a customer or
the agreed date of delivery as set by the customer.

Summary
This chapter has considered the importance of having sufficient stock on hand
so as not to delay production or to keep the customer waiting longer that is
acceptable. However, holding stock is a cost. A balance has to be found
between achieving the objective of customer satisfaction and the objective of a
reasonable return on assets employed. Stocks of inventory are a major asset
in manufacturing and retailing and in the intermediate stages of distributing
and warehousing. This chapter has covered several approaches to inventory
management within the supply chain.
8
Operations management in
the supply chain

Within an organization operations management is the function which interacts

with and delivers products and services to customers. Operations management
is not limited to the manufacture of products. Everyone, no matter what their
role, is an operations manager. We all use resources, and we all have a mission
to employ these resources as efficiently as possible for the benefit of the organ-
ization for which we work. ‘Efficient operations management is crucial to the
success of any organization. The role of an operations manager is to provide
customer service within the framework of the organizations policy and to use
the resources as efficiently as possible. Simply put: the operations manager
makes things happen’ (Wright and Race, 2004, p. 4). For supply chain man-
agement operations management is where, with in factories and facilities,
plans are converted into reality to produce goods and services. Input resources
basically consist of information, materials and utilities. They are transformed
into desired outputs by the three converting components of people, process and
technology. In addition to the conversion of inputs into outputs operations
management is responsible for the physical flow of the supply chain. This
includes the upstream flow of input resources and the downstream flow (distri-
bution) of outputs.
The input–process–output model shown in Figure 8.1 is the cornerstone of
operations management and can be found in most operations management
texts. The modern approach to operations management is to consider opera-
tions as a process and a whole systems approach is taken.

Input  Process  Output

Figure 8.1 The IPO model.

Service operations
The distinguishing features of service operations are that the service cannot be
provided without customer input and that ownership does not change. Service
includes transportation of goods and people. Transportation can only take place
if there are goods to move or passengers to carry. At the end of the transportation
ownership has not changed, when you travel in a bus or aircraft the passenger
110 Total Supply Chain Management

does not own or get to keep the seat! In other service operations such as a con-
sultant providing advice without the customer the service cannot be provided
and again there is no change of ownership. A more mundane example is a hair-
dresser, without a customer hair cannot be cut! Further examples are a freight
train, it can travel from one city to the next but if it carries no freight it has not
carried out its function. The same applies to a bus service, the bus can leave the
depot and travel around the planned route and finally return to the depot, but
unless it has carried a passenger its function has not been fulfilled. The function
is to carry passengers not to drive in circles without passengers:

A service organization exists to interact with customers and to satisfy cus-

tomers’ service requirements. For any service to be provided, there has to
be a customer. Without a customer, and interaction between customer and
the service organization, the objective of providing service cannot exist.
Wright and Race (2004, p. 4)

The amount of interaction between the customer and the service providing
organization depends on the type of service offered. For example, a computer
consultant will have high ‘face-to-face’ interaction with the customer, whereas
service provided over the Internet such as currency exchange conversion calcu-
lation will have no face-to-face interaction. Irrespective of the level of face-
to-face interaction, without customer input the service cannot be provided.
However, this does not mean that the customer always has to be present when
the service is being provided. For example, when a vehicle is due for a routine
service, once delivered to the garage the driver does not have to be present, but
unless the vehicle is available the service cannot be provided. With all of the
above resources are held waiting for the input of a customer before an output
can be provided. In manufacturing operations the major difference is that own-
ership changes hands and outputs, that is finished goods, can be stored without
customer input.

Manufacturing operations
In manufacturing operations customer interaction is not essential. For exam-
ple, cars can be manufactured, food can be harvested and processed, hamburg-
ers can be made, and houses can be built, all without customer input. Although
it might be desirable that the customer has input into the design and the speci-
fications of the product (be it a car, a hamburger or a house), customer input is
not essential. In a ‘bespoke’ operation the desired policy is to make only to
order, that is manufacture will not begin until an order has been received. The
limitation of not beginning until an order has been received is self-imposed and
can be over ridden. For example, a house builder might prefer not to begin
building unless a client has signed a contract, nonetheless the builder can
change his strategy and build a house without having a client (in the belief that
the house will be sold before it is completed or soon after completion).
 Operations management in the supply chain 111

Resources
Resources include:

• Materials: Materials include the goods that are consumed by the system,
goods that are transformed by the system, and finished goods held for sale.
Utilities such as fuel, water electricity and gas are also materials. Conversion
or transformation refers to changing the shape, form or combination of mate-
rials to produce an output. For example, by assembling 12,000 components
sourced from a variety of suppliers a car is ‘manufactured’.
• Machines/equipment: These include plant, fittings, tools, vehicles, storage
facilities available to the operating system.
• Information systems: This covers the flow of information within the organ-
ization, and externally from and to suppliers, customers and other stake-
holders. Electronic systems are important communication conduits but they
are not the only means of communication in an information system. An
information system includes all means of communication, for example
speech, newsletters, manuals, brochures, radio, television, etc.
• People: People not only means the number of people employed in the oper-
ating system, but includes knowledge and skill levels of the people. People
also includes the pervading culture of an organization including intangibles
of dependability, attitude and shared values.
• Real estate: This includes owned, leased or rented; offices, warehouses, fac-
tories, display areas, yards, parking space and hard standing, etc.

All of the above represent either a capital investment or an ongoing expense to

the organization. Tangible inputs are physical and can be seen and touched, and
the amount or rate of use can be measured in quantifiable terms. Intangible
inputs are difficult to quantify. They cannot be seen or touched and include
knowledge (intellectual capital) culture and values.
Money is not a resource. Money is used to buy resources (people, machines,
buildings, etc. are the resources).
Likewise time is not a resource. Time, like money, is used to measure effi-
cient use of resource or performance (e.g. on time delivery, lead time, idle time
and down time).
With today’s technology there is an abundance of information, indeed there
can be an overload of information – how many e-mails did you receive today
and how many were actually of use? The concern of the operations manager is
to know what information is required and in being able to interpret and use
information for the benefit of the organization.
To summarize, in a service organization customer and resources are brought
together to provide a service output. For manufacturing input resources are
transformed to provide an output, and the customer draws from the system,
that is the product is made, and the customer buys the finished good. With a
service operation output cannot be stocked, and the service cannot begin
112 Total Supply Chain Management

without customer input. Wild (2002) developed a set of system structures to

illustrate the flow of inputs through to outputs in various systems.

System structures
In considering system structures, Wild uses the following symbols:
O  the transformation process of combining resources including utilities
to add value;
V  ‘stock’ of input resources and output stocks, or ‘queue’ of customers-
waiting to enter the system;
➜  the flow of resources through the system;
C  the customer. Note, the customer does not have to be external to the
organization, but may be an internal customer. The ‘internal customer’ is the
next person, or department, in the process.

V
O
C Examples
(a) Call centre waiting for customers.
(b) Ambulance or fire service.

Figure 8.2 Customer does not wait.

(Resources)
O
C V Examples
(a) Customers waiting in line (queue) for
service (e.g. supermarket check out).
(b) Customers make an appointment to see a
specialist for advice (e.g lawyer, doctor, hair stylist).

Figure 8.3 Customer queue.

V
O
C V Examples
(a) Empty containers in western sea ports in the USA
waiting for freight, and at the same time container
shortages in eastern sea ports in Asia.
(b) Taxi cabs waiting for fares at the airport, and at
the same time passengers frustrated as there are no
taxis available at downtown hotels.

Figure 8.4 Idle key resource and customer queue.

Overall there are three basic service or transport structures (Figures 8.2–8.4)
and four basic manufacturing or supply structures. Most organizations will
consist of a combination of systems.
 Operations management in the supply chain 113

Service and/or transport structures

For the structure shown in Figure 8.2 the strategy is always to have sufficient of
all resources on hand so that the customer never has to wait to enter the system.
Service is provided direct to the customer from a stock of resource. ‘The stock
of resource could be the bus moving from stop to stop, an accident ward wait-
ing for patients, a fire brigade waiting for a call-out, a restaurant waiting for din-
ers, an accountant waiting for customers, or a betting shop waiting for punters.
In this structure the customer does not normally wait: the resources do)’
(Wright and Race, 2004).
In Figure 8.3 the structure is aimed at efficient use of resource and customers
are expected to wait to enter the system. The objective is customers’ wait and
the key resource is kept fully employed. For example, a business school has
resources of lecture rooms and other facilities which are relatively fixed and
cannot be used 24 hours a day. The key resource are the lecturers. Students do
not determine when the lectures will be, and need to enrol before the semester
begins. Lecturers are scheduled for classes (and other duties) and are not paid
to have idle time. In some cases such as high profile lawyers and other profes-
sionals we would be surprised if we didn’t have to make an appointment for a
consultation. Thus the consultant’s time is not wasted waiting for clients, and
clients are conditioned to make an appointment.
In Figure 8.4 the structure implies inefficiency as neither objective of cus-
tomer service or efficient use of resources is being achieved.
It might be asked why a service system could not be balanced so that there
are no idle key resource and no customer queue. The answer is that if cus-
tomers are never kept waiting there has to be spare resource, or if resources are
to be fully utilized with no idle time, there must be a store of customers.
Occasionally a balanced system might exist but this will be for a short period
of time.

Manufacturing and/or supply structures

Figure 8.5 shows manufacture from stock to stock. For the factory manager this
structure is easy to manage. It enables batch and/or level production, and the
manufacturing line can be balanced by building to output stock. The downside
is that it is expensive in stock holding costs. In the fashion industry and other
areas where technology changes, or is likely to change (e.g. electronic goods
such as cell phones) there is a danger of the manufacturing organization being
left with goods no longer in fashion or which are obsolete.
Figure 8.6 shows that an input stock of materials is held, and once manufac-
tured outputs are delivered direct to the customer (no output stock of finished
goods are held). This structure also applies to a retail operation or supply
from a warehouse to a customer or to the next component of the supply chain
where stocks of finished goods are held and the customer is supplied from
stock.
114 Total Supply Chain Management

This structure shown in Figure 8.7 applies where it is either not feasible to
hold input stocks or it is not desirable to hold input stocks. The customer is
supplied from an output stock.
Figure 8.8 shows just in time or lean production. This is best explained by
the ‘Toyota 72 Hour Car’ concept. With this model Toyota holds no stocks of
input materials and has no stock of finished cars. The idea is that the purchaser
will visit a showroom and be able to see a car indicative of the type of product
that Toyota makes. There will not be a wide range of vehicles to inspect;
instead the purchaser will be shown on a computer screen the various models
available and a list of optional specifications. The purchaser will then select, by
keying into the computer, the basic car model and required details such as size
of engine, type of transmission, colour scheme, type of upholstery, sound sys-
tem and so on, but all chosen from a given list. This information will now be
electronically transmitted to the factory and to the suppliers of the factory.
Within 72 hours the car will be delivered to the purchaser. The benefits include
the customer getting what they want. But in fact the customer is now more than
just a customer; the customer is now very much part of the manufacturing
process. In effect, by keying in their requirements the customer initiates the
whole process, raises the raw materials order for the factory, and updates the
production schedule. From Toyota’s point of view there is a further substantial
benefit. Presumably the purchaser will pay on delivery, so there will be no cash
flow problems (within a 72-hour period it is unlikely that Toyota will have paid
for the materials or for the direct labour). As Taiichi Ohno of Toyota said, we
are ‘Looking at the time line from the moment the customer gives us an order
to the point where we receive the cash. And we are reducing the time line by
removing the non-value wastes’. Obviously, a system such as this does not, and
cannot, make allowances for mistakes. It relies on good planning by manage-
ment, quality designed into the product, well-trained workers who are empow-
ered to work as a team, suppliers who are trusted to supply when required and
who are also part of the team, an integrated computer system and the elimina-
tion of ‘non-value wastes’. We challenge you to ring any car dealer, other than
for a Japanese brand, and ask how long it would take for a car meeting your
various requirements to be delivered. Unless you pick a stock vehicle, and the
colour you want is in stock, you are likely to be told that you will have to wait
about 72 days!

V O V C
Examples
(a) Manufacture from a stock of input materials and hold
a stock of finished goods. Customer draws from the system
(e.g. Ford motor company).
(b) Manufacture drawing from own warehouse of materials
and stockpile for expected future demand, (e.g. womenís
shoes manufactured in winter months for release in spring).

Figure 8.5 From stock to stock.

 Operations management in the supply chain 115

V O C
Examples
(a) Make to order, such as manufacture of a high voltage
transformer. High voltage transformers are high capital items
and are made to customer specification. It is possible to build
a high voltage transformer without a customer order, but few
manufacturers would do so, due to the specialised nature of
each transformer. Likewise few ship yards would build a
cruise liner without a contract from a customer.
(b) Retail or supply from warehouse. Goods are stocked
and the customer draws from the system. Unlike service
structures, ownership changes hands.

Figure 8.6 Input stock, nil output stock.

O V C
Examples
(a) Food processing. Once the food is harvested it goes
straight into production. If not processed straight away after
harvesting it would deteriorate.
(b) Oil drilling. Once the oil begins to flow it is held in stor-
age tanks.
(c) In a manufacturing operation this structure would apply
where materials are ordered just as required, and a stock of
finished goods are held.

Figure 8.7 Nil input stock; stock of finished goods.

O C
Examples
(a) A small house building firm. Materials are ordered as
required and once finished the client takes possession
(ownership changes).
(b) Just in time or lean production as pioneered by the
Japanese.

Figure 8.8 Just-in-time model.

Combined structures
Although seven basic service system structures are shown in the above figures,
in reality most service organizations will employ a combination of structures
(see Figures 8.11–8.13).
For example, consider the freight consolidator and forwarder. The customer
does not have to wait to enter the system, but arranges for a part container load
of goods to be left with the consolidator for on forwarding. The structure for
116 Total Supply Chain Management

this stage is as per Figure 8.9. Note, this is a transport service and ownership
does not pass to the freight consolidator.

V
O
C

Figure 8.9 Overall operation freight forwarder.

The freight consolidator and forwarder’s policy is to only ship fully loaded
containers. The second stage of the operation is out of sight of the customer(s)
and is the loading (consolidating) of the container. As this is a separate opera-
tion it can be shown as a back room ‘factory’ type activity (see Figure 8.10).
This represents a container being loaded from a stock of goods (waiting to be
loaded), culminating in delivery to the destination.

V O C

Figure 8.10 Backroom activity.

Figure 8.11 shows the two structures in sequence.

V
O V O C
C

Figure 8.11 Combined structure; freight forwarder.

A further example is the small building firm. The owner of a block of land
seeks information from the builder as to what can be built within the parame-
ters of local regulations. The builder has a book of house designs which can be
altered to some degree to meet the clients needs. Eventually both parties agree
but as the builder is currently working on another house, the client might have
to wait 6 weeks before construction can begin. Once the house is completed
ownership of the house passes to the client. This combined structure is shown
in Figure 8.12.

(Builder)
Oi Vii Oii
C Vi

Figure 8.12 Combined structure; small builder.

 Operations management in the supply chain 117

Vi  Customer makes appointment to see builder

Oi  Consultancy
Vii  Builder has a ‘stock’ of work waiting to be started
Oii  House constructed
Another situation is where the ‘back room’ activity takes place before the
customer enters the system. An example is the breaking down of a bulk con-
signment by a distributor into small lots in anticipation of small orders from
down stream retailers. This is shown in Figure 8.13, the first operation is the

V Oi V Oii C

Figure 8.13 Preparation in advance of demand.

breaking down and storage of the inwards shipment, the second operation is
supplying a retailer from stock.

Five V’s
Slack et al. (2006) also refers to the input–process–output model, but add four
V’s of processes to analyse processes. Their four V’s of processes are: ‘Volume,
Variety, Variation and Visibility’ to which we have added a fifth ‘Velocity’.

Volume
Processes with a high regular demand will have a high degree of repetition. In
operations management this means that tasks are repeated often and it makes
sense to train staff to specialize in a limited number of tasks. Tasks become
systemized and repeated. Henry Ford back in 1913 is reputed to have said give
me a stupid person and in 24 hours I can make that person a specialist, a spe-
cialist in a very limited and repetitive operation. With high volume processes
the opportunity to mechanize and automate and/or to use robots is obvious. In
the supply chain if components can be standardized and common parts are
used in the manufacture of different models then ordering in bulk at regular
intervals will be possible. The margin for manufacturing errors by the supplier
will be minimized and unit costs will reduce. Low volume demand on the other
hand is not likely to make high throughput technology cost effective. The same
applies to transportation costs. Full containers reduce the cost per unit. Parcel
post, where one item sent by courier will obviously increase the unit cost.

Variety
The greater the variety the more stock has to be held and the amount held will
multiply with the number of stocking points within the supply chain. As Slack
et al. say ‘A high level of variety may also imply a relatively wide range of
inputs to the process and the additional complexity of matching customer
118 Total Supply Chain Management

requirements to appropriate products or services’. So, high variety processes

are invariably more complex and costly than low variety ones.

Variation
Under this heading Slack et al. ‘say that processes are easier to manager when
they only have to cope with predictably constant demand resources can be
geared to a level that is just capable of meeting demand’ (2006, p. 21). In short
all activities can be planned in advance. This applies to ordering materials to
arrive ‘just in time’ and for outputs to be completed to meet demand dates just
in time without the need to hold input or output stocks. By contrast when
demand is unpredictable buffer stocks will need to be held to cover sudden
changes in demand. This applies especially in the fashion industry, for exam-
ple ladies footwear. The range will be designed months in advance of the next
season, but until the new season’s pre-orders are received from retailers, and
then subsequently once the season is under way and repeat orders flow in
knowing what amount and which materials to hold will be difficult. Lower
variety eases the stock holding pain, but if variety is too low sales will be lost.

Visibility
Visibility in the supply chain relates to the exposure of the process. In Chapter
15 we introduce the ‘bull whip’ effect which occurs when each component of
the supply chain only receives one way information from the next down stream
component. The result is an escalating and wildly fluctuating demand pattern
known as the bull whip effect. If information is shared, that is visibility of the
intensity of the bull whip effect can to some extent be softened. Front office is
usually highly visible, that is in materials movement acceptance of goods for
consolidation, but the consolidation and transportation is not visible to the cus-
tomer. Visibility can be increased for goods in transit by the use of bar coding
or RFID tags to track movement of materials. In general, processes that are
directly in contact with customer (e.g. retail) should have more visibility than
those that are carried out in an office or a factory.

Velocity
Velocity, or time, is an important aspect of supply chain management. Measure-
ment of time performance are:

• time taken to fulfil orders (lead time),

• time taken at each stage of the supply chain,
• delivery on time,
• age of stock (used by dates),
• numbers of days of stock on hand,
• stock turn.
 Operations management in the supply chain 119

A process related to lean and agile supply chain (see Chapter 13) should
increase its velocity.
The Supply Chain Council (www.supply-chain.org/) recommends a metric
system for performance covering the four areas of customer satisfaction/qual-
ity, time , cost and assets. They provide a range of measures for each category
and also provide benchmarking for their members. A sample measure is sup-
ply chain response time (SCRT).
This represents the measure of time taken to recognize and react to changes
in demand. For the Supply Chain Council perfect order fulfilment only occurs
when all orders are delivered in the quantities required, on the agreed delivery
date, and documentation is complete and correct, and the goods are received in
perfect condition and meet specification.

Infrastructure facilities
What are infrastructure facilities? They include factories, offices, equipment
and hardware, conversion technology and third party suppliers/service
resources. Infrastructure facilities do not include people, procedures and sys-
tems. Here we consider the challenge for selecting the most appropriate infra-
structure facilities, and whether this challenge differs for manufacturing and
service industries?
The challenges of infrastructure facilities are far more complex than cash
flow management, and the parameters are not of the short-term nature of
labour and software. The outcome of an investment decision for a manufactur-
ing facility is likely to last for 10–100 years. Likewise, it normally takes sev-
eral years of disciplined effort to transform an existing weak service unit into a
strong unit.

Manufacturing sector
Skinner (1969) described manufacturing facilities as either a corporate mill-
stone or a competitive weapon depending on the strategy applied and pursued.
As Hayes and Wheelwright (1985) observed in a manufacturing business, a
number of interrelated functions (such as marketing, innovation, engineering,
purchasing, manufacturing and distribution) work towards a common objective
of satisfying the customers and at the same time ensuring an attractive return
on investment for the shareholders.
Of these, the manufacturing function share the organizations assets and
people. According to Hayes and Wheelwright the four stages in the strategic
role of manufacturing are as follows:

• Stage 1: Minimize manufacturing’s negative potential: ‘internally neutral’

manufacturing is kept flexible and reactive.
• Stage 2: Achieve parity with competitors: ‘externally neutral’ capital invest-
ment is the primary means for catching up with competition.
120 Total Supply Chain Management

• Stage 3: Provide credible support to the business strategy: ‘internally sup-

portive’ longer-term manufacturing developments and trends addressed
systematically.
• Stage 4: Pursue a manufacturing-based competitive advantage: ‘externally
supportive’ long-range programmes pursued in order to acquire capabilities
in advance of needs.

In a typical fast-moving consumer goods (FMCG) manufacturing business:

• 98 per cent of the products sold are either own manufactured or co-produced.
• 90 per cent of the assets of the company are for manufacturing.
• 75 per cent of the people work in manufacturing.

It is not enough just to formulate and pursue an ‘up front’ manufacturing strat-
egy, no matter how good the strategy is. To maintain a competitive advantage it
is essential to support the strategic planning of facilities with the ongoing mon-
itoring of performance and with continuous improvement programmes. The
management of manufacturing facilities should be dynamic with the relentless
pursuit of the elimination of unnecessary non-value adding expense and always
with the objective of adding value for customers. Competitive advantage once
achieved through a strategy such as investment in new facilities will require
hard work if the advantage is to be retained.

Service sector
A service business is one where the perceived value of the offering to the cus-
tomer is determined by the service rendered than the product offered.
This intimacy of a customer in a service function has led to the perception
that service cannot be stored and has to be produced and consumed simultane-
ously. Of course, there are some services which have to be produced at the
delivery point, such as emergency medical treatment. However, in a higher
proportion of services the activities which can be isolated from the interaction
of the customer are uncoupled from the organization. The isolated operations
can be managed using the similar methods as used in manufacturing opera-
tions. The examples of these types of services include tailors, banks and hotels.
Whether it is a small scale or a large-scale operation, all services can be
grouped as direct services or isolated services as shown in Table 8.1.
The strategic and operational considerations related to infrastructure facili-
ties for isolated services are likely to be similar to those for manufacturing
operations. For direct service also, it can argued, that manufacturing principles
can be selectively applied such as the application in fast foods services. Mass
service is often like pre-setting the work outside the machine running cycle in
a mass production packing line.
 Operations management in the supply chain 121

Table 8.1 Categories of services

Direct service Isolated service

Small scale Professional service Service shop

(e.g. Doctor, Hairdresser) (e.g. Garage, Tailor)
Large scale Mass service Service factory
(e.g. University, Supermarket) (e.g. Banks, Post-office)

Adapted from Schmenner (1993).

Summary
This chapter has explained the importance of operations management in the
context of supply chain management. To do so the traditional operations man-
agement input–process–output model was introduced and extended to include
system structures. The five V’s of Volume, Variety, Variation, Visibility and
Velocity were explained and how these ‘V’s’ can be managed to add value (yet
another ‘V’) for the supply chain. The chapter concluded with a section re
infrastructure facilities. There are many books, including Total Operations
Solutions by Basu and Wright (2005), dealing with detail processes in opera-
tions management. Our primary objective of this chapter is to set the critical
role of operations management as a building block in the physical flow of the
total supply chain.
9
Distribution management

Introduction
The physical movement and delivery of goods and services to customers is a
key objective of supply chain management. The three key aspects of customer
service are specification, price and timing. Specification and timing are often
measured by the metric, ‘on time in full’ and are the direct result of distribution
management. Distribution management is closely linked with the ‘customer
intimacy’ model of Treacy and Wiersema (1993) but many organizations out-
source distribution management to third-party hauliers thus reducing the fre-
quency of direct customer contact.
Web-based software and e-market places have increased opportunities
available to e-supply chain managers in all operations including the service
industry.
Information technology and the Internet has improved the access to infor-
mation, enabled currency transactions, and improved data accuracy. However
the real effectiveness of supply chain management is the physical movement
of materials from source to customer. Important components for every
e-commerce, on-line trading and virtual supply chain are factories, warehouses
and transport.
It is vital that a physical distribution process is in place to ensure the
performance of e-supply chain for both virtual and physical activities, but it is
well recognized that supply chain order fulfilment is the Achilles heel of the
e-business economy.
This building block, distribution management addresses the challenge of
distribution efficiency under three headings:

1. Physical distribution
2. Strategic alliances
3. Customer relationship management

Physical distribution
In the same way that enterprise resource planning (ERP) is concerned with
information flow, suppliers and inbound logistics, distribution management is
 Distribution management 123

likewise concerned with materials flow, customers and outbound logistics.

Inbound logistics is characterized by demand variability, and outbound logis-
tics is characterized by variable service levels.
With the management of distribution, that is the physical transportation of
goods from the factory through the various components of the supply chain to the
customer, invariably some stock will be held in the system to buffer the variability
of demand and to make allowance for vagaries in supply lead times. The focus on
outbound logistics is to balance customer service level against cost. Cost of distri-
bution is not just transportation costs but also includes warehousing including spe-
cial requirements such as refrigeration, insurance and financing of stock, and stock
slippage (deterioration, damage, pilfering and obsolescence). The more stock that
is held the greater the cost of storage and the greater the chances of losses.
The main components of distribution management are:

• Distribution strategy
• Warehouse operations
• Stock management
• Transport planning

Distribution strategy
It is important that a company in a consumer focused business has a defined
distribution strategy. The first criteria of distribution strategy is to decide
whether the management of activities should be by the company or by a third
party. With assets (buildings, equipment and transport vehicles) the strategy
can go three ways:

1. Own the assets or some of the assets

2. Lease or rent assets
3. Contract (outsource)

Some of the various strategy mixes are shown in Table 9.1. Note there are 64
possible combinations, for example own premises, leased premises, own man-
agement of premises, third-party management of premises, own transport, leased
transport, or third-party supplied and managed transport, and so on. Table 9.1
shows 24 of the most likely combinations.
There are some obvious advantages of distribution management by a third
party, for example the distribution expertise of third-party companies, the
avoidance of capital outlay and under utilized equipment. It has become a pop-
ular practice with many original equipment manufacturers (OEMs) organiza-
tions to outsource warehousing and transport to third-party companies. However,
as the delivery of the finished products is closest to the customer on the supply
chain, there could be some degree of risk if the management of outbound logis-
tics is totally left to third parties.
A distribution strategy is significantly influenced by: economic factors,
channels of distribution and their location, location of service centres and
warehouses. Shorter channels are ideal especially for perishable items, services
124 Total Supply Chain Management

Table 9.1 Distribution strategy combinations

Warehousing Transport

Building Operation Trunking Delivery

Strategy A Own Own Own Own

Strategy B Rent Own Leased Own
Strategy C Rent Own Third party Third party
Strategy D Own Own Third party Third party
Strategy E Rent Third party Third party Third party
Strategy F Rent Own Own Own
Strategy G Own Own Third party Own

requiring closeness to customers, and urgent products. An intermediary in the

channels of distribution can reduce distribution costs where; the sources of
supply are not in abundance, there are numerous destinations, or transportation
is difficult or expensive. The choice of location is usually driven by cost objec-
tives for warehouses and manufacturing facilities and by revenue objectives for
service type operations. With the impact of Internet the distance of a service
centre to customer has become less important.

Channels of distribution
It is important for a manufacturer of fast-moving consumer goods (FMCGs),
that the distribution strategy should consider the opportunities for both present
and future business through an appropriate mix of the channels of distribution.
Examples are:
Factory to:

• distributor,
• wholesaler,
• supermarket,
• direct to end user (e.g. Dell).

The distribution strategy should also include the company policy of exclusive
agents or stockists and of direct mail or on-line order to end users. Figure 9.1

Distribution
Supermarket
centre
Consumer

Factory
Mail order

Distribution Regional
Wholesaler Retailer
centre depot
Third-party
supplier

Figure 9.1 Channels of distribution.

 Distribution management 125

illustrates an example of the channels of distribution in a typical FMCG busi-

ness. The selection of a strategy may be influenced by the cost of distribution
and it should be tempered by the business judgement of customer service and
future opportunities.
The channels of distribution is also determined by the stages required
to deliver products or services depending on the type of business. An organiza-
tion exercises more control or influence on the service for a single stage
channel, that is delivering product or service directly to the customer.
If, however, more stages exist with intermediaries between the organization
and the customer then each party may have some influence over such
decisions as stock holding, service levels and market cover. Table 9.2 shows
typical examples of stages in distribution channels in different kinds of
organizations.

Table 9.2 Stages in distribution channels

Original Equipment Manufacturer (OEM) No. of stages Intermediaries

Manufacturing sector
Civil Engineering 1 (direct)
Foods manufacture 2 Supermarket
Car manufacturer 4 Overseas agent
Distributor
Retailer
Service sector
Original supplier No. of stages Intermediaries
Hairdresser 1 (direct)
B2C Internet sale 2 Transporter
Hospital 2 Doctor
Charter Airline 3 Holiday company
Travel agent

Facilities location
Another important aspect of distribution strategy is location of distribution
warehouses. The location, design and operations of distribution warehouses
are all vital ingredients of a supply chain – not only for cost optimization
but also for the quality and safety standards of products and for improving
customer service by a faster turnaround at the warehouse. There are computer
simulation models available for determining the size and location of a distribu-
tion centre, but local body planning regulations, the proximity of a highway
and a big demand centre very often will be the prime determinants of the
location.
126 Total Supply Chain Management

The location of a warehouse can be influenced by many factors both objec-

tive and subjective. The factors which generally affect the selection of a ware-
house site can be grouped in three sets of factors:

1. Cost factors
2. Revenue factors
3. Local factors

The cost factors have three main components: variable cost, fixed cost and
inventory cost. The variable cost of a warehouse operation include the costs of
labour, material and utilities. The accessibility to labour and materials will
affect the variable cost. The fixed costs are associated with the provision and
maintenance of facilities and the cost of security services. When the number
of facilities is reduced there is a saving in the fixed cost. If we, for example,
centralize the inventory of a number of warehouses to a single location the
base stock will remain the same but the safety stock will reduce according to
the following equation:
Sn  S1(n)/n
where Sn is the sum of safety stocks for n locations,
S1 is the safety sock for 1 location, and
n is the number of locations.
The location of a retail outlet or service centre has traditionally, and for obvi-
ous reasons, been determined by the proximity to customers, or expected growth
of population (and future customers) in the region. The opening of a warehouse,
such as Ikea, in the proximity of a town has been known to increase the revenue
in that town. With the impact of e-commerce the traditional ‘bricks and mortar’
locations are now to some extent challenged by ‘clicks and mortar’, nonetheless
large new super stores and shopping malls continue to open and to prosper.
The local factors influencing the selection of a location include management
preferences, congeniality of the district, local infrastructure and transport net-
work, industrial relations and availability of trained labour. There are often
incentives or investment grants available to encourage organizations to estab-
lish facilities in areas designated for regeneration or industrial development.

Case example: Warehouse location

The brief: After the merger between Fosroc* and Expandite in England
the joint operation had main warehousing facilities in the neighbouring
towns of Tamworth and Greenford, with a smaller warehouse at St Helens.
As a result of a logistics structure review, the client decided to rationalize
the warehousing facilities by centralizing and consolidating all finished
goods in a single facility on their production site in Tamworth. It was
agreed that the best approach to producing a building which would
 Distribution management 127

efficiently meet their requirement was to design the facility ‘from the
inside out’.
The approach: Due to the sensitive nature and possible closure of ware-
housing it was important to keep the study confidential. The project started
with a feasibility study into various configuration options. As the client
had available land to build the new warehouse, a study into the location was
not needed and this meant that we could start calculating the required size
immediately. The stock was analysed and activity data from the three ware-
housing locations to work out the site size needed in conjunction with the
proposed layouts. After the decision on the favoured design had been made, the
option was developed to the level where the scheme could be put-out to
a design and build organization for tendering. During this stage detailed
analysis was produced of proposed floor space, equipment requirements
and pallet racking locations. Another aspect of the project was the produc-
tion of staffing requirements together with a staff structure diagram.
The result: The floor space was reduced from the three combined units
of 80,000 to 50,000 square feet in the new single distribution centre
by removing duplication of stock and improving operating techniques.
Also, reduced were staffing levels by 30 and other costs.
Trade counters with minimal stock holdings at the old sites were
retained but the major storage facilities were closed. Due to its central loca-
tion, the new warehouse provides consistent, accurate delivery through-
out mainland UK within 3–4 working days from receipt of order.
*Fosroc Expandite is one of the largest manufacturers of construction
and civil engineering products in the world.
Source: Supply Chain Planning UK Ltd. (2007)

Warehouse operations
The operations of a distribution warehouse in general, can be represented by
Figure 9.2. There are good opportunities of ‘re-engineering’ the warehouse func-
tions when the total process from reception to despatch is critically examined.
The design issues of a warehouse include:
(a) Storage systems
– block stock
– back-to-back racking
– double deep racking
– narrow aisle racking
– drive-through racking
– mobile racking
(b) Handling systems
– counterbalanced trucks
– reach trucks
128 Total Supply Chain Management

– turret trucks
– stacker cranes
– automated guided vehicles
– overhead cranes
(c) Product quality
– ambience
– chilled store (e.g. margarine)
– cold store (e.g. ice cream)
(d) Safety and control systems
– detection systems
– sprinkler and fire hydrants
– warehouse management system (WMS) software

Re-palletizing

Goods Storage
Inspection
reception allocation

Bulk storage

Replenishment

Picking

Packing/
Despatch Order assembly
labelling

Figure 9.2 Warehouse operations.

In view of the above inter-related design issues there should be a structured

approach for designing a warehouse. We suggest the following steps:

1. Calculate pallet positions by taking into account:

– annual volume
– stock policy (amount of safety stock)
– units or kg per pallet
– variability of stock keeping units (SKUs) (peak, growth)
– lead times from suppliers
2. Evaluate functional options of storage and handling systems
3. Establish quality requirements (e.g. chilled)
4. Establish systems and infrastructure
5. Select the location of the warehouse
6. Estimate budget costs (15 per cent accuracy)
 Distribution management 129

Example: Pallet calculation

The calculation of pallet positions is illustrated by the following worked
out example:
• Given data
– Annual demand 12,000 tonnes
– Load per pallet 400 kg
– Stock turn 13
– Weekly peak 1.2  average
– SKUs 4 (same weight)
• Calculation
– Weekly demand 12,000/52  230.8 tonnes
– Pallets for 4 weeks (230.8  4)/0.4  2308
– Allowing 20% for peak and 85% pallet utilization, pallet positions 
(2308 1.2)/0.85  3258 pallets

7. Evaluate financial and risks options including own or rent

The following case example illustrates an outline design process of the physi-
cal requirements of a warehouse in response to an invitation to tender.

Case example: Warehouse design

Background: Zigafroos Consolidated Industries (ZCI) is the UK’s lead-
ing importer of high-quality consumer electrical goods for the independ-
ent retailer. The current storage centre in Edgware, London, is at the end
of the lease period and is not considered adequate for future operations.
The company is also considering offering operation of the storage centre
to a third-party logistics (3PL) partner. You are therefore invited to ten-
der for the sourcing, design and operation of a new dedicated storage
centre. The tender will be a two-stage process, with the first stage con-
centrating on defining the physical requirement for the new facility.
The operation: ZCI purchases product from multiple overseas sources.
Stock is delivered to the storage centre in 20 or 40 feet sea van containers
and is generally loose loaded. Stock is stored pending orders and picked
for a network of independent regional wholesalers. Currently there are 25
wholesalers covering all of the UK. Stock availability is declared to
wholesalers electronically and orders passed to ZCI on a weekly basis.
Stock picking is at the individual carton level and orders are built up for
delivery to wholesalers on multi-SKU pallets. The manufacturer arranges
transportation into the UK, customs and port clearance and transport to
the warehouse are sub-contracted by ZCI as is delivery to the whole-
salers. Volumes and stock characteristics are available. ZCI is planning
on 5 per cent growth year on year.
130 Total Supply Chain Management

Given data: In addition to the above information ZCI has provided the
results of an internal study to estimate the peak pallet holding for 2002.
The calculation is shown in a spreadsheet which contains the following
summary data for 2002:
• Annual sales 217,390 boxes
• Product groups 49
• SKUs 1839
• Peak stockholding 8385 pallets*
* Euro pallets 800 mm 1000 mm
Next step: Based on these submissions the Zigafroos board will short-
list prospective partners and issue a comprehensive request for proposals.
Please deliver your proposal to our Edgware offices for the attention
of Mr Harry Zoogorilla.
Exercise
Provide your recommendation on size and configuration for new
Zigafroos Storage Centre. Address the following issues:
1. Size of warehouse required: design for 5 years of growth
– Maximum pallet positions for design
– Approximate area for the chosen storage method**
2. Outline layout
– Pallet and shelving configurations
– Picking and despatch area
3. Recommended mechanical handling equipment
Provide the rationale for your choice of design and equipment and an
indication of your company’s experience with this type of operation
** As a rough guide for estimating approximate area for given pallet
positions you may use the data in the following table:
Approximate area (square metres) requirement per 100 pallets
Pallet dimension 1200 mm 1000 mm

2 high 3 high 4 high 5 high

Wide aisle 138 92 69 46

Narrow aisle 117 78 59 47

Note: If 6 or higher is required the area needed can be prorated.

