A Best-Practice Approach to Transforming Global Supply Chains

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1 A Best-Practice Approach to Transforming Global Supply Chains Ralph G. Kauffman, Associate Professor University of Houston-Downtown, Houston, TX 77002, Thomas A. Crimi, Category Manager ChevronTexaco Overseas Petroleum Corp., Houston, TX 77010, th Annual International Supply Management Conference, April 2004 Abstract. Supply chains vs. value chains. What is the difference? This article provides a bestpractice approach for leveraging knowledge to transform global supply chains into value chains. A value chain model and process map provide a transformation network. Communication and information systems are integrated as enablers of value chain transformation. Supply Chains vs. Value Chains Supply Chains: "The supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage (extraction), through to end users, as well as the associated information flows" (Monczka, Trent, and Handfield 2002). Monczka, Trent, and Handfield go on to say that the supply chain includes "systems management, operations and assembly, purchasing, production scheduling, order processing, inventory management, transportation, warehousing, and customer service." Value Chains: Porter (1985) indicates that every business is a collection of activities to design, produce, market, deliver, and support its product. The sequence of these activities is what he terms a "value chain." The activities are called "value activities" and they are the means by which a firm creates a product of value to its customers. Monetarily, the value chain includes the total cost of all value activities which, when subtracted from total value to customers, results in margin to the firm. Any firm that exists needs supply chains in some form just to operate. The degree to which a firm's supply chain has been transformed into a value chain determines the degree of success of the firm in terms of profitability. Firm's whose supply chains are just supply chains are not achieving their potential to add value for their customers and will financially underperform other firms who have made the transformation from supply chain to value chain. Overall Objective of Global Value Chains. Have in place the global supply chain configuration that results in meeting or exceeding worldwide customer (internal and/or external) expectations at the lowest cost. Specific Objectives and Expectations of Global Value Chains. Achievement of the transformation of supply chains into value chains will normally include some combination of the following objectives and expectations: Leverage spend (across business units and geographic boundaries)

2 Align Incentives for integration of activities (buyers, suppliers, end-users) to support organizational goals and strategies Optimize supply chain operation (no. of members, capabilities, costs) Reduce inventories across the chain Reduce all costs (item costs and supply chain operational costs) Assurance of supply of right quality items to support operations Global Complexities. If the supply/value chain involves sourcing in multiple countries, additional considerations need to be addressed. Some of these include: Currency exchange and risk Countertrade opportunities and requirements Varying laws and jurisdictional questions Cultural differences Language differences Labor and training availability, practices, laws, regulations Transportation, packing, shipping, storing, import, export, customs Security: materials, products, personnel, intellectual property Challenges and Barriers to Transforming Global Supply Chains into Value Chains. In the varying environments encountered internationally, there are a number of challenges and barriers involved in building global supply chains. Many of these are rarely if ever a concern with domestic supply chains. Some of these include: Uncertain political stability, self-serving governments Lack of infrastructure in some countries (roads, port facilities, trained labor, utilities, communications) Lack of critical market mass in particular countries High transaction costs Requirements to use in-country agents or partners and local content requirements Lack of potential for repeat purchases Slower adoption of e-business than in the domestic market No or limited free trade zone availability Partner/contract limitations requiring bidding for all procurement activities and inhibiting alliance-building High logistics and transportation costs Different time zones (communication difficulties) Financial risks are higher, e,g, potential for war, terrorism, government changes The nature of global activity (may be fragmented and/or scattered) Long/unpredictable supplier lead times Protectionism (tariffs, duties, quotas, inspections) Limited number of qualified global suppliers Difficult to link global project work to "run and maintain" global activities Limited availability of trained personnel for purchasing or supply management positions How to Transform Global Supply Chains In their book, Transform Your Supply Chain - Releasing Value in Business, Hughes, Ralf, and Michels (1998) recommend an eight-step approach:

3 1. Reverse neglect: Release the value. Improve the quality/cost ratio of your supply chain. Strive for the highest quality at the lowest cost. 2. Leverage value across the supply chain. Understand what constitutes value and to whom it is valuable in your supply chain. Identify and evaluate trade-offs between value added and profitability. Leverage knowledge to create and deliver value. Where commodity markets are involved, be proactive in initiating change that will benefit you. 3. Redefine the boundaries of business. Redefine the boundaries of your business in the context of what provides continuing competitor and customer advantage. Evaluate any existing vertical integration structures and replace with virtual sourcing if value can be added by doing so. Evaluate what to insource and what to outsource. Use all capabilities of existing or potential supply chains in the development of new products. 4. Develop relational competence. View relationships with other members of your supply chains as a continuum ranging from spot relationships to strategic alliance or co-ownership but recognizing that most relationships will be somewhere between these extremes. Determine where more competition will add value and where more collaboration will add value and seek the best combination of competition and collaboration. 5. Manage at the right level. Determine which strategies and activities best add value with global management and which best add value with local management. Determine the best level of autonomy for local management within supply chain activities. Analyze supply chains for each category of material or service that is significant to the organization to determine the best value-adding approach for management and control. 6. Develop supply chain responsiveness. Determine how the degree of responsiveness to