Sample solutions
Answer to Question 1
Compound growth for 5 years at 5%  27.6%
Peak stockholding after 5 years  1.276 8385
 10,701 pallets
 Distribution management 131

Assuming 5 high narrow aisle, approximate storage area

 10,701  47/100
 5034 square metres

Answer to Question 2
The outline layout will depend on the configuration of the space avail-
able. Assuming a greenfield site, a configuration could be:
Width of the warehouse 100 m
Span between columns (bay) 17 m
Storage space  3 bays
 3  17  100
 5100 square metres
Picking and despatch area  2 bays
 2  17  100
 3400 square metres
Total warehouse area  8500 square metres

Answer to Question 3
For a narrow aisle five high warehouse recommended mechanical han-
dling equipment:
Storage and retrieval Reach trucks
Despatch area Counterbalanced Fork lift trucks
Picking area Hand pallet trucks

Stock management
As indicated earlier in Chapter 7, stocks are kept as a buffer along the supply
chain in various warehouses, factories (work in process) and retail store shelves.
These inventories can cost between a minimum of 15 per cent up to 40 per cent
of their value per year (storage space, handling costs, energy costs including
heating and refrigeration, stock slippage and insurance). Therefore, careful
management of stock levels makes good business sense.
In traditional stock management there are two basic approaches see Chapter 7,
namely the pull approach and the push approach. In a pull system a warehouse is
viewed as independent of the supply chain and inventory is replenished with order
sizes based on a predetermined stock level for each warehouse. The stock manage-
ment model for the pull system is normally geared to establish re-order level
(ROL) and re-order quantity (ROQ). That is, when the stock drops to a certain
level, a re-order is triggered of a predetermined amount. The ROQ takes into
account past demands and the lead times for a re-order to be satisfied. The aim is
to have as small amount of inventory as possible on hand at any one time, and the
ROQ should likewise be as small as possible. However in some processes, such as
a batch system, there will be a minimum amount that can be produced and in other
cases there can be economies of scale which will determine the optimal size of an
order. The push method is used when economies of scale in procurement outweigh
132 Total Supply Chain Management

the benefits of minimum inventory levels as achieved in the pull method. That is,
the warehouse does not decide the quantity of the order but will receive a delivery
as determined by the production schedule. Normally, a fixed interval review model
with a forecast demand for manufacturing planning is used in a push system.
With the support of information technology, businesses are moving towards
a virtual inventory system with a single stock concept which can be held any-
where in the system, be it on order with the supplier, in production or at the
point of sale (POS). This is the concept of virtual inventory management
(VIM) or electronic inventory. Thus instead of considering stocks of raw mate-
rials, work in progress at the various stages of production and finished goods in
warehouses each as separate stocks of inventory, purely because of their phys-
ical location, inventory is now considered as being part of one single stock.
The movement and management of inventory in a warehouse is further
enhanced by the application of advanced technology such as warehouse man-
agement systems (WMS) and radio frequency identification (RFID).
The evolution of WMS is very similar to that of many other software solutions.
Even though WMS continues to gain added functionality, the initial core function-
ality of a WMS has not really changed. The primary purpose of a WMS is to con-
trol the movement and storage of materials within an operation and process the
associated transactions. Directed picking, directed replenishment and directed put
away are the key to WMS. The key functionality of a WMS must include:
• A flexible location system.
• User defined parameters to direct warehouse tasks by using live documents.
• Built-in level of integration with data collection devices or an established
ERP system.
RFID is an automatic identification method, relying on storing and remotely
retrieving data using devices called RFID tags. An RFID tag is an object that
can be attached to or incorporated into a product, pack or pallet in a warehouse
for the purpose of identification using radio waves. They may not ever com-
pletely replace barcodes, due in part to their higher cost, but with the advantage
of more than one independent data source on the same object the application of
RFID is likely to grow in supply chain management.

Case example: FDA tracks drugs supply

The Food and Drug Administration (FDA) of the USA announced in
February 2004 new steps to strengthen protection against the problem of
counterfeit drugs in the supply chain. The agency’s Counterfeit Drug Task
Force recommended RFID tags to track drugs from the source to the POS.
The Prescription Drug Marketing Act of 1987 requires drug distributor
to provide documentation of drug products throughout the distribution
system. This chain of custody of medicines is also known as ‘pedigree’
regulation. The Task Force outlined the new measure in a report to safe-
guard the drug supply with the use of electronic track and trace technology
such as RFID. This would create an electronic pedigree for tracking the
 Distribution management 133

movement of drugs through the supply chain. This report recommends

that drug manufacturers and distributors continue to work toward that
goal and that their implementation of RFID technology be used first on
products which are most susceptible to counterfeiting.
In order to ensure the appropriate usage of RFID technology the rec-
ommendations from the Task Force also include:

• Consumer education about RFID and the labelling of RFID tagged

products.
• When RFID tagged drugs are dispensed to consumers there should be
protection of consumer privacy to prevent unauthorized information
stored in RFID tags.

‘We intend to work with industry and standard setting organizations to

explore the feasibility of allowing FDA to access relevant electronic
pedigree information, as that information would greatly improve
our ability to minimize exposure of consumers to counterfeit drugs by
facilitating rapid criminal investigations of illicit transactions’,
Dr. L M Crawford, Acting FDA Commissioner added. The FDA also
applauded the initiatives announced by the pharmaceutical companies
Pfizer, GlaxoSmithKline and Purdue Pharma.
Source: FDA (2004)

Transport planning
Transport planning is a key decision area of distribution management.
Transportation is a non-value-added item to the cost of the product and absorbs,
in general, the biggest share of the logistics cost. Students often argue that
unless a product is in the right place it is of little value and thus transportation
does add value. Not so! The concept of adding value relates to the transforma-
tion process, that is the conversion of inputs of raw materials, labour and
machinery into a finished product. Storage, inspection and transportation all
add cost but do not add value. Some of these costs will be unavoidable; mate-
rials have to be moved, goods have to be distributed, but storage, handling and
movement only add to the cost, and not to the value of the product.
The main factors in transport decisions are (see Figure 9.3):

• Transport mode selection.

• Trucking routing.
• Delivery planning.

There are various means of transportation such as railway, river, canal, coastal
shipping and pipelines for products such as oil. In some countries, for some
products, air transport might prove to be the most viable option. Generally how-
ever because of dependability, flexibility, speed and door-to-door service, road
134 Total Supply Chain Management

Supplier

T1
T3 Local D1
depot
Distribution
centre
D4 D2
Factory

D3

T2
T1/T2/T3 Trunk miles
D1/D2/D3/D4 Delivery miles

Figure 9.3 Distribution routes.

transport has proved to be the best option. For the UK, the Channel Tunnel has
added to the convenience of road transport to and from Europe.
There are significant opportunities in optimizing the selection of hauliers or type
of trucks. In order to take advantage of the competitiveness and the up-to-date
development of vehicles, companies are building partnerships with hauliers.
After the selection of the mode, the planning of trunking or primary transport
for single-drop repetitive journeys between known or well-known locations
(e.g. factory to warehouse), is relatively straightforward. However, the routing
and scheduling of delivery vehicles to customers is extremely variable and
therefore requires more systematic planning. There are computer-based proce-
dures to optimize delivery to customers. The objective is not to minimize the
total mileage but to maximize the utilization of vehicle time (delivery window)
and space (by volume or weight) and ensuring customer service.

Case example: Fresh foods – Christian Salvesen

Christian Salvesen is a major logistics business specializing in the strate-
gic management of outsourced supply chains.
A key task of Christian Salvesen is defined in its mission statement as:
‘To meet customer service requirements consistently and reliably through
a mutually cost effective supply chain’. This usually takes some time to
achieve, not because it is either complex or controversial but because the
supply chain can mean different things to different people. Furthermore,
although the objectives are unanimous, the way in which each organiza-
tion achieves them through their respective supply chains is different.
According to the Logistics Director ‘It is these two elements – cus-
tomer service and resource efficiency – that drive any supply chain’.
 Distribution management 135

Let us examine Christian Salvesen’s experience in implementing

these principles in the area of the supply of fresh foods through Evesham
chilled depot. Here is a product group whose availability is measured in
hours. Meticulous planning and co-ordination is required to customer
demand in rigid ‘delivery windows’ and plans have to cope with most
unpredictable element of a supply chain – Mother Nature.
Evesham is a chilled depot of approximately 20,000 square feet
situated in the Vale of Evesham in Worcestershire, which is one of the
major produce growing areas in the UK. It has a staffing level of 94 and
nearly half of them are qualified reefer vehicle drivers. It is a stockless
depot for cross docking operation under temperature controlled conditions.
The main function of the depot is to act as a consolidator of suppliers
produce and chill products received from various parts of the country,
for subsequent onward despatch to the majority of the UK and Irish
Regional Distribution Centres. It is a stockless depot for cross docking
operation.
Operating on a 24 hour/7 day a week (24/7) basis Evesham is a criti-
cal link in the fresh food temperature controlled supply chain, and
allows the speediest possible route from field to plate thus preserving
both product quality and maximum shelf life. The depot has an operat-
ing revenue budget of £7.6 million from which it generates a return on
investment (ROI) of 21 per cent and a profit margin of 10 per cent.
The depot is subject to seasonality due to the nature of its core volume
product, but continues to develop its year round chill business. The
majority of its profits however are derived during the summer months of
the produce season. Volumes peak during August at a throughput of 7600
pallets per week, with a peak day activity of 1600 (21 per cent) pallets.
Regular daily collections are made from suppliers/packers during the
day and return to the depot during the afternoon/evening. Product is off
loaded into a cross dock/straight through chilled warehouse facility
where it is sorted for onward delivery destination and despatched any-
time from 16.00 hours onward through until 01.30 that night.
Orders from the major retailers would have been received into Evesham
between the hours of 11.00 and 17.00 that day. A typical example of the
complexity of the physical operation would be for suppliers such as
Flamingo/Wealmore which are based in the North West of London.
10.00 Vehicle leaves Evesham to collect clean empty trays from
Corby for delivery to Flamingo.
16.00 Arrives at Flamingo, off loads trays and reloads half the vehi-
cle with product for that days retail orders.
17.00 Arrives at Wealmore to collect balance of load for that days
retail orders.
20.30 Arrives back at Evesham to off load product into chill ware-
house where it is sorted into delivery destinations for Ireland and
Scotland.
136 Total Supply Chain Management

Tesco – Dublin/Belfast/Livingston
Safeway – Bellshill
Asda – Grangemouth
Somerfield – Pitreavie
(Irish product would leave asap).

23.00 Vehicle leaves for Salvesen depot at Ormskirk in Lancashire.

01.30 Arrives at Ormskirk where further product is put on (Ormskirk
is a produce growing area) and the trailer is then taken on to Scotland
by an Ormskirk driver, with the Evesham driver returning with
another trailer (may be loaded) to Evesham.
07.30 Arrives at first of Scottish delivery points.

On completion of deliveries the vehicle would go into the Salvesen oper-

ation at Camerons Wood (Livingstone, Scotland) to confirm all activities
onto the Salvesen ‘Track and Trace’ Sharp system (confirms visibility of
delivery to customer). The vehicle may then reload with produce or soft
fruits collected earlier by Camerons Wood from the Scottish growers, and
return it via the Ormskirk changeover link into Evesham for consolida-
tion and onward delivery to the retail RDC’s (Re-distribution Centres).
The transport fleet at Evesham comprises 34 owned tractors sup-
ported by 53 temperature controlled trailers including 40 hired trailers.
In addition to 10 tractor/trailers based Ormskirk the operation has the
flexibility to ‘buy in’ extra resource from other depots in the Salvesen
temperature controlled network. The hired tractors are made up of both
long-term rental contracts and short-term casual hire to meet the variable
demand and seasonality in a changing market.
Currently Salvesen covers the following retailer RDC profile for fresh
foods:

Tesco 11
Safeway 8
Somerfield 7
Asda 8
CWS 2
M&S 3

The service level agreements with retailers include that delivery should
be made within the limit of the delivery window. Any significant varia-
tion of delivery time is subject to penalty. There is no buffer stock, as
such a short shelf life of such a perishable product group does not allow
for it. There are also other challenges, such as forecasting the effect of
weather or promotions. The supply chain cannot afford any shortage
of refrigerated trucks of appropriate capacity when needed. Even we
 Distribution management 137

achieve 100 per cent availability on all products it may count for nothing
if the absenteeism of drivers is out of control.

Exercise
1. What are the customer service and resource utilization objectives at
Evesham?
2. What are the demand planning and supply planning problems at
Evesham? Outline a strategy to deal with these problems.

Sample solution
The customer service objective at Evesham is to provide fresh food prod-
ucts on time in full to RDCs according to their delivery windows. The
most important criteria is timing. The compromise is for cost. However the
reefer supply is now moving from a specialist business to a commodity
business and thus the cost should be competitive. Thus cost is of medium
importance. The specification is also of medium importance. Students
may argue that as the customer expects all deliveries in right quantity in
controlled temperature the specification should be of high importance, but
the quality of product is the primary responsibility of the farmers.
The resource utilization objective is maximizing the utilization of
resources owned by the company – people (drivers) and facilities (own
vehicles). Facilities refer to those owned by the depot. The materials are
not owned by the depot and stock control is not an issue. As the products are
handled in controlled temperature the importance of materials is medium.
The capacity management strategy should be to provide an efficient
adjustment of capacity.
As output stocks are not feasible an efficient adjustment of reefer
vehicle capacity has been provided. The depot provided own and con-
tract vehicles (34 tractors and 53 trailers) to cover the average through-
put (e.g. 1100 pallets per day  at 20 pallets per trailer, 55 trailers). In
addition 10 tractor/trailers from Ormskirk are available to adjust for
variation and seasonality.
Of the 94 staff nearly half of them are qualified drivers. Therefore,
some extra capacity of drivers are planned to cover for both variations
and absenteeism.
Because of the agreed delivery window the principle of ‘backward
scheduling’ is applied. A route scheduling optimization programme is
available to provide recommended schedules, based on which final
adjustments are made by the route planner.
In order to improve the exchange of information the company
has installed EDI (electronic data interchange) systems with some
supermarkets.

Source: Christian Salvesen, UK (2002)

138 Total Supply Chain Management

Strategic alliances
In order to achieve an integrated supply chain the various players need to work
together. The four most important types of distribution management strategic
alliances are third-party logistics (3PL), retailer–supplier partnerships (RSP),
distributor integration (DI) and customer relationships management (CRM).

Third-party logistics (3PL)

The use of a third party to take over some or all of a company’s logistics
responsibilities is becoming more prevalent. 3PL is simply the use of an out-
side company to perform all or part of the firm’s materials management and
product distribution function. 3PL relationships are typically more complex
than traditional logistics supplier relationships. Modern 3PL arrangements
involve long-term commitments and often multiple functions or process man-
agement. As organizations focus on their core competencies they are looking
for other specialist organizations to partner with.

Retailer–supplier partnerships (RSP)

As customer satisfaction becomes more imperative and margins get tighter it
makes sense to create co-operative efforts between suppliers and retailers in
order to leverage the knowledge of both parties. The types of RSP can be
viewed on a continuum. At one end is information sharing. At the other is a
consignment scheme of vendor-managed inventory (VMI), where the vendor
completely manages and owns the inventory until the retailer sells it.
In a simple quick response strategy, suppliers receive POS data from retail-
ers and use this information to synchronize their production and inventory
activities with actual sales at the retailers. In this strategy the retailer still pre-
pares individual orders, but the POS data is used by the supplier to improve
delivery performance and hence reduce supply variability.
In a continuous replenishment strategy, sometimes called rapid replenish-
ment, vendors receive POS data and use this data to prepare shipments at pre-
viously agreed intervals to maintain specific levels of inventory.
In a VMI system, the supplier decides on the appropriate inventory levels of
each product and the appropriate policies to maintain these levels. The goal of
many VMI programmes is to eliminate the need for the retailer to oversee spe-
cific orders for replenishment. The ultimate is for the supplier to manage the
inventory and only receive payment for it once it has been sold by the retailer
in essence the retailer is providing an outlet for the supplier!

Distributor integration (DI)

Modern information technology has enabled this strategy in which distributors
are integrated so that expertise and inventory located at one distributor is avail-
able to the others. DI can be used to address both inventory- and service-related
 Distribution management 139

issues. In terms of inventory, DI can be used to create a large pool of inventory

across the entire distributor network thus lowering total inventory costs while
raising customer service levels. Similarly, DI can be used to meet the cus-
tomers specific needs by directing those requests to the distributor’s best suited
to address them.
The influence of the Internet on the economy in general and business prac-
tice in particular has been tremendous. The direct business model employed by
industry giants such as Dell Computer and amazon.com enables customers to
order products over the Internet and thus allows these companies to sell their
products without relying on third-party distributors apart from those providing
the physical delivery service.
Similarly, the Internet and the emerging e-business models have produced
expectations that many supply chain problems will be resolved merely by
using these new technology and business models. Whilst it has promised so
much in reality the expectations have not been achieved. In many cases the
downfall of some of the highest profile Internet businesses has been attributed
to their logistics strategies.
Whilst the success of the business to customer concept has not yet eventu-
ated the use of the Internet for business to business integration has more likeli-
hood of success. Integration of the supply chain players is made possible with
the use of the Internet and the associated technologies.
Reviewing the impact of the new technologies on the supply chain provides
an interesting development. The Internet and the evolving supply chain strate-
gies has seen a shift in transportation and order fulfilment strategies away from
case and bulk shipments to single item and smaller-size shipment and from
shipping to a small number of stores to serving highly geographically dis-
persed customers. This shift has seen the importance of partnerships with
parcel and LTL (less than truck load) industries. It has also increased the
importance and complexity of reverse logistics, that of handling the significant
numbers of product returns. Thus, one of the big winners in the new develop-
ments is the parcel industry. Indeed one of the important advantages of the par-
cel industry is the existence of an excellent information infrastructure that
enables real-time tracking. Those players in this industry who work to modify
their own systems in order to integrate it with their customers’ supply chains
are likely to be successful.
As businesses come to understand the role of the Internet we will see new
models of business evolving. As yet what those models will be is unsure, but
one thing is for certain the Internet will have an impact on how supply chains
of the future will be managed.

Customer relationship management

The recent growth in availability of customer relationship management (CRM)
systems has lead to access to data that can be used to improve overall supply
chain performance. The objective of CRM is to develop a customer-centred
140 Total Supply Chain Management

organization that ensures every opportunity is used to delight customers, foster

customer loyalty and build long-term relationships that are mutually benefi-
cial. The ultimate goal is to ensure that each individual customer’s current and
future wants and needs can be satisfied. What this involves is the capture of
individual customer transaction details and from this historical data developing
a picture of what that customer needs and purchasing habits are.
CRM’s relevance to overall supply chain management lies in the need to inte-
grate such systems with the management of the supply side. The information
gathered by the CRM systems can be used to improve the overall performance of
the complete supply chain. As the need for supply chain transparency increases,
businesses are looking for ways to improve the efficiency of supply. This has lead
to the development of the concept of total demand chain management.
The partnership with customers is the mirror of working with suppliers with
the role reversed. Ideally, the relationship will be that the customer involves the
manufacturer in the market research phase so that together the best product can
be designed to meet the end consumers’ needs. Likewise the customer through
electronic data information (EDI) or Extranet can input directly into the ERP
system. Improved internal relationships within the business between manufac-
turing and logistics staff interfacing directly with the customers should achieve
a more precise specification of customer needs and sharing data (e.g. EDI or
B2C – Business to Customer web).
Thus, it is useful to carry out an activity-based costing (ABC) analysis
(Pareto chart) to identify the top customers as shown in Figure 9.4. The Pareto
theory is that 20 per cent of the customers will account for roughly 80 per cent
of the business. ABC analysis takes this a step further by dividing customers
into three groupings as shown Figure 9.4. Normally the division will be the
top 5 per cent, the next 15 per cent and the balance of customers 80 per cent.

100
95
Cumulative % of sales value

80

A B C

20 60 100
Cumulative % of customers

Figure 9.4 ABC analysis of customers.

 Distribution management 141

In this example the analysis has been further broken down so that it can be seen
that the top five customers account for 24 per cent of the sales, and overall just
3 per cent of the customers account for 80 per cent of the sales.
Another challenge of working with customers is to identify the true prof-
itability of all customers and then to improve the profitability of key customers.
Figure 9.5 illustrates that a ‘tail’ of unprofitable customers actually reduces the
total profit contributions.
Cumulative % of profit contribution

100

100
Cumulative % of customers

Figure 9.5 Customer profitability.

Source: Christopher (1992).

In one organization we encountered, the top 5 per cent of the customers

accounted for 40 per cent of the sales, and because of their importance to the
company they had been able to negotiate volume discounts and special deliv-
ery arrangements. When these benefits were examined and costed out it was
found that whereas the balance of the customers were providing the company
with a true 40 per cent gross profit margin on sales, these top 5 per cent were
only providing the company with a margin of 10 per cent. Thus overall the
gross margin on all sales for the company was reduced to 28 per cent whereas
the budget had allowed for 40 per cent. This had not been apparent as the dis-
counts had been shown in the accounts as an overhead expense and the extra
transport costs had also been included as an overhead cost. There were also
other reasons as to why the drop in true margin was not obvious.
In order to assess the true profitability of customers it is necessary to move
away from the average allocation of cost (e.g. cost per tonne) and conventional
cost accounting. Logistics managers are now working towards what is known
as ‘activity-based costing’ (ABC) where cost is allocated according to the level
of activity that consumes the resources. For example, the order picking cost of
an order will vary according to its work content depending on whether the
142 Total Supply Chain Management

order is in full pallet or small units, number of lines or SKUs or whether it

requires additional packaging.

Summary
It is generally accepted that unless you are in the distribution business you
should seriously consider outsourcing your distribution to a third-party spe-
cialist. It is reasonable to expect that a specialist distribution company is likely
to provide more cost effective service for a supplier. However, cost effective is
not the same as service effective and it is arguable if a third-party company is
likely to full customer satisfaction. When a distribution company is delivering
goods on behalf of a group of suppliers it is fair to assume that the distributor
will not offer any extra service beyond what is specified in service level agree-
ments. Therefore, order fulfilment and customer relationship management will
be affected by outsourced distribution policy.
In this chapter we have described the fundamentals of distribution strategy,
warehouse operations, stock management, transport planning and CRM to
encourage a better understanding of distribution management. With this backdrop
a manager hopefully will be better equipped to manage their own distribution
operations or monitor the distribution activities of third-party distributors. The
knowledge of distribution management principles as a building block of total
supply chain management also highlights its key role in delivering goods and
services to the customer.
Part 2: Building Blocks of
Supply Chain

Exercises
Forecasting
1. A popular product at Beaconsfield Garden Centre is orchid plants imported
from South East Asia. These plants are nurtured in temperature and humid-
ity controlled green houses. The monthly sales figures of orchid plants for
2006 are shown in the following table:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
80 70 90 100 115 100 120 110 70 80 60 130

(a) Forecast the monthly demand for January, February and March 2007 by
using simple exponential smoothing with α  0.1.
(b) Evaluate the mean absolute deviation (MAD).
2. A call centre in Bangalore recorded the incoming overseas calls as shown
in the following table. This data is to be used for forecasting the staff and
investment in facilities.

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006
Call minutes 35 39 44 49 56 63 73 84 96
(millions)

(a) Plot the data on a scatter diagram and develop a linear regression that
best fits these data.
(b) Is the linear regression a good forecasting tool for the call centre? How
do you justify your response?
(c) What is forecast of overseas calls in 2010?
3. The sales figures of the first 12 weeks of 2006 at Domino Pizza shop are
shown below:

Week Demand Week Demand Week Demand

1 110 5 98 9 116
2 116 6 122 10 112
3 120 7 100 11 96
4 128 8 106 12 92
144 Total Supply Chain Management

(a) Estimate the forecast for the next 4 weeks using

(i) a 4-week moving average,
(ii) exponential smoothing with α  0.1.
(b) Evaluate the MAD and MAPE (mean absolute percentage error) for
each method of forecasting.
(c) Which of the two methods do you consider more appropriate and why?

Inventory management
1. The total annual demand of an item is 2000, the ordering cost is €20 and the
stock holding cost per unit per year amounts to 10 per cent of its purchase
cost. The cost per unit of an item is €80.
Find the economic order quantity (EOQ) by using the formulae:
EOQ   (2Dc1/c2)
where D is the annual demand, c1 is the ordering cost per lot and c2 is the stock-
holding cost per unit per year.

2. A garden centre selling sacks of fertilizer has an average demand of 10

sacks per day. The stock is replenished every 15 days.
Assuming that for a level of 95 per cent, safety stock  1.64  standard
deviation of demand during lead time.
Determine the re-order level of the fertilizer when the standard deviation
during 15 days is 11.6.
(Hint: R  Average demand in lead time  safety stock.)

3. Ford Motor Company has an engine plant in England and a car assembly
plant in Germany. The assembly plant delivers 1500 completed cars to dis-
tributors every year. Engines are transported by trucks to Germany. The
transport and shipping cost for each truck is £1000. The ex-works cost
of each engine is £1500 and the stockholding cost for engines in England is
20 per cent per year.
Calculate by using EOQ formula how many engines should be transported
by trucks in each trip?

4. A sports shop in Rio de Janiro sells football T-shirts to tourists at the rate of
2000 shirts per year. The ordering cost is £20 (GBP) and the holding cost
per unit per year amounts to 50 per cent of its purchase cost. The purchase
cost per unit of the T-shirt depends on the total quantity ordered as follows:
Less than 500 500–999 1000 or more
1.21 1.00 0.81
(a) Find the economic lot size.
(b) Calculate the optimum value of cost per year.
 Distribution management 145

5. The weekly average demand of Nokia mobile phone handset at a high

street store is 300. The demand pattern is normally distributed with a standard
deviation of 200. The lead lime of supply is 2 weeks. The store monitors
its inventory continuously and tries to maintain a service level target of
95 per cent.

(a) Determine the safety stock of Nokia handsets that the store
should carry.
(b) What should be the re-order point?

Planning and scheduling

1. Joyamaya Toys is a family owned business for children leisure products.
The planning office of the company is based at High Wycombe,
Buckinghamshire, and the distribution of products including mail orders is
carried out from a rented warehouse at Milton Keynes. The turnover of the
company in 2002 was £14 million.

The weekly sales forecast of ‘Game Boy’ including additional confirmed

orders from customers is shown in Table 1. The planning office has the follow-
ing additional demand and supply data:

– Distribution demand: 10 units each in week 3 and 6

– Promotion: 15 units in week 4 and 5 units in week 5
– MPS (master production schedule) lead time is 2 weeks
– The delivery of MPS is due on week 2

(a) By taking into account additional requirement for distribution

demand and promotion, complete Table 1 and calculate the demand for
‘Game Boy’.
(b) By using the total demand from Table 1 as forecast demand in Table 2
also the given data for MPS, calculate ‘Projected available’ in Table 2.

Table 1 Total demand management

Weeks

1 2 3 4 5 6 7 8

Sales 30 25 20 20 20 20 25 30
forecast
Customer orders 10 5 – – – 5
Distribution demand –
Promotion
Total
146 Total Supply Chain Management

Table 2 Demand/supply review

Weeks

1 2 3 4 5 6 7 8

Forecast
demand
Actual
demand
On hand Projected
50 available 20
Available to
promise
Order MPS at
quantity receipt
70

Normal actual demand – replace forecast

Abnormal actual demand – do not replace forecast

Warehousing
1. The Central Warehouse of a large supermarket has an annual demand
of 32,000 tonnes and an average stock cover target of 8 weeks. During the
holiday months of July and August the weekly demand becomes 30 per cent
more than the average.

Given that the average load per pallet is 500 kg and desired utilization of pallets
is 85 per cent calculate the required pallets required for the peak months.
Clearly state the assumptions made.

Questions
1. What is required from forecasting in the following cases:
(a) Stock holding for a manufacturer of FMCG (fast-moving consumer goods).
(b) A make to order just-in-time product supplier.
(c) A mail order firm.
2. Which method of demand planning would you recommend and why for
products with a low market share and which also have seasonality of demand:
(a) A computerized demand planning software with appropriate formulae
to smooth forecast.
(b) A process of demand forecast regularly reviewed by Marketing, Sales,
Manufacturing and Logistics.
3. What is aggregate planning? Explain the type of industry or product where
aggregate planning would be most appropriate. How would you apply
aggregate planning in a business with high demand uncertainties?
 Distribution management 147

4. What are the basic capacity planning strategies? Describe with examples
and a diagram (e.g. ‘decision tree’) the use of each of these strategies.
5. What are the key steps of a purchasing process in a supply chain? Explain the
appropriate authorization level for procuring stocked and non-stocked items.
6. Explain with examples the outsourcing strategy of an automobile manufacture.
What types of suppliers would be appropriate for supplier partnerships and
for SLAs (service level agreements)?
7. Describe the principles of ROL/ROQ and ‘Fixed Interval’ inventory manage-
ment systems. Show the circumstances required for each of these systems.
8. What are the common and distinctive features between a typical manufac-
turing and service operation? Explain how you may apply selected manu-
facturing tools and processes to a service industry.
9. Should all operations be managed in the same way? Explain the ‘five V’s’
of processes and discuss there implication in managing operations.
10. It appears to be a popular practice to outsource warehousing and distribu-
tion operation. Discuss the implication of outsourcing on customer service
and for competitive advantage.
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 Part 3
New Demands
and Trends
This page intentionally left blank
10
Service industries, event
operations and non-profit
organizations

Introduction
This chapter considers the special supply chain requirements for:
• Service industries
• Event management
• Non-profit (humanitarian) organizations
All of these operations require materials just as do any other organization, but
their needs and way of working merit special consideration. In service industries
the output is intangible and performance will largely be measured in qualitative
terms, for example value of advice, friendly empathetic service. Each service
delivery will be to some extent unique. With service industries demand is often
erratic and the duration of each interaction can vary. For example, a doctor in a
general practice might schedule 10 minutes per consultation, but by the end of
the day patients will be waiting up to an hour for their appointment due to the
doctor needing longer time than planned with some patients and the late arrival
of others. In events operations each event can be planned and resources sched-
uled in advance with some degree of certainty. Each event is unique. If an event
consists of more than one performance, each performance no matter how skilled
the participants, will be unique and once the event is over can it never be exactly
repeated and in many cases not at all. For example, if the television and video
recording equipment fails during a cup final (be it cricket, football, rugby or
darts) there is no chance of a repeat. The actual performance of the actors in an
event can sometimes be measured, for example 15 young Chinese women break-
ing the world record for the number of people on a bicycle, but for many events
performance measurement is subjective, for example can Kiri Te Kanawa still hit
the high notes? In non-profit operations such as relief for flood or earthquake vic-
tims, although organizations exist and contingency plans might exist, when and
where the disaster will occur cannot be known. The performance of the relief
organization will be hard to judge, although some lives might have been saved
more could have been done, and how much of the money donated is spent on
administration or wasted and what percentage actually gets to the victims?
152 Total Supply Chain Management

All of the above types of operations have several things in common; each
occurrence will be unique and performance to a large extent will be judged in
qualitative terms and judgement can well be uninformed and emotional. In a
pure supply or manufacturing operation performance can be measured in quan-
titative terms; for example, how many delivered, specification met, delivery
on time and cost. This chapter considers the special requirements of service,
event, and non-profit organizations and shows how application of supply chain
management principles will improve efficiency and effectiveness.

Service operations
In the UK 78 per cent of the work force are engaged in service industries (see
www.Statistics.gov.uk.) and according to the US Bureau of the Census in the
USA 80 per cent of the work force is engaged in service industries or work for
the government (see www.census/gov).
In Chapter 8, we distinguished service and transport from manufacturing
and supply operations with the use of system structures. We repeated Wright
and Race (2004, p. 4) who say that ‘A service organization exists to interact with
customers and to satisfy customers’ service requirements. For any service to be
provided there has to be a customer’. Without the input of the customer the
service cannot be provided. From the clients point of view, where in some service
industries such as law and accounting time charged is calculated on 6-minute
blocks (10 units per hour), the cost of the service is not cheap. Customers are
becoming price conscious and thus service industries across the board are
under pressure to reduce costs and at the same time to provide a accurate and
fast service.
Before the service provider can provide a service they will need a supply of
resources. The acquisition of tangible resources such as office space, computer/
information system, electricity and water, stationery, forms and brochures, etc.
are generally not a big issue and any problems associated with acquisition of
these basic and direct requirements will be the same for any type of organiza-
tion and need not be discussed further. Service industries rely on the intellec-
tual capital of their people. Wages will be the biggest direct cost. Service
industries in turn will require services. A big area and often neglected for sav-
ings for service industries is in the purchase of indirect goods and services.
Where a service organization has several offices, some distance from each
other, spending escalates, and suppliers of services to the offices become pas-
sive and complacent. For the remote office it seems to be cumbersome to be
continually applying for approval for routine purchases, and generally it will
not be obvious as to who is responsible for what. Further when mergers and
take overs occur there is a reluctance to impose rules and regulations from the
‘head’ office for day to day expenses and there will be little commonality in
how expenses are controlled at each remote office.
Costs can be reduced. There is no reason why service industries and clients
of service industries cannot adopt supply chain management and supplier
 Service industries, event operations and non-profit organizations 153

relationship management to reduce costs. One of the big savings can be made
by formalising service purchasing.

Service spend by non-service companies

Fearon and Bales (1995) also cited in Lyson and Farrington (2006), found from a
study of 116 large American companies, that 54 per cent of total purchasing was
for services. According to the Center For Advanced Purchasing Studies (CAPS)
the spend for services in some organizations is as high as ‘86 per cent of the total
purchasing spend’ also see Knowledge Storm (2006). The Institute for Supply
Management (2004) from their studies find that between 30 and 70 per cent of an
organizations total spend is for services. Fearon and Bales in their study also
found that 70 per cent of services purchasing is made by staff not in the purchas-
ing department. In other words staff went direct to their preferred service
providers and less than 30 per cent of the expenditure was handled by purchasing
staff. One of the largest and not well-controlled expenditure is in travel and enter-
tainment. Travel might in many cases require advance approval, but the actual
amount spent is not well monitored or queried. It is reported that Delta Airlines by
analysing service spend was able to leverage discounts with suppliers. They had
several hubs each doing their own purchasing, by centralizing purchasing in 2002,
over a 3-month period, they were able to save $US 11 million on the cost of hotel
rooms for staff (a saving of $44 million per annum).
The reasons why staff bypass the purchasing department are fairly obvious:

1. They think they have better expertise than the purchasing department, know
what they want, and cannot be bothered with following procedures and
form filling.
2. They have a personal relationship with the supplier, and prefer to commu-
nicate direct rather than through an intermediary.

The dangers of allowing staff, no matter how well intentioned and honest they
may be, to do their own thing is obvious. A study by Denali Consulting found
that when cost savings are pursued, savings on services ranged from 10 to 29
per cent compared to an average of 5–17 per cent for other commodities or
materials (Stratford and Tiura, 2003).
Once an organization realizes the amount actually spent on services the next
step is to determine:

• What and why

• Where and why
• When and why then
• Who and why that person

The objective being to determine ‘How’. ‘How’ being to agree the most effi-
cient and effective system. It goes without saying that the new system has to be
154 Total Supply Chain Management

monitored to be kept in place. It is too much of a temptation for staff in a hurry

to bypass the system.

Outsourcing
Purchasing departments if not accustomed to buying services almost certainly
will need to develop new skills. A study by CAPS (2003) found that 75 per cent
of the respondents (from purchasing departments) found it was more difficult
to manage (and buy) services than to buy/manage goods. If an organization
does not have the right purchasing staff, outsourcing of specialist purchasing
should be considered.
It is becoming increasingly cost effective for organizations to outsource
service provision. For example, in 1999 Harley-Davidson outsourced its entire
indirect spend to three suppliers, who either provide the service required or
who in turn arrange services from other suppliers. The savings in 2000
amounted to a reported $US 4 million.
Service providers can be grouped under the following headings:

Professional Personnel Property Support

Legal Recruitment Cleaning Information

Financial Appraisals Maintenance technology
Taxation Staff contracts Additions Logistics
Consultants Pay roll Layout planning Procurement
(such as Six Sigma) Development/ Waste management Printing and
Medical training Environmental copying
Insurance Welfare/ advice Vehicle fleet
Architects counselling Recycling Laundry
Specialist research Labour/union Gardens Catering
Travel arrangements relations Security Credit control
Reception

ISS, a Danish based company operating in 42 countries with a staff of 375,000

provides ‘facility’ services with specialist divisions for cleaning, office support,
property and catering. Other companies provide specialist services for one or
more of those listed above.
It can be argued that an organization, large or small, will find it more efficient,
effective and cheaper to subcontract to specialist organizations and to concen-
trate on their core business. Whereas once large organizations such as hospital
and military bases would have own support services of kitchen, laundry and do
its own cleaning, all of these activities are now subcontracted. Likewise, for a
small or medium enterprise having own in-house lawyer or other professional
specialist would not be warranted.
 Service industries, event operations and non-profit organizations 155

The public sector and government organizations are engaged in initiatives to

improve the performance of their service supply chain and reaching out to the
experience of global service providers such UPS, FedEx and DHL. The national
institution of National Health Service (NHS) in the UK which is known to be an
icon of self-contained healthcare services has formed an outsourcing service
supply chain partnership with DHL Logistics.

Case example: DHL service supply chain for NHS

In 2006, DHL Logistics won a 10-year deal to manage GBP 22 billion of
the UK Department of Health’s annual procurement spending. Under the
agreement, DHL will run a division called NHS Supply Chain on behalf
of NHS Business Services Authority, and be responsible for delivering
all procurement and logistics services across an initial 500,000 products
to support 600 hospitals and other healthcare providers in England. NHS
Supply Chain will have its own management team and be governed by a
Board dedicated to managing the performance of the operations. The range
of products NHS Supply Chain will manage encompasses a range of goods
including supplier and maintenance contracts, food, bed linen, office equip-
ment, stationery, cleaning products, patient clothing, medical and surgical
equipment, dressings and provisions. The UK Department of Health
believes the arrangement will allow public health authorities more
resources to patient care and continue to manage their cost base.
DHL has committed to return GBP 1 billion savings over the contract
period back to the UK National Health Service. John Allan, Chief
Executive of DHL’s Logistics division, said, ‘The contract will ensure that
NHS Trusts get access to a wide range of high quality, innovative products
that will be selected by having extensive dialogue and testing procedures
with clinicians’.
Logistics Today (September 2006)

Event management
The events industry includes festivals, meetings, conferences, exhibitions, ports
and a range of other events. With the growth of government regulation and cor-
porate involvement in events including sponsorship, the event environment has
become increasingly complex. Event managers are required to understand the
needs of their direct customer and of the final customers and to satisfy a number
of stakeholders. The number of suppliers including performers can be complex.
And in some cases the event manager will have no direct control, but will be
held responsible if things go wrong.
156 Total Supply Chain Management

The following section is derived, with amendments from Tum et al. (2005).
Resources and specializations used for each event are diverse, and can be
sourced from many different suppliers. Some of the resources may be under
the events manager’s direct control, and others may be subcontracted or out-
sourced to agreed specialists – for example, lighting and sound contractors,
caterers, musicians and pyrotechnic companies.
The event supply chain can be shown as Figure 10.1.

Supplier

Supplier Event manager Client Customer

Supplier
Figure 10.1 Event supply chain.

Managing this chain will normally involve dealing directly with purchasing
and supply and inventory management. The feedback that flows backwards is
essential because it allows the event manager to see how well received the
products, supplies and services were, and whether there should be any changes
in the future.
The flow of resources should be managed from its very origins right up to the
point where the customer experiences the event. For example, the event manager
needs to know the health and safety procedures for a visiting Chinese circus
company including a firework display to coincide with the Chinese New Year at
a local football ground booked though an agent. Although the agent will have
covered many of the details, the event manager will still need to be assured about
the suitability of the performance, how it will match the needs of the audience,
and how it can be coordinated with all the other activities into a whole event.
For an event there can be many different supply chains through which the
varied resources flow. They all have to be managed and coordinated into one
event, which is delivered at the moment it is experienced.
Supply chain management is a holistic approach that stretches forward across
the event manager’s own organization to the client and customers (see Figure 10.1),
and backwards through the many different suppliers and to their suppliers. By
having this holistic approach and integration across company boundaries there
can be substantial benefits for all stakeholders. It should be viewed as a chain,
and any break in that chain will have an adverse affect on the client. The aim is
to develop an integrated supply chain to achieve those critical success factors
judged by the customers, required by the client and other stakeholders including
local regulatory authorities. Unlike most other industries, the project that the
event manager is responsible for cannot fail. It must happen on time, and there
is no chance of a repeat. For example a one night concert cannot be repeated if
the hall has been double booked. If on the night, 10 minutes after the start the
lighting system or sound system fails for a rock concert the event manager will
not be able to arrange another supplier.
 Service industries, event operations and non-profit organizations 157

Basic objectives of purchasing

Like any other manager event managers are responsible for providing events at
the right cost, the right time, to the right specification and quality, and for the
right duration. These requirements are made even more challenging when
many of the resources are arranged through third and fourth parties. As for any
operation the event manager will be under pressure to keep costs down.
Often within an event company there is not a specific purchasing officer, and
many of the staff may create buyer/supply relationships with different compa-
nies. Some products may be bought outright and owned by the organization,
and others will be used for only one event. In the case of some of the purchase
agreements, for example, the caterers or security service, it is the whole serv-
ice and system that is purchased and the contracted company will bring their
own resources and staff. To be successful, these relationships and the method
of purchasing or leasing must be managed effectively since they all provide
vital supply chains throughout the operation.
In arranging contracts the events manager must always take time to check
legal implications and to assess what can go wrong and what the implications
will be. Risk management is crucial.
The companies from whom products and services are purchased should not
be just seen as suppliers, but should be considered as customers. They are cus-
tomers in the way they are approached for quotations. All businesses are both
customers for some other business. Every operation and part of an operation
should be seen as a network, linking together customers’ customers and suppliers’
suppliers. In the event industry many of the suppliers are specialists and have
their own marketplace and rules and regulations that have to be conformed to.
This includes health and safety, government agencies, international companies
and international customers, and many other organizations. The event manager
needs to be able to stand back and see the myriad of operations and contracts,
working together to deliver the event, as a whole and integrated network of
supply chains.
Slack and Lewis (2002) point out that there are qualitative issues to understand:

1. How does an operation relate to other players in its network?

2. What knowledge of its supply network does it have? Is it close and intimate?
3. Does its supply network have an intimate and close understanding of its own
operations, and ultimately its customers’ needs and objectives?

Single sourcing or multi-sourcing of suppliers?

The event manager should question the number of suppliers with whom the
organization is involved. Does one supplier provide a ‘one-stop shop’ where
many of the resources required can be purchased, or are there are a great many
suppliers providing a range of different services for the same event? If the latter
is the case, then there are consequently more supply chains to be managed. Often
158 Total Supply Chain Management

in events management many brief relationships will be made and there will not
be time to develop loyalty, trust, and understanding of each other’s needs. In real-
ity, depending upon the type of event, a combination of the two polices would
be used.
For example, if you produced classical concerts nationwide you could use a
UK wide sound and lighting company that produces bespoke requirements for
each event, including design and set-building, but you would most likely use a
local caterer and security company. Silver (2004) recommends that all projects
or purchases should be put out to three bids every time to ensure competitive
pricing. On the other hand, Tum et al. argues that a company that is assured of
continued business with an organization will provide competitive prices. It avoids
quotation and administrative costs, and will know which staff and resources are
necessary for the provision of the service. This close relationship might be
jeopardized if frequent competitive tendering is undertaken. However, compla-
cency within this special relationship must not be allowed to propagate and
lead to decreased customer satisfaction or over pricing.
Some event companies prefer to complete everything in-house – both
important and non-important activities. This style of company is known as
being vertically integrated that is, it creates and supplies all the necessary
resources and services from within its own resources. An example of a verti-
cally integrated company is a circus owner who owns the circus animals; has
the artists on payroll; owns the big top, other tents, caravans and transporters;
employs his own costume makers, scene designers and constructors; has a supply
of memorabilia for sale; runs a refreshment booth; and does his own promo-
tion. At the other end of the scale some event companies do nothing in-house
and buy in all of their requirements. This style of company is referred to as being
virtual. An example of a virtual company is a promoter who arranges the tour of
an overseas ballet troupe, hires the theatres, arranges accommodation for the
artists, hires the orchestra, etc., and uses an advertising agency for promotion. In
essence, the promoter owns nothing and works from a rented office. However,
the event manager in this case cannot subcontract the risk or the responsibility!

Vertically integrated organizations

Making a choice to buy out a supplier, or to make/provide those products and
services in-house, would be known as backwards integration. In the event
industry that might entail buying out a lighting specialist or a catering company,
or making all the props for themed evenings in-house rather than using an
external company. This may be worthwhile if that specialism is being used a great
deal within all events, and if the cost of acquisition and integration into the
company would create savings and increase a better provision of what is needed.
Other advantages include preventing competitors from gaining control of key
suppliers.
Forward integration is when an organization buys out or actively completes
the work done by a customer. In the event industry, an example might be a
 Service industries, event operations and non-profit organizations 159

lighting or catering company which, instead of always waiting for an event com-
pany coming to them to ask for a quotation to supply certain goods and services
for an event, proactively seeks out customers and puts on the event itself.
As covered in Chapter 12 the Internet and e-mail provides quicker response
and quicker access to information. The Internet also opens up a greater choice
of providers.
The integrated flow of materials and services through and from the operation is
a prerequisite for achieving high-quality, rapid and low-cost provision for clients.
Therefore, managing the supply chain is a major concern and of major importance
for event organizations, where a high proportion of their products and services
often come from different suppliers or different parts of the organization.
In delivering this well-managed supply chain, the aim of the event company
should be to diminish obstacles between functions and departments within the
organization, minimize activities undertaken, and improve the links between
the departments so that there is no unnecessary repetition. External to the
organization, the event manager should look to improve communication and
relationships with suppliers.
O’Toole and Mikolaitis (2002) see the contract as central to the correct proce-
dure for project planning and implementation. Much is written about contracts in
engineering, building and software industries, and event manager can take
advantage of lessons learned from successes and failures in these other industries
in their use of project management. Each contract specifies who will do what,
when and how. It can contain many details, or be simple letter of agreement or a
purchase order.

Decision points in purchasing for an event

organization
Although each event is unique, the following nine-stage purchasing chain of
decisions is provided as a check list to enable the event manager to assist in
planning. Stage 9 is important as it enables the event manager and future event
managers to benefit from past experience:

1. When it is initially considered that an event should go ahead, there is a need

for a range of products and services. There should be detailed discussion
regarding how these might best be procured – in-house or from an external
company.
2. The next stage is to create a clear specification of what is required.
3. Some organizations may have a list of preferred suppliers. This provides use-
ful contacts regarding reliable companies who are known to deliver as per
specification of quality and who also respect and value working with the event
manager’s organization.
4. Suppliers should be approached for a price and an overview of what they
could provide – Can the exact specification be provided? Is there flexibility
of provision?
160 Total Supply Chain Management

5. When the quotations are returned, it is important that they are examined
fairly and checked to see that what is being offered is as per specification.
6. The price and quality and reliability may be compared against in-house pro-
vision where that is possible. If you buy on price alone, you will get what
you pay for. Cheap can be expensive!!
7. When the event manager is satisfied that the goods and services are as required
in all respects, including competitive price and appropriate provision, then
an agreement can be made with the supplier. This may be called a purchase
order, but in reality what happens is that a contractual relationship is formed
between the event manager and the supplier. A contract is said to exist when
something is offered and accepted in writing or verbally with witnesses. Its
purpose and provisions must be legal, and the different parties should be capa-
ble of entering into the agreement. The standard contract elements, according
to Catherwood and Van Kirk (1992), are:

• Specification of the agreeing parties

• Purpose of the contract
• Duration of the contract
• Terms
• Signatures
• Witnesses and date signed

8. The goods and services should be delivered as expected. In many instances

within the events industry the actual delivery and consumption will be
simultaneous. For example, a rock band delivers its services at the moment
it is playing for the audience.
9. The final stage is a review. Did the purchased product or service deliver as
expected and as required? The review will inform the next set of decisions
about a similar service/product. Review after the event, when successes and
problems are still fresh in the mind, is essential. Consider and note what went
right, what went wrong and what would we do differently next time? It is
advisable to record contact names and addresses on file for future reference.
Each event should be better managed than the last one. There is always room
for improvement. Event managers should ask staff and subcontractors what
they think could be done better, and their opinions should be taken seriously.

Customer relationship management

Customer relationship management (CRM) software now exists to capture
data to improve overall supply chain performance (also see Chapter 9). The
objective of CRM is to develop a customer-centred organization that ensures
every opportunity is taken to delight the customers, foster customer loyalty,
and build long-term relationships that are mutually beneficial. The ultimate gain
is to ensure that each customer’s current and future wants and needs are satisfied.
 Service industries, event operations and non-profit organizations 161

This involves recording details of each time we work with a customer, and
developing a picture from this information of what the customer liked and did
not like in our past dealings. Although software exists to capture these data,
for smaller operations such information can easily be recorded as notes on the
customer’s file.

Non-profit (humanitarian) organizations

Unlike events management, natural disasters do not keep to a timetable. None
the less as a disaster will require quick response delivery of materials and serv-
ices, an efficient supply chain would seem to be important. From a study of the
literature and media reports it is found that the general perception is that
money is not spent wisely, and overall performance of relief agencies be they
government funded or private are generally not as efficient as they could be or
should be.
From a survey of 54 organizations, Oliver (2006) found that non-profit
organizations compared to commercial organizations:

1. Have fewer regular meetings with key suppliers, do not easily engage in col-
laborative product development, have little direct information technology (IT)
interface and seldom have a designated body responsible for co-ordination.
2. Have less trust in their supply partners, but ironically were less likely to
monitor the performance of their suppliers. Where there is some distrust the
implication is that the suppliers should be checked. He also quoted Kupila
(2003) who believes that suppliers to the humanitarian agencies were less
approachable and proactive. Kupila also observed that donors to charities
do not fully trust front line agencies.
3. Have less control over their logistics network, with inbound and outbound
logistics comparatively less efficient. Oliver found that the humanitarian
organizations have less power within the supply chain. He contends that
co-operation in a supply chain can be achieved through power or by a
strong drive to meet common goals, and that generally both these factors were
missing. He also found that single sourcing was not prevalent and in his
opinion and from our experience single sourcing leads to tighter control and
a better understanding of common goals. Oliver found that weakness in
power and control leads to deficiencies in management of incoming goods
and services and insufficient cost information and control.
4. Supply chain professionals in the humanitarian organizations are underval-
ued and are less likely to be encouraged to develop and to be involved in
key decisions.
5. Charities do not use IT effectively in the supply chain. This hampers perform-
ance in knowledge sharing, demand planning, collaboration and performance
monitoring. End to end costs are not always clearly known.
6. Performance is not well assessed and therefore continuous improvement
suffers.
162 Total Supply Chain Management

Case example: Wal-Mart

Referring to the Hurricane Katrina disaster in New Orleans, Waller (2005)
was not surprised that Wal-Mart responded quicker and was more effective
in providing what was required than the Federal Emergency Management
Agency and the Red Cross. As he said Wal-Mart was only doing what it
does every day. It has mastered Supply Chain Management and the com-
pany’s expertise worked well during the disaster.
Worthen (2005) provides an insight as to how Wal-Mart was able to
perform so well. ‘The hurricanes that flattened the Gulf Coast in August
and September tested corporate logistics and supply chain operations, as
companies struggled to move relief supplies and inventory to and from the
region before and after each storm.’ Wal-Mart trucks were distributing aid
to Katrina’s victims days before federal relief arrived. One lesson from
these storms is that having procedures for communicating quickly about
what needs to be done is as essential for companies as having integrated
inventory and logistics systems. ‘Wal-Mart, for example, was able to
move food, water, generators and other goods to areas hit by Hurricanes
Katrina and Rita following each storm because it has an emergency
operations center that is staffed every day around the clock by decision-
makers who have access to all of the company’s systems. Under normal
circumstances, a 6 to 10 person staff at the center responds to everyday
emergencies, such as a fire in a store or a shooting outside one. When dis-
asters such as hurricanes threaten, the staff is joined by senior representa-
tives from each of the companies functional teams. The center is equipped
with hurricane-tracking software, and on August 24, days before Katrina
made landfall, company managers were already planning their response.’
The emergency response team works in a large, open room that is
designed with efficient communication in mind. For the record during the
first two and a half weeks following Katrina, Wal-Mart shipped 2500
containers to the region. Wal-Mart also set up satellite links for its stores
that lost phone or Internet service so that they could stay connected to
headquarters.
Worthen reported that Starbucks was also able to get aid to hurricane-
ravaged areas quickly. ‘When the company got a request from the American
Red Cross to donate coffee, managers at headquarters contacted the com-
pany’s distributors to discuss how they could help. Starbucks determined
that it could donate 30,000 pounds of coffee, 235,000 bottles of water and
44,000 pastries without affecting supplies to its retail stores’.
Adapted from Waller (2005) and Worthen (2005)

Summary
The economies of most advanced countries are heavily dependent on service
industries and today’s progressive business leaders are dramatically reshaping
 Service industries, event operations and non-profit organizations 163

their enterprises extending their reach through partners, resellers and e-commerce.
This chapter has looked at the special circumstances that face managers of
service industries, events and non-profit humanitarian organizations.
In service industries it is found that service spend is less controlled than for
direct goods and materials and that in service industries the expenditure on
services is a comparatively large and generally not well-controlled expense.
The same applies to all other types of organization, the spend on services is not
treated as seriously as is the expenditure on goods and materials. Centralizing
all purchasing of services under the control of the purchasing department is
one approach. The other is to outsource the purchasing of specialist services.
The example given was Harley-Davidson who saved $US 4 million per annum
by subcontracting service spend to three suppliers.
With events management it was shown that seldom there is a second chance.
Once an event has been staged it cannot be recaptured. Thus, events managers
have to get it right first time. The various methods of supply chain management
practiced by events managers were considered including subcontracting.
Although each event is unique, a nine-stage purchasing chain of decisions was
provided as a checklist to enable the event manager to get it right first time and
to benefit from past experience.
For non-profit humanitarian organizations it was found that greater adoption
of supply chain management principles will improve performance. A major
issue being the need to have agreements with suppliers and procedures for
communication in place before any disaster occurs. Unlike event management
the timing of a natural disaster cannot be known, but as shown in the Wal-Mart
case study it is possible to have resources in place and on standby to meet
emergencies when they occur.
11
Supply chain in emerging
markets

Introduction
‘The Empire strikes back: India forges new steel alliance. It is a dramatic illus-
tration of the shift in the balance of power from West to East: a £5 billion bid
for Corus, formerly British Steel, by Tata, an industrial conglomerate that has
aspirations to turn itself into an Asian version of America’s General Electric’,
writes The Observer, the Sunday paper in the UK, on 22 October 2006. Founded
by Jamsedji Tata in the 1860s, initially with a textile mill in Bombay (Mumbai),
is today India’s largest company with a controlling interest in 96 companies.
In 2000 the Tata group became the first Indian company to gain a major
international brand when it acquired the UK company Tetley Tea. Tata is one
of the world’s lowest cost producers of steel; Tata Chemicals is one of the
Asia’s largest manufacturers of soda ash; Titan is one of the world’s top six
manufacturers–brands in the watch sector and Tata Motors is among the top six
commercial vehicle manufacturer in the world. Besides being the largest software
services provider in India it is also India’s largest international long distance
telecom and Internet services provider.
Tata is not the only organization from the emerging market that is making
the world sit-up and notice. Khanna and Palepu (2006) cites a list of companies
from emerging economies who are competing in the global market, for instance,
Brazil’s AmBev (which in 2004 merged with Belgium’s Interbrew to form
InBev); Chile’s S.A.C.I. Falabella; China’s Baosteel, Galanz , Haier and Lenovo
groups and Huawei Technologies; India’s Dr Reddy’s Laboratories, Infosys,
NIIT, Ranbaxy, Satyam, Mahindra and Mahindra and Wipro; Israel’s Teva
Pharmaceuticals; Mexico’s Cemex; the Philippines’ Jollibee Foods and Ayala
groups; Turkey’s Koc and Dogus groups; and South Africa’s SAB Miller.
The multinationals from North America, Western Europe, Japan and Korea
appear to have near-unbeatable advantages over companies from emerging
economies, such as well established brand names, large R&D infrastructure,
proven management systems, advanced technologies and access to a vast fund of
both financial and intellectual capital. However after a closer analysis it is evident
that the newly industrialized countries can benefit from the experience of advanced
economies and adapt the best practices to their local advantage. Historically Japan
 Supply chain in emerging markets 165

and later Korea did just this in the 20th century. It is like the saying, ‘an early bird
catches the worm but the second mouse gets the cheese’. Furthermore the compa-
nies in emerging markets can count on their supply chain partners to make and
deliver products more inexpensively and can work better around the local bureau-
cratic processes. We shall analyse these factors in this chapter.
China is the fastest growing market in the planet. Since the start of liberal-
ization in 1979, the countries GDP is growing at 9.3 per cent annually – three
times faster than United States. With a combined population of 2.5 billion,
China and India have the most consumers in the world. Besides China and
India, over the past two decades waves of liberalization have swept aside pro-
tectionist barriers in developing countries in other regions such as Latin
America (Mexico, Brazil, Chile and Argentina), South East Asia (Malaysia,
Thailand, the Philippines and Indonesia) and Eastern Europe (Poland, Czech
Republic and Hungary) and Africa/Middle East (Turkey, Israel, South Africa
and Egypt). As these nations adapted themselves and interface with the global
economy, multinational corporations from the advanced economies of North
America, Western Europe, Australasia, North Korea and Singapore expanded
their outsourcing and supply chain network. In this chapter we focus especially
on three regions of emerging markets:

• Supply chain in India

• Supply chain in China
• Supply chain in Latin America

Supply chain in India

Economics experts and various studies envisage that India and China will dominate
the world during the 21st century. For over a century the United States has been the
largest economy in the world but major developments have taken place in the world
economy leading to the shift of focus from the USA, the rich countries of Europe,
and the eastern dragons of Japan and Korea to the two Asian giants – India and
China. Experts predict that by 2035, India is likely to be a larger growth driver than
the six largest countries in the EU, though its impact will be a little over half that of
the USA. India, which is now the fifth largest economy in terms of purchasing
power parity, will overtake Japan and become third major economic power within
10 years. The visible success factors are the liberalization of a 1.2 billion consumer
market, a good higher education policy supplemented by European and American
training and English speaking communication and management systems.
India is however still a country of visible contrasts. The sophisticated
nuclear science technology in research centres contrasts with bullock carts in
rural areas. Indeed in Bangalore (population 6.2 million), regarded as the IT
(Information Technology) centre of India, bullock carts can still be seen. In the
past few years the cities in India have undergone tremendous infrastructure up
grading but the situation is not similar in most part of rural India. Universities
are producing millions of English speaking graduates in science, medicine and
166 Total Supply Chain Management

engineering, yet in the realm of health and primary education and other human
development indicators India’s performance has been far from satisfactory,
showing a wide range of regional inequalities with urban areas getting most of
the benefits. Although Indian Railway network employs a vast army of
employees with moderate effectiveness the infrastructure of road network and
port handling facilities have a long way to go.
In spite of the above challenges, the economic growth in India in the early 21st
century has been remarkable. The growth in Indian industrial sector in 2004–2005
remained healthy. The index of industrial production (IIP) continues to grow at the
rate of 7 per cent. The major element of the buoyancy in the industrial growth was
the manufacturing sector with 80 per cent of IIP. Service sector accounts more than
half of India’s Gross Domestic Products. The growth rate of India’s service exports
in 2005 was 8 per cent with regards to 5 per cent worldwide. Reason for high
growth rate in service sector in India is liberalization in regulatory framework and
high demand for low cost IT, BPO (business process outsourcing) and call centre
services. India’s IT Market reached a turn over of US $16.2 billion in 2004–2005.
The IT sector employs 697,000 people and this is likely to reach 2 million by 2014.
The BPO and call centre sector has been growing at 60–70 per cent annually and
its turnover in 2004–2005 reached US $5.8 billion.
In congruence with the diverse infrastructure, level of technology and eco-
nomic development the supply chain and logistics models in India are also
diverse. For example, the auto industry follows a traditional model of the West
and Japan for a predominantly urban and affluent market. At the other end of
the scale fresh foods supply are limited to the regional markets. Manufacturers
of fast-moving consumer goods, such as Hindustan Lever, deploys a hybrid of
urban and rural logistics by empowering the regional wholesalers for stocking,
distributing branded products to rural customers. Multinational retailers, such
McDonald’s restaurant chain, are gradually applying the available local infra-
structure to the best of their advantage. The following case examples illustrate
the application of appropriate supply chain models in India.

Case example: The auto components supply chain in India

The most highly developed supply chain in India is that of the automo-
bile industry and over the past decade Indian companies have begun to
play a major role in its extension. The liberalization of the local equity
and regulatory control encouraged the arrival of a wave of international
car makers as joint ventures with local partners.
A link up with Suzuki, forming Suzuki–Maruti company (now Maruti
Udyog) led to early success. The once dominant Hindustan Motors
whose ‘Ambassador’ model had India’s biggest selling cars in a con-
trolled market for decades lost market share to the new Suzuki–Maruti
model in an open market. Suzuki–Maruti went on to capture over 60 per
cent of passenger car sales by 2002 as shown in Table 11.1.
 Supply chain in emerging markets 167

Table 11.1 Car makers in India 2002

Maruti Udyog Ltd. 62%

Hyundai Motor India Ltd. 17%
Tata Engineering and Locomotive Co. Ltd. 12%
Hindustan Motors Ltd. 4%
Others 5%

The development of the auto industry supply chain in India proceeded

very rapidly at the level of car makers and their first tier suppliers. Here
current standards are close to world class standards and it has led to
exports of components and sub assemblies to overseas car makers.
Furthermore domestic car makers like Mahindra and Mahindra can out-
source more effectively achieving cost reductions while maintaining
quality levels. Another strategic choice in a low wage environment is the
use of highly qualified employees for shop floor operations. For example,
one car seat maker employs only science graduates for all production line
operations. The car producers interact very closely with low technology
components such as car seats and exhausts.
The main weakness of the supply chain lies in the fact that in spite of
the effective collaboration between car makers and first tier suppliers
international best practices are not permeating down to the second or
third tier suppliers.
Source: J Sutton, London School of Economics (2004)

Case example: Seafood supply chain in India

Sustainability of fish stock is a global concern. According to the Food
and Agriculture Organization (2002) about 47 per cent of main fishing
stock are over exploited and are very close to their sustainable limits.
Several measures are being adopted at national and international levels,
including India, to promote sustainable fisheries. With an annual fish
production of approximately 6 million tonnes in 2003, India ranks fourth
in global fish production. The seafood world market has doubled in the
last decade reaching approximately $50 billion and India’s share of
export to the world seafood market is nearly 3 per cent. Chennai, Kerala,
Mumbai and Visakhapatnam are the four biggest seafood exporting ports
in India accounting for about two-thirds of the total seafood exports.
Most exports are in the form of frozen fish and more than 60 per cent
of India’s seafood exports to south-east Asia are re-exported after pro-
cessing. Fish is a depleting commodity and regulations on excess fishing
168 Total Supply Chain Management

have made supply conditions more irregular. In India state governments

are responsible for the development and sustainability of the fishery sec-
tor, but their inability to form a cartel (similar to the oil cartel) seafood
exporters are unable to charge higher prices in spite of rising costs
of fuel and maintenance. Fishing efforts are largely (about 90 per cent)
are confined to the inshore waters within a depth range up to
70 meters.
There are generally two types of fish landing centres. They are natural
ports which are normally beach landings and constructed ports. Each has
distinct infrastructure problems.
The seafood supply chain in India, in general comprises Fisherman to
Commission Agent to Supplier (pre-processor) to the Exporter.
The average share of the final export price is typically as follows:

Fisherman 25%
Commission Agent 15%
Supplier 20%
Exporter 40%

Transaction costs between the Fisherman and Commission Agent are

borne by the Agent and those between the Agent and the Supplier are
borne by the Supplier. However those between the Supplier and Exporter
are borne by the Supplier.
The Fisherman sells his catch to the Commission Agent who is the link
between the Fisherman and the Supplier. The Commission Agent is useful
because he deals with less literate Fishermen as well as organized
Suppliers. The Supplier has trucks to transport to his facility where stocks
are cleaned and graded based on size and quality. The Exporter is the price
setter and the most sophisticated end of the supply chain. Issues such as
HACCP (Hazard Analysis and Critical Control Point) first emerge at the
Exporter’s end. The rest of the downstream supply chain is vaguely aware
or completely unaware of export–import and safety issues. Fishermen are
the most disorganized group in the supply chain. They are spread across
the country, practice different fishing methods and operate on different
scale but they are the most affected stakeholder of government regulations
of fishing bans and conservations.
Although the seafood supply chain is organized and well connected
with adequate clusters and sophisticated exporters, fishermen and bottom
of the chain workers are not trained in fish hygiene, safety and handling
methods and not adequately rewarded. The beach landing ports and most
constructed ports are also inadequately equipped.
Source: Kulkarni (2005)
 Supply chain in emerging markets 169

Case example: McDonald’s India supply chain

McDonald’s Corporation (USA) opened its doors in India in October

1996. McDonald’s in India is a 50-50 joint venture partnership between
two Indian businessmen. Amit Jatia’s company Hardcastle Restaurants
Pvt. Ltd. owns and operates McDonald’s restaurants in Western India.
While Connaught Plaza Restaurants Pvt. Ltd. headed by Vikram Bakshi
owns and operates the Northern operations. Ever since then restaurants
opened in Mumbai, Delhi, Pune, Ahmedabad, Vadodara, Ludhiana,
Jaipur, Faridabad, Doraha, Manesar, Bangalore and Gurgaon, and more
are in the pipeline.
McDonald’s India has developed a special menu with vegetarian selec-
tions to suit Indian tastes and preferences. McDonald’s does not offer
any beef or pork items in India. The company established what is known
as ‘cold supply chain’. The term Cold Chain describes the network for the
procurement, warehousing, transportation and retailing of food products
under controlled temperatures. McDonald’s restaurants store products to
be used on a daily basis, within a temperature range of –18°C to 4°C.
About 52 per cent of our food products need to be stored under these
conditions before they are used.
All suppliers adhere to Indian government regulations on food, health
and hygiene while continuously maintaining McDonald’s recognized
standards. As the ingredients move from farms to processing plants to the
restaurant, McDonald’s Quality Inspection Programme (QIP) carries out
quality checks and HACCP at over 20 different points in the ‘Cold Chain’
system. Setting up of the Cold Chain has also enabled the company to cut
down on operational wastage.
The relationship between McDonald’s and its Indian suppliers is mutu-
ally beneficial. As McDonald’s expands in India, the supplier gets the
opportunity to expand his business, have access to the latest in food tech-
nology, exposure to advanced agricultural practices and the ability to grow
or to export.
There are many cases of local suppliers operating out of small towns who
have benefited from their association with McDonald’s India. For example,
the implementation of advanced agricultural practices has enabled Trikaya
to successfully grow speciality crops like iceberg lettuce, special herbs and
many oriental vegetables. Vista Processed Foods Pvt. Ltd. is a joint venture
with OSI Industries Inc., USA; McDonald’s India Pvt. Ltd. and Vista
Processed Foods Pvt. Ltd. produces a range of frozen chicken and vegetable
foods. Dynamix has brought immense benefits to farmers in Baramati,
Maharashtra by setting up a network of milk collection centres equipped
with bulk coolers. Amrit Food, an ISO 9000 company, manufactures
widely popular brands – Gagan Milk and Nandan Ghee at its factory at
Ghaziabad, Uttar Pradesh. An integral part of the Radhakrishna Group,
170 Total Supply Chain Management

Foodland specializes in handling large volumes providing the entire range

of services including procurement, quality inspection, storage, inventory
management, deliveries, data collection, recording and reporting.
Source: www.mcdonaldsindia.com (2007)

Case example: Rural supply chain at Hindustan Lever Limited

By 2005, Hindustan Lever Limited (HLL), a subsidiary of Unilever Group
was one of the India’s largest fast-moving consumer goods companies with
market leadership in home and personal care products and one of its seven
biggest exporters. HLL operated over 100 manufacturing facilities across
the country, together with several third-party manufacturing arrangements.
HLL’s potential distribution outreach in India was 3800 towns and
627,000 villages. However, of the total number of villages, the existing
distribution network only reached 300,000. HLL’s dilemma was how to
extend it into the remaining villages in inaccessible rural areas.
HLL already had one of the widest and most efficient distribution net-
works for consumer products in India; in fact, this was recognized as one
of its key strengths. HLL’s products were distributed through a network
of about 7500 ‘redistribution stockists’ (RS) who sold to shops in urban
areas and villages with more than 2000 people that could be reached by
vehicle. Its supply chain was supported by a satellite-based communica-
tion system, the first of its kind in the fast-moving consumer goods
industry. This sophisticated network with its voice and data communica-
tion facilities linked more than 200 locations all over the country, includ-
ing the head office, branch offices, factories, depots and the key ‘RS’.
This was a tried and tested model.
However, HLL wanted to penetrate these local communities even further
and work deep within the villages. A profound knowledge of Indian rural
communities would give HLL an unbeatable market advantage. However,
the only solution for many Indians below the poverty line was to borrow
from a moneylender at extortionate rates. A solution had been found to
counteract the power of the moneylender in rural Indian areas. The success-
ful Grameen Bank initiative, launched in Bangladesh in 1976, had more
than proved that commercial banking for the poor without collateral was
not a pipe dream and was awarded Nobel Prize for Peace in 2006.
HLL’s growth strategy was to ask ‘self-help groups’ (SHGs) to operate
as ‘rural direct-to-home’ teams of saleswomen, who would accomplish
several tasks by raising awareness and educating people about HLL
products as well as selling the products directly within their communities.
 Supply chain in emerging markets 171

The idea was for the women to not only act as salespeople, but also as ver-
itable brand promoters, often physically demonstrating products, such as
shampoo, by offering hair washes at religious festivals, at the local village
markets (haat) or by performing hand washing experiments.
A pilot initiative was set up in the Nalgonda district of Andhra Pradesh
in November 2000, with 50 SHGs in 50 villages and the participation of
1000 to 2000 inhabitants. Once fine-tuned, the model would be scaled
upward to cover more than 150,000 villages in India. This HLL-SHG
business partnership initiative was called ‘Project Shakti’, meaning
‘strength’ or ‘power’. By the beginning of 2002, the project team had
already reached the entire Nalgonda District and exceeded 400 villages
with no signs of this momentum slowing down (refer to Figure 11.1 for
an illustration of HLL’s rural distribution model).

HLL factories

Regional distribution
centres (RDCs)

Rural stockists (RS)

Village 1 Village 2 Village 3 Shops 3%

SHG 1 SHG 2 SHG 3 SHG 4 SHG 5 SHG 6

Rural consumers at homes 10%

Figure 11.1 Rural supply chain model at Hindustan Lever Ltd.

Source: Amann and Ionescu-Somers, Henley Management College

(2006)

Supply chain in China

During the past 3 years (2003–2005) China has accounted for one-third of global
economic growth (measured at purchasing-power parity), twice as much as
America. In 2005, China became the world’s 4th largest economy replacing
172 Total Supply Chain Management

Britain. In 2006, China’s official GDP growth rate has surged to 10 per cent.
Even this may underestimate the true rate, which some economists reckon was
as high as 13 per cent. In 2003 alone, ‘it consumed 40 per cent of the world’s
output of cement. It also accounted for one-third of the growth in global oil
consumption, 90 per cent of the growth in world steel demand, and more than
the whole of the increase in copper demand’ according to the Economist, 13
May 2004. It is predicted (Lieberthal et al, 2003) that for the next 10 years, and
probably considerably longer, multinationals should be the biggest winners as
China’s economy becomes increasingly open.
In addition to its phenomenal economic growth China offers a powerful com-
bination to sustain this growth including a disciplined, low cost labour force, a
large pool of technical personnel (e.g. China graduated over 2 million engineers
and technicians in 2004), tax incentives to attract investment and infrastructure
sufficient to support efficient manufacturing operations and exports. Like its
export base, China’s home market is also growing spectacularly. For example,
6 million mobile phone subscribers are signing up every month. Comparable
growth is also seen in the use of computers, motor cars and retail stores.
China also has major challenges. The coal-fired power stations and emis-
sions from cars and from industrial and domestic facilities are causes of serious
concern for the environment of the planet. A lack of management expertise
plus a culture of a centralized economy is also a major constraint on the com-
petitiveness of Chinese companies. However, after two decades of joint ven-
tures and management training Chinese managers are developing skills in
critical multi-functional management tasks. Nonetheless in 2003 during the
outbreak of SARS (Severe Acute Respiratory Syndrome) despite extensive
investment in genomics Chinese research institutes waited for specific orders
from higher government levels before turning to SARS research and this iner-
tia due to centralized control and beaurocracy is still a concern. China’s trans-
portation, distribution and retail infrastructures are still being developed, and it
is expensive to supply goods nationwide. Furthermore, provincial governments
impose taxes on goods that are not manufactured in the region. Zeng and
Williamson (2007) commenting on the backdrop described above of economic
growth and local strengths and weaknesses, accordingly identified four groups
of Chinese companies tackling the global markets. China’s ‘national champions’
(such as Haier Group, Huawei Technologies, Legend Group and Wanxiang
Group) are using their advantages as domestic leaders to build global brands
(see Haier Group case example). The second group is the country’s dedicated
exporters (such as Galanz, China International Marine Containers and BYD
Battery) who are entering the export markets on the strength of large
economies of scale. Another group, ‘competitive networks’ (such as Wenzhou,
Chenghai & Shenzhen and Schenzen) is expanding by bringing together small,
specialized companies that operate closely in provinces. And finally, ‘technology
upstarts’ (such as Dangdang.com, Innova Superconductor and Datang
Microelectronics) are using innovations developed by China’s government owned
research institutes to enter emerging sectors of new technology (see Dangdang
case example).
 Supply chain in emerging markets 173

Case example: Supply chain of Haier Group in the USA

Haier Group in China is a leading manufacturer of consumer durables
with an annual turnover of about $9 billion. By the early 1990s the com-
pany had battled Whirlpool, Electrolux, Siemens and Matsushita to
become the leader in China’s market for home appliances. The group is
now leaders with 250 types of refrigerators, air conditioners, dish wash-
ers and ovens, and in the USA alone its market share is about 50 per cent.
When it entered the US market in 1994 it focused on selling only com-
pact refrigerators (smaller than 180 litres) for hotel rooms and student bed
sitters. In 1997 Haier entered the market for wine coolers and captured the
60 per cent of that specialized segment by 2002. The company set up
a manufacturing facility in Camden, South Carolina, to bypass the non-
tariff barriers imposed by the USA on imports of appliances. Haier formed
partnership with nine of the ten largest retail chain in the USA to carry and
sell its products.
Haier customers did not demand ground breaking innovation or state-
of-the-art technologies; they only wanted reliable and value for money
products to meet their needs. The success of Haier in the US market
demonstrated that Chinese companies are not only the suppliers of out-
sourced manufacturing facilities with cheap labour, but also they are now
global competitors in advanced economies.
Source: Zeng and Williamson (2007)

Case example: e-Supply chain in China: dangdang.com

By 2003, Dangdang.com (dangdang) was rated as one of the most success-
ful online bookstores in China. It featured almost 90 per cent of the books
published in China. Dangdong launched in November 1999 by Peggy Yu,
an MBA graduate from New York, and Li Guoging, a Chinese entrepre-
neur, recorded sales worth China Yuan Renminbi (CNY) 1 million in the
first 2 months. In a year’s time, Dangdang was ranked as the number one
online bookstore in China.
After studying the model of Amazon.com, Li Guoqing and PeggyYu,
realized that the website owed its success largely to its vast database of
titles. It took the couple almost 2 years to make a comprehensive database
of 200,000 book titles published in China. Ironically in 2004 they turned
down an offer from Amazon, who then invested in their major Chinese rival
Joyo.
In November 1999, they launched the Dangdang website. Dangdang
was chosen as a name because it could be easily pronounced, remembered,
and typed. Dangdang is derived from the Chinese adjective xiangdang-
dang, meaning resounding and worthy.
174 Total Supply Chain Management

Within 1 year of its launch in 2000, Dangdang was ranked first among
China’s five major online bookstores by a significant margin in a survey
conducted by the local industry publication, Computer Business Infor-
mation. The most popular books on Dangdang.com are on computers,
English language learning, science and tourism.
In April 2000, Softbank China Venture Capital (SCVC) and IDG
invested $22 million in Dangdang. This was to be used to strengthen
Dangdang’s logistics. Dangdang planned to build a 10,000 square metres
storage facility in Beijing and expand its delivery system to 40 major cities
in China. It also had plans of getting listed on the US Nasdaq stock market,
by the end of 2000. But following the crash in tech stocks, it postponed its
plans indefinitely. Subsequently, in 2006, Dangdang was able to attract sub-
stantial venture finance from the USA to fund the development needed.
Prior to the launch of Dangdang, online bookstores such as bookmall.
com, cp1897.com, 8848.net were already operational. The success of
Dangdang inspired the opening of a few more online bookstores. While
Dangdang was considered the most competitive in terms of price and
variety of products; Joyo.com (joyo) offered more popular products; bol.
com (bolchina) had the biggest advertising budget and store. sohu.com
(store.sohu) had a good brand name and heavy traffic.
In October 2002, Joyo, Bolchina, Dangdang and Store.sohu were
engaged in a price war. All these websites sold books and audio–video
products online. The list price of the Chinese version of The Lord of the
Rings trilogy was CNY 62.6 per set whereas the websites were selling it
at 40 per cent below list price for CNY 45. Similarly, another bestseller,
Harry Potter was also sold on websites at heavy discounts. These players
were mainly aiming for market share and were willing to sacrifice profits
to acquire this.
Source: www.chinatechnews.com (April 2007)

The potential of setting up joint ventures and expanding businesses for multi-
nationals is tremendous. However, the risk of operating a supply chain needs to
be analyzed in a hard-nosed way. These risks could include the politics of the
World Trade Organization, implementation, oversupply and possible deflation,
the structure of political power and political stability, and currency exchange
fluctuations. Lieberthal and Lieberthal (2003) recommend a five-stage strategy
for Western multinationals to consider business expansions in China:

• Focus attention on properly nesting your China strategy into the organiza-
tion as a whole.
• Tailor strategies to both national and local governments and markets.
• Adopt a ‘show me’ attitude toward the purported advantages of forming a joint
venture.
 Supply chain in emerging markets 175

• Recognize and take steps to minimize the particular risk of operating in the
Chinese environment.
• Avoid irrational exuberance in responding to the opportunities that China
presents.

Supply chain in Latin America

Latin American countries have a current total population of over 370 million.
The economy for Latin America gained momentum in the recent years of the
21st century, bolstered initially by robust global demand and strong commodity
prices. This was followed from 2000, by a brisk pickup in household consumption
and business investment. According to the International Monetary Fund (2005)
‘It is likely that region-wide growth in 2004 was even higher than the 4.5 per
cent forecast of last autumn, and the best since 1997. This result is even more
encouraging since it was achieved with moderate inflation’.
There has also been a remarkable turnaround in the region’s external position,
with a small current account surplus likely to have been achieved. Considering
the region’s history of macroeconomic and political instability, these are all
welcome developments. Individual performances of Mexico, Brazil, Argentina
and Chile are examples of these positive trends. The economic development of
Latin America is bolstered by regional ‘common market’ agreements such as
Mercosur and NAFTA (North American Free Trade Agreement).
The Mercosur or Mercosul was created by Argentina, Brazil, Paraguay and
Uruguay in March 1991 with the signing of the Treaty of Asuncion, subse-
quently amended in 1994 by the Treaty of Ouro Preto, Mercosur was originally
set up with the ambitious goal of creating a common market/customs union
between the participating countries on the basis of various forms of economic
co-operation that had been taking place between Argentina and Brazil since
1986. Bolivia, Chile, Colombia, Ecuador and Peru currently have associate
member status. Venezuela became a full member in 2006. The organization has
a South and Central America integration vocation.
In January 1994, Canada, the United States and Mexico launched NAFTA
and formed the world’s largest free trade area. The Agreement has brought
economic growth and rising standards of living for people in all three coun-
tries. In addition, NAFTA has established a strong foundation for future growth
and has set a valuable example of the benefits of trade liberalization.
Clearly, Latin America still faces significant challenges, perhaps the most
pressing of which is how to step up the pace of economic growth while main-
taining stability. It is well known that in 2004, a year in which all developing
country regions posted strong economic growth rates, growth in Latin America
was less vigorous. The main reason for this was the collapse of the Argentine
economy in 2001. Throughout Latin America unemployment and poverty remain
unacceptably high, and severe income disparities persist. The primitive trans-
port and logistics infrastructures in the remote interiors of especially Brazil,
176 Total Supply Chain Management

Bolivia and Colombia is encouraging population over spilling into urban slums
around mega cities such as Mexico, Sao Paulo, Rio de Janiro, Buenos Aires
and Bogota. The current favorable economic environment in North America
and generally in the world provides an excellent backdrop against which action
can be taken to ease these vulnerabilities.
Many Latin American companies have become world class businesses by
capitalizing their link with multinational companies like Proctor and Gamble,
Unilever and global car and drugs manufacturers. Multinationals also utilized
both people skills and markets of Latin American countries to consolidate their
global earnings, systems and business practices. In this regard local companies
in China and India have been more successful in blunting the multinationals’
edge. However there are limited examples of a local company (such as AmBev
and Bunge in Brazil and Cemex in Mexico) which have judiciously adapted to
the special characteristics of local customers, suppliers and infrastructure. The
following three case examples illustrate some of the developments of supply
chain management in Latin America.

Case Example: Data warehouse system in Unilever Latin America

Unilever Latin America, the fast-moving consumer goods conglomerate,
was facing the challenge of tracking business performance in a single
data warehouse in 34 companies, 19 countries and currencies, thousands
of users, three languages and operating over five time zones. The organ-
ization had multiple Enterprise Resources Planning (ERP) and Customer
Relationship Management (CRM) systems from various vendors, as well
as 34 custom-built data warehouses, adding up to about 150 separate
information systems and coding structures.
Each country had its own way of classifying information. Supply chain,
ERP and CRM systems, for example, had different ways of classifying
products and customers from country to country. ‘Companies and countries
have different cultures, different ways to run the business’, notes Monica
Parisi, information architecture manager at Unilever Latin America in San
Paolo, Brazil.
Faced with a constantly changing marketplace where acquisitions and
consolidations abound, Unilever Latin America believed there had to be
an easier way to track regional information and improve business perform-
ance. So it initiated a Dynamic Information Warehouse system to help har-
monize processes and information through a project called Sinfonia, the
Portuguese word for symphony.
Sinfonia is replacing all of Unilever Latin America’s local ERP systems
for finance, supply chain and order-to-cash processes. For this to work,
Unilever needed to extract data from a wide variety of systems, including
SAP, Siebel, Manugistics, PeopleSoft and legacy applications. In addition,
the solution had to be adaptable to rapid and dramatic business changes.
 Supply chain in emerging markets 177

Unilever Latin America has successfully implemented Sinfonia in

Argentina, Paraguay, Uruguay, Chile and Brazil. ‘That represents more
than 50 per cent of the revenue or sales of the total region’, according to
Parisi. The organization is halfway to reaching its goal of implementing
Sinfonia across the entire region.
The implementation thus far supports more than 2000 business users.
Unilever Latin America expects that the final project will support more
than 4000 users with about 12 million records loaded per day.
Sinfonia delivers an aggregated view of data across Unilever Latin
America at high speed throughout constant business changes such as
acquisitions and market consolidation.
That was the most significant challenge the organization had to conquer:
harmonization across companies and countries. The overall architecture
presented another challenge because Unilever Latin America had limited
experience with very large databases. It brought in a team of consultants
from Accenture, NetPartners and Kalido to help put Sinfonia in place.
Unilever Latin America’s vision is to deliver the right information at
the right time to the right people. Sinfonia is helping that vision become
reality through daily monitoring of the extended supply chain. The
organization can dynamically generate information to track and manage
the full supply chain from production to delivery.
What used to take the organization a couple of weeks to determine per-
formance information across the entire region can now be done immedi-
ately, online, even as Unilever Latin America, its suppliers or its customers
are changing.
Unilever Latin America intends to grow Sinfonia and to incorporate sup-
ply chain, finance and human resource processes into the mix. Eventually,
the data warehouse will feed a regional Balanced Scorecard application as
an executive information system and assist in strategic business planning.
This will happen by enabling existing data to be viewed according to pos-
sible future hierarchies.
If given the opportunity to redo the project, Unilever Latin America
would use internal people that could learn and stay with the development
team, Parisi notes. The organization began developing the system with
third parties and consultants.
Source: Unilever Brazil (2004)

Case example: Bristol-Myers Squibb supplier partnership in Mexico

Bristol-Myers Squibb in Mexico has adopted supplier management as
part of its sustainability 2010 goals. In July 2006, the San Angel facility
178 Total Supply Chain Management

organized an event to recognize those suppliers to Bristol-Myers Squibb

and other companies who participated in Phase I of the eco-efficiency
program ‘Competitive Chains’. Phase I was held from October 2005 to
April 2006 and resulted in the identification of more than $1 million in
cost savings. Written recognition was presented to the suppliers by the
Ministry of Environment. Phase II of the program was launched in July
2006, with the participation of suppliers to Bristol-Myers Squibb and
other companies.
The company has developed an environment, health and safety (EHS)
questionnaire that may be sent to most third-party manufacturers and to
a contractor or supplier if it falls into one of the following categories:

• Sole source
• Manufacturer of a strategic material
• Manufacturer of a material to Bristol-Myers Squibb’s specifications
• Referenced in a New Drug Application submitted to the US Food and
Drug Administration

Based on the results of the questionnaire, a site evaluation is conducted.

The evaluation team will make recommendations and then develop and
track an action plan for the contractor.
Source: Bristol-Myers Squibb website (www.bms.com) (2006)

Case example: Oilseeds supply chain in Brazil

Founded in 1818 in Amsterdam, Bunge is a leading agribusiness and
food company with integrated operations that circle the globe, stretching
from the farm field to the retail shelf. Bunge in Brazil is the largest pro-
ducer of oilseeds in the world. The company has created a supply chain
that links Brazil’s farmers to customers all over the world.
The trading departments of the company track the supply and demand
of oil seeds and decide when to buy oil seeds, when and where to crush
them and when and where to transport oil products to customers. Bunge
charters about 100 ships and leases warehouses and oil mills all over the
world. The flexible infrastructure allows the company to respond
quickly to changes in customer requirements and also to cope with logis-
tics problems. The company feeds supply and demand data to Brazil’s
farmers along with technical advise so that the farmers can plant the
right kind of oilseeds. Bunge’s sales grew by 235 per cent between 1997
and 2004, from $7.4 billion to $25 billion.
Source: Khanna and Palepu (2006)
 Supply chain in emerging markets 179

Summary
In this chapter we have discussed the shift of product and services supply in the
global market due to emergence of stronger so called, second and third world
economies. The supply strategy of established multinationals of the West and
Japan and Korea has been remodelled by enhanced outsourcing to the emerg-
ing markets and at the same time big organizations particularly from China and
India have extended their supply base as a global player. The organizations in
Latin America and the Eastern Europe are less dominant in the global market
but their local economies and infrastructure are benefiting from the expansion
activities of multinationals.
Both the local organizations and multinationals are capitalizing and adapt-
ing to the specific opportunities and challenges of the emerging markets. These
include the availability of both low cost semi skilled and highly skilled labour,
expanding consumer demands especially in China and India, developing trans-
port and logistics infrastructure, the importance of execution and governance
according to local regulations and finally the market structures in developing
countries. Khanna and Palepu (2006) suggest that the ‘four tiered’ structure
(see Figure 11.2) of markets in emerging economies helps local companies
counter their multinational rivals.

Products of global quality and

Global global features

Products of global quality and

Glocal local features

Products of local quality and

Local local features

Bottom Most inexpensive products

Figure 11.2 The four-tiered structure of emerging markets.

At the apex of this pyramid structure is the ‘global’ tier where global cus-
tomers want products of global quality with global features and are willing to
pay global prices for them. The second tier is the ‘glocal’ segment where products
are of global quality but with local features and prices are cheaper than offered
180 Total Supply Chain Management

by developed countries. The customers in the third or ‘local’ tier are happy with
products of local quality and at local prices. The ‘bottom’ tier of the market con-
sists of consumers who can only afford to buy the most inexpensive products.
The markets for talents and capitals in developing countries are also roughly
structured along the same ‘four tier’ hierarchy. Multinationals typically compete
in the ‘global’ tier while smart local companies dominate the ‘local’ and ‘bottom’
tiers move into the ‘glocal’ tier. However some multinational corporations with a
robust local representation (e.g. Hindustan Lever in India) are also attempting to
compete in lower tiers.
12
e-Supply chain

Introduction
There is no doubt that supply chain order fulfilment is the Achilles heel of the
e-business economy. At the beginning of every e-commerce, on-line trading
and virtual supply chain there is a factory, a warehouse and a transport. Internet
has elevated the performance of information accessibility, currency transac-
tions and data accuracy, but the real effectiveness of supply chain from the
source to customer cannot be achieved without the efficient physical move-
ment of goods and materials through the supply chain. Web-based software
and e-market places have increased the alternatives available to e-supply chain
managers in all types of operations including service industries. More oppor-
tunities mean more options and complexity. Therefore, it is vital that a process
is in place to monitor the performance of e-supply chain for both virtual and
physical activities. A Balanced Scorecard approach of performance manage-
ment will ensure the sustainability of an e-business when it becomes a stable
operation after the project stage.
In order to facilitate communications between software used by internal
supply chain partners, multinational companies have tried very hard, but gen-
erally unsuccessfully, to standardize computer systems. The emergence of the
Internet protocol has helped the interaction between powerful supply chain
systems such as i2, Manugistics, Ariba, Oracle and SAP R/3 to name a few.
The rigour and problems related to the validation process still remain. In spite
of the complexity and regulatory requirements, or perhaps because of it, the
healthcare industry remains a huge untapped market for e-supply chain.
A recent study carried out in the USA by Efficient Healthcare Consumer
Response (EHCR) consortium showed that the healthcare industry could reduce
its overall supply chain costs by over US $11 billion (48 per cent of the current
process cost) through the efficient application of collaborative e-supply chains.
Peter Drucker once said, ‘Alliances are where the real growth is’. In the mar-
ket driven competitive world, businesses are continuously seeking new strat-
egies and business models to excel. They strive to update the process and
metrics used to measure and improve performance. The Internet is providing
companies both with new challenges and potential solutions. Arguably,
the biggest external factor that is revolutionizing business culture is the power
of the Internet. One such area of impact is collaborative supply chain.
182 Total Supply Chain Management

The idea of a collaborative economy is not entirely new. Over the past
decades strategic collaborations and global sourcing have become a familiar
business strategy. Even during the 1970s and 1980s multinational companies
were setting up manufacturing sites to meet local demand and regulatory
requirements. In terms of industrial relations it was considered a high-risk
strategy to focus sourcing from a small number of sites. However, with gradual
de-regulation and the improved manufacturing capabilities of the developing
markets, the strategy of global sourcing and third-party supply began to
advance forward. Perhaps the biggest transformation in collaborative economy
has been enabled by the Internet and information systems. The visibility of
real-time information, round the clock on-line trading and the gradual shift in
power from suppliers to customers have accelerated this transformation.
As indicated in Chapter 1, the Internet-enabled integrated supply chain or
e-supply chain has extended the linear flow of the supply chain to an Eco system
(see glossary) or a supply web (see Figure 1.4). It now includes all suppliers and
customers to the end user or consumers suppliers’ customers and customers’
suppliers and so on. e-Supply chains and more broadly e-businesses have
enhanced supply chain efficiency and effectiveness by sharing real-time infor-
mation regarding forecasts, inventory, order status and other key information
between partners. The process of e-supply chain is going through a rapid
change through both technology and application. We will cover some of these
opportunities and challenges under the following headings:

• e-Supply chain enabling technology

• e-Supply chain processes
• e-Supply chain strategy
• e-Supply chain applications (case examples)
• e-Supply chain learning points

e-Supply chain enabling technology

Adapting from Kulkarni (2005) we define three key components in the imple-
mentation of an e-supply chain:

1. Implementation of an ERP or enterprise resource planning (such as SAP

R/3 and PeopleSoft) software in an organization.
2. Adoption of collaborative planning and scheduling with critical suppliers and
customers allowing effective sharing of forecasts and order status. This is also
known as CPFR (Collaborative Planning Forecasting and Replenishment)
and is supported by so called Global Supply Chain (GSC) software (such as
i2 and Manugistics).
3. Electronic linking of customer and supplier data using Internet technolo-
gies. This allows virtual communication between customers and suppliers
anytime anywhere.
 e-Supply chain 183

The complex web and infrastructure of e-supply chain will be discussed in

more details in Chapter 17. Such complex elements are usually in the domain
of ICT (information and communication technology) specialist. In this section
we cover some basic technology enablers which are accessible to traditional
users and stakeholders of supply chain management (SCM). These are EDI
(electronic data exchange), Intranets, Extranets and Business to business
(B2B) Portals.

Electronic data exchange

EDI is computer to computer direct transfer of business data through electronic
media between organizations and partners. It helps real-time information
exchange between locations far apart and enables significant reduction in lead
time and improves the accuracy of shared data. Despite being relatively unher-
alded, in this era of technologies such as XMLservices, the Internet and the
World Wide Web, EDI is still the data format used by the vast majority of elec-
tronic commerce transactions in the world.

Intranets
Intranet is an Internet linked network inside an organization secured behind its
‘firewalls’. The Intranets helps to share documents between employees only,
with given password controlled access, regardless of their geographic loca-
tions. Most companies have Intranet-based websites for internal use.

Extranets
According to Smith (2001), Extranets combine the privacy and security of
Intranets with the global reach of the Internet, allowing access to external part-
ners, suppliers and customers to a controlled portion of the enterprise network,
such the ERP system.

Case example: Extranet

Adaptec Inc. is a $1 billion microchip manufacturer supplying critical
components to electronic equipment makers. The company, with its
headquarters based in California, outsources the manufacturing tasks
and concentrates on product research and development.
Before the introduction of Extranet Adaptec required 15 weeks to
deliver products to customers. Some competitors were known to deliver
similar chips within 8 weeks. The longer delivery time was mainly
caused by the need to co-ordinate design activities between the head
office in California and the three manufacturing sites in Japan, Hon Kong
and Taiwan. After the introduction of Extarnet links beween partners
184 Total Supply Chain Management

supported by enterprise level supply chain integration software the com-

munication with manufacturers in different zones became easy. Adaptec
can send chip design diagrams and changes over the Extranet, enabling
the manufacturer to prepare for product changes and new design, and
lead time reduced below 4 weeks.
Source: PSG Institute of Management,

B2B portals
With the advent of Internet it is easy for buyers and suppliers to meet, buy and
sell across cyber market places and collaborate more quickly than the trad-
itional way. These are also known as B2B and are classified under Net market
places and Private market places. Net market places are independently owned
portals that bring numerous suppliers and buyers to cyberspace in a real-time
environment. They could be either industry orientated vertical market places
(e.g. metalsite.com) or product or service orientated horizontal market places
(e.g. tradeout.com). A Private market place is a trading hub in which member-
ship is closed or by invitation or subscription only.

e-Supply chain processes

e-Supply chain processes conform broadly to the building blocks of a trad-
itional supply chain plus a fundamental component which is visibility.
Visibility of information across the supply chain allows supply chain partners
to automate some of their internal processes. For example, if a manufacturer
knows the inventory level of the retailer then the replenishment process can be
automated by VMI (vendor managed inventory) policy. This type of workflow
automation within the supply chain forms the second characteristics of e-supply
chain processes. Finally, a formal process of collaborative planning is required
to harness greater efficiency and effectiveness from visibility and workflow
automation. Figure 12.1 shows a framework of e-supply chain processes to
complement the traditional supply chain building blocks.
The communication technologies such as Internet and wireless, information
technologies such as XML, Java, etc. and information systems such as ERP
have made the flow and accessibility of information seamless, visible and in real
time. It is now possible to instantly trace an order placed with a retailer to the
database of the OEM (original equipment manufacturer) and the intermediate
suppliers can plan their activities to meet the requirement of the specific order.
The second characteristic of workflow automation uses automation tools to
integrate the commonly occurring interactions between the stakeholders and
companies of a supply chain. Some of the commonly deployed workflow
automation applications include available to promise, VMI, electronic pro-
curement and dynamic pricing. By harnessing the visibility within the supply
chain and the automation applications current ERP systems (such as SAP R/3)
 e-Supply chain 185

Collaborative
planning

Workflow
automation

Visibility

Figure 12.1 A framework of e-supply chain processes.

and SCM systems (such as Manugistics) are enabling workflow automation

requirements.
In spite of the great opportunities provided by supply chain visibility and
workflow automation the true potential of e-supply chain can only be realized
when it is supported by an executive decision-making process that optimizes
the automated flow of materials based on the information available from supply
chain visibility. This executive decision process is collaborative planning
which can only be effective through a real-time communication network via
Intranet, Extranet and B2B portals (or trading hubs) and a sales and operations
planning (S&OP) process. Figure 12.2 show the e-supply chain communication
network of a pharmaceutical company. The S&OP is described in Chapter 16.

Company Hub

On-line intranet link

Primary Supply Trading

Suppliers Market Customers
sites sites partners

Internet link EDI link Internet link Internet link

Trading Hub Trading Hub Online

420 Suppliers 111 Factories 5 Trading Partners 139 Markets 32,000 SKUs

Figure 12.2 e-Supply chain in a pharmaceutical company.

186 Total Supply Chain Management

It is important the key suppliers and partners are included in the S&OP meet-
ings of the OEM.

e-Supply chain strategy

e-Supply chains are rapidly making inroad in all types of organizations and
sooner or later most major players of SCM will voluntarily or involuntarily
adopt e-supply chain management. It is still treated as a competitive advantage
when all systems and infrastructure work well and not as a commodity like
telephone. The fact is if you do not rapidly adapt to e-supply chain you are
likely to be left behind with the traditional ways of information exchange and
your service will not be cost effective and will be outmoded by new standards
of performance. The following Table 12.1 shows the impact of Internet in the
cost per transaction in a bank.

Table 12.1 Transaction costs in banking

Channel Cost per transaction (US $)

Branch 1.07
Telephone 0.54
Automated teller machine 0.27
Internet 0.01

Source: Booz Allen Hamilton (July 2006)

There is also the influence of big multinational companies who have imple-
mented e-business network with their suppliers and partners. According
to Donavan (2004), one CEO of a large US conglomerate is quoted as saying,
‘… all of our suppliers will supply us on Internet or they won’t do business
with us’. There is little doubt that heavy emphasis and investment of resources
have deployed by larger organizations to implement sophisticated e-supply
chain. Suppliers, regardless of size, should have got the clear message that the
e-supply chain has arrived and is here to stay.
However it is important to note that just throwing more software at the prob-
lem is not the answer to the core issues of SCM. Although software and web-
based network are need it is also very necessary to define the process
information flow at the right time and ensure accurate data into the systems.
Good supply chain practioners know that information should be passed on only
to those who need to know and use it in the form they need to have it.
The ambition and expectation of many so-called ‘dot.com’ companies ended in
failure in late 1990s mainly because of not spending enough time on up-front
strategy development. Basu and Wright (2004) expressed a cautionary note for
all types of change management. ‘Major, panic driven changes can destroy a
company. A poorly planned change is worse than no change’.
 e-Supply chain 187

In view of the above opportunities and challenges of Internet driven ICT

revolution we recommend that the following considerations should be included
during the development of an e-supply chain strategy in any organization:

1. It is evident that e-supply chain strategy will be mostly driven and financed by
large multi-site and multi-national companies. Only partial benefits will be
achieved if the e-supply chain initiatives of larger companies focus solely for
their own operations and sites and do not include the key suppliers. Proactive
policy should be in place in larger organizations to involve and train key part-
ners in the development and implementation of an e-supply chain network.
2. Smaller organizations and suppliers should incorporate in their business
strategy how to keep abreast with ICT technologies affecting their supply
chains. It is important to co-operate fully with OEMs and larger customers
in their e-supply chain programmes. Often relatively smaller companies
may develop specialization and expertise in specific operations or out-
sourced services (e.g. IT support) and they contribute a key link to the
e-supply chain strategy.
3. Spending more time at the front end of e-strategy development for improving
order to delivery cycle and SCM will pay good dividends. The challenging
aspect is to think through an e-supply chain strategy, network and appropriate
infrastructure that will improve your performance ahead of your competitors.
It is essential to design an appropriate roadmap and do it right first time.
4. The e-supply chain network and infrastructure should emphasize workflow
automation and at the same time should accommodate some degree of flexi-
bility to interface with non-automated suppliers. This consideration of sys-
tem flexibility could be of particular importance for conducting business
with emerging markets such as China and India.
5. It is paramount that before embarking on an e-supply chain programme
companies understand their supply chain priorities and the structure of
Internet-enabled linkages with key suppliers and partners. The real benefits
of an e-supply chain and the cost of implementing and maintaining it must
be properly evaluated before taking a big leap into the e-supply chain.
6. It must be emphasized that the success of the systems in an e-supply chain
will depend on the robustness and lean or agile characteristics of basic
processes and the velocity of flow. Therefore, the re-engineering of the key
business processes in the supply chain before the implementation of sys-
tems should be an essential part of an e-supply chain strategy.
7. Having understood the fundamentals of e-supply chains it is also necessary
to understand the emerging trends in supply chains that will impact the nature
of future e-supply chains and consequently the e-supply chain strategy. Such
trends include customer centric supply chain (see Figure 12.3) and outsour-
cing of supply chain activities. The customer centric supply chain is basic-
ally a ‘pull system’ and is also branded as Demand Driven Supply Chain.
Companies such a FedEx, UPS, DHL and InSite offer professional logistics
and supply chain services customized to the user requirements. The trend of
outsourcing logistics to third-party service providers (known as 3PLs) is fast
188 Total Supply Chain Management

gathering momentum. Outsourcing a major logistics contract is a strategic

business decision and should also be part of e-supply chain strategy.

Assets core Inputs and Product/service

Channels Customers
competencies materials offering

The traditional supply chain: Starts with assets core competencies

Product/service Inputs and Assets core

Customers Channels
offering materials competencies

The customer-centric supply chain: Starts with customers

Figure 12.3 Customer centricity.

e-Supply chain applications

Organizations today are faced with an incredible number of choices of web-
based procurement applications, forward and reverse on-line auctions, vertical
and horizontal marketplaces, global supply networking, collaborative planning
and forecasting applications, electronic catalogues and so on. These and other
applications comprise the e-supply chain applications that are in various stages
of development today. Many companies are focused on buy-side order man-
agement applications (i.e. Ariba, Frictionless, CommerceOne, etc.) as the end-
all solution to conducting business in the Internet economy. These buy-side
procurement applications can help companies reduce costs by directing more
spend to strategic suppliers enforcing standard product selections, and redu-
cing transaction costs and cycle times. However, the e-supply chain universe is
much more than buy-side procurement applications. It is generally perceived
that the e-business revolution is taking place mainly in the new environment
created by young ‘dot.com’ entrepreneurs. This is of course a partial view of
e-commerce. The real changes are also happening quietly within ‘traditional’
or ‘old economy’ companies. This is fast changing area but one in which
corporate stories of success and failure are beginning to emerge.
We have, therefore, chosen one case example of a small enterprise promot-
ing e-procurement and three case examples to illustrate the application of
e-supply chain in established businesses and there solutions are not strictly in
the buy-side procurement applications.

Case example: e-LabSHOP from Biotech Analytics UK

Biotech Analytics offers a biotech-dedicated portal that provides on-line
resources for the biotechnology sector. Founded in 1997, Biotech
Analytics is a member of the Bio-Industry Association, UK. Its services
 e-Supply chain 189

include the provision of FSA regulated independent financial research

and analysis of all UK biotechnology companies for investors.
Using Izodia InTrade business-to-business trading community soft-
ware, Biotech Analytics has developed a customized on-line market-
place called e-labSHOP. It is designed to offer purchasers and suppliers
of laboratory products a single resource that simplifies and streamlines
the product search and ordering process. e-LabSHOP integrates with
suppliers existing sales processes and purchasers can thus browse, order
or transact via a single order point that is customized to their organiza-
tion’s authorization protocols.
Currently Biotech Analytics is operating an e-labSHOP pilot. The
participants include Teklab (ML) Limited, Scientific Systems Design
Inc., Campsec Limited and a large government scientific research insti-
tution. Once live, e-labSHOP will make available on-line a broad range
of biotech consumable products and services and by using e-labSHOP
biotechnology companies, research institutes and universities will be
able to buy goods and services on-line.
The potential financial benefits for the users include:

(a) For scientists

– Elimination of purchasing paper chain
– Electronic authorization process
– Saving time by viewing catalogue information from multiple
suppliers
– Reduction in errors
(b) For purchasing organizations
– Improved efficiency in the purchasing process
– On-line internal accounts maintenance
– Multiple site organizations can collate purchasing power by
aggregate orders
(c) For suppliers
– Receive aggregated orders and minimize administration costs
for small orders
– Expand geographically without increasing sales force
– Reduction in incoming erroneous orders
(d) For Biotech Analytics
– Licence fee from subscribers
– Increase customer base
– Market products to a highly specific scientific audience

A Business Case for Wolfson Institute

The application e-labSHOP in Wolfson Institute is a good example of an
e-procurement solution for scientists. With reasonable assumptions and
from the current data it may be possible to justify a business case based
190 Total Supply Chain Management

on the improvement in productivity. Wolfson Institute for Biomedical

Research was founded in 1995 as part of University College London. It
is funded by many sources Wellcome Trust, MRC and industries. By
2002, the staff level reached about 250 and it has teaching facilities for
1200 medical students.

Current data
Income £10 million per annum
External orders 360 per annum
Number of lines 1090
Average value of order £350
Error rate 13.5%
Transaction fee (e-lab) 5% of order value

Assumptions
Loaded scientist cost £50,000 per annum
 £25 per hour
Time to prepare and authorize an order  75 minutes
Time to order electronically  15 minutes
Document cost per order  £5
Error rate in e-procurement  3.5%

Calculations
Average cost of a manual order  25  75/60  5  £36.25
Average cost of an electronic order  25  15/60  £6.25
Average saving per order  £30
Saving in ordering cost per year  30  360  £10,800 per annum
Saving due to 10% reduction in error  0.1  360  36.25  £1305
per annum
Transaction charges at 5%  0.05  350  360  £6300
per annum
Net savings per year  £5805 per annum

Naturally, the costs and savings of an e-procurement initiative will

vary according to the size and complexity of operations and the assump-
tions made to calculate them. In a large pharmaceutical organization the
company may wish to develop their own e-procurement solution. The
investment could include the software cost (£50,000 ) and the imple-
mentation cost associated with the customization of the software. In
such an initiative a traditional return on investment (ROI) approach is
appropriate. However, for smaller organizations such as WIBR it appears
sensible to use systems such as e-labSHOP where functionalities have
been tried, validated and implemented. Each organization will avoid the
investment cost and see their purchasing solution customized for them.
Source: Basu (2002)
 e-Supply chain 191

Case example: Sainsbury’s e-supply chain

The company
Sainsbury’s opened its first grocery store in 1869 in London’s West End.
The business has grown to encompass over 400 ‘supermarket’ stores
generating a turnover of over £12 billion. In a low margin, fiercely com-
petitive consumer market, Sainsbury’s is still aiming for growth with a
strategy of bringing the best products and excellent service to an increas-
ing number of consumers. However, the company’s market leadership
has been threatened by the dominance of Tesco and the muscle of
Wallmart following their acquisition of Asda.

Drivers for e-supply chain

The quality and perception of customer service is the key driver for the
success or failure of a retail business. The visible aspects of customer
service are demonstrated by the quality or freshness of produce sold, the
choice available (for instance, vegetarian or organic choices) and, to a
certain extent, the cost of items. The visible customer can only be as
good as the invisible supply chain that supports it. The effectiveness of
this supply chain is determined by the speed of response and availability
of products. A further consideration is the cost of supporting the supply
chain including the stock holding rate.
During the 1990s, Sainsbury’s adapted three detailed initiatives to
improve the effectiveness of the supply chain:

1. Centralization of the supply chain

2. Centralization of logistics management
3. Value chain initiative (VCI)

Sainsbury’s wanted to apply a ‘just-in-time’ (JIT) supply chain enabling

a continuous flow of products as and when the stores needed them. Under
the old process, products were passed from group to group requiring sev-
eral stops and this reduced responsiveness. There was a lack of ownership
for the causes of delays, creating further difficulties. Following the cen-
tralization of the supply chain under Logistics Management, half of the
group focused on business processes and the other half was devoted to the
development of IT systems.
The second initiative to satisfy the consumer is based on what is known
as efficient consumer response (ECR). This aims to provide the retail
consumer with the best quality service through collaborative supply chain
operations. It relies on both the retailer’s (viz. Sainsbury’s) and the sup-
plier’s (e.g. Unilever) supply chain. Thus, the sharing of information
between the systems of different partners within that chain is essential.
ECR has been a philosophy put into practice within the retail market in
Europe since the mid-1990s and Sainsbury’s has embraced it. ECR
192 Total Supply Chain Management

encourages retailers and suppliers to share common data on promotion,

demand planning and inventory levels. When this information sharing is
feasible, significant savings can be made by optimizing the order size and
stock levels while at the same time improving the availability of products.
The VCI is an extension of the type of information sharing practised in
ECR. It aims to improve end-to-end supply chain efficiencies from the
sourcing of raw materials to the delivery of finished products in the con-
sumer’s hands. The goal of VCI is to link systems applications in a number
of supply chain industries (e.g. distribution, import/export, warehousing)
and share dynamic business information between new and existing trading
partners. Sainsbury’s is a proactive partner of VCI.
The above initiatives could not be effectively supported by traditional
communication methods. ‘We needed to look at further IT solutions that
would enable the communication process to be effective’, says John Rowe,
Director of Logistics at Sainsbury’s.

The e-supply chain solution

After evaluating several off-the-shelf applications, the IT Team at
Sainsbury’s concluded that a B2B e-commerce system would have the
potential to meet their requirements. They chose a solution called the
‘EQOS Collaborator’.
The EQOS Collaborator was developed using Microsoft technology
tools that allowed companies to publish information that could be viewed
easily and downloaded into ‘legacy’ systems and back. The majority of
companies including Sainsbury’s standardized on Microsoft technology.
The wide range of MS tools and available skills in the market was also an
important factor.
The system was built on a Microsoft Windows NT server platform, by
a Microsoft Internet Information Server and browsed by a Microsoft
Internet Explorer. The database is a Microsoft SQL server but the informa-
tion can be integrated into other legacy databases. The main program for
displaying further applications is EQOS Administrator which has been
developed by using Microsoft Visual Basic and e-commerce functionality.
The EQOS Collaborator solution allows companies in the total value
chain to automate and share-business information on a real-time basis
amongst customers, suppliers, distributors and retailers.

Business benefits
The Internet-based information sharing and collaborations system
(EQOS Collaborator) went live for Sainsbury’s in 1998 and so far has
demonstrated some significant business benefits.
A tangible advantage was achieved in the area of the forecasting of
promotional uplift. The real-time information in the system exposed the
fact that in some cases, suppliers had different expectations, but the data
 e-Supply chain 193

was visible before the start of promotion and allowed Sainsbury’s to go

back to suppliers to agree revised dates and estimates.
The project enhanced the partnership with key suppliers. For example,
Nestlé agreed to participate in the web-based collaboration system and
heavily invested to ensure interfaces with their legacy systems. The EQOS
collaborator enabled the realization of an opportunity to synchronize
dynamic supply chain information between suppliers and customers.
Another hidden plus point is the ability to pass on consumer com-
ments to suppliers in an efficient manner. Previously, paperwork was
complex and feedback was slow. Significantly, the EQOS system is now
available to Sainsbury’s suppliers for free.
‘Sainsbury’s has taken an important lead in shaping the way in and its
suppliers can jointly benefit from developing collaborative information
systems’, comments Mike Quinn, Director of EQOS Systems Ltd.
EQOS is looking to build the Microsoft Commercial Internet Pipeline
(CIP) technology into the solution. The CIP would enable a standard
method of sharing any type of business critical data using the Internet,
e-mail or third-party Virtual Added Networks (VANs). This solution
would allow all 4000 of Sainsbury’s suppliers to strive towards the ECR
principles of integrated supply and demand.
Source: Microsoft (2001)

Case example: GlaxoWellcome e-supply chain

Long before the merger with SmithKline Beecham, GlaxoWellcome
embarked upon their Global Supply Chain project in 1996 and the use of
e-business within the supply chain was in its infancy then. Following the
integration between Glaxo and Wellcome it was evident that the domin-
ance of cash cows such as Zantac and Zovirax would soon be over. In the
new level playing field environment the supply chain network of
GlaxoWellcome would have to deliver cost, speed, order fulfilment and
reliability advantages to the company, and its stakeholders including
suppliers, trading partners, wholesalers and internal customers.
The worldwide manufacturing and supply division of the company set
up a number of mutually complementary initiatives. Two such projects
were most significant for the supply chain performance:
1. GSC supported by Manugistics software
2. International MRPII Programme (IMP) supported by BPCS software
The prime objective of the GSC was to enable forecasting, stock replen-
ishment and visibility of real-time data amongst supply, sites trading
partners and market sites. IMP focused on ensuring S&OP and order ful-
filment of individual sites.
194 Total Supply Chain Management

The Global Supply Chain network of GlaxoWellcome comprised:

• Five primary sites (four in the UK and one in Singapore) for the man-
ufacture of active ingredients.
• Ten FDA approved secondary manufacturing sites in the USA and
Europe.
• Two trading partners (Adecsa and Lapsa).
• Forty-one local supply and marketing sites.

At the early stage of the project the trading partners are linked by EDI
with the supply sites and most of GW sites were connected by e-mail.
The global demand was aggregated and processed at the centre and sim-
ulations by Manugistics projected the stock status and replenishment
requirements for all supply sites. With the progress of the programme
BPCS was replaced by SAP R/3 for FDA approved sites and the ERP
databases of local sites wire interfaced with the Manugistics database.
The Global S&OP process enabled regular review of demand, supply
and inventory, and a stable process was established. The importance of
internal market sites reaffirmed the B2B environment of the GW supply
chain network. The company embarked upon web-enabled data exchange
with key suppliers and smaller markets where the implementation of
Manugistics and SAP R/3 were still a long way from reality. The process
of e-supply chain started to work in GW and the company started the
measurement of key performance measures.
The initiative that underpinned the e-supply chain project was the
development of a Balanced Scorecard on a data warehouse management
system. The GW sites could access the data warehouse with appropriate
password control and compare the site performance with other sites for
range of metrics related to customers, suppliers, quality, factory, cost,
growth and innovation.
Source: Basu (2002)

Case example: e-Supply chain at Hermes Abrasives

Background
Hermes Schleifmittel (HS) GmbH is a leading manufacturer of abra-
sives, founded in 1927 with headquarters in Hamburg. Products include
coated abrasives as well as bonded abrasives such as vitrified and resin-
bonded products using aluminium oxide. Customers are from metal
working industry, automotive industry and glass manufacturing industry.
Hermes Abrasives tools are also used to produce aesthetically attractive
surfaces and precision functional parts in ski industries. Registered and
protected trademarks are Hermes, Hermesit, Sapphire Blue and webrax.
 e-Supply chain 195

Problem
The market for HS is not of growth. The company was facing fresh
logistical challenges with regard to order processing system. The new
opportunities in globalization and e-businesses made it necessary for the
company to re-engineer traditional supply chain strategy and structures.
Within the framework of the gobal production network a series of sub-
sidiary units came within the scope of the new structure. There were
already numerous internal customer–supplier relationships between
individual sites without taking into account the external suppliers and
customers. The complexity of an order event is characterized by the
multi-level nature of the value chain as shown in Table 12.2.

Table 12.2 The complexity of an order event

Level of order processing Order handling

Local order The directly assigned site is the production
site
Single-level composite order The next assigned site is the production site
Two-level composite order The next but one assigned site is the
production site

Solution
HS defined the concept of the ‘fractal company’ as the creation of com-
pany units on the basis of the holistic and seamless view of the organiza-
tion. The core point of the change was to link sales and distribution to the
production factories directly, without a production planning unit. The
formal production planning unit became a strategic production planning
responsible primarily for the definition of production sites and inter-
company scheduling. The change was enabled by an ERP (SAP R/3) to
form a holistic solution of e-supply chain as shown in Figure 12.4.

SOURCE
MAKE DELIVER
e-Procurement
e-Logistics
e-Production (track and trace
SELL (scheduling in with external
the network) logistics)
e-Commerce

PLAN
e-Business
(SAP R/3)

Figure 12.4 e-Supply chain of Hermes Abrasives.

Source: Gasos and Thorben (2003).
196 Total Supply Chain Management

The e-supply chain of the company comprised broadly five inter-

linked processes, such as source process, sell process, make process,
deliver process and plan process.
Source process: Sourcing and acquisition were decentralized, that is
production units were responsible for all e-procurement activities.
Sell process: e-Commerce application was directly linked to com-
pany’s business information system and automatically performed by
SAP R/3, the ERP system.
Make process: Orders were navigated automatically through all pro-
duction sites following an order allocation criteria shown in Table 12.2.
On-line displays of order status were also available for tracking orders.
Deliver process: Customers and distributors had facilities to track
orders via Internet.
Plan process: The above four processes were underpinned by plan
process driven by SAP R/3. All network servers including SAP servers
were operated initially under Windows NT which were then updated to
Windows XP. A total of 500 users worked on the e-supply chain network
in European companies.

Results
The e-supply chain solution offered the company many intangible bene-
fits including the redesigning the business processes, better collabor-
ation and trust between stakeholders and satisfied customers. A sample
exercise two years after the start of the project also demonstrated some
quantifiable benefits including:

– Increase productivity  4%
– Delivery service within 24 hours up to 98%
– Reduction in lead time  40%
– Reduction in despatch complaints  60%

Source: Gasos and Thorben (2003)

e-Supply chain learning points

The initial optimism that first e-movers would rapidly establish ‘new econ-
omy’ brands has proved unfounded. Nonetheless the recent and chequered
history of e-businesses has provided sufficient learning experience and data to
develop a strategy for e-business.

Strategy for e-business

• Continuous review: Reviewing the impact of e-business in transforming

business landscapes, we conclude that we need to keep a close track on its
 e-Supply chain 197

progress and use that old rule of ‘measurement is the driver’. Technology is
changing rapidly and we do not have any one-stop solution providers. It is
equally important to manage technology, processes, and people culture.
This must be borne in mind when developing models for measuring e-business
initiatives and processes.
• Weaker links: Relative late-comers to e-business have not ‘missed the bus’,
but they must take advantage of this powerful enabling technology. Smaller
companies may not be enthusiastic to join the e-supply chain of larger
organizations perceiving that the benefits of automation may accrue to
larger business partners and not to smaller companies. Appropriate tools for
measurement are needed to optimize this open opportunity and bigger play-
ers should be proactive in sharing the cost of implementation.

Growth in e-business
e-Commerce will be a growth area, with Gartner (2002) predicting that while
its pace will accelerate rapidly, it may be five to ten years before expectations
are realized. While the initial hype that B2C e-business will replace traditional
sales has been dispelled, it is true that e-business will enhance rather than
replace existing revenue generating activities. In the USA, this has been
achieved by product focused websites.

• Electronic global network: Internet enabling technology has made it pos-

sible to link up with both suppliers and customers who did not already share
ERP and SCM systems. The e-supply chain will become an acceptable
process in both manufacturing and service industries, and ICT managers
will be able to take advantage of the collaborative supply chain.
• Knowledge sharing: Traditional knowledge management will continue to
support both Internet- and Intranet-based e-learning, and indeed all industries
are investing in e-KM initiatives. With the inclusion of e-HR, Enterprise
Directory and the Intranet, this combined B2E channel will form the largest
segment of e-business in which e-supply chain will also be inclusive.
• Future trend: The share of wireless Internet users is also set to rise, and
interest in the adoption of this new technology is high in most industries.
However the technology is challenging and limited, and the telecommuni-
cations industry faces an additional problem currently in the difficulty of
raising capital. The security of data, which is an area of major concern when
a company considers joining an e-supply chain, will continue to be area of
detail attention. New security measures like ‘encryption’ will emerge to
protect data so that members of e-supply chain can only have access to data
that is relevant to them.

Summary
In this chapter we have described the impact of the Internet driven global infor-
mation and communication systems in enhancing the management of supply
198 Total Supply Chain Management

chain processes. The Internet should be viewed as being complementary to

traditional ways of competing in business. e-Supply chain as part of e-business
is a vital, durable and enduring technology essential for transforming business
and business efficiency, a powerful enabling tool that can be harnessed and
utilized in almost any business. We have also suggested strategies preferably
led by larger organizations how to take advantage of new technology in the
expansion of globalized markets and emerging sources. These strategies should
be assessed in the light of learning points from the recent and chequered history
of e-businesses.
It is to be noted, as we have emphasized in S&OP in Chapter 17, the technol-
ogy, systems and processes of e-supply chain (such as CPFR) cannot be effective
without human involvement and management and the support of a proven review
process such as S&OP.
13
Lean and agile supply
chain

Introduction
With the real-time access to the Internet and search engines like Google and
with the increased global competition, customers have more power than ever
before. They demand innovative product features, greater speed, more product
variety, dependable performance and quality at a best in class and at a competi-
tive price. Furthermore, today’s discerning consumers expect fulfilment of
demand almost instantly. The risk attached to traditional forecast driven lengthy
supply line has become untenable for consumer products. In this chapter, we
discuss how to take up this challenge through a lean and/or agile supply chain.
As we discussed in Chapter 3 (see Figure 3.6), a distinction is often drawn
between the philosophy of leanness and agility. Like the perennial business
phrase ‘quality’ both ‘leanness’ and ‘agility’, there appears to be differing opin-
ions as to what is meant or intended.
In their ‘pure’ form three models of supply chain can be identified being
traditional, lean and agile.

• Traditional – Known for:

– Protection of market, aims for leadership
– Forecast driven
– Higher emphasis on customer service than cost
– Inventory held to buffer fluctuations in demand and lead times
• Lean – Characteristics are:
– Integration upstream with suppliers
– Integration downstream with customers
– High emphasis on efficiency
– Aims for minimum stock holding
• Agile – Noted for flexibility and speed in coping with innovative products
and unpredictable demand.

Although many supply chains will be a hybrid of models, it is important to

understand the differences and the application of each model and application
whether pure or hybrid. The traditional supply chain model has been covered
200 Total Supply Chain Management

in various chapters of this book, this chapter will primarily cover lean and agile
models.
The organization of this chapter is:

• The origin of lean

• The tools of a lean supply chain
• The characteristics of a lean supply chain
• The characteristics of an agile supply chain
• The strategy of a lean and agile supply chain

The origin of lean

As with all facets of the quality movement, the origin of Lean enterprises is in
manufacturing. Lean enterprise philosophy, and make no mistake, Lean is
more than a system it is a philosophy, began with Japanese automobile manu-
facturing in the 1960s, and was popularized by Womack et al. in The Machine
that Changed The World (1990). The Machine that Changed the World is
essentially the story of the Toyota way of manufacturing automobiles. Up until
then the manufacturing of automobiles had changed very little since Henry
Ford in 1913 adapted the conveyor belt for manufacturing cars. Prior to Henry
Ford’s assembly line the automobile had been a luxury item hand made by a
group of workers in a stationary workplace. Ford’s conveyor belt (the assembly
line) approach was for production to take place on a moving belt with each
worker doing a small specialized task. Ford believed that if each step of pro-
duction was broken down to the smallest element that ‘the stupidest man could
become a specialist in two days’. With this moving conveyor belt approach
Ford was able to produce 250,000 cars a year, which sold at $500 each. The car
from being a luxury item that only the rich could afford now became in effect
a consumer item within the reach of most families. The downside was the minute
division of labour and the cyclical nature of the work, and the inexorable pace
of the moving conveyor belt. Workers lost a sense of the purpose of what they
were doing, they could not see that they were building cars, they saw a repeti-
tive mindless task such as putting bolts on a component as it moved past them.
‘The assembly line is no place to work, I can tell you. There is nothing more
discouraging than having a barrel beside you with 10,000 bolts in it and using
them all up. Then you get another 10,000 bolts and you know that everyone of
those bolts has to be picked up and put in exactly the same place as the last
10,000 bolts.’ Walker, and Guest (1952). Chrysler, and General Motors and
other manufacturers soon adopted the assembly line approach, but whereas
Ford only had one model (the model ‘T’) the others led by General Motors and
Chrysler began offering several models in the 1920s. Ford had to follow suit
and to do so had to cease production for 7 months while new models were
rushed into production. The assembly line approach was still used and models
were made in batches, changing a model required set-up time for change of
dies, etc. Work at each stage of production was still broken down to the lowest
 Lean and agile supply chain 201

level, workers were not expected to think and there was a heavy reliance on
inspection and testing to maintain a standard of finished product. The next
major change in car manufacturing is credited to Ohno Taiichi of Toyota. Ohno
Taiichi, after visiting USA car manufacturers in the 1960s, returned to Japan
and developed a new method of manufacturing, which became known as lean
production.
The Lean Manufacturing, sometimes referred to as Toyotaism or Toyota
Production System, is that materials flow ‘like water’ from the supplier through
the production process onto the customer with little if any stock of raw materials
or components in warehouses, no buffer stocks of materials and part-finished
goods between stages of the manufacturing process, and no output stock of fin-
ished goods. This ‘just-in-time’ (JIT) approach requires that materials arrive
from dedicated suppliers on the factory floor at the right stage of production
just when required, and when the production process is completed it is shipped
directly to the customer. With no spare or safety stock in the system there is no
room for error. Scheduling of activities and resource has to be exact, commu-
nication with suppliers must be precise, suppliers have to be reliable and able
to perform to exacting timetables, materials have to arrive on time and meet the
specification, machines have to be maintained so that there is no down time,
operators cannot make mistakes, there is no allowance for scrap or rework and
finally the finished product has to be delivered on time to customers. This is
often implemented by circulating cards or Kanban between a workstation and
the downstream buffer. The workstation must have a card before it can start an
operation. It can pick raw materials out of its upstream (or input) buffer, per-
form the operation, attach the card to the finished part, and put it into the down-
stream (or output) buffer. The card is circulated back to the upstream to signal
the next upstream workstation to do next cycle. The number of cards circulat-
ing determines the total buffer size. Kanban control ensures that parts are made
only in response to a demand.
This ‘just-in-time’ approach generally precludes large batch production;
instead items are made in ‘batches’ of one. This means that operators have to
be flexible, the system has to be flexible and ‘single minute exchange of dies’
(SMED) becomes the norm. A lean approach reduces the number of super-
visors and quality inspectors. The operators are trained to know the production
standards required and are authorized to take corrective action, in short they
become their own inspectors/supervisors. The principles of TPM (Total
Productive Maintenance) and Five Ss (Sort, Set in place, Shine, Standardize
and Sustain) are followed and as a result the equipment becomes more reliable
and the operator develops ‘ownership’ towards the equipment.
Another important aspect of the Toyota approach was to expand the work
done at each stage of production. For example, a team of workers will be
responsible for a stage of production or ‘Work Cell’ on the moving assembly
line, such as installing the transmission, or installing the seats, etc. Each team
is responsible for it is part of the assembly and might be able to make minor
changes to procedures within the confines of a time limit (the time allowed on
the moving line for production to move from one stage to the next) and within
202 Total Supply Chain Management

the limits of the specified standards (for example, the team can change the
order of assembly at their workstation but would not have the authority to add
extra nuts, etc.). Quality standards are assured the application of Zero Quality
Control or Quality at Source before the actual production and Poka Yoke (mistake
proofing) during a production process.
A visitor to a Lean manufacturer will be struck by the lack of materials;
there is no warehouse, no stocks of materials between workstations, and no
stocks of finished goods. At first glance this suggests that Lean is an inventory
system. But Lean is not just an inventory system, Lean also means the elimination
of ‘muda’. Muda, is a Japanese word, which means waste, with waste being
defined as any human activity that absorbs resource but creates no value. Thus,
the philosophy of Lean is the elimination of non-value adding activities. The
rough rule is the elimination of any activity that does not add value to the final
product, and the taking of action so that the non-value activity never again
occurs.
Before anything can be eliminated it first has to be identified. The Toyota
approach to identifying areas of waste is to classify waste into seven ‘mudas’.
The seven ‘mudas’ are:

• Excess production
• Waiting
• Movement or transportation
• Unnecessary motion
• Non-essential process
• Inventory
• Defects

The approach is to identify waste, find the cause, eliminate the cause, make
improvements and standardize (until further improvements are found).

The tools of lean supply chain

The original Toyota model of Lean Manufacturing, from which various
hybrids were developed, comprised eight tools and approaches:

1. TPM
2. Five Ss: These represent a set of Japanese words for excellent house keeping
(Seiri – Sort, Seiton – Set in place, Seiso – Shine, Seiketso – Standardize and
Shitsuke – Sustain).
3. JIT
4. SMED
5. Jidoka or Zero Quality Control
6. Production Work Cells
7. Kanban
8. Poka Yoke
 Lean and agile supply chain 203

The methodology of lean thinking and lean supply chain has moved on since
Toyota’s Lean Manufacturing model and embraced additional tools and
approaches. We have therefore included two more:

9. Value stream and process mapping

10. Lean Sigma and FIT SIGMA

Glossary of lean tools

A brief description of frequently used tools and approaches in lean sup-
ply chain is given below. For further details please see:

• Implementing Quality (Basu, 2004)

• Quality Beyond Six Sigma (Basu and Wright, 2003)

TPM: In TPM, operators are enlisted in the design, selection, correc-

tion and maintenance of equipment so that every machine or process is
always able to perform its required tasks without interrupting or slowing
down defect-free production.
Five Ss: The five rules of good housekeeping – sort, set in place, shine,
standardize and sustain.
JIT: It is an inventory strategy implemented to improve the return on
investment of a business by reducing in-process inventory and its associ-
ated costs.

• Single minute exchange of die (SMED): Operator techniques pioneered

by Shigeo Shingo, a Japanese industrial engineer, that result in
changeovers of production machinery in less than 10 minutes.
• Zero Quality Control (Jidoka): The transfer of human intelligence to
automated machinery so that machines are able to stop, start, load and
unload automatically, detect when a defective part has been pro-
duced, stop themselves and signal for help. This means operators are
freed up to do value adding work. (The practitioners of Japanese mar-
tial art Judo are called Judoka. Six Sigma also adopted terms like
Black Belt and Green Belt from Japanese martial art.)
• Production Work Cells: At Toyota, the work done at each stage of
production was expanded, so that a team of workers is responsible for
a stage of production, and has the power to be able to make minor
changes to procedures within the confines of a time limit and stand-
ards. The autonomy of operators is in direct contrast to Ford’s pro-
duction line drones. Lending power to the workers so they could take
corrective action meant that there was less need for inspectors to stop
mistakes.
204 Total Supply Chain Management

• Kanban: Kanban cards ensures that parts are only made in response
to demand – each workstation must have a card before it can start an
operation.
• Mistake proofing (Poka Yoke): A procedure that prevents defects or
malfunction during manufacture by, for example, eliminating choices
that lead to incorrect actions; stop a process if an error is made; prevent
machine damage.

Value steam and process mapping: Process mapping is a tool to represent

a process by a diagram containing a series of linked tasks or activities
which produce an output. Value stream mapping is a high level process
mapping to show the total operation or business and identify ‘mudas’.
Takt Time is the pace of production needed to meet customer demand.
It is the average rate at which customers buy products and hence the rate
at which products should be manufactured. It is expressed in time units –
one every so many minutes or so many minutes between completions:
Available work time
Takt Time 
Customer demand

Lean Sigma and FIT SIGMA: Lean Sigma incorporates the principals
of JIT and now relates to the supply chain from supplier and supplier’s
supplier, through the process to the customer and the customer’s cus-
tomer. FIT SIGMA incorporates all the advantages and tools of TQM
(total quality management), Six Sigma and Lean Sigma. The aim is to
get an organization healthy (fit) by using appropriate tools for the size
and nature of the business (fitness for purpose) and to sustain a level of
fitness.

The characteristics of lean supply chain

The characteristics and tenets of a lean supply chain are derived from the prin-
ciples of Toyota Production Systems (TPS) and the methodology of Lean
Sigma. Womack, Jones and Roos (1990) proposed five Lean principles based on
TPS, viz. value, value stream, flow, pull and perfection. However, the applica-
tion of Lean principles has moved with time and experience of organizations in
both manufacturing and service sectors. Until recently supply chains were
understood primarily in terms of planning the demand forecasts, upstream
collaboration with suppliers and planning and scheduling the resources.
Emphasis perhaps is shifted to provide what the customers want at a best in
class cost. Cost reduction is often the key driver for lean, but it is also about
speed of delivery and quality of products and services. The competition for
gaining and retaining customers and market share is between supply chains
 Lean and agile supply chain 205

rather than other functions of companies. A supply chain therefore has to be

lean with four inter-related key characteristics or objectives:

1. Elimination of waste
2. Smooth operation flow
3. High level of efficiency
4. Quality assurance

Elimination of waste
The lean methodology as laid out by Womack, Jones and Roos (1990) is sharply
focussed on the identification and elimination of ‘mudas’ or waste and their
first two principles (i.e. value and value stream) are centred around the elimin-
ation of waste. Their motto has been, ‘banish waste and create wealth in your
organization’. It starts with value stream mapping to identify value and then
identify waste with process mapping of valued processes and then systematic-
ally eliminate them. This emphasis on waste elimination has probably made
lean synonymous to absence of waste. Waste reduction is often a good place to
start in the overall effort to create a lean supply chain because it can often be
done with little or no capital investment.
One popular area of waste in processes is excess inventory. Many organizations
started to measure their ‘leanness’ only in terms of inventory performance.
Inventory reduction attempts to reduce inventory through such practices as
enterprise resource planning (ERP), JIT and modern approaches to supply
chain management have led to lower inventory levels, but there is still plenty of
room for improvement. In fact, most all manufacturers carry at least 25 per cent
more inventory than they have to. The techniques of inventory management
and reduction have been covered in Chapter 7. This inventory centred approach
seems to be encouraged by Leanness Studies (Schonberger, 2003). In these
annual study reports, Schonberger measured the trends in inventory turnover
(annual cost of goods divided by value of inventory) and then graded and ranked
the companies according to inventory performance. This approach although is
a good indicator of inventory policy of a company, but it does not necessarily
reflect the business performance of the company. For example, the inventory
policy of a fast-moving consumer goods (FMCGs) company is different from
that of a pharmaceutical company. Inventory is only one of the seven ‘mudas’.
Cycle time or lead-time reduction is another target area of waste reduction.
Cycle time is the time required to complete a given process. The cycle time
required to process a customer order might start with the customer phone call
and end with the order being shipped. The overall process is made up of many
sub-processes such as order entry, assembly, inspection, packaging and ship-
ping. Cycle time reduction is identifying and implementing more efficient
ways of completing the operation. Reducing cycle time requires eliminating or
reducing non-value-added activity. Examples of non-value-added activity in
which cycle time can be reduced or eliminated include repair due to defects,
machine set-up, inspection, waiting for approval, test and schedule delays.
206 Total Supply Chain Management

There are a few formal and publicized methodologies for cycle time reduction
including QRM (Quick Response Manufacturing; Suri, 1998) and SMED
(Single Minute Exchange of Dies; Shingo, 1985). QRM is underpinned by two
key principles. First, plan to operate at 80 per cent or even 70 per cent capacity
of critical resources. Second, measure the reduction of lead times and make
this the main performance measure. These principles are supported by material
requirements planning (MRP) plans for production-oriented cells and continu-
ous training. The SMED method involves the reduction of production changeover
by extensive work study of the changeover process and identifying the ‘in
process’ and ‘out of process’ activities and then systematically improving the
planning, tooling and operations of the changeover process (see Figure 13.1).
Shingo believes in looking for simple solutions rather than relying on technol-
ogy. With due respect to the success of the SMED method, it is fair to point out
that the basic principles are fundamentally the application of classical indus-
trial engineering or work study.

Total set-up time

Existing

Improved

Machine running
Total set-up time
External set-up
Internal set-up
SMED Single Minute Exchange of Die

Figure 13.1 Set-up time reduction.

Source: Basu and Wright, Total Manufacturing Solutions (1997).

The reduction of cycle time has become an important feature of lean think-
ing beyond manufacturing industries where approaches other than QRM and
SMED are applied. In service industries such as call centres there has extensive
application of value analysis around process mapping charts. Even flow pro-
duction technique (Ballard, 2001) is applied in reducing cycle time in the con-
struction of repetitive residential homes. The technique comprises: (1) overlap
activities within their phase of the work, (2) reduce activity durations through
 Lean and agile supply chain 207

cycle time studies and (3) reduce work in process through the development of
multi-skilled workers. Cycle time reduction is also an important area of Lean
Sigma projects as illustrated by the following case example.

Case example: Cycle time reduction

Platinum catalyst is used for production of an active pharmaceutical
ingredient (API) in an Eastern European Pharmaceutical Company
(henceforth referred as ‘company’). Used catalyst is sent back to supplier
who recovers platinum and uses it for production of fresh catalysts.
During that cycle certain quantity of catalyst evanesces and new quantity
has to be purchased periodically to maintain required level of inventory.
The catalyst is expensive because of platinum and the related cost of
capital for required catalyst inventory is significant. A task team led by
a Six Sigma Black Belt was formed to reduce the cycle time of procuring
the platinum catalyst.
Catalyst inventory required for normal production of the API depends
on catalyst consumption in production and catalyst regeneration cycle
time. Time required for cycle of regeneration of catalyst (platinum
recovery and new catalyst production) was about 3 months. During that
period it was necessary to have enough catalyst in possession for normal
production. Since significant improvements in the production of the API
were already achieved in reducing catalyst consumption, the scope of the
project included only activities related to the reduction of regeneration
cycle time.
For the monitored period the mean regeneration times depending on the
supplier varied between 77 and 69 days (year 2003) and during the year
2004 values were marginally better than the year before. During the year
2004 significantly better results were achieved also for the transport time
and the average transport time was 5  2 days what was acceptable.
Transport time had relatively less influence on overall cycle time. Still
and it was important to minimize mistake opportunities during the trans-
port. This was assured by proper planning (sales, production, purchasing
and distribution), regular communication (all interested parties) and
using only reliable and proved carrier and forwarder. Addition to that all
transport details were carefully specified and agreed, transport of cata-
lyst always had high priority (because of high value of shipment) and the
company always had proper information about shipment status during
the transport.
The biggest influence on overall cycle time was the regeneration of
catalyst. This was clearly the supplier’s responsibility and the company
could not directly influence that process. The regeneration time specified
in contract between the company and each supplier was 10 weeks for one
mayor supplier and 11 weeks for another for year 2004.
208 Total Supply Chain Management

After brainstorming the team identified only two possible solutions:

• To ask each approved supplier to prepare offer for year 2005 with
maximum regeneration time of 8 weeks.
• To find and develop new supplier for catalyst who can fulfil our
request.

Although the company developed four new suppliers for the platinum cata-
lyst, only two of them were reliable and another two could not achieve
required quality each time. Another problem was that the specification for
catalyst was quite general and earlier analysis could not properly represent
the regulated quality of the catalyst. Consequently, the development of
approved new suppliers took a long time. Minimum regeneration time
achieved in the past was 8 weeks and 6 days and because of all that the
team decided to ask each of qualified suppliers to regenerate catalyst
within 8 weeks and the team prepared negotiation strategy for that.
To test supplier’s ability to fulfil new requirement, the company asked
each of the supplier to deliver next shipments of regenerated catalyst till
the end of the year 2004 within 9 weeks instead 11 (including transport).
One of the approved suppliers answered positively but asked for some
adjustment in packaging of spent catalyst which did not require additional
cost, that allowed the company not to buy new quantity of 1.000 kilograms
of fresh platinum catalyst and generated a saving in cost of capital of US
$20,000 in last 3 months of the year 2004.
Negotiations with key suppliers for platinum catalyst finished suc-
cessfully and resulted with new contracts where maximum regeneration
time is 8 weeks. New contract with one of them was signed on February
2005, and with another one on March 2005.
New contract with supplier is a powerful tool for sustaining of new
agreed platinum catalyst regeneration performance, and performance in
the year 2005 is better than promised. All involved in platinum catalyst
handling were educated against that standard operating procedure.
Both of these improvements cycle time was reduced by 30 per cent
and the inventory of the catalyst reduced from 7.728 to 4.500 kilograms.
The overall annual savings related to avoidance of cost of capital needed
for buying of new quantity of catalyst was $408,615 per annum.

Smooth operational flow

The well publicized JIT approach is a key driver of Lean Supply Chain and, as
we have indicated earlier, it requires materials and products flow ‘like water’
from the supplier through the production process onto the customer. The cap-
acity bottlenecks are eliminated, the process times of workstations are balanced,
and there is little buffer inventories between operations. Smooth operation flow
 Lean and agile supply chain 209

requires the applications of appropriate approaches. Three of the most frequently

applied approached are:

1. Cellular manufacturing
2. Kanban pull system
3. Theory of constraints (TOC)

In cellular manufacturing concept, traditional batch production area is trans-

formed into flow line layouts so that ideally a single piece flows through the
line at any time. In practice an optimum batch size is calculated starting with
the most critical work centres and the largest inventory carrying costs. Action
is taken for improvement at the work centres and methods that have greatest
impact on the throughput, customer satisfaction, operating cost and inventory
carrying charges. Good management consists of avoiding a wide variety of
products. Cellular manufacturing concept is most appropriate when demand is
predictable and products have low variety and high volume.
The Toyota Motor Company of Japan pioneered the Kanban technique in the
1980s. As part of Lean Manufacturing concepts Kanban was promoted as one
of the primary tools of JIT concepts by both Taiichi Ohno (1988) and Shingo
(1988). Inspired by this technique, American supermarkets in particular replen-
ished shelves as they were emptied and thus reduced the number of storage
spaces and inventory levels. With a varied degree of success outside Japan,
Kanban has been applied to maintain an orderly flow of goods, materials and
information throughout the entire operation.
Kanban literally means ‘card’. It is usually a printed card in a transparent
plastic cover that contains specific information regarding part number and
quantity. It is a means of pulling parts and products through the manufacturing
or logistics sequence as needed. It is therefore sometimes referred to as the
‘pull system’. The variants of the Kanban system utilize other markers such as
light, electronic signals, voice command or even hand signals.
Following the Japanese examples, Kanban is accepted as a way of maximising
continuous flow and efficiency by reducing both cost and inventory.
The key components of a Kanban system are:

• Kanban cards
• Standard containers or bins
• Workstations, usually a machine or a worktable
• Input and output areas

The input and output areas exist side by side for each workstation on the shop
floor. The Kanban cards are attached to standard containers. These cards are used
to withdraw additional parts from the preceding workstation to replace the ones
that are used. When a full container reaches the last downstream workstation, the
card is switched to an empty container. This empty container and the card are then
sent to the first workstation signalling that more parts are needed for its operation.
A Kanban system may use either a single card or a two cards (move and pro-
duction) system. The dual card system works well in a high up-time process for
210 Total Supply Chain Management

simpler products with well-trained operators. A single card system is more appro-
priate in a batch process with a higher changeover time and has the advantage of
being simpler to operate. The single card system is also known as ‘Withdrawal
Kanban’ and the dual card system is sometimes called ‘Production Kanban’.
The system has been modified in many applications and in some facilities
although it is known as a Kanban system, the card itself does not exist. In some
cases the empty position on the input or output areas is sufficient to indicate
that the next container is needed.

Case example: Kanban pull system

The following example is based on the experience of Level Industrial,
the Brazil subsidiary of Unilever in Sao Paulo.
Lever Industrial was engaged in the batch production of industrial deter-
gents comprising nearly 300 stock keeping units (SKUs) which varied from
a 500 kilograms draw to a 200 grams bottle. After carrying out a Pareto
analysis the team selected three fast-moving products for a pilot Kanban
system. These products in total accounted for 18 per cent of output.
The company adopted for each product, a simple single card Kanban
system consisting of five stages as shown below (Figure 13.2).

Board
Stage 1
1 2 3 Three cards
Planning board

Board
Stage 2
3 4 5 Three cards
Scheduling board

Pallet
Stage 3
5 One card
Production 1

Pallet
Stage 4
5 One card
Production 2

Pallet
Stage 5
5 One card
Despatch

Figure 13.2 Kanban system.

 Lean and agile supply chain 211

Both the planning board and the scheduling board contain three cards
each as a buffer between the variability of production cycle time and the
availability of materials.
When the card arrives from the despatch (Stage 5) it is kept on the
planning board and planning for the product starts. When the planning
board is full with three cards, the third card is passed to the scheduling
board and production scheduling is ensured. Similarly when the sched-
uling board is full, the third card is transferred to the pallet at the
Production Station 1 and actual production begins.
When the pallet in Stage 3 (Production 1) is full, the card then moves
to the next station (Production 2) in Stage 4, and then on to despatch in
Stage 5. After the goods are despatched, the card returns to the planning
board and the next cycle begins.
The pilot exercise was successful. It achieved an improvement in cus-
tomer service which rose from 84 per cent to an excellent 98 per cent and
inventory was also reduced. The Kanban system was extended to nine
additional key products. The manual system was retained for the above
five stages, although both the planning and stock adjustment processes
were supported by MFG-Pro, the ERP system.

The Theory of Constraints (TOC) is a management philosophy developed by

Goldratt (1992). It enables the managers of a system to achieve more of the goal
that system is designed to produce. The concept or the objective is not new.
However, in service operations where it is often difficult to quantify the capac-
ity constraint TOC could be very useful. For companies that employ skilled
workers and for many service organizations the constraint is often the time of
one or a few key employees. The key steps in this process are:
1. Identify: The first step in applying TOC is to identify the constraining or
bottleneck factor.
2. Exploit: Determine the throughput per unit of the constraining factor.
3. Subordinate: Prevent the resources needed from waiting in a queue at a
non-constrained resource.
4. Elevate: If it still cannot produce enough products to produce demand, find
ways to increase capacity.
5. Go back to step 1.
Implementation TOC, although simple in principle, is often difficult because it
may require a complete change in the way a company operates. For example,
TOC requires a shift from cost-based decision making to decision-making
based on continuous improvement.
The smooth operation flow of materials and products are further enhanced
by Lean Sigma methodology where the variances within processes and between
workstations are minimized by the statistical techniques of Statistical Process
Control (see Basu, 2004, pp. 151–157).
212 Total Supply Chain Management

High level of efficiency

The more popular concepts of lean operations tend to be the concepts of muda,
flow and pull system. A preliminary analysis of all these methods, as we have
described earlier, however, highlights the fact that all assume sufficient machine
availability exists as a prerequisite. In our experience for many companies
attempting a lean transformation this assumption is not true. Machine avail-
ability depends on maximizing the machine up time by eliminating the root
causes of down time. The ratio of up time and planned operation time is the
efficiency of the operation. Therefore, in order to make lean concepts work it is
vital that the pre-condition of running the operations at a high level of efficiency
should be met. The old approach of measuring labour efficiency (e.g. the ratio
of standard hours and hours worked) has now shifted to the efficiency of the
control or bottleneck workstation.
There are many methodologies and tools of ensuring a high level of efficiency in
a lean supply chain. We are going to describe one such methodology (viz. TPM)
and two such tools (e.g. overall equipment effectiveness (OEE) and Five Ss).
Total Preventative Maintenance (TPM) is a proven Japanese approach to max-
imizing overall equipment effectiveness (OEE) and utilization, and relies on
attention to detail in all aspects of manufacturing. TPM includes the operators
looking after their own maintenance and thus encourages the empowerment. The
use of the word ‘maintenance’ in the title is misleading. TPM includes more than
maintenance, it addresses all aspects of manufacturing. The two primary goals of
TPM are to develop optimum conditions for the factory through a self-help peo-
ple/machine system culture and to improve the overall quality of the workplace.
It involves every employee in the factory. Implementation requires several years,
and success relies on sustained management commitment. TPM is promoted
throughout the world by the Japan Institute of Plant Maintenance (JIPM).
TPM is the manufacturing arm of TQM and is based on five key principles:

1. The improvement of manufacturing efficiency by the elimination of six big

losses.
2. The establishment of a system of autonomous maintenance by operators
working in small groups.
3. An effective planned maintenance system by expert engineers.
4. A training system for increasing the skill and knowledge level of all perman-
ent employees.
5. A system of maintenance prevention where engineers work closely with
suppliers to specify and design equipment which requires less maintenance.

TPM requires the manufacturing team to improve asset utilization and manufac-
turing costs by the systematic study and the elimination of the major obstacles
to efficiency. In TPM these are called the ‘six big losses’ and are attributed to
(i) breakdown, (ii) set-up and adjustment, (iii) minor stoppages, (iv) reduced
speed, (v) quality defects and (vi) start-up and shut-down.
The process of autonomous maintenance is to encourage operators to care for
their equipment by performing daily checks, cleaning, lubrication, adjustments,
 Lean and agile supply chain 213

size changes, simple repairs and the early detection of abnormalities. It is a step-
by-step approach to bring the equipment at least to its original condition.
Some managers may hold the belief that in TPM ‘you do not need experi-
enced craftsmen or engineers and all maintenance is done by operators’. This
is not true. The implementation of a maintenance policy with appropriate infra-
structure is fundamental to planned maintenance. Planned maintenance is the
foundation stone of TPM. However, if the skill and education levels of oper-
ators are high then a good proportion of planned maintenance activities should
be executed by operators after proper training. Cleaning, lubrication and minor
adjustments together with an ability to recognize when a machine is not func-
tioning correctly should be the minimum which is required of operators.
For TPM to succeed a structural training programme must be undertaken in
parallel with the stages of TPM implementation. In addition, ‘one point les-
sons’ can be used to fill in a specific knowledge gap. This uses a chart which is
displayed at the workplace and describes a single piece of equipment and its
setting or repair method.
Whilst great progress can be made in reducing breakdowns with autonomous
maintenance and planned maintenance, ‘zero breakdowns’ can only be achieved
by the specification of parts and equipment which are designed to give full
functionality and not to fail. All engineers and designers of the user company
should work concurrently with the suppliers of equipment to achieve a system
of maintenance prevention.
Although there is a special emphasis of input by different employees to differ-
ent aspects of TPM (e.g. ‘six big losses’ for middle management, ‘autonomous
maintenance’ for operators, ‘planned maintenance’ for middle management,
‘maintenance prevention’ for senior management), TPM involves all employ-
ees and the total involvement is ensured by establishing TPM work groups or
committees. Figure 13.3 illustrates an example of a TPM organization.

Company TPM
Technical director committee

Factory TPM
Plant manager committee

Section TPM
Manufacturing manager committee

Line TPM
Supervisor committee

TPM
Team leader circle

Figure 13.3 TPM organization.

214 Total Supply Chain Management

To summarize, TPM is a factory-wide continuous improvement programme

with particular emphasis on changing the culture of the shop floor through
improved attitudes and skills. TPM progress is measured by the stages of
autonomous maintenance completed, and visible progress is also seen in the
higher reliability of equipment, reduction of waste and improvements in safety
statistics.

Case example: TPM at Nippon Lever, Japan

Background
The Utsunomia plant in Japan was commissioned in 1991 on a green-
field site by Nippon Lever to manufacture household detergents prod-
ucts and plastic bottles for liquid detergents. The factory was
experiencing ‘teething’ problems primarily due to the poor reliability
and lack of local support of the imported equipment. Many of the
employees were new to factory work.
To improve this situation the company used the help of the JIPM, an
organization which is working on TPM with over 800 companies in
Japan. TPM has been widely used in Japan, having been developed to
support Lean/JIT and TQM. It was considered to be appropriate for the
Utsunomiya plant TPM focuses on machine performance and concen-
trates on operator training and teamwork.

Approach
A TPM programme was launched at the Utsunomiya plant in July 1992
with the objective of zero losses:

• zero stoppages
• zero quality defects
• zero waste in materials and manpower

Strong organizational support was provided by the Nippon Lever man-

agement in terms of:

• a top management steering team to facilitate implementation by

removing obstacles;
• a manager to work full time supporting the programme;
• one shift per week set aside for TPM work;
• training for managers, leaders and operators involving JIPM video
training material.

The programme launch was initiated at a ‘kick-off’ ceremony in pres-

ence of the whole Nippon Lever Board and managers from other com-
pany and suppliers’ sites.
 Lean and agile supply chain 215

Implementation
The initial thrust of the programme was the implementation of ‘autono-
mous maintenance’ following the JIPM’s seven steps:
1. Initial cleanup
2. Elimination of contamination
3. Standard setting for operators
4. Skill development for inspection
5. Autonomous inspection
6. Orderliness and tidiness
7. All-out autonomous working
To implement the seven steps, ‘model machines’ (those giving the biggest
problems) were chosen. This approach helps to develop operators’ knowl-
edge of a machine and ensures that work on the model can be used as
the standard for work on other machines. It also helps motivation. In that
if the worst machine moves to the highest efficiency, this sets the tone for
the rest of the process.
The improvements to the machines were made using Kaizen method-
ology (small incremental improvements), and were carried out by groups
of operators under their own guidance. Two means of support were given
to operators – a Kaizen budget per line so that small repairs and capital
expenses could be agreed without delay and the external JIPM facilitator
provided encouragement and experience to workgroups.

Results and learning points

By the end of 1993, substantial benefits were achieved within a year at
the Utsunomiya plant including:
• £2.8 million reduction in operating costs;
• reduced need for expensive third-party bottles;
• production efficiency increased from 54 to 64 per cent for high speed
soap lines and from 63 to 80 per cent for liquid filling lines;
• a team of trained, motivated and empowered operators capable of
carrying out running maintenance.
The success of the programme at the Utsunomiya plant led to the introduc-
tion of TPM to other two factories of Nippon Liver (Shimizu and
Sagamihara). Over the next few years the Corporate Groups of Unilever
encouraged all sites outside Japan to implement TPM with remarkable
successes achieved particularly in factories in Indonesia, Brazil, Chile,
UK and Germany.
Tools and techniques used
OEE, Five S, Five Why, Kaizen, SMED
Source: Leading Manufacturing Practices, Unilever Research and
Engineering Division (1994)
216 Total Supply Chain Management

The Overall Equipment Effectiveness (OEE) is an index of measuring the

delivered performance of a plant or equipment based on good output.
The method of monitoring OEE is devised in such a way that it would high-
light the losses and deficiencies incurred during the operation of the plant and
identify the opportunities for improvement.
There are many ways to calculate OEE (see Hartman, 1991; Shirose, 1992).
In this section, we describe the methodology of OEE that was developed and
applied by Ron Basu in both Unilever1 and GlaxoWellcome.2
OEE is defined by the following formula:
Actual good output
OEE %   100
0
Specified output

where specified output  specified speed  operation time

The application of OEE has been extensive, especially when driven by the
TPM programmes, to critical plant and equipment. It can be applied to a single
equipment, a packing line, a production plant or processes. In order to appreci-
ate the usefulness of OEE it is important to understand equipment time analy-
sis as shown in Figure 13.4 and described below.

T Total time

Unavail
A Available time
time

Operation Planned
O
time down time

Production Routine
P
time stops

Effective Unexpect
E
time stops

Figure 13.4 Equipment time analysis.

Total time defines the maximum time within a reporting period, such as 52
weeks a year, 24 hours a day, 8760 hours in a year.
Available time is the time during which the machine or equipment could be
operated within the limits of national or local statutes, regulation or convention.

1
In Unilever Plc, the methodology was known as PAMCO (Plant and Machine
Control).
2
In GlaxoWellcome it was called CAPRO (Capacity Analysis of Production).
 Lean and agile supply chain 217

Operation time is the time during which the machine or equipment is planned
to run for production purposes. The operational time is normally the shift hours.
Production time is the maximum time during which the machine or equip-
ment could be expected to be operated productively after adjusting the oper-
ation time for routine stoppages such as changeover and meal breaks.
Effective time is the time needed to produce a ‘good output delivered’ if the
machine or equipment is working at its specified speed for a defined period. It
includes no allowances for interruptions or any other time losses.
It is important to note that effective time is not recorded, it is calculated from
the specified speed as:

Good output
Effective time 
Specified speed

where specified speed is the optimum speed of a machine or equipment for a

particular product without any allowances for loss of efficiency. It is expressed
as quantity per unit such as tonnes per hour, bottles per minute, cases per hour
or litres per minute.
In addition to OEE, two other indices are commonly used as shown below:

Effective time (E))

Production efficiency (%)   100
Production time (P)

Operation time (O)

Operational Utilisation (%)   100
Total time (T )

A properly designed and administered OEE scheme offers a broad range of

benefits and a comprehensive manufacturing performance system. Some of its
key benefits are:

• It provides information for shortening lead time and changeover time and a
foundation for SMED.
• It provides essential and reliable data for capacity planning and scheduling.
• It identifies the ‘six big losses’ of TPM leading to a sustainable improve-
ment of plant reliability.

Case example: OEE of ACMA soap wrapping machine

Consider the production data of a toilet soap packing line where the con-
trol station governing the specified speed is an ACMA 711 wrapping
machine.
Week Number 31
Operation time 128 hours
Specified speed 150 tablets per minute
218 Total Supply Chain Management

Good output 4232 cases

Routine stoppages 11 hours 30 minutes
Unexpected stoppages 27 hours 15 minutes

Given that each case contains 144 tablets,

Good output  4232  144  609,408 tablets

Good output 6009, 408

Effective time    67.71 hours
Specified speed 150  60

Production time  Operation time  Routine stoppages

 128  11.5  116.5 hours
Total time  7  24  168 hours

Effective time 67.71

OEE    0.53  53%
Production time 128

Effective tim
me 67.71
Production efficiency    58%
Production time 116.5

Operation time 128

Operation utilization    76%
Total time 1688

It is important to note that the effective time was calculated and not
derived from the recorded stoppages. There will be an amount of
unrecorded time (also known as time adjustment) as, in the example,
given by
Unrecorded time  (Production time  Unexpected stoppages)
 Effective time
 (116.5  27.25)  67.71
 21.54 hours

• It provides information for improving asset utilization and thus reduced

capital and depreciation costs in the longer term.
Five S is a tool for improving the housekeeping of an operation, developed in
Japan, where the Five Ss represent five Japanese words all beginning with ‘s’:

• Seiri (organization): Separate what is essential from what is not.

• Seiton (neatness): Sort and arrange the required items in an orderly manner
and in a clearly marked space.
• Seiso (cleaning): Keep the workstation and the surrounding area clean and tidy.
• Seiketson (standardization): Clean the equipment according to laid down
standards.
• Shitsuke (discipline): Follow the established procedure.
 Lean and agile supply chain 219

In order to retain the name ‘Five S’, a number of English language versions
have evolved. These include:

• Seiri: Sort
• Seiton: Set in order/Stabilize
• Seiso: Shine
• Seiketsu: Standardize
• Shitsuke: Sustain

The Five S method is a structured sequential programme to improve workplace

organization and standardization. Five S improves the safety, efficiency and
the orderliness of the process and establishes a sense of ownership within
the team.
Five S is used in organizations engaged in Lean Sigma, JIT, TPM and TQM.
This principle is widely applicable not just for the shop floor, but for the office
too. As an additional bonus there are benefits to be found in environmental and
safety factors due to the resulting reduced clutter. Quality is improved by better
organization and productivity is increased due to the decreased time spent in
searching for the right tool or material at the workstation. Consider the basic
principle of a parent tidying a small child’s room which is overflowing with
clutter and sorting together various types of toys. The end product should be a
neater, warmer, brighter and more civilized play environment which will
encourage the child to utilize all toys and equipment more productively because
all relevant pieces are together, space is enhanced and mess is reduced.
It is useful to note that the quality gurus of Japan like numbered lists, for
example the Seven Mudas, the Five Whys, and the Five Ss. However, the exact
number of Ss is less important than observing the simple doctrine of achieving
the elimination of wastes.
As the Five S programme focuses on attaining visual order and visual con-
trol, it is also a key component of Visual Factory Management. As Five S is
primarily a visual process, a good example of promoting its message would be
to display pictures of a workplace with photographs showing both ‘before’ and
‘after’ depictions of the implementation of Five S.

Case example: Five S at Northrop Grumman Inc., USA

Northrop Grumman Corporation is a global defence company headquar-
tered in Los Angeles and provides technologically advanced products,
services and solutions in systems integration, defence electronics,
advanced aircraft and space technology.
Northtrop Grumman first deployed Five S on a part delivery process.
The work area assembled a variety of components into a single product.
Before Five S, the area was not well organized, and the process was
inefficient. With Five S implementations, the area saw a huge 93 per cent
reduction in the space employees travel to complete tasks as well as a
220 Total Supply Chain Management

42 per cent reduction in the overall floor space and 20 per cent improve-
ment in operational efficiency.
The system has become a one-piece flow operation between assembly
and mechanics, enabling everyone involved to know what the station has
and what it needs.
Source: Skinner (2001)

Quality assurance
Womack Jones and Roos (1990) propose perfection as the fifth Lean principle
and according to this a lean manufacturer sets his/her targets for perfection in
an incremental (Kaizen) path. The idea of TQM also is to systematically and
continuously remove the root causes of poor quality from the production
processes so that the organization as a whole and its products are moving
towards perfection. This relentless pursuit of the perfect is key attitude of an
organization that is ‘going for lean’.
The incremental path to TQM progressively moves from earlier stages of
quality control and quality assurance. Quality assurance focuses on the preven-
tion of failures or defects in a process by analysing the root causes and sustain-
ing the improved process by documenting the standard operating procedure
and continuous training. TQM is quality assurance of all processes across the
organization involving everyone from the top manager to a trainee. Therefore,
the central driver towards perfection is quality assurance.
This drive for quality assurance has now been extended beyond TQM to Six
Sigma with additional rigour in training deployment (e.g. Black Belts and Green
Belts), the methodology of DMAIC (e.g. Define, Measure, Analyse, Improve and
Control), and measurement (both variances and savings). The principles of Six
Sigma are embedded in the path towards perfection in a lean supply chain and Six
Sigma has now moved to Lean Sigma and FIT SIGMA. Basu and Wright (2003)
explain that the predictable Six Sigma precisions combined with the speed and
agility of Lean produces definitive solutions for better, faster and cheaper business
processes. Through the systematic identification and eradication of non-value
added activities, optimum value flow is achieved, cycle times are reduced and
defects eliminated. The dramatic bottom line results and extensive training
deployment of Six Sigma and Lean Sigma must be sustained with additional fea-
tures for securing the longer-term competitive advantage of a company.

Case example: Lean supply chain in Seagate, USA

Background
Seagate Technology is the world’s largest manufacturer of disc drives
and HDD recording media. With its headquarters at Scotts Valley,
California, the company employs 62,000 people and its turnover in 2000
 Lean and agile supply chain 221

exceeded $7 billion. The business operates in a market environment of

short product life cycle and quick ramp to high volume. The data storage
market is growing 10–20 per cent per year and the technology content
doubles every 12 months. Volume products remain in production for
only 6–9 months.

Approach
In 1998, Seagate’s senior executive team was concerned that business
performance was not on par with expectations and capabilities. The
quality group was charged with recommending a new model or system
with which to run the business. The Six Sigma methodology was
selected and launched in 1998 to bring common tools, processes, lan-
guage and statistical methodologies to Seagate as a means to design and
develop robust products and processes. Six Sigma helps Seagate to make
data-based decisions that maximize customer and shareholder value thus
improving quality and customer satisfaction while providing bottom line
savings.
Six Sigma was one of the three key activities seen as essential for
Seagate’s continuing prosperity. The other two were:

1. Supply chain: How to respond to demand changes in a timely man-

ner, execute to commitments and provide flexibility to customers.
2. Core teams: How to manage product development from research not
sure what you are saying hereto volume manufacture.

Implementation
Seagate Springtown (which is part of Seagate Recording) started a sup-
ply chain project to improve materials management and develop a stra-
tegic vendor relationship. The fabrication plan at Springtown introduced
the Lean Manufacturing philosophy that recognizes waste as the primary
driver of cycle time and product cost. Very soon a change had taken
place at Springtown and Lean Manufacturing was wholly integrated
with the supply chain initiative.
The corporate office at Scotts Valley was rolling out a global Six
Sigma deployment programme. The Springtown site followed the Six
Sigma training programme and implemented a number of tools and tech-
niques including the process map, sampling plan, cause and effect analy-
sis and control plans, which identified a ‘hidden factory’. The less
visible defects of this ‘hidden factory’ included:

• Repeated measurements (in and out)

• Repeated chains (post and pre)
• Transits between manufacturing areas
• Process steps conducted in ‘non-standard operating conditions’
• High rework on a process
222 Total Supply Chain Management

Results and learning points

The Six Sigma methodology proved a key enabler for supply chain
/Lean Manufacturing and the integrated programme achieved improved
process capability and quality as shown by:

• Increased throughput by 31 per cent

• Significant impact on capital expenditure due to increased efficiency
of existing equipment
• Lower work in progress
• 80 per cent pass rate on qualifications for vacuum tools (previously
40 per cent)

The main learning points from the Six Sigma programme at Seagate
Technology include:

1. Companies using Six Sigma need to learn how to use the metrics to
manage – to make appropriate decisions on a holistic basis, avoiding
sub-optimization. This task of integration with the whole of the com-
pany’s business process is the key.
2. Set aggressive goals – do not make them too easy.
3. Develop a system for tracking ‘soft savings’.
4. Develop a common language and encourage its use on a widespread
basis early in the program.
5. Embed the business process within the organization by training
all functions – use green, black belt and customized programs as
appropriate.
Source: Basu (2004, p. 257)

The Toyota Production System is frequently modelled as a house with two pil-
lars. One pillar represents JIT, and the other pillar, the concept of jidoka. Jidoka
is ‘automation with a human touch’. This is usually illustrated by example of a
machine that will detect a problem and stop production automatically rather
than continue to run and produce bad output. Jidoka principle contributes to the
achievement of both high efficiency and sustainable quality assurance.
The principle was first used by Sakichi Toyoda at the beginning of the 20th
century when he invented a loom which stopped when the thread broke. Jidoka
comprises a four-step process that engages when abnormalities occur:

1. Detect the abnormality

2. Stop
3. Fix or correct the immediate condition
4. Investigate the root cause and install a countermeasure
 Lean and agile supply chain 223

The first two steps can be mechanized or automated. Poka-yoke method also
allows a process to detect a problem and stop. Ultimately, it is about transfer-
ring human intelligence to machines to eradicate the problem.

The characteristics of an agile supply chain

In Chapter 3, we highlighted the distinction between a lean supply chain and
an agile supply chain in concurrence with both Fisher (1997) and Christopher
(2000).
Christopher (2000) defines agility as achieving a rapid response on a global
scale to constantly changing markets. The rapid response needs to cover
changes in demand for both volume and variety. A third dimension is lead
times and how long it takes to replenish the goods in order to satisfy demand.
Agility is achieved by flexibility and in order to achieve flexibility standard
platforms are postponed and components and modules are final assembled
when the demand for volume and variety are known. The standardized compon-
ents and modules enable minimum stock keeping of finished products while at
the same time the late assembly makes mass customization possible with short
lead times. Buffer capacity is maintained in order to satisfy the fluctuation of
demand. The above described agile set-up demand that the full global supply
chain is involved. The subassembly of components into modules can be done
in a low-cost environment, where as the final assembly will often be done close
to demand in order to localize the product. Christopher suggests four charac-
teristics of a truly agile supply chain as (1) market sensitive capable of reading
and responding to real demand, (2) virtual which is information based rather
than inventory based, (3) process integration ensuring collaborative working
between buyers and suppliers and (4) network committed to closer and respon-
sive relationships with customers.
Fisher (1997) offers a similar view on agile and responsive supply chain
based on predictable demand versus unpredictable, but also with the product
component of functional versus innovative products. Functional products are
like staples that can be bought at groceries and petrol stations satisfy basic
needs and have a predictable demand with a long lifecycle and low profit mar-
gin. Innovative products on the other hand are like state of the art MP4 players
or fashion clothes having a short life cycle, with higher profit margins but with
very unpredictable demand. These distinctions are exemplified as the product
life cycle for functional products is typically more than 2 years, but for innova-
tive products it can be from 3 months to 1 year. The margin of error for fore-
casting for functional products is in the 10 per cent range, but for the innovative
products it varies from 40 to 100 per cent. Based on the short lifecycle and the
unpredictable demand and forecasting, innovate products need an agile supply
chain. The agile supply chain is achieved by buffer capacity and buffer stocks.
Fischer further argues that it is critical that the right supply chain strategy
is chosen in order to match the demand and the product, so that innovative
products with a high margin are channelled trough a responsive supply chain.
224 Total Supply Chain Management

The cost of the buffers in capacity and inventory will be offset by a higher margin
and the lower number of goods needed to be sold. The agile supply chain is
achieved, according to Fischer, by adopting four rules, such as (1) accept that
uncertainty is inherent in innovative products, (2) reduce uncertainty by find-
ing data that can support better forecasting, (3) avoid uncertainty by cutting
lead times, increasing flexibility in order to produce to order or move manufac-
turing closer to demand and (4) hedge against uncertainty with buffer inven-
tory and excess capacity.
Yusuf et al. (2003) claim that there are four pivotal objectives of agile manu-
facturing as part of an agile supply chain. These objectives are (1) customer
enrichment ahead of competitors, (2) achieving mass customization at the cost
of mass production, mastering change, (3) mastering change and uncertainty
through routinely adaptable structures and (4) leveraging the impact of people
across enterprises through information technology. This list clearly shows that
enhanced responsiveness is a major capability of an agile supply chain.
In congruence to our research and experience we summarize that in order to
achieve the responsiveness required for innovative products, an agile supply
chain should contain the following key characteristics:

1. Flexibility
2. Market sensitivity
3. A virtual network
4. Postponement
5. Selected lean supply chain principles

Flexibility is a key characteristic of an agile supply chain. Flexibility in manu-

facturing is the ability to respond quickly to the variations of manufacturing
requirements in product volume, product variety and of the supply chain. The
variability in volume is demonstrated by product launching, seasonal demand,
substitution and promotional activities. The changes in variety relate to
increased number of SKUs in new products, distributors’ own brands (DOB),
etc. The variations in the supply chain result from variability of lead times of
both suppliers and customers, increased service level, change in order size, etc.
There are instances of failures during the 1980s where companies invested in
sophisticated flexible manufacturing systems (FMS) in pursuit of flexibility.
At the other end of the scale all the attentions were given to organizational flexi-
bility (e.g. cultural and skills integration between craftsmen and operators),
producing limited success. Recognizing a closer link between agile processes
there is a huge interest in the service sector, also how to optimize the benefits
of agile processes for a faster response to customer demand. In order to improve
flexibility in a supply chain, it is crucial to reduce complexity in product spec-
ifications to maximize mass customization, reduce complexity in processes by
standardizing them and enhance organization flexibility by multi-skilling and
seamless working practices.
Market sensitivity means that the supply chain is capable of responding to
real demand. This requires demand planning not to be driven by periodically
 Lean and agile supply chain 225

adjusted annual forecast, but by actual customer requirements. The scheduling

of operations will be reverse scheduling based on customer orders rather than
forward scheduling based on forecast. In addition to actual customer order, the
use of information technology and efficient consumer response (ECR) and cus-
tomer relationship management (CRM)systems should be utilized to capture
data directly from point of sales and consumer buying habits. The growth in
‘loyalty cards’ and ‘store cards’ is also another source of consumer data to
enhance the management of market sensitivity.
The use of Internet and information technology have enabled the real-time
sharing of data between customers, buyers, suppliers, planners, manufacturers
and distributors in a virtual network. The visibility of demand and collabora-
tive planning forecasting and replenishment (CPFR) systems (see Chapter 12)
in a virtual network are important tools to respond to the real needs of cus-
tomers in a global market. The concept of competitive advantage through
world class manufacturing in individual sites has now shifted to network excel-
lence. The supply chain where a group of partners can be linked together in a
virtual network and communicate on-line and on time is a vital characteristic
of agility.
Postponement is based on the principle that semi-finished products and
components are kept in generic form and the final assembly or customization
does not take place until the final customer or market requirements are known.
The principle of postponement is an essential characteristic of an agile supply
chain. The rapid response tailored the customer needs is also helped by the
buffer capacity of key workstations. The point in the supply chain where the
semi-finished products are stocked is also known as ‘de-coupling’ point. This
point should be as close to the market place as possible in the downstream of
the supply chain. In addition to responding quickly to specific customer
demand, the concept of postponement offers some operational, economic and
marketing advantages. As the inventory is kept at a generic level there are
fewer SKUs and this makes easier forecasting and less inventory in total. As
the inventory is kept at an earlier, stage stock value is also likely to be less than
the value of finished product inventory. A higher level of variety can be offered
at a lower cost and marketing can promote apparent exclusivity to customers
by ‘mass customization’.
An agile supply chain also shares some lean supply chain principles or char-
acteristics. The enhanced responsiveness of an agile supply chain is in addition
to the high level of efficiency, quality assurance and smooth operation flow
which are the key characteristics of a lean supply chain. An agile supply chain
also focuses on the elimination of waste or mudas as in a lean process but with
a different strategy for buffer capacity and inventory required for postpone-
ment. However, a pure lean strategy can be applied up to the de-coupling point
and then an agile strategy can be applied beyond that point. It should be poss-
ible to achieve volume-oriented economies of scale up to the de-coupling point.
This is similar to a service operation (e.g. a bank) where the repetitive activities
are isolated or de-coupled and carried out in the back office with lean thinking
while responsive customer service is provided at front end.
226 Total Supply Chain Management

The strategy of a lean and agile supply chain

The above analysis and our experience strengthen the suitability of a pure agile
supply chain for innovative products with unpredictable demand pattern with
high profit margin and high variety requiring many changes and shorter lead
time. A pure lean supply chain, on the other hand is suitable for high volume
functional products with a lower margin and variety requiring a few changes.
A lean supply chain may also compromise a longer lead time for a lower cost.
A survey by Yusuf et al. (2003), which was carried out by questionnaire to
600 manufacturing companies, showed that only a few companies adopted
agile supply chain practices, but many companies embraced long-term collab-
oration with suppliers and customers, which was conceptualized as lean supply
chain practices.
Christopher (2000) comments, ‘There will be occasions when a pure agile or
a lean might be appropriate for a supply chain. However, there will often be situ-
ations where a combination of the two may be appropriate, that is a hybrid
strategy’.
Naylor et al. (1997) agree that both agile and lean can be combined in the
same supply chain calls it ‘Leagile’.
In the business world it is more likely that companies have a mixed portfolio
of products and services. It is also likely many high volume manufacturers or
service providers experience short-term or seasonal demand of novelty products
(e.g. chocolate eggs at Easter and T-shirts for the Olympics). There will be some
high volume products where demand is stable and more predictable and there
will be products with sporadic demands seeking agile response. Therefore, it is
not important to follow either lean or agile supply chain strategy. However, it is
important to recognize that a supply chain can be lean for part of the time, agile
for part of the time and both lean and agile (hybrid) for part of the time.

Case example: A lean and agile supply chain

Zara is a successful apparel company in Spain supplying fashionable
clothing to an international target market of young customers between
the age of 18 and 35. The market positioning of the company places it in
competition with some of the leading operations in the business, includ-
ing the Italian company Beneton, the US based Gap, and the UK based
FCUK and Monsoon.
The process of supply planning starts with a cross-functional team
comprising fashion, commercial and retail specialists working in Zara’s
head office in La Curuna, Spain. The design reflects the international
fashion trends of target customers with inspiration gained through visits
to relevant fashion shows, stores, university campuses, cafes, clubs and
events appropriate for the life style of young aspiring customers.
The team’s understanding fashion trend and demand forecast is further
 Lean and agile supply chain 227

guided by regular inflow of sales data from company’s stores around the
world.
Raw materials are procured from three buying offices in the UK,
China and the Netherlands and most of the materials are supplied from
India, China, Mauritius, Turkey, Morocco and also from New Zealand,
Australia, Italy and Germany. Approximately 40 per cent of broadest but
least transient garments are purchased as finished products from the low
cost centres of the Far East. The remaining 60 per cent are produced by
quick response in Zara’s-automated factories in Spain and a network of
small contractors. Materials or fabric are also held in semi-finished form
(e.g. un-dyed and un-printed),
Zara’s manufacturing systems are modelled upon ideas developed in
conjunction with Toyota. The operations with a higher economy of scale
(e.g. cutting, dying, labelling and packaging) are conducted in-house to
enhance cost efficiency. Other manufacturing activities including the
labour intensive finishing operations are accomplished by a network of
300 specialist subcontractors. These subcontractors work exclusively for
Zara’s parent company, Inditex SA. They receive necessary training and
technological, financial and logistical support as if they are subsidiaries
of Zara. The system is flexible to adjust total capacity depending on the
fluctuation of demand and production is kept at level below expected
sales to keep the stock moving.
Zara’s rapid and sustainable growth in a competitive market is attrib-
uted to its ability to establish an agile supply chain which also incorp-
orates many lean characteristics. There is a success story of a combined
lean and agile supply chain strategy.
Adapted from Christopher (2000)

Summary
Changing customer and technological requirements, volatile markets and
global sourcing have created fresh challenges to supply chain management and
the traditional forecast driven longer and slower logistic pipelines are becom-
ing non-competitive and therefore unsustainable. In this chapter, we have dis-
cussed how to respond to this challenge by a lean and agile supply chain. We
have developed the key characteristics of a lean supply chain as elimination of
waste, smooth operation flow, high level of efficiency and quality assurance.
We have differentiated the characteristics of an agile supply chain as flexibil-
ity, market sensitivity, a virtual network, postponement and selected lean sup-
ply chain principles. We have also given guidelines to apply appropriate
strategies of lean and agile supply chain. The supply chain objectives and char-
acteristics of a lean and an agile supply chain are summarized in Figure 13.5.
228 Total Supply Chain Management

Lean Agile

• Low cost • Fast response

Objectives • High utilization • Buffer capacity
• Minimum stock • Deployed stock

• Flexibility
• Elimination of waste • Market sensitivity
Process • Smooth operation flow • A virtual network
characteristics • High level of efficiency • Postponement
• Quality assurance • Selected lean supply
chain principles

• Functional products • Innovative products

Product • High variety
• Low variety
characteristics
• Low margin • High margin

Figure 13.5 Lean and agile characteristics.

14
Retail supply chain

Introduction
A columnist in the Times of India, 6 September 2006 asked readers to picture a
busy evening in a small town supermarket in India in 2010. ‘Jagannath Dash the
manager, watches a large-screen display with satisfaction. He sees from the
display that it is time to open more checkout lines and that there is a shortage of
shopping carts in circulation. A red light on the screen highlights that it is time to
restock the oatmeal rack’. To readers in Europe and North America, or even
Australia and New Zealand, the above description would seem to be reflecting
what we imagine is already common practice. We would believe, or are led to
believe in text books, journal articles and magazines, that computer systems exist
and are used that link sales, to stock records, and trigger orders based on preset
re-order levels. Such systems are also meant to calculate stock turn and profit mar-
gin by line item, and can indicate the customer profile for a particular store. For
example, the products being purchased in a particular store could suggest that
most of the customers in that market area have young families, one pet animal,
buy lower priced wine and will favour on special items. When combined with a
loyalty card, where customers gain points for each purchase with a reward once a
certain amount has been spent, the computer system could know more about indi-
vidual households purchasing habits than will the customer themselves know.
How many of us know, how much bread and milk we buy a week, or how much
we spend on fruit a week?

The theoretical ‘ideal’ model

For the following described model bar coding and bar code readers are essen-
tial in the retail supply chain. In the not too distant future bar coding will be
replaced by RFID (radio frequency identification tags). The major difference is
that RFID readers can recognize and record transactions without the goods
230 Total Supply Chain Management

having to be removed from the shopping trolley. Operationally, the process and
the benefits are essentially the same.

Point of receipt of goods

When goods are received bar code scanning enables:

Receipt of goods tallied and stock balances updated.

Received goods married to an order number, and the balance of outstanding
orders updated and highlighted. Highlighting of shortfall in delivery enables
outstanding orders to be followed up.
Amount owing to suppliers – accounts payable – updated.

Point of sale
When sold, bar coding at point of sale (POS) adds up the cost of all the items
the customer has picked and does not rely on the arithmetic ability of the check
out clerk. The customer generally will present a plastic bank debit or credit card,
and sometimes a loyalty card. Irrespective, whether a debit or a credit card,
and/or loyalty card from the retailers point of view the result is the same. Eftpos
(exchange of funds at point of sale) transfers money from the customers bank
and directly into the retailers bank account (less a bank fee) at the time of the
sale. No money needs to physically change hands. The check out clerk does not
have to possess arithmetic skills and is absolved from having to add up, calcu-
late change, or for being blamed from entering wrong prices. Once the bar code
is read into the system the computer does it all.
The bar code action at the POS reduces the potential for human error between
the customer and the check out clerk, but even more importantly updates stock
records.

Stock keeping records

The POS bar code action automatically:

Adjusts (reduces) the stock balance.

Triggers a re-order on the supplier once a re-order level is reached.
Updates the general ledger for sales and margins.
Calculates daily, weekly, monthly and year to date actual results of sales and
revenue and compares to budget.
Upgrades the sales and revenue forecasts.
Produces exception reports for management on slow moving/high moving
items.
Calculates stock turn for each line item.
Calculates the margin (profit) per line item.
Updates customer profile details for marketing.
Updates the bank account balance.
 Retail supply chain 231

Re-order system
The re-order system will require a calculation taking into account stock turn,
lead times, and a reserve level to determine a re-order level. It is important in
the grocery industry not to hold too much stock not only because of the finan-
cial cost of holding stock and limited shelf space, but also the perishability of
food items (used by dates). It is also important not to run out of stock. The cal-
culation of a re-order point is important. Bar coding updates information of
average lead times, average demand and adjusts for seasonal ups and downs.

Flow of information
A POS system that is integrated with suppliers will enable information to be
transmitted direct to the suppliers and further up the supply chain. Apart from
the saving in clerical work of repetitive entering, and checking of data and
correcting errors the electronic exchange of data as described above enables
fast and accurate sharing of information. If organizations can have faith in the
system and trust each other, major suppliers (factories and distributors) will be
responsible for replenishment of their products based on the information
received direct, electronically, from the retail POS. The responsibility of the
smooth flow of goods is transferred to the supplier. In effect the supplier can
manage the sales and marketing of their products in the retail stores. The major
benefits of the direct sharing of information is that key suppliers can react
quicker, delivery is quicker, inventory of materials are reduced, and product is
fresher.

Cross docking model

With the cross docking process, pioneered by Wal-Mart, orders are transmitted
direct to the factory distribution centre or to the distributor (e.g. for imported
goods). The distributor (factory or distribution centre) aggregates the demand
from all the retail stores and goods will be shipped in bulk to a regional cross
docking facility. At the cross docking facility picking slips for each retail store
will have been received made up of the various items required per store. Once the
trucks arrive from the distributors they are unloaded into the cross docking ware-
house. Within no more than 48 hours the goods received from the various distribu
tor will have been sorted to match the picking slips, packed and loaded onto trucks
at the other side of the cross docking facility for delivery to retail stores in the
region.
Figure 14.1 depicts POS integrated system and shows cross docking.

Reality
The above describes what could happen.
232 Total Supply Chain Management

Food processor
Customers Retailers
bank bank

EFT Re-order
Distributor
POS

Customer
Bank card Retailer Picking slips Cross docking
Point of sale facility
Loyalty card

Marketing information Stock Inwards

To retailers
Customer profiles etc. record goods

Accounting
records

Sales/Margins
Accounting
reports Accounts payable
Budget reports

Figure 14.1 Integrated POS system.

The reality is that although the technology has been available for years not
all supermarkets or other fast-moving consumer good retailers actually make
use of the technology to the extent portrayed above and manual entry of data
and repetitive entries at each level of the supply chain are made.
Typically shelves are manually checked, orders are raised by hand and are sent,
generally by e-mail, to the regional warehouses rather than direct to the distribu-
tors. The regional warehouses manually load orders received from retailers into a
computer system. The computer system aggregates orders which are e-mailed to
the distributors. As stock outs at retail are unacceptable, to avoid late deliveries
regional warehouses find it prudent, indeed necessary, to carry stock in anticipa-
tion of orders, and to order ahead of actual demand in anticipation based on past
seasonal demand, and late delivery from suppliers further up the supply chain.
Once an order is received from the regional warehouse the distributors in
turn manually load the aggregated demands into their computer systems and
place orders further up the supply chain, and so on.
Back at the regional warehouse when inwards goods are received they will
be entered into the computer to update the regional warehouse stock records.
Most systems will not allow goods to be despatched until they have been
receipted into the computer system. Picking slips are generated by the regional
warehouse computer. In a parody of the cross docking process goods are
received in one side of the warehouse and despatched from the opposite side.
When received, after being entered into the computer, goods are stored in racks.
When the picking slips for each retail store are printed they show the packer,
 Retail supply chain 233

the order in which to collect and accumulate the various items required by each
retail store. The computer will calculate and show the shortest route around the
warehouse to pick the required bundle of goods. By using a bar coding wand
the packer will record what has been packed and the regional warehouse stock
records will be updated. Goods are loaded onto pallets for delivery to retailers
at the other side of the warehouse. As each delivery truck will be delivering to
several stores the delivery route will be planned to reduce the distance trav-
elled. The order in which pallets are loaded onto the delivery trucks will take
into account the order in which they will be delivered.
The above process, with data being re-keyed (with added opportunities for
human error) into respective computer systems is shown in Figure 14.2. It is

Regional ware
Retailer Distributor
house

Retailers bank E-mail order received Orders entered into

system

Customer Point of sale Orders aggregated Re-order on

food processor

Stock records updated Orders raised on Goods packed and

Re-order highlighted distributor forwarded
to ware house

Manual count of shelves Goods received System updated

and stock

Compare to sales trend Recorded in system

Re-order decision Packing slips raised

Re-order raised Goods picked

Bundled
Despatched
Computer system
E-mail to regional ware updated
house

Goods received manually

entered into system

Figure 14.2 Non-value adding activities.

(Note: Three Separate Computer Systems.)
234 Total Supply Chain Management

not hard to find non-value adding activities in this approach. Compare this to
the true cross docking process shown in Figure 14.3. The more entries are
required the more chance there is of errors and delays.

One integrated system

Orders
automatically triggered Demand on
Retailer
distributor
point of
sales Picking Distributor automatically
slips aggregates orders

Cross Inwards
docker Goods
To
Goods picked
retailers
and out within
24 hours

Figure 14.3 Cross docking system.

The automated integrated system shown in Figure 14.3 requires trust in

the system and trust in each member of the supply chain. Having trust in the
system is one thing, being practical is another. An often quoted example of
where an organization reacted to computer generated information is Volvo and
their green cars. In the mid-90s Swedish car maker Volvo found itself with too
many green cars in the middle of the year. The marketing department was
tasked with moving the green cars. They did a great job but the problem was
that the supply chain planning team had not been notified of the promotion on
the green cars and it appeared that there was an increasing demand for green
cars! As sales increased, production stepped up to match demand. The end
result was Volvo was left with a huge inventory of green cars at the end of
the year.

Supply chain speed

The amount of information available to retailers re-point of sale, buying pat-
terns, customers tastes, seasonal fluctuations, and lead times is enormous. But,
we have all experienced going to a store to find that it does not have the item
we want. And what retailer, especially in the fashion industry, has not been caught
with huge stocks which have to be cleared at below cost at the end of the season?
It would seem obvious that retailers at the beginning of a ‘season’ once early
sales figures are known would update their sales forecasts and order accordingly
and thus reduce the likelihood of selling out of ‘hot’ products and/or being
caught with large stocks of unpopular items at the end of the season. However,
 Retail supply chain 235

in many cases, especially in the apparel industry, retailers cannot change their
pre-season sales orders as the lead time is such that orders have to be ‘fixed’
before the season begins. Fisher et al. (2000) from their research give the
example of a large apparel retailer in the USA having to order 11 months in
advance for products with product life cycles of only 3 months. The retailer in
question did do product testing but ‘the problem is we already own the product;
the test merely reveals that it will be a dog once it gets to the stores’.
One manufacturer has found a way to overcome the lead-time problems so
as to be able to quickly respond to fashion. Benetton, an Italian apparel manu-
facturer makes sweaters in bulk, but delays the dyeing process until after initial
sales figures are received from the retailers. In other words, colour choices are
made after the manufacture. This approach has increased the cost of production
by 10 per cent but has resulted in improved forecasts, less surplus stock and due
to quick response to customer demand higher sales which has more than com-
pensated for the increase in production cost. Major retailers are responding to
challenges of lean and agile supply chain (see Chapter 13) as the following case
example of Tesco illustrates.

Case example: Lean retail chain – Toyota to Tesco

Tesco is the largest retail chain in the UK with a global network. In 2006,
Tesco turnover was nearly £47 billion with a trading profit exceeding
£2.5 billion. At the heart of Tesco’s recent success lies an obsession with
lean retail supply chain based on principles learned from Toyota.
Its product range increased, between 1983 and 1996, from 5000 to
40,000 stock keeping units (SKUs) but at the same time lead time to
stores came down from 7–14 days to 2 days, stock cover from 4.4 weeks
to 2.4 weeks. This improvement was achieved by traditional initiatives
of supply chain management such as centralized distribution, centralized
ordering, POS scanning and Electronic Data Interchange (EDI) with its
main suppliers.
Traditional supply chain worked according to the ‘motto’, better cen-
tralized and distant. Back in 1996, a typical product was handled 170
times and spent most of 20 to 60 days sitting in one of the seven differ-
ent stockholding points. While average availability of 98.5 per cent was
good at that time, this translated into, before selecting the substitutes,
55 per cent chance of finding 40 items on the shelf.
Tesco learned from Toyota’s lean production principles and, after 1996,
began to understand what it would take to create value streams which really
flow towards the customer. In the stores work began on ways to reduce
handling and streamline the flow of goods to the shelf. Tesco achieved
99.8 per cent availability for its customer and stock cover of 3.5 days in
its total supply chain, much more like Toyota. More recently, work also
began in RDCs (Re-distribution Centres) to streamline incoming receiving
236 Total Supply Chain Management

and inspection and to prepare flow of fast moving products straight through
to despatch.
The key next step for Tesco and its major suppliers was to jointly analyse
changes in demand pattern using Collaborative Planning Forecasting
and Replenishment (CPFR) to adjust production volumes to agreed fore-
cast and also to decided off-line stock and stocking points. Many manu-
facturers had already been using lean manufacturing techniques such as
total productive maintenance (TPM). Products would be made to order
and picked up by milk round where they would flow through the RDC
and out to the store within 2 to 5 days being touched only 70 times and
stopping in only two stocking points.
With the introduction of the Clubcard scheme on-line shopping by
customers Tesco has been building up a customer relationships manage-
ment (CRM) system and plans to use loyalty card and home shopping
data to customize the range of products displayed in each store to the
buying profiles of that store’s customers. Given the growing diversity in
types of customer and many alternative routes to market it is unlikely to
have just one solution. However the key to doing so will be a relentless
focus on a customer-driven supply chain.
Adapted from Jones and Clarke (2002)

Accuracy of information
The underlying assumption with the bar coded ‘ideal’ model is that information
is accurate. In the USA in the grocery industry the annual stock shrink is $92
billion. Stock or inventory shrink is a term used for the discrepancy between
what the records show as being the balance and what is actually physically on
hand. This is a loss that goes straight to the bottom line! The problems are many.
In 2005, shoplifting accounted for $5 billion and employee theft for a stagger-
ing $46 billion, Nishi (2006). The other $41 billion loss was due to human error.
Human error is most likely to occur when entries are hand keyed rather than
bar code read. Other examples are when an item is returned because it is the
wrong size and it is replaced by the sales person without scanning the return
and the replacement product although prices could be different. Irrespective of
price the stock records for both ‘small’ and ‘large’ size will be wrong. In the
grocery trade the check out clerk will often scan in one item several times
rather than scanning six similar items. For example, out of six packs of differ-
ent flavoured yoghurt, only one will be scanned perhaps six times at the same
price. Fisher et al (2000, p. 121) report that one supermarket chain consistently
record sales of medium ripe tomatoes to be 25 per cent higher than the actual
amount of medium ripe tomatoes delivered to the stores, ‘if it’s red and soft it’s
a medium tomato at check out’ although the actual tomato might be a higher
priced vine ripened. Other problems are the recording of inwards goods, for
 Retail supply chain 237

example the amount of items per container could be entered as 20 in the

re-order system when the delivery pack only contains 12. Unreported breakages,
damaged goods and goods past the use by date account for much of the balance
of shrinkage.

Supply chain forces

‘The dynamic nature of the supply chain is evident in both the changing nature
of the structure of the supply chain and is also evident in the day-to-day activ-
ities of members at each level. In a typical supply chain, each member creates
disturbances, either independently or in response to actions taken elsewhere
within the supply chain. These disturbances frequently create a chain reaction’
(Wright and Race, 2004, p. 211). This latter phenomenon is often demonstrated
in a management simulation known as ‘the Beer Game’. The ‘Beer Game’ has
its origins in a role-playing exercise for a simple production and distribution
system developed by MIT in the 1960s. Variation of the game have been used in
business schools around the world for over 40 years, in particular in MBA pro-
grams. Simchi-Levi et al. (2003), as have others, developed a computer based
simulation games to enable students to explore issues associated with supply
chain dynamics. The original beer game consists of a basic supply chain of a
single retailer, drawing on a single wholesaler, who in turn draws on a single
distributor, who in turn is supplied from a single brewery with unlimited raw
materials that supplies the distributor. There is no limit to the amount of stock
each member of the supply chain can keep. The constraints are that there is a lead
time for delivery and a fixed order delay time for each re-order and delivery step
in the chain.
In the original game each of the players manages one of the supply chain com-
panies. Each ‘week’ the lecturer in the role of the end user customer gives the
‘retailers’ a demand order, and the retailer fills that order if possible and calcu-
lates an order for the wholesaler. If the order cannot be totally fulfilled a ‘back-
order’ is recorded. Each of the other two members of the supply chain, wholesaler
and distributor, also observe the demand, satisfy the demand if possible and/or
records a backorder and places an order, or in the case of the factory schedules
production. The person running the game (the lecturer) after a few ‘weeks’ feeds
in a change to demand and the whole supply chain has to react to this change.
The lead time and delivery time constraints cause a delay in the system. As a
result the players tend to over order especially when backorders exist. Due to
these disturbances the supply chain as a whole appears to have dramatic up and
down demand changes. These changes are magnified at each successive stage up
the supply chain. Thus inventory and backorder levels vary markedly from week
to week. At the end of the simulation players blame the other players for causing
the situation.
The game is also described in great detail in Senge (1990). As Wright and Race
(2004) say there is no real beer in the beer game and it does not promote drink-
ing though it does lead to some interesting behaviour amongst participants.
238 Total Supply Chain Management

What is interesting about the beer game is that it has been played so many
times yet the patterns of behaviour generated in the game are remarkably similar.
The beer game introduces the players to the phenomenon known as the ‘bullwhip
effect’. In practice, this phenomenon is observed in all forms of the supply chain
but especially in retail supply chains.

The bullwhip effect

As Melnyk and Swink (2002) describe, the bullwhip effect occurs when
a small disturbance generated by a customer produce successively larger disturb-
ances at each upstream stage in the supply chain. Bullwhip effects are of great
concern because they incite excessive expediting (moving certain orders ahead
of others), increased levels of inventory, uneven levels of capacity utilization
(where plants go from being idle to working overtime) and ultimately, increased
holding costs for stocks of goods.
Simchi-Levi et al. (2003) give the following illustrative example. Proctor
and Gamble in examining the demand for Pampers disposable nappies noticed
an interesting phenomenon. As expected, retail sales of the product were fairly
uniform; there is no particular day or month in which demand is significantly
higher or lower than any other. However it was noticed that distributors’ orders
placed to the factory fluctuated much more than retail sales. In addition P&G’s
orders to its suppliers fluctuated even more.
Why does this effect occur? In the absence of information, suppliers are
likely to overreact to changes in order sizes, whether upward or downward.
The amplification of variations through the stages of the supply chain results in
the bullwhip effect.
Wright and Race (2004) explain that the main factors contributing to the
increase in variability in the supply chain are as follows:

1. Demand forecasting: Traditional inventory management techniques, practiced

independently at each level in the supply chain lead to the bullwhip effect.
Forecasting is typically used to estimate average demand and demand vari-
ability. These are used to determine the re-order point and safety stock levels.
The more variable the demand the higher the safety stock level and hence
this can lead to changing the order quantifying increasing variability.
2. Lead time: Increase in variability is magnified with increases in lead time.
With longer lead times a small change in the estimate of demand variability
implies a significant change in safety stock and thus re-order quantities thus
leading to an increase in variability.
3. Batch ordering: If the retailer uses batch ordering the wholesaler will observe
a large order followed by several periods on no orders, followed by another
large order. Thus the wholesaler sees a distorted and highly variable pattern
of orders. Also requirements to ship full truck loads can lead to the same
order pattern. Similarly end of season sales quotas or incentives can also
result in unusually large orders being placed on a periodic basis.
 Retail supply chain 239

4. Price fluctuation: If prices fluctuate, retailers often attempt to stock up when

prices are lower. This is accentuated by the prevailing practice in many
industries of offering promotions and discounts at certain times of the year.
5. Inflated orders: During shortages or periods of allocations retailers will
inflate their orders to ensure that they will receive supply proportional to the
amount ordered. When the period of shortage is over they will revert back to
standard orders further distorting demand estimates.

These factors all contribute to increase the variability of orders placed within the
supply chain. One of the first steps that can be taken to reduce the bullwhip effect
is to ensure all stages in the supply chain have access to the customer demand
information. By centralizing the customer demand information and sharing it
with all stages the bullwhip effect can be reduced but it will not be eliminated.
Simchi-Levi et al. (2003) suggest the following methods for coping with the
bullwhip effect:

1. Reducing uncertainty by centralizing demand information, that is, by pro-

viding each stage of the supply chain with complete information on actual
customer demand.
2. Reducing variability: The bullwhip effect can be diminished by reducing
the variability inherent in the customer demand process. This can be achieved
through using an ‘everyday low pricing’ strategy, that is offering a product
at a single consistent price. By eliminating price promotions, a retailer can
eliminate many of the dramatic shifts in demand that accompany such
promotions.
3. Lead-time reduction: Lead-time reduction reduces the amount of ‘safety
stock’ estimated to be carried.
4. Strategic partnerships: Engaging in any of a number of strategic partnership
initiatives can eliminate the bullwhip effect. These initiatives are outlined
below.

Information and integration

Wright and Race (2004) observe that information enables the supply chain to
be integrated. Within any supply chain there are many systems. Managing any
one of these systems is complex and involves a series of trade-offs with the need
to balance the two objectives of customer satisfaction and resource utilization.
To manage the whole supply chain requires even more complex trade-offs.
The complete supply chain needs to be considered as a whole and decisions
concerning the whole need to be made. In many supply chains there is no com-
mon owner to co-ordinate the whole process, each step will be separately
owned and controlled and each with an understandable aim to do the best for
their operation. Without co-ordination the result is local optimization and each
member of the supply chain tries to optimize their own operation without con-
sideration of the impact of its actions on the other members components in the
240 Total Supply Chain Management

supply chain. What is desirable is global optimization which implies that we

identify what is best for the whole system. To do this involves addressing the
following two issues:

1. Who will optimize?

2. How will the savings obtained through the co-ordinated strategy be split
between the different supply chain facilities?

These issues can be addressed in various ways.

Strategic alliances
In order to achieve an integrated supply chain the various members need to
work together. The three most important types of supply chain related strategic
alliances are third-party logistics (3PL), retailer–supplier partnerships (RSP)
and distributor integration (DI).

Third-party logistics (3PL)

The use of a third party to take over some or all of a company’s logistics respon-
sibilities is now common. 3PL is simply the use of an outside company to per-
form all or part of the firm’s materials management and product distribution
function. This might include one or all of the activities of transportation, ware-
housing, package delivery and information systems. 3PL relationships are cer-
tainly more complex than traditional logistics supplier relationships. Modern
3PL arrangements involve long-term commitments and often multiple functions
or process management. The aim is to allow organizations to focus on their core
competencies and to allow specialist organizations to manage non-core activ-
ities. However, unless the subcontractors or partners are competent the danger is
that control will be lost. Any subcontracting has to be carefully thought through
as once an activity has been subcontracted out, and skilled staff (intellectual
capital) has gone it is hard to rebuild.

Retailer–supplier partnerships
As customer satisfaction become more important in gaining a competitive edge
and as due to large-scale world class competition prices have been driven down
and margins have become tighter at retail it makes sense to try and to create
co-operative efforts between suppliers and retailers. The objective should be to
achieve benefits for all parties and not for one party to try and to dominate at
another’s expense. The types of RSPs can be viewed on a continuum. At one
end is information sharing, in the middle is continuous replenishment enabled
by sharing information from POS, and at the other end is a consignment scheme
of vendor-managed inventory (VMI).
In a simple quick response strategy, suppliers receive POS data from retailers
and use this information to synchronize their production and inventory activities
 Retail supply chain 241

with actual sales at the retailers. In this strategy, the retailer still prepares indi-
vidual orders, but the POS data is used by the supplier to improve delivery per-
formance and hence reduce supply variability.
In a continuous replenishment strategy, sometimes called rapid replenishment,
vendors receive POS data and use this data to prepare shipments at previously
agreed upon intervals to maintain specific levels of inventory.
In a vendor-managed inventory system, the supplier decides on the appropriate
inventory levels of each product and the appropriate policies to maintain these
levels. The goal of many VMI programmes is to eliminate the need for the retailer
to oversee specific orders for replenishment. The ultimate is for the supplier to
manage the inventory and only receive payment for it once it has been sold by
the retailer in essence the retailer is providing an outlet for the supplier!

Distributor integration
Modern information technology has enabled this strategy in which distributors
are integrated so that expertise and inventory located at one distributor is available
to the others. DI can be used to address both inventory-related and service-related
issues. In terms of inventory, DI can be used to create a large pool of inventory
across the entire distributor network thus lowering total inventory costs while
raising customer service levels. Similarly DI can be used to meet the customers
specific needs by directing those requests to the distributor’s best suited to
address them. The down side is that if you were a retailer stocking high value
electronic equipment, why would you want to deplete your stock by supplying
a competitor with goods so that they can make sale? Who is making the profit
and who has incurred the financial cost of stock holding and carrying the risk?

Who has the power?

In days gone by the power was with the farmers. After the Second World War
farmers in the western countries in Europe, in North America and Australia
and New Zealand were given government subsidies and grants. Without doubt
farmers in the main did use subsidies and grants to restructure and to adopt
labour saving machines. But today even the wealthy countries in the European
Union can no longer afford to support extravagant subsidies to maintain ineffi-
cient farming. During the period that farmer power was waning manufacturing
and food processors were though mergers, and takeovers were getting stronger.
For example, in the USA four beef processors control over 80 per cent of beef
processing. In this system the farmer becomes a contractor, providing labour
and capital but never owning the product as it moves through the system.
The major management decision for their farms are not made by the farmers.
Professor Lang of City University says ‘it is a similar story with agrochemicals
seven firms account for 90 per cent of worldwide sales’. In the grocery industry,
the large supermarket chains dictate to the farmers what to sow, when to sow, what
fertilizers and chemicals to use, when to harvest and how to pack, and sets the
242 Total Supply Chain Management

standards for reject or acceptance of produce. The farmer does the work and
takes the risk, but has little choice to accept the terms of the supermarket.
The international fast food giant McDonald’s operates in a similar fashion.
The upside for the consumer is a consistent standard of quality.
Even though the manufacturers have become giants it is now accepted that
the power is with the retailers, rather than with the manufacturers. In the grocery
industry, and also for other retailers of fast-moving consumer goods large con-
glomerates such as Wal-Mart (trading as ASDA in the UK) and Tesco’s are the
big spenders. In the UK, five major supermarket chains account for just on
70 per cent of food sales, and over 50 per cent of food in the UK is sold from
1000 huge super or hyper markets. Cap Gemini Ernst and Young in an extensive
market analysis, The State of the Art Food Report (2003) conclude that in the
near future four or five large retail organizations will operate on a worldwide
scale and 10 food manufacturers/processors will operate globally with 20–25
global brands, along with a number of consumer goods companies that will be
dominant in particular countries or regions. Add to this consumers have a
growing degree of choice and greater ability to make comparisons. As a result
their expectations are rising and needs constantly changing. In 1975 items
available to consumers (SKUs) in supermarkets totalled 14,000 and by the end
of 2006 the number is estimated to be 300,000! In 2006 in the USA 13,000 new
items were added to the list, of which it is expected that 11,000 will not survive.
Value in this environment is a moving target. Any organization must be flex-
ible to be able to adapt to these changes. It is very difficult for a single organ-
ization to possess all the capabilities required to keep up. The large retailers can
control, or as some say black mail the manufacturers and processors. Smaller
organizations do not have this clout. They now look for suppliers who can pro-
vide the skills and capabilities needed as they require them. Smaller firms form
partnerships with appropriate skilled suppliers that last as long as the need exists.
As demand changes so to do the partnership arrangements.

Advances in technology
The merging of information and communications technologies has supported
the growth in supply chain partnerships. These technologies have enabled exten-
sive connectivity. Today’s computer networks, open systems standards and the
Internet enable people working in different areas of the supply chain to maintain
constant contact. Since information transactions have become so easy, there is
less of a need to restrict operations to within traditional organizational bound-
aries. These new capabilities offer the ability for supply chain partners to share
information in real time. This enables the partnering firms to hold lower inven-
tories and incur fewer transactions costs. These lower costs can in turn be passed
on to the customer in the form of lower prices and better value. Or alternatively
retained as increased profits!
Organizations are increasingly recognizing that great improvements in value
can be attained by co-ordinating the efforts of partners along the supply chain.
 Retail supply chain 243

When firms focus only on their internal operations they are making decisions
in isolation and as a result this can lead to the overall performance of the supply
chain deteriorating. Firms who work together and share their plans and other
information are actually able to improve the overall supply chain performance
to their mutual benefit.

The Internet and the supply chain

The power of the Internet in providing ready information and quick exchange
of information has enabled major changes in business practice. The direct busi-
ness model employed by industry giants such as Dell Computer and Amazon.com
enables customers to order products over the Internet and thus allows these
companies to accept orders direct from end users and in turn allows them to
forward product direct to the customer without having to go through a middle-
man. Apart from parcel delivery third-party distributors and warehouses are no
longer needed.
In general the retail industry was slow to respond to competition from virtual
stores and to recognize the potential of the Internet. It is however now common
for ‘brick and mortar’ retailers to also have a ‘click and mortar’ or Internet
shopping facility for customers. Unlike the dot.com companies who for the most
part did not carry any stock but acted as an on-line order taker for customers,
the large click and mortar companies such as Kmart, Target, TESCO, Wal-Mart,
Barnes and Noble, have distribution and warehousing infrastructure in place.
One model is for high volume fast moving consumer goods to be stocked in retail
stores and on-line orders supplied from there, and slower-moving products to
be stocked centrally for on-line ordering and supply. A push strategy is used
for the high volume fast-moving goods, and a pull strategy for low volume
slow-moving goods.
Likewise, the Internet and the emerging e-business models have produced
expectations that many supply chain problems will be resolved merely by using
these new technology and business models. Whilst it has promised so much in
reality the expectations have not been achieved. In many cases the downfall of
some of the highest profile Internet businesses has been attributed to a lack of
sound logistics planning.
Nonetheless in developed countries and progressively in the emerging giant
economies of India and China most people have a computer at home or have
access to a computer at work. In the USA alone by the end of 2007 it is estimate
that on-line retail sales, or more accurately ‘e-tail’ sales will exceed $250 billion.

Conclusion
Although business to customer – e-tail – is here to stay, the use of the Internet
for business to business integration is the real issue for this chapter. Integration
244 Total Supply Chain Management

of the supply chain players has been made possible with the use of the Internet
and the associated technologies.
The impact of the new technologies on the supply chain provides an interesting
development. The Internet and the evolving supply chain strategies has seen a
shift in transportation and order fulfilment strategies away from case and bulk
shipments to single item and smaller-size shipment and from shipping to a
small number of stores to serving highly geographically dispersed customers.
This shift has seen the importance of partnerships with parcel industries. It has
also increased the importance and complexity of reverse logistics of handling
the significant numbers of product returns. One of the big winners in the new
developments is the parcel industry. An important advantage for the parcel
industry is the existence of an excellent information infrastructure that enables
real-time tracking. Those players in this industry who work to modify their
own systems in order to integrate it with their customers’ supply chains are
likely to be successful (Simchi-Levi et al., 2003; Wright and Race, 2004).
As organizations come to understand the power of the Internet, new models
of business are sure to evolve. One thing is that certain supply chains of the future
will be managed along the lines of the Indian journalist we quoted at the begin-
ning of this chapter. It is obvious that the big players will take the co-ordination
role. We are of the opinion that is consumers will benefit. There will be greater
selection, quality will be consistent, and grocery items will be fresher. Although
prices will not go down savings in costs throughout the supply chain will keep
prices at a reasonable level.
The future looks to be exciting and bright.
15
Green supply chain

Introduction
Organizations are facing increasing challenges to balance business perform-
ance with environmental issues and these challenges have created a new area
of green supply chain management. Green supply chain refers to the way in
which organizational innovations and policies in supply chain management
may be considered in the context of the sustainable environment. If industry is
seen as a complex web of buying, making, selling and delivering, then the
opportunities for environmental considerations when brought into play in sup-
ply chain management could not only provide sustainable environmental meas-
ures but also be beneficial to both organizations and individual consumers. The
objectives of green supply chain management are aimed at a win-win strategy.
Environmental regulations are also changing the way supply chains are
designed and managed. The problem is that the sheer number of regulations,
other influences such as changing consumer sentiment, and the complexity of
global trade, makes it difficult for companies to decide exactly how they should
respond to these pressures.
Not surprisingly, there are instances in recent history where the performance
of manufacturing businesses was drastically affected due to negligence in envi-
ronment and safety standards. A failure in product safety which caused deformed
‘thalidomide children’ is still haunting the manufacturers. The gas explosion of
1984 in Bhopal, India, which killed over 1000 people, permanently damaged the
business of the manufacturers. Food poisoning costs to John Farley and Wests
were huge. Environmental pollution by chemical companies in New Jersey
resulted in numerous legal battles with consumers and also affected their busi-
ness performances. On a global scale industrial pollution is the main contributor
to the so-called ‘greenhouse’ effect and global warming.
The greenhouse gases include carbon dioxide, methane, CFCs (chlorofluro-
carbons) and nitrous oxide. CFCs are produced only in industrial processes.
The combustion of fossil fuels (coal, oil and natural gas) is the major source of
manufactured carbon emissions. Greenhouse gases allow incoming radiation
from the Sun to pass through the atmosphere of the Earth. The Earth absorbs
the radiation and reflects it back. When this outgoing radiation meets particles
of a greenhouse gas the radiation is absorbed by the particle, and on a large
scale all greenhouse gases around the Earth form a sort of warm blanket caus-
ing global warming. Some scientists believe that increased emission of green-
house gases, particularly carbon dioxide, are causing energy to be trapped,
increasing the global temperature.
246 Total Supply Chain Management

CFCs are used in aerosols, refrigerator coolants and air conditioners. They are
a strong contributor to the greenhouse effect but are relatively easy to regulate
because they only result from the manufacture of refrigeration units and aerosols.
Methane and carbon dioxide emissions are linked to a much larger economic
infrastructures and are more difficult to regulate. In 1997, the Kyoto Treaty was
drawn up in Kyoto, Japan, to implement the United Nations Framework
Convention for Climate Change. It largely binds industrial nations to reduce the
emission of greenhouse gases by an average of 5.2 per cent below their 1992 lev-
els over the next decade. When the USA pulled out in March 2001, the treaty was
severely in disarray. A compromise was reached by 180 nations in July 2001 in
Rio de Janiro; the US government refused to sign it as it was argued that not only
would Kyoto be bad for the US economy but it would be ineffective, because
major developing nations like India and China were not covered by its provi-
sions. Australia also refused to agree to the treaty and more recently (2006)
Canada has abandoned the specific emission targets set by the Kyoto agreement.
It should be noted that India and China are two of the worlds biggest and most
rapidly growing polluters. Some environmentalists argue that emissions would
have to be cut by 60 per cent and the target of Kyoto is not enough. They claim
gases can remain in the atmosphere for a century or more. On the other hand, not
every scientist believes that global warming is any thing more than a cyclical
phenomenon and that the temperature of the Earth rises and falls over long peri-
ods of time irrespective of greenhouse gases.
Whatever the scientific evidence, or lack of evidence, sufficient number of
people (as evidenced by 180 countries signing the Kyoto treaty) mean that no
organization can in the long-term hope to avoid legislation and regulations
designed to honour the spirit of the treaty.
Our personal belief is that environment and safety are not just social or politi-
cal issues; they are vital ingredients contributing to the performance of an organi-
zation. In manufacturing industries, there is much scope for environment and
safety. Accidents do occur and likewise there are many opportunities to prevent
accidents. Apart from humanitarian reasons it is a truism that accidents cost
money. Likewise many businesses and organizations are facing declining reserves
of natural resources, increased waste-disposal costs, keener interest in their
human rights’ records and tighter legislation. These rising environmental pres-
sures and social expectations can be turned to commercial advantage if a strategic
approach is taken to develop a ‘green’ supply chain. The strategic approach of
green supply chain involves complex longer-term considerations involving not
just industry but environment protection has an important international issue.
Industrialized countries, including the US are spending between 0.5 and 1.5
per cent of their gross national product (GNP) on the control of pollution. It is a
big subject and any attempt to make a comprehensive analysis of all the issues is
beyond the scope of this book. In this chapter, we aim to review some of the crit-
ical issues and initiatives of green supply chain under the following headings:

• What is green supply chain?

• Green initiatives by manufacturers and suppliers
 Green supply chain 247

• Green initiatives by governments and non-profit organizations

• Green initiatives by retailers
• Green initiatives by consumers

What is green supply chain?

‘Green supply chain’ according to Walton et al. (1998) refer to buyer compa-
nies requiring a certain level of environmental responsibility in core business
practices of their suppliers and vendors. Many businesses have internal stan-
dards, policies and/or environmental management systems (EMSs) that govern
their own environmental performance and efficiency. And it is becoming
increasingly common for organizations to advertise their standards in their
marketing. But if their suppliers are not aware of, or do not follow these same
standards, the buying company is likely to be using products that do not meet
their standards, and in some cases could be accused of misleading advertising.
A supply chain can be complex, with environmental issues occurring at the
second- and third-tier supplier levels.
Green supply chain concepts manage environmental impacts where they
occur, ideally before they occur. As shown in Figure 15.1, green supply chain
recognizes the disproportionate environmental impact of supply chain processes
in an organization and balances the issues arising from both sides to satisfy the
stakeholders. The stakeholders in the green supply chain are not just buyers and
suppliers, they also include governments, regulatory bodies, non-profit organiza-
tions and above all consumers.

Environmental Green supply chain Supply chain

management management management

Managing the flow

of materials from
Managing the supplier to end
Recognizes the
environmental customer, including
environmental
impact of operations, procurement,
impact of supply
including compliance, transportation,
chain processes in
emissions and inventory,
an organization
remediation management and
production

Figure 15.1 Green supply chain concept.

Green initiatives by manufacturers and suppliers

It is reasonable to state that manufacturing industries are major players in envi-
ronment issues. But when the issues relate to safety, whether for products or
248 Total Supply Chain Management

workplaces, they apply seriously to both manufacturing and service organiza-

tions. Lack of safety in the product or in the workplace will inevitably cost
money. Accidents mean lost production time plus time wasting inspections by
government officials and perhaps legal costs as well as the cost of correcting
the situation. It has to be cheaper to do it right first time!
The Advanced Studies Centre of the Massachusetts Institute of Technology
back in 1976 studied the cause and effect of environment factors on the perform-
ance of a wide range of companies from different industrial sectors. It found in
all cases that those companies which were most advanced in environment protec-
tion were also the most profitable. On reflection it is not surprising that an effi-
cient (and profitable) company will be safety conscious and environmentally
aware and will be following best practices. It is however surprising that the
investments for environment protection by manufacturing companies swing
to the political pendulum rather than to business objective. A report by US
Environmental Protection Agency (2000) has concluded that ‘a number of lead-
ing US companies are providing increasing proof of the link between impro-
ved environmental performance and financial gains’. For example, the GM
Corporation reduced disposal costs by $12 million by establishing a reusable-
container programme with suppliers; Commonwealth Edison saved $25 million
through more-effective resource management. Re-evaluating a company’s sup-
ply chain – from purchasing, planning and managing the use of materials to ship-
ping and distributing final products – with an emphasis on environmental
performance leads to savings. However, environmental performance is too often
forgotten by supply chain managers. What are supply chain managers missing?
Many managers are unaware that improved environmental performance means
lower waste-disposal and training costs, fewer environmental-permitting fees
and, often, reduced materials costs. In efforts to green their supply chain, some
customers may expect suppliers to meet standards equivalent to their internal
standards. Others may request that their suppliers implement an EMS or become
certified to other industry standards. Many environmental standards and models
are available, from national ecolabel certifications to international standards.
One of the better-known environmental standards is put forth by the International
Organization for Standardization (ISO), known as ISO 14001. ‘It is becoming
more common for companies to include ISO 14001 compliance as a minimum
standard in their procurement policies’ (Darnall et al., 2006).
Both customers and their supply chains stand to gain by collaborating on
environmental and efficiency improvements. Benefits of partnering are:

• The supplier knows the product better than the buyer and can maximize
efficiencies and minimize associated wastes.
• Two or more perspectives (or different expertise areas) are better than one
when it comes to designing greener products and processes.
• Working together strengthens the customer–supplier relationship.
• Shared savings and mutual benefits make such efforts even more worth-
while.
 Green supply chain 249

Basu and Wright (2005) have established that environment protection relates
to pollution control in two stages. Conventional controls or ‘first generation
pollution’ controls are applied to pollution in air, water and of noise created in
the manufacturing process. Such controls are usually regulated by legislation.
There is also a ‘second generation pollution’ which relates to the problems
caused by the usage of certain products and chemicals over a long period. The
most widespread example of such ‘second generation pollution’ is the contam-
ination of land which permeates ground water.

Causes of pollution
Pollution control engineering has essentially evolved from sanitary engineer-
ing and thus the solutions are primarily concerned with effects rather than
causes, and with control rather than prevention. The overall ongoing economic
impact of pollution has been largely neglected and most of the attention of
manufacturing companies has gone to the cost impact of pollution control.
The contamination of land is mostly caused by the disposal of solid wastes
by manufacturing industries. With the introduction in the UK of the ‘land fill
tax’ the disposal of solid wastes by incineration will be more cost effective and
environmentally friendly in the future.
The three main gases causing air pollution are carbon dioxide, sulphur diox-
ide and nitrogen oxides. For many years the consumption of combustion fossil
fuels has been releasing carbon dioxide to the atmosphere faster than it can nat-
urally be absorbed by photosynthesis (provided by trees and plants). As the
proportion of CO2 in the air increases, it absorbs heat and as a result the atmos-
phere warms up. Sulphur dioxide resulting from the combustion of coal and oil
or any sulphur burning process is another pollutant of air and one of the sub-
stances causing ‘acid rain’. The damage by acid rain to plants and trees is very
evident in parts of Europe. Other acidic gases are the oxides of nitrogen result-
ing from high-temperature combustion processes in power plants.
Lead is a serious pollutant (neurotoxin) affecting nerves and brain. The
sources of lead include emission from motor vehicles, lead pipes carrying
drinking water, paint and other industrial processes. The Royal Commission on
Environmental Pollution recommended in 1983 the benefits of banning the use
of lead in petrol. A second pollution bearing metal is cadmium which is used
industrially in batteries, metal plating and micro electronics. The discharge of
cadmium from local industries in the Severn Estuary in the UK severely dam-
aged the local shellfish industry. A third heavy metal is mercury, causing haz-
ards to life even today. In the 1950s, the discharge of industrial effluents with
high levels of mercury in a Japanese bay led to deformity and death for vil-
lagers who ate the fish from the bay.
Another harmful mineral is asbestos, causing painful and fatal diseases such
as asbestosis and mesothelioma. Many domestic items such as textured ceiling,
ovens, electrical heating equipment in the past contained asbestos. After cam-
paigning by environmental pressure groups, asbestos lagging in power stations
and electric sub-stations has been gradually eliminated in the UK.
250 Total Supply Chain Management

The noise levels in many ‘metal bashing’ and packaging industries caused
low performance and, more seriously, hearing impairment. Today there are
established preventive and protective measures of noise control.

Cost of pollution
In addition to the long-term immeasurable damage done to vegetation, birds,
animals and human beings by air and water pollution, there are many instances
of huge compensation bills paid by polluting industries.
The notorious case of mercury poisoning in Japan referred to above led to
damages of over US $50 million (1971 value) being awarded to 700 people
who were crippled and to the estates of 200 people who died.
In 1978, as a result of the wreck of the oil tanker Amoco Cadiz, 200,000
tonnes of crude oil was discharged into the English Channel. The French
Government presented claims amounting to $2 billion.
In 1992, Cambridge Water Company (UK) were awarded damages of £1
million in compensation for the pollution of land due to tetrachloroethylene by
a local leatherworks company.

Benefits of environmental protection

A sound environment protection policy of a company can earn it an extremely
marketable environment friendly image leading to higher sales and profitability.
There are also several published examples of ‘non-waste technology’ where
a project of environment control turned out to be a profit earner.

Case example: Dow Chemical

One such example is the Dow Chemical Company’s $7.2 million project
for the re-use of cooling water which produced over 10 per cent return
on investment and considerably reduced the pollution of a neighbouring
river.

Case example: 3M Company

The famous 3P programme (Pollution Prevention Pays) of the 3M
Company brought about major savings including $2 million from the
elimination of hydrocarbon wastes from a reactive costing process.
When 3M instigated this programme back in 1974 the approach was to
capture and control pollutions and emissions before they could damage
the environment. This approach although effective has been changed to
a philosophy of prevention rather than containment. The 3P programme
now aims to prevent pollution at source by using different materials,
changing the process, redesigning the plant and equipment, and through
recycling waste.
 Green supply chain 251

Case example: Scottish distillery

Another example is a distillery in Scotland. An effluent treatment proj-
ect for the control of suspended solids and BOD (biological oxygen
demand) produced, with the addition of a drying plant, high quality cat-
tle feed.

Case example: Dutch flower industry

About 65 per cent of cut flowers in the world are produced in
Netherlands where land is limited. Mass cultivation in a confined area
resulted in fertilizers, herbicide and pesticide contamination.
To correct this problem growing was shifted to rock wool and water.
Fertilizer in the water is recycled through the system to reduce waste.
Water based growth also reduces the risk of installation by weeds and
pests, reducing the need for chemical treatments. The new system also
greatly reduced variations in growth conditions, greatly improving the
predictability of output.
Producers were able to increase output per space and introduce new
harvesting methods to reduce costs.

Case example: Texas Instruments

Texas Instruments saves $8 million each year by reducing its transit
packaging budget for its semiconductor business through source reduc-
tion, recycling and use of reusable packaging systems

Case example: Pepsi-cola

Pepsi-cola saved $44 million in 2004 by switching from corrugated to
reusable plastic shipping containers for 1 litre and 20 oz bottles, conserv-
ing 98,000 tonnes of corrugated materials.

Environmental strategies
Royston (1979) suggested an eight-point strategy of environment protection
for a manufacturing company:

1. Cut down waste by improving efficiency.

2. Sell waste to someone else.
3. ‘Build on’ extra plant to convert waste into raw materials or products which
are valuable to the company or to someone else.
252 Total Supply Chain Management

4. Work with self-cleansing and dispersing power of the environment so as to

permit maximum discharge or effluent.
5. Negotiate emission standards and subsidies with the authorities and the
community.
6. Build a treatment facility needed for residual wastes jointly with another
enterprise or the local authority.
7. Build the plant using company staff and know how.
8. Sell the acquired know how to others with the same problem.

Green initiatives by governments and non-profit

organizations
Environment protection is going in cycles without showing a continuous
improvement. In the 1970s, the environment was a political hot potato but as
we became accustomed to the issues, and without doubt some issues were
overstated (e.g. it was widely said in the 1970s that oil would run out by 2000,
and we all remember the nonsense that was the YK2000). But now since the
Kyoto Treaty of 1997, influenced by pressure groups such as Friends of the
Earth, and well-publicized activities of Greenpeace, environment issues are
again at the forefront. The scientific evidence of global warming produced by
scientists (e.g. of the Royal Society) has seriously created a sense of urgency in
governments, including the State Governments of the USA, and non-profit
organizations worldwide.
One such non-profit organization in the UK is the National Centre for
Business and Sustainability (NCBS) which is committed to advancing sustain-
able policy solutions, and has already shown the way forward through a num-
ber of ground-breaking studies. The NCBS is working with a range of
businesses and organizations to help integrate the principles of sustainable
development into policies, programmes and decision-making processes. The
Centre does this by taking a practical approach to sustainability, combining the
inspiration of the Co-operative Bank’s ethical and ecological policies with
a number of practical and applied tools that help put sustainability into a
working business context. The NCBS Sustainability Management services
include:

• Sustainable policy generation

• Sustainability appraisals
• Measuring and monitoring progress
• Sustainability reporting
• Sustainability visioning and training

Political leaders both in government and in opposition are embedding environ-

mental protection and climate change in their political agenda and proposing
‘green taxes’ to control carbon emission by industries as well consumers.
 Green supply chain 253

A recent UK government sponsored Stern Review (2006) on ‘the economics of

the climate change’ has concluded:

1. There is still time to avoid the worst impacts of climate change, if we take
strong actions now.
2. Climate change could have very serious impacts on growth and develop-
ment and if no action is taken global average temperature is likely to rise by
2°C by 2035.
3. The costs of stabilizing the climate are significant but manageable (e.g.
1 per cent of global GDP) and delay will be much more costly.
4. Action on climate change is required across all countries and it need not cap
the aspirations for growth of rich or poor countries.
5. Climate change demands an international response, based on a shared
understanding of long-term goals and agreement on framework of actions.

The UK government has set up a government-funded non-profit organization

called Envirowise (www.envirowise.gov.uk). Envirowise delivers a valuable
government-funded programme of free, confidential advice to UK businesses.
This assistance enables companies to increase profitability and reduce environ-
mental impact.
Many countries and regions are taking action on environment issues. The
EU, and non-members of Kyoto such as the US, Australia, China and India
have said that they will reduce greenhouse gas emissions. The UN Framework
Convention on Climate Change and the Kyoto Protocol provide a basis for
international co-operation on the climate change initiatives. Countries facing
diverse circumstances will use different approaches to make contribution to
tackling climate change and these approaches will have both direct and indirect
impact on supply chain management. Key elements of future international
frameworks could include emissions trading, technology co-operation, action
to reduce deforestation and adaptation of new cleaner technologies in develop-
ing countries.

Green initiatives by retailers

Global retail giants Wal-Mart and Carrefour and other supermarkets all over
the world are responding to the pressures on packaging waste reduction and
other environmental issues of green supply chain.
The media reports in 2006 are loaded with announcements on ‘greening the
supply chain’ from large retail groups. Wal-Mart a US company and the
world’s largest retailer, unveiled its packaging scorecard to major suppliers
such as Proctor & Gamble, Unilever and Nestle to cut packaging. Wal-Mart
hopes that the scheme will reduce packaging across its global supply chain by
5 per cent by 2013.
UK supermarket Sainsbury’s announced in October 2006 that 500 of its
own-brand goods would be in compostable packaging.
254 Total Supply Chain Management

ASDA supermarket, a subsidiary of Wal-Mart in the UK, claimed, as an

example, that by taking pizzas out of cardboard boxes saved 747 tonnes of
cardboard in a year.
‘Friends of the Earth’, a non-profit organization in the UK, gave a cautious
welcome to Tesco’s new environment fund of $100 million but said the super-
market giant still had a very long way to go if it was serious about greening its
operations. Tesco would need to address a number of key areas if it was seri-
ous about reducing its environmental impacts. These include moving away
from car-dependent stores, switching from its global supply chain, radically
improving energy efficiency in its stores and cleaning up its supply chains.
Even the airlines, the biggest polluters of CO2 emission, have joined the
bandwagon. Richard Branson committed the next 10 years of profits for Virgin –
around $3 billion – to fighting global warming.
There has been stronger emphasis to introduce organic and bio products.
The following case example of ‘Carrefour Bio Coffee’ illustrates that by pro-
moting unbranded 500 g/1 kg coffee in bags as ‘organic coffee to support fair
trading’ in 1997 sales increased by 80 per cent in 4 years.

Case example: Carrefour Bio Coffee

Carrefour is a global hypermarket retail chain organization from France
with a turnover over €100 billion and only second to Wal-Mart, the
largest retail company in the world.
The first shipment of coffee beans were delivered in 10 kg sacks to
Vitrolles, France, in 1970. The beans were roasted in store and sold in
500 g and 1 kg bags. In April 1997 Carrefour launched the ‘organic’ cof-
fee brand under the name ‘Carrefour Bio’ to promote organic products
and support fair trading. In 2001 it was decided to establish a ‘green sup-
ply chain’ for ‘Carrefour Bio’.
The organic coffee marketed under the name ‘Carrefour Bio’ is not
indexed on the world coffee market. The purchase price is approximately
30 per cent higher than the average price in Mexico. The supplier is con-
tracted to pay a guaranteed minimum price to producers. Producers can
obtain up to 60 per cent of the value of the coffee at current international
rates. Three thousand producers from 37 Mexican communities cultivate
coffee using organic methods. A local infrastructure has been introduced
to transport people between towns and villages (a 2-hour bus ride replac-
ing what was previously a 2-day walk). A health scheme has been intro-
duced providing free medicine and healthcare and a consortium has been
set up to buy basic foodstuffs at cost price.
The coffee is cultivated by small farmers working for Uciri coopera-
tive in Mexico using organic method of farming. Such cultivation helps
prevent the land becoming impoverished. The cultivation is carried out
in accordance with French Organic Society standards without the use of
 Green supply chain 255

organofluoridated fertilizers or chemical pesticides for tropical forest

conditions. An organic fertilizer comprising sun-dried hand picked
stoned cherries and animal waste is spread over the plants. This is the
only plant treatment used by the farmers.
Cultivation methods are monitored by an organic certification body.
An agricultural education centre has also been established catering for
organic farming, animal breeding and bio culture.
‘Carrefour Bio’ coffee project appears to a win-win initiative for
green supply chain. For Carrefour sales for the product increased from
29.5 tonnes in 1997 to 54 tonnes in 2001. The fertility of the land has
been protected. The average income per family of producers increased
from €53 per year in 1985 to €1524 per year in 2000. The local commu-
nities benefited from the infrastructure and facilities for transport, health-
care and education. The consumers are happy with an organic product at
an affordable price.
Source: Carrefour Belgium (2002)

Green initiatives by consumers

Consumers have both power and responsibility to enhance the activities and
effectiveness of the green supply chain. It is the consumer who pays for the end
product or service and it is the consumer who ultimately suffers or benefits
from the impact on the environment. The green initiatives from consumers
could be manifested in three ways:

1. Make your home green

2. Feedback to retailers
3. Reverse supply chain

‘Make you home green’ is becoming a conscious target of many consumers.

This is effected in two paths. First consumers are attempting to minimize ‘car-
bon emission’ by making houses and household appliances more energy effi-
cient and also by moving towards eco-friendly transport. Secondly, encouraged
by local authorities, consumers are making good efforts in the recycling of
household wastes.
A recent survey in the UK (The Guardian, 14 November 2006) showed that
the wasteful packaging from goods bought in the shops accounted for 33
per cent of an average household waste. According to a minister in the UK
Government consumers should remove offending or excessive packaging and
leave them at the checkout. The shoppers are further encouraged to report the
stores to the trading standards in an attempt to cut the amount of unnecessary
plastics sent to landfill sites. Under a new reward system of a supermarket chain
in the UK loyalty points are offered in return for not taking away plastic bags.
The chain claims that it is giving out 10 million fewer carrier bags a week.
256 Total Supply Chain Management

A reverse supply chain is a process of getting goods from the customers

back to the manufacturers. It is a relatively new trend in supply chain manage-
ment that focuses on ‘green manufacturing’ to target recycling, recovery and
remanufacturing systems. In these reverse networks consumers bring products
to a retailer or a collection centre. For example, supermarkets in Germany have
a bin where customers leave used batteries. Depending on the particular prod-
uct, it can be refurbished, remanufactured or recycled; making sure the physi-
cal flow is efficient. It is estimated that 63 million personal computers were
obsolete (worldwide) in 2003 and about 10 million electric waste products
are dumped per year in Japan. Mobile phones can be returned to the store where
the new one is purchased. From there, the phones are resold and reused in other
countries where the technology that is being phased out in developed countries
are being introduced. Many other products have the potential for second use,
including computers, auto parts, printer cartridges, refillable containers and a
host of other possibilities. In remanufacturing, reverse logistics introduces
additional challenges to planning for a closed loop supply chain. Plan, source,
make and delivery of the products are affected by the reverse flow of used
products and materials for subsequent consumption in manufacturing of new
products. Reverse logistics play a key role as retail organizations tend to look
at their reverse supply chains more closely to enhance customer satisfaction,
cost/time efficiencies and supplier performance.

Case example: Xerox copier take-back programme

Xerox Corporation is an American document management company,
which manufactures and sells a range of colour and black-and-white print-
ers, multi-function systems, photo copiers, digital production printing
presses, and related consulting services and supplies. Xerox is headquar-
tered in Stamford, Connecticut.
In early 1990s, Xerox launched a new initiative to take back used copiers
as a source of materials for new machines. Customers like the programme
because they no longer worry about machine disposal.
As a result, 70–90 per cent by weight of machines were re-used and
72,000 tonnes were diverted from landfills in 2003. Xerox estimates that
‘several millions’ were saved per year.

Summary
‘The scientific evidence is now overwhelming: climate change is a serious
global threat, and it demands an urgent global response’, concludes Nicholas
Stern (2006).
Note this has been disputed by other scientists but irrespective of what we
believe the pressure is on for industry and nations to adopt a green approach to
the supply chain. In this chapter, we have attempted to present a balanced view
 Green supply chain 257

of various initiatives adopted by manufacturers and suppliers, government and

non-government organizations (NGOs), retailers and also consumers. Every
stakeholder has a role and responsibility in ‘greening’ the supply chain. We
have shown that there are commercial benefits in reducing wastes (e.g. exces-
sive packaging). Large retailers like Wal-Mart, Carrefour and Tesco are proba-
bly facing disproportionate demands from environmental pressure groups and
regulatory bodies but nonetheless are showing visible efforts to respond to
these demands. As Saha and Darnton (2005) ask, ‘are companies really green
or are they pretending to be?’
16
Supply chain for major
projects

Introduction
According to Wikipedia (the on-line free encyclopedia), ‘project management
is the discipline of organizing and managing resources in such a way that these
resources deliver all the work required to complete a project within defined scope,
time and cost constraints. A project is a temporary and one-time endeavour
undertaken to create a unique product or service. This property of being a tem-
porary and a one-time undertaking contrasts with processes or operations, which
are permanent or semi-permanent ongoing functional work to create the same
product or service over-and-over again. The management of these two systems
is often very different and requires varying technical skills and philosophy, hence
requiring the development of project management’. The Project Management
Institutes ‘Body of Knowledge’ (2004) adds that project management is the
most efficient way of introducing unique change.
Because of the one-off unique nature of a project and the repetitive nature of
operations, the traditional approach of project management has been conciously
different from that of operations management. As supply change management
is intextricably linked with operations management, the mind-set of project
managers usually excludes the principle of supply chain management.
The primary objectives of project management (viz. scope, time, cost and risk)
is beginning to include quality as another parameter of objectives. Hence, the
objectives of project management (with the exception of scope and risk) are
identical to those of supply chain management, viz. quality, cost and time.
Typically a major project involves several stakeholders working together with
controlled resources to deliver a completed project. A major project has many
suppliers, contractors and customers; it has procurement and supply, demand
planning and scheduling; it often lasts over several years and has longer lead
times. Therefore, we believe that the management of major projects will benefit
from adopting some customized supply chain management principles as discussed
in this chapter.
It is also evident that there is now increasing awareness amongst both prac-
titioners (www. viasysweb.com) and academics (O’Brien, 2001) of applying
 Supply chain for major projects 259

appropriate supply chain principles in major projects. The most noticable change
in the last three decades is the introduction of information and communication
technology with faster and comprehensive systems to improve the efficiency of
project supply chains from procurement to supplier.

Case example: Airbus A380

The Airbus A380 is a double-deck four-engined airliner manufactured
by Airbus SAS. It first flew on 27 April 2005 from Toulouse in France.
After well-publicized lengthy delays commercial flights are not likely
before 2008.
Airbus has spent 2 years grappling with the design of the A350 and
A380, while archrival Boeing has gone ahead with producing its 787
Dreamliner, winning more than 400 orders for the plane which is due to
go into commercial service in 2008. Costly delays in production of the
A380 super jumbo and surging demand for Boeing’s 787 have rocked
Airbus and its parent company EADS (European Aeronautic Defense
and Space), which is on its third chief executive in a year. The 12-billion-
euro A380 super jumbo project is over budget, over 2 years behind
schedule. A decision by the US mail group Fed-Ex to cancel its order for
10 Airbus 380 caused massive losses at EADS. A major partner in the
project, BAE Systems, also sold its share in the project.
The problems facing EADS in the Airbus 380 project are many and
complex. Analysts have highlighted two problems at the forefront and
these are related to funding and supply chain management. For historical
reasons manufacturing is a transnational process, structured around key
manufacturing units in the UK (BAE Systems), Germany (Daimler–
Chrysler Aerospace), France (Aerospace-Matra) and Spain (CASA). Each
country is responsible for producing a complete section of the aircraft
and then transporting by a specially constructed roll-on/roll-off vessel
(built by a shipyard in China) to the final assembly line in Toulouse. In
addition the project has hundreds of suppliers, contractors and subcon-
tractors (including Rolls-Royce, GE/Pratt & Whitney, Smiths Industries,
Rockwell Collins and Northrop Grumman).
There may not be simple solutions to the complex and serious problems
of Airbus 380. However, EADS has recognized the link between project
management and supply chain management and has implemented proj-
ect management methods and tools for suppliers to simultaneously man-
age resources, time, cost and performance to ensure project success. In a
structured course, chosen representatives for suppliers learn and practise
a straightforward and effective project management methodology that is
adaptable to all types of projects.
Source: www.aerospace-technology.com/projects (2006)
260 Total Supply Chain Management

In this chapter, we cover the challenges and opportunities of improving the per-
formance of supply chain in major projects under the following headings:

• What is project supply chain?

• Sharing information in projects
• Collaborative forecasting and scheduling in projects
• Procurement in projects
• Community networking in projects
• Operational excellence in projects

What is project supply chain?

Turner (2000) defines projects as ‘unique, novel and transient endeavours
undertaken to deliver business objectives’. The transient nature of a project creates
urgency for the development and delivery of objectives by a certain time. Oper-
ations are also often transient with a delivery target or due date. The novelty in
a project creates the need for integration with interfaces between different
organizational units working on the project. In a traditional supply chain man-
agement, as we have established earlier, all departments or functions are
required to interface and integrate to satisfy business objectives. The uniqueness
in a project creates risk and uncertainty as it is not possible to predict precisely
the outcome at successive stages of a project. Projects work with new resources
and stakeholders. Even when, for example a bridge of the same design or soft-
ware of the same functionality is built or implemented the environment and
stakeholders will be different. This third characteristic of uniqueness in a proj-
ect differentiates it from operations management and this is manifested by
additional risks in project management.
Dawson (2000) suggests that the management of a project can be viewed in
three dimensions. First, a project can be viewed as a number of stages of life cycle.
Second, a project can be composed of what require managing the basic objectives
throughout the entire life cycle, that is time and cost, scope and configuration risk
and quality. The third perspective of a project can be viewed from a different man-
agement levels at which specific aspect of the project is managed and controlled.
This aspect of the multi-level communication network creates the project supply
chain. As shown in a typical project organization in Figure 16.1, a Sponsor author-
izes the project, a Project Board controls project authority, scope and objectives,
and the Project Director is responsible for the execution and closure of the project.
Reporting to the Project Director is a Project Office responsible for design brief,
and the review of cost, time, risk and quality. The project team is supported
by Consultants who provide designs and recommendations for improvement.
The ‘building’ of the project is supervised by the Site Office reporting to the Project
Director. The typical roles of the Site Office are to assist the project director in the
appointment of major contractors and supervise their progress. The Contractors
then appoint Subcontractors, mobile site and complete building. In addition, there
are external suppliers in the procurement of materials and equipment and other
stakeholders (e.g. local authority, investors, users and regulatory bodies).
 Supply chain for major projects 261

Sponsor

Project board

Project director

Site office Project office Consultants

Contractors

Subcontractors

Figure 16.1 A simplified organization structure of a major project.

As indicated earlier, a project supply chain becomes more complex for a

major project (such as Airbus 380 or London Olympic 2012) where the project
lasts for several years, with many stakeholders, and a multilayer of contractors
and subcontractors. Figure 16.2 shows a conceptual model of a project supply
chain in a major construction project. Several subcontractors work on such a
project. Each contractor is served by several subcontractors and each subcon-
tractor is served by several suppliers. Suppliers in turn can be served by one or
more sub-suppliers and so on. We therefore argue that in a major project there
a case for deploying a supply chain management discipline (such as risk man-
agement) during the total life cycle of the project.

Supplier Supplier Subcontractor

Supplier Project site activity

Supplier Subcontractor

Supplier

Figure 16.2 A conceptual representation of a project supply chain.

(Note: Project supply chains are composed of hundreds of firms.)
262 Total Supply Chain Management

The management of risk in projects is approached in two ways and they are
risk assurance and risk control. The objective of risk assurance is focused on
prevention, avoidance or minimization. The tools, techniques and methodolo-
gies of project management have been developed and applied to enhance risk
assurance. Methodologies, such as BS 6079, ISO 10006, PRINCE2 or PMIBOK
which are all aimed at risk assurance (see Pharro, 2000). For example, the prin-
ciple of project life cycle (see Figure 16.3) breaks a project into manageable
stages, such as definition, organization, implementation and closure, to mini-
mize risks. Project management tools such as critical path analysis and earned
value management also support risk assurance (see Basu, 2004). Risk control
is applied usually with the aid of formal risk registers at all stages of the project
life cycle for events occurring in spite of project assurance principles are applied
to minimize risks. In Figure 16.3, the four major stages of a project life cycle
are underpinned by specialist functions in managing the core activities project
management (i.e. risk assurance) such as cost and time, scope and configuration

Review and governance

Supply chain management

Stakeholders management

Project Project Project Project

definition organisation implementation closure

Proposal and Design and Execution and Finalisation and

initiation appraisal control follow-up

Quality management

Risk management

Scope and configuration management

Cost and time management

Figure 16.3 Project supply chain and project life cycle.

 Supply chain for major projects 263

and quality and risk control. Additional enabling functions such as stakeholder
management and governance also span across all stages of the project life cycle.
We believe that it is justifiable to recognize the role of supply chain management
as a specialist function during the total duration of the project.
The role of this supply chain management function in a major project, as
described below, is primarily to import and adapt basic principles of supply chain
management from operations management to improve the performance of a
project supply chain.

Sharing information in projects

With the increasing use of computers and computerized systems particularly over
the last two decades we have become increasingly accustomed to both the prob-
lems and opportunities of sharing data on project activities and members of the
supply chain. The computer systems in project management are traditionally
focused on time and cost control, critical path scheduling and Gantt charts. There
are many such project management systems in extensive use and the most popu-
lar of these systems are ‘Microsoft Project’ and ‘Primavera’ (see Burke, 2004).
In the 1990s, focus was generally on the management of a single project, whereas
now within an organization there are likely to be several projects running concur-
rently. One project will live among many other projects in the enterprise, or may
be part of a programme of projects and may utilize resources that are shared
among other projects. In order to facilitate governance, it has become essential to
be able to manage, monitor and assess the status of all projects in the enterprise,
through a set of enterprise project management (EPM) processes, methods and
application packages. The corporate network environment is no longer tied to
a single vendor, let alone a single platform. A typical EPM system operates from
a project management office and communicates with team members working on
different projects in the organization; it is yet to expand its collaborative capabil-
ity to external suppliers and supply chain partners in a major project.
There appears to be significant difficulties in sharing information between
members of the supply chain in a major project. Firstly, information exists in
many locations and is typically in a raw form not useful for an enterprise system.
Secondly, local knowledge is not formalized although there be a large amount
of design and procurement information represented on-line. This leads to long
meetings between parties and miscommunication. O’Brien (2001) proposes
further research on enabling technologies to address these issues and problems
of data sharing in the three areas of extracting supply chain data, formalizing
local knowledge and sharing product/process visualizations.
Encouraged by the experience of traditional supply chain managers in
Collaborative Planning Forecasting and Replenishment (CPFR) between man-
ufacturers, suppliers and retailers, the organizations managing major projects are
now seeking solutions from enterprise resource planning (ERP) systems on data
sharing amongst supply chain members. ERP was designed at a time when
process management was an internal affair. The companies could link their
ERP systems through expensive electronic data interchange (EDI) connections.
264 Total Supply Chain Management

As we discussed in Chapter 13, web-enabled technologies have now progressed

to create e-supply chains. The market for managing the core ERP information
(orders, inventory, etc.) of the ‘extended supply chain’ is only now beginning
to emerge in major projects as the following case example illustrates.

Case example: ERP in British Columbia Transmission Corporation major

projects
The British Columbia Transmission Corporation (BCTC) is a provincial
crown corporation of Canada, incorporated 2 May 2003. BCTC’s corpo-
rate offices are located in Vancouver. The corporation operates six system
control centres all over BC, which are responsible for maintaining the
reliability of the ‘backbone’ of BC’s transmission grid which includes
18,000 kilometres of high voltage wires.
Upon receiving approval from the British Columbia Utilities Commis-
sion (BCUC), BCTC direct new transmission infrastructure investment
projects. The Commission continues to regulate the terms and rates for
transmission services.
BCTC selected IBM Business Consulting Services to lead a consortium
to implement Oracle Applications version 11.5.9. IBM implemented the
project in two waves:

• Wave 1 consisted of the Oracle General Ledger, Fixed Assets, Accounts

Receivable, Accounts Payable, Purchasing and iProcurement modules,
as well as Oracle Projects, Oracle Discoverer, Oracle Enterprise Asset
Management (limited functionality) and integration with BC Hydro,
banks and other BCTC systems using Oracle Interconnect.
• Wave 2 consisted of the Oracle iExpenses and Oracle Internal Controls
Manager modules, as well as some extensions to Wave 1 functionality.

In the project, IBM led a team that included up to 33 clients and 27 con-
sultants (including Oracle Consulting and Delinea as subcontractors)
and also worked with an outside infrastructure application service provider.
The fully integrated solution that IBM implemented is delivering bene-
fits in BCTC’s major project management such as better access to informa-
tion: for example, Oracle Discoverer enables users to build reports on their
own without technical support. Furthermore because BCTC’s asset data is
now segregated from BC Hydro’s, BCTC can perform data analysis more
easily, thus improving the quality of its decision-making.
Source: IBM Business Management Consultancy (2004)

It is useful to note that SAP AG, largest supplier of ERP systems in the world,
is marketing ERP systems specifically designed for major capital projects. SAP
for Engineering, Construction & Operations (SAP for EC&O), one of SAP’s
 Supply chain for major projects 265

23 industry solution portfolios, supports the business processes of project-

oriented companies involved in engineering, planning, execution, operation and
maintenance of capital intensive projects. Engineering firms and construction
businesses are typically involved in costly, high-risk projects and are organized
in a decentralized structure which demands a solution allowing high integra-
tion and close collaboration both within the enterprise and across global supply
chains and partner networks.

Collaborative forecasting and scheduling in projects

As we discussed in Chapter 12, CPFR or just collaborative forecasting is the
process of setting up a continual line of communication between you and those
customers with the ability to predict the future needs of the products they buy
from you. Advances in electronic commerce have facilitated better communica-
tions between computer systems that has resulted in the development of electronic
CPFR systems. Large retailers like Wal-Mart and Tesco are benefiting from
sophisticated CPFR systems by electronic link with the major suppliers’ ERP and
global supply chain systems.
In the case of project supply chains it may not be necessary to introduce
sophisticated e-supply chain or CPFR systems with all members of the supply
chain. However, the principles of CPFR and Sales & Operations Planning
(S&OP) can be gainfully incorporated in the supply chain of major projects.
The supply chain manager in a major project (see Figure 16.3) should take the
role of co-ordinating an S&OP style regular and formal meetings between the
supply chain members (including major suppliers) of the project. The objectives
of this S&OP style meeting is different from a typical project review meeting in
so much that here the emphasis is on collaborative forecasting and rough-cut
capacity planning. The supply chain related problems in major projects such
Airbus 380 or London Olympic 2012 could be contained and resolved by a for-
mal collaborative forecasting process between key suppliers and stakeholders of
the project. The benefits are more significant when the supply chain members
are electronically linked to share the common data. Even in smaller projects col-
laborative forecasting can deliver huge benefits as the following case example
illustrates.

Case example: Collaborative forecasting in Dower projects

Dower Industries uses a No. 456 gasket in the process of rebuilding a No.
A 4000 power unit. On average, Dower rebuilds two power units each
month and the building of each power unit is considered a project because
the No. A4000 power unit is critical to Dower’s operations, its supplier,
Ajax Distribution, normally keeps four No. 456 gaskets in stock.
However in a specific month, say September, Dower’s engineers
decide they need to rebuild eight power units in November … Although
266 Total Supply Chain Management

the No. 456 gasket is a critical component in the rebuilding process, it is

only a small element of the total procedure. Ajax Distribution always has
an ample supply of gaskets in stock, so it does not occur to Dower’s
buyer to notify Ajax of the increased need for the product occurring in
8 weeks.
On November 1, Dower starts rebuilding the power units. After com-
pleting four units, they are stopped dead in the water because there are
no more gaskets. Dower’s management strongly voices its displeasure at
the buyer, who in turn unloads on his contact at Ajax. Ajax offers excuses,
citing the unusual demand and offers to increase its normal inventory of
No. 456 gaskets from four pieces to eight. The result: Ajax has disap-
pointed the customer and brought in additional stock that is probably
excess inventory.
This situation could have been avoided if Ajax and Dower implemented
a program to exchange need and availability information. Using a CPFR
system, Dower would have notified Ajax of the increased need for the
gaskets as soon as it made the decision to accelerate maintenance opera-
tions. Ajax would have ordered more gaskets for a late October or early
November delivery. Following this experience Dower set up an EDI
link with Ajax and a simple process of CPFR was established in Dower
projects.
Source: www.EffectiveInventory.com (2006)

Procurement in projects
In the preceding two sections we have described the challenges and opportunities
created by new information and communication technologies in managing
project supply chains. Procurement or purchasing of goods and services from
multitude of suppliers has been the traditional home of supply chain management
in projects. The roles and responsibilities for the management of procurement
in a large project can be seen as a hierarchical sequence of authorization between
various levels of the project organization (see Figure 16.1) from sponsor (or a
client) to subcontractor. These cascade down from the strategic and commercial
drivers acting on the sponsor and progress through various parties in the entire
supply chain according to the procurement strategy. There are variations of
procurement strategies which are hybrids of the following strategies:

• Client-controlled strategy
• Turnkey strategy
• Joint ventures (JVs) and partnering

The key player is a client-controlled strategy (which is also the traditional pro-
curement strategy in construction industry), sponsor or slient, consultants and
contractors. A client initiates and authorizes a project. A consultant undertakes
 Supply chain for major projects 267

the feasibility and design and a contractor is responsible for implementing the
project. The client appoints a Project Board and a Project Director who selects
consultants and main contractor. The subcontractors are chosen by the main
contractor.
In a turnkey strategy, main contractor has the responsibility for the design,
construction and commissioning phases of a project. Usually, client appoints
a functional project manager who with his or her project team prepares and moni-
tors a performance specification and scope document. The turnkey contractor’s
project manager has executive authority and more multidisciplinary responsi-
bilities to co-ordinate the project supply chain. London Olympic 2012 project
is broadly following a turnkey strategy and Olympic Delivery Agency is the
turnkey contractor.
Primarily because of the financing sources of larger projects Joint Ventures
(JVs) or partnering strategies are emerging particularly for public sector projects.
Local or regional government policies in some countries (e.g. China) prescribe
JV procurement strategies. The public–private partnerships (PPPs) is a hybrid
of JV in the UK Government sponsored projects where funding is sourced
from both public and private sectors. To operate within these PPP organizations,
the project manager is confronted by two types of diverse cultures and yet has
to secure effective decisions in project supply chain.

Case example: What is a PPP?

Any collaboration between public bodies, such as local authorities or
central government, and private companies tends to be referred to a PPP.
British Prime Minister Tony Blair is keen to expand the range of PPPs
because he believes it is the best way to secure the improvements in public
services that the labour promised at the last election.
He believes that private companies are often more efficient and better
run than bureaucratic public bodies.
In trying to bring the public and private sector together, the government
hopes that the management skills and financial acumen of the business
community will create better value for money for taxpayers.
Many public sector unions, however, remain sceptical – and are partic-
ularly concerned about the extension of the private sector into new areas
like schools and hospitals which have traditionally been publicly run.
Source: BBC News (12 January 2003)

The traditional service level agreements (SLAs) where suppliers are penalized
for non-conformance of time, cost and specifications are not appropriate for
procurement strategy based on partnerships. The traditional procurement
thinking should be revisited and there should be a move where a client organi-
zation is actively managing the cause of risk or non-conformance and not the
268 Total Supply Chain Management

effect of the risk. The supply partners are in turn encouraged and incentivized
to improve performance and create competitive advantage for their businesses.
This type of progressive partnership approach is illustrated by the so-called
‘T5 Agreement’ of the London Heathrow Terminal 5 Project of British Airport
Authority (BAA).

Case example: BAA T5 Agreement

BAA’s Terminal 5 (T5) programme at Heathrow Airport is currently (end
of 2006) one of Europe’s largest construction projects. When complete it
will cater for approximately 30 million passengers a year and will provide
additional terminal and aircraft packing capacity. The facility is scheduled
to be opening to public on 30 March 2008 and represents a £4.2 billion
investment to BAA.
To achieve this audacious target in money and programme, BAA had
to consider a novel contracting and procurement strategy. Suppliers
signing up to BAA agreements are expected to work in integrated teams
and display consistent behaviours and values. Before embarking on the
T5 programme of works, BAA looked at a number of UK construction
major projects to ascertain lessons learnt particularly where they had
gone wrong. BAA decided that they had to have an agreement that could
deal with an adaptable and dynamic approach dealing with the uncer-
tainties and embracing integrated teams. So BAA wrote their own
bespoke agreement or contract. The same conditions of contract apply to
all key suppliers irrespective of type or usual position as a subcontract.
The key features of the T5 Agreement include:

• BAA as the client organization holds all the risk all of the time during
the total life cycle of the project – on time, in budget and to quality.
• This was underpinned by BAA’s unique insurance policy against risk.
It is not so much about the cost of the BAA policy but the value it
releases. It did not increase the cost of the project as the insurance
covers the supply chain on T5.
• As BAA will underpin all financial risks, contractors need not worry
that they will be held financially accountable when things go wrong.
• Contractors or suppliers are committed to teamwork in partnership.
There is a requirement for a high level of transparency between BAA
and their suppliers.
• Contractors work to predetermined fixed profit levels.
• Profit is the key driver of supplier incentives. By taking away the
financial risk, BAA is taking away the key commercial constraint and
thus suppliers can focus on technical delivery.
• The T5 Agreement is then supported by other documents such as the
Commercial Policy which defines an appropriate commercial terms
 Supply chain for major projects 269

and conditions and the Delivery Agreement which is the legal deed
and conditions of contract.

BAA divided the programme into 18 projects ranging in size from £10 to
£200 million. These were then split further into 150 sub-projects and then
it was split into circa 1000 work packages. The suppliers are engaged as
and when on plans of work or where a supplier’s capability is required.
From the very start BAA requested that suppliers work together in com-
pleting the projects, even those that are traditionally rivals or lower tier
subcontractors. At a corporate level BAA ensured that all suppliers under-
stood that corporate objectives were aligned to achieve a high quality
product within expected cost and enhance reputations. BAA also dealt
with challenges in encouraging the entire workforce to understand, appre-
ciate and trust the working relationship both between contractors and
BAA. They constantly have to reinforce this message to the workforce.
The T5 project is on course to completion complying with targets for
time, budget and quality having generated a team working and partner-
ship culture. The T5 Agreement as a whole looks to become a template in
other major programmes. It now represents a serious alternative procure-
ment route for major programmes of work and project supply chains.
Source: BAA Terminal 5 Project (Basu, 2006)

Community networking in projects

A supply chain of a major project deals not only with several contractors and
subcontractors, but also with numerous internal and external ‘stakeholders’.
There is a distinctly more interest in project management today to take stake-
holders into consideration. The internal stakeholders are relatively easy to
identify because of their closer proximity to the project and can be broadly
classified depending on their interest and influence on the perceived outcome
of the project (see Figure 16.4). The internal stakeholders with high influence
and high interest are usually the core members of the project team. Steering

 Level of influence 


Keep informed Key player

Level of interest

Minimal effort Keep satisfied

Figure 16.4 A stakeholder management model.

270 Total Supply Chain Management

team members could be chosen from the internal stakeholders with high influ-
ence but with less interest. The stakeholders with high interest but less influ-
ence are good candidates for task team members.
The external stakeholders are more difficult to identify and engage in a proj-
ect supply chain. Turner (1995) defines this group as ‘a group of people who are
often involved without their prior agreement, sometimes against their will, and
who often view the project as being a disbenefit because it somehow distracts
from their local environment’. Pryke and Smyth (2006) argue that major proj-
ects are inherently ‘social’ and suggest so called community network relation-
ships to deal with both the key players of a project and the external stakeholders.
Sometimes projects may not fit into the core operation of an organization or
they may be geographically isolated from the centre of operation. As shown in
Figure 16.5, a major project resides in larger social or community network
boundary and the success of such a project is relationship dependent not only
within the project environment, but also in its wider social or community net-
work. There are several relationship models and approaches in literature, for
example the IMP approach (Ford et al., 2003) and the Nordic School approach
(Gummesson, 2001) and the perceived value approach (Smyth, 2004). Our
opinion, based on observation, is that these approaches are primarily academic.
They stimulate thinking among project team members but do not provide any
specific practical or best practice solutions. Major concerns still remain how to
communicate with external stakeholders throughout the project life cycle.
Given that a long and costly investment is necessary for building up a relation-
ship, it is recognized that developing relationships with stakeholders at the
project initiation stage and maintaining relationships with communication is
important.

Community network boundary

External
stakeholders The project
Social
network
Client
Contractor
Supply Supply End
chain chain use
Design
team

Supply and
work cluster

Figure 16.5 Project supply chain in a community network.

Source: Adapted from Pryke and Smyth (2006, p. 31).
 Supply chain for major projects 271

Operational excellence in projects

Operational excellence in projects has always been important. Leaders of major
projects are now seeking project performance improvement tools and method-
ologies from proven practices of supply chain management. Manufacturing and
service organizations tend to execute more of their activities in projects and
programmes. Large-scale organizational change processes arising from mergers
and acquisitions, restructuring and major information technology (IT) projects,
are today carried out more efficiently by programme management. Multinational
construction contractors like Bechtel, Balfour Beatty and AMEC Group are
embedding operational excellence functions (e.g. Lean, Six Sigma, Performance
Management) in their project and programme management organization struc-
ture. Our research has shown the activities related to operational excellence in
projects, which are generally in the domain of supply chain management in proj-
ects, comprise three major areas:

• Lean project management

• Professional services automation (PSA) solutions
• Six Sigma in projects

The initiatives and processes in lean project management are deriving benefits
from two sources. Firstly, the traditional approach of critical path scheduling,
Basu (2004, p. 129) is to optimize time for completion and secondly derived
from the lean tools applied in supply chain management (such as value stream
and process mapping) to reduce procurement lead-time and non-value adding
activities.
When work on a critical path stops because resources are busy elsewhere or
critical resources are idle, the cause is likely to be in poor scheduling. The critical
path keeps shifting because of the uncertainty of project work. Goldratt (1999)
with his ‘Critical Chain’ and theory of constraints pointed out that the calcula-
tion of ‘floats’ can be misleading. The apparent buffer of time can evaporate
due to preset times and allocation of resources. Building upon the concept of
‘Critical Chain’ lean project management developed, and it comprises three
major activities:

1. Time buffers are inserted as scheduled of time into projects where non-critical
paths feed into the critical path and act as shock absorbers and keep the
critical path stable.
2. Projects are scheduled into the pipeline after checking the availability of
resource constraints to ensure that schedules are feasible.
3. Buffer consumption is monitored and tasks feeding into the ‘most empty’
buffers are given first priority.

Lean project management principles may have provided good measures to deal
with the uncertainty of project work, but its apparent complexity is pushing
project managers towards the lean approaches of supply chain management.
This lean thinking approach to minimize waste in project supply chain is
272 Total Supply Chain Management

championed by the Lean Construction Institute (LCI) (www.leanconstruction.

org). The goal is to build the project while maximizing value, minimizing waste
and pursuing perfection for the benefit of all project stakeholders. Pinch (2005)
explains that LCI aims are primarily focused on the reduction of the waste, as
defined by the seven categories of ‘Mudas’, caused by unpredictable workflows.
The Mudas or wastes identified by Taiichi Ohno (1973) are:

• Excess production (no stock piling of finished goods)

• Waiting (no buffer stocks between processes, no idle time)
• Conveyance (reduce movement to a minimum)
• Motion (adoption of ergonomic principles)
• Process (Deming claimed that 90 per cent of waste is due to poor processes)
• Inventory (materials should arrive just as required and flow like water through
the system to the end user)
• Defects (the aim is zero defects. It is cheaper to do things right the first time)

This approach has been defined as lean construction. By first focusing on work-
flow, lean construction unplugs clogs in the project stream and gradually plan-
ning, design, construction, delivery and closure of the project are better
co-ordinated to deliver maximum value for the project owner. Ballard (2001) has
proposed a method of reducing cycle time in home building projects within the
context of even flow production. His innovation is the formation of multi-craft
teams to overlap activities in each phase of the project and also reduce activity
durations through time studies. The principles of lean construction are almost
identical to those of a lean supply chain as discussed in Chapter 13.

Case example: Lean project management

Morris and Spottiswood is a property solutions business established in
1925 based in Glasgow, Edinburgh and Manchester. The company provides
innovative solutions within clients’ property space. This is delivered pri-
marily through partnering relationships with leading retail, financial and
public sector organizations.
Morris and Spottiswood ran its first lean project management in 2002/
2003. The project’s scope was to investigate the annual expenditure of
externally hired plant. Using techniques such as Pareto analysis, value
stream mapping, cause and effect and implementation planning, a cross
function team investigated existing processes and established improve-
ments that led to delivery of short, medium and long-term benefits to the
business.
The quantifiable savings resulting from the lean project management
was approximately £200,000 in the first year.
Source: Scottish Enterprise, Glasgow (2006)
 Supply chain for major projects 273

The applications that support project-based processes within an organization

are commonly referred as PSA solutions. PSA solutions appear to be very much
in vogue in project performance improvement at the moment. PSA solution
comprises a range of specific modules that combine to provide a solution to
manage the entire project lifecycle. The integrated nature of the PSA modules
supports and enhances the flow of real-time information throughout a business
collecting detailed transactional data accurately and turning it into business
knowledge that can be shared to business benefit. PSA solutions are offered to
project organizations as functional packages such as customer relationship
management (CRM), human resources management (HRM), project delivery
management (PDM), project execution management (PEM), project cost man-
agement (PCM), etc.
In a recent survey Cap Gemini (2005) surveyed a number of projects where
PSA solutions had been used. On each solution the following four areas were
addressed:

1. Internal perspective (the organization features of the PSA vendor)

2. External perspective (customer side of the solution)
3. Technical perspective (technical aspects of the system)
4. Functional perspective (how well the solution fulfilled the requirements of
process areas)

Their report showed that 42 per cent of PSA vendors had disappeared in the last
5 years but most of the solutions had been adopted by new vendors. Our critical
observation on PSA solutions is that they are useful data management systems but
the effectiveness in achieving operational excellence in projects depends on how
their outputs are used for project performance improvement. The demise of 42 per
cent vendors in 5 years indicates a moderate success rate of PSA solutions.
Interest in Six Sigma is growing rapidly within the professional project man-
agement community, and the most common question coming from that group
is something like ‘How does Six Sigma relate to the Project Management Body
of Knowledge (PMBoK)?’ Gack (2006) concludes that Six Sigma and PMBoK
do have connections, similarities and distinctions and it is clear that Six Sigma
complements and extends professional project management, but does not replace
it. Both disciplines make important contributions to successful business out-
comes. As described in Chapter 16, the core methodology of Six Sigma, that is
DMAIC (Define, Measure, Analyse, Improve and Control) is closely linked to
the methodology, rigour and stages of life cycle of project management.
Even today project managers are not comfortable with embracing Six Sigma
in managing their projects and their arguments include that a project is unique
and one-off and does not have a stable process and Six Sigma is only effective
in repetitive stable processes. They also question, do we need data driven statis-
tics of Six Sigma in projects where contractors are busy just doing their jobs?
Our response to these doubts is that Six Sigma can be very effective if the tools
and methodology are applied appropriately (fitted to purpose). In ‘Quality
Beyond Six Sigma’ (Basu and Wright, 2003), Chapter 8 ‘Project Management
274 Total Supply Chain Management

and FIT SIGMA’ addresses the issue of fitness for purpose. In projects we have
many repetitive processes and/or we have many processes requiring design. In
both situations DMAIC or DFSS (Design for Six Sigma) can be applied. How-
ever, the caveat is the appropriateness and for this reason we recommend Six
Sigma methodology to larger projects with a longer duration, projects with
large management organizations or multinational contractors.
DMAIC has added the rigour of project life cycle to the implementation and
closeout of Six Sigma projects. Figure 16.6 shows the relationship between
DMAIC with a typical project life cycle.

Project
Define Organise Implement Closure
life cycle

DMAIC Define Measure Analyse Improve Control

Figure 16.6 DMAIC life cycle and project life cycle.

Project organizations are showing positive interests in Six Sigma and courses
and conferences are on offer for project members. Bechtel was one of the early
users of Six Sigma in delivering their multinational projects as the following
case example illustrates.

Case example: Six Sigma at Bechtel

Founded in 1898, Bechtel is one of the world’s premier engineering, con-
struction, and project management companies. Forty thousand employees
are teamed with customers, partners and suppliers on a wide range of proj-
ects in nearly 46 countries.
Bechtel has completed more than 22,000 projects in 140 countries,
including Hoover Dam, the Channel Tunnel, Hong Kong International
Airport, the reconstruction of Kuwait’s oil fields after the Gulf War and
Jubail industrial city.
Bechtel was the first major engineering and construction company to
adopt Six Sigma, a data-driven approach to improve efficiency and qual-
ity. Although it was originally developed for manufacturing companies,
the company was confident that Six Sigma would work in professional
services organizations such as Bechtel. Six Sigma has improved every
aspect of Bechtel’s business, from construction projects to regional
offices, saving time and money for both customers and the company.
Six Sigma uses a rigorous set of statistical and analytic tools to produce
dramatic improvements in their work processes (see Basu and Wright,
 Supply chain for major projects 275

2003). Bechtel launched Six Sigma in 2000, when the company was
experiencing unprecedented growth – and facing corresponding process
challenges. The company has now implemented Six Sigma in its key
offices and business units around the world. About half of its employees
have had Six Sigma training, and most of its major projects employ its
methods from start to finish.
The investment of Bechtel in Six Sigma reached the break-even point
in less than 3 years, and the overall savings have added substantially to the
bottom line, while also benefiting customers. Some examples:

• On a big rail modernization project in the UK, a Bechtel team used

Six Sigma to minimize costly train delays caused by project work and
reduced the ‘break in’ period for renovated high-speed tracks.
• At a US Department of Defense site in Maryland, Six Sigma helped
achieve significant cost savings by streamlining the analysis of neu-
tralized mustard gas at a project to eliminate chemical weapons.
• To speed up the location of new cellular sites in big cities, Bechtel
developed a way to let planners use computers to view video surveys
of streets and buildings, making it easier to pick the best spots.
• In a mountainous region of Chile, Six Sigma led to more efficient
use of equipment in a massive mine expansion, with significant cost
savings.

‘Six Sigma is the most important initiative for change we have ever under-
taken. We are happy to report that it is becoming “the way we work”.’
Source: www.bechtel.com (2006)

Summary
Longer supply chains in major projects with durations over several years will
mean more dependence on other companies and contractors and so collabora-
tion throughout the project supply chain is becoming a must as opposed to tra-
ditional adversarial relationships. Indeed, competitive advantage is increasingly
coming out of the ability to challenge assumptions and deliver projects on time
in collaboration with project partners. In this chapter, we demonstrated with
case examples how the principles of supply chain management including the
approaches of operational excellence can and should be applied in projects,
especially major projects dealing with several contractors over a number of
years, to achieve sustainable, efficient and effective results. The communication
and management of stakeholders in a wider community network of a project
supply chain still remains a challenge.
We propose that a dedicated supply chain manager should be deployed
immediately after the authorization of major project to manage supply chain
276 Total Supply Chain Management

activities over the total life cycle of the project. The supply chain manager
should assume a function role, similar to a risk manager or a quality manager,
reporting to the Project Director to oversee supply chain activities including
supplier partnership, forecasting and scheduling, ERP and PSA systems (where
appropriate) and other operational excellence initiatives.
Part 3: New demands and
trends

Questions
1. Describe a supply chain management approach in managing a major event
like an international book fair. Explain the nine-stage purchasing chain of
decision in the event management.
2. Discuss the role of applying the traditional supply chain approach of man-
ufacturing industries to a service industry such as hotel management.
Explain how you would adapt the processes of supply chain building
blocks in such a service environment.
3. Describe the key features of the market-based ‘transactional’ relationship
and the longer-term ‘partnership’ relationship with ‘suppliers’. It is
unlikely that any service business will benefit from engaging exclusively
in one type of ‘supplier relationship’, discuss this in the context of hospi-
tal services supply chain.
4. What are the common and uncommon supply chain management practices
between a profit and non-profit organizations? What are your recommenda-
tions to apply the supply chain management expertise of the profit sector to
the relief organizations responding to major natural or political disasters?
5. Discuss, with appropriate examples, the new growth opportunities and
supply chain challenges in the emerging markets of:

• China
• India
• Latin America

6. In the Hindustan Lever Limited (HLL) case study of rural supply chain
should HLL enter the informal sector in this way?
What are the threats and opportunities of such a step?
Should HLL roll out this business model?
If the company rolls out this model, what do you think is needed in order
to ensure success?
7. In 1997, Haier Group from China entered the market for wine coolers in
the USA and captured 60 per cent of that specialized segment by 2002.
What was their strategy and why was it a success? Should Haier roll out this
strategy for marketing larger refrigerators in the USA?
278 Total Supply Chain Management

8. Identify the role of e-business in a retail supply chain. TESCO supermar-

kets are selling ‘on-line’ household grocery products especially to profes-
sional workers. In which product categories does on-line sale offer greatest
advantage and smallest advantage for TESCO?
9. Explain how CPFR network is assisting suppliers, manufacturers and retail-
ers in planning and delivering products and services. Comment on the risks
in rolling out CPFR in a regulated business like a pharmaceutical company.
10. What are the advantages and challenges in implementing an e-supply chain.
Recommend a strategy of developing and rolling out an e-supply chain strat-
egy in a fast-moving consumer goods (FMCGs) multinational enterprise?
11. How do you distinguish between a lean supply chain and an agile supply
chain? Describe the characteristics of both a lean supply chain and an agile
supply chain.
12. In the case example of Zara apparel company was the strategy a lean supply
chain or an agile supply chain? Should Zara continue to roll out this business
model? What additional measures would you recommend to ensure Zara’s
success in future?
13. What is green supply chain? What are the roles of governments, non-
government organizations (NGOs) , manufactures, retailers and consumers
in ensuring a sustainable green supply chain? Comment on so-called
‘greenwash’ initiatives such as ‘carbon off setting’.
14. In the Airbus 380 case example in hindsight, which specific measures of
traditional supply chain management could be applied to improve the suc-
cess factors of the project?
15. What are components of the supply chain in a major project? Discuss the
challenges and opportunities of applying supply change management prin-
ciples in a major project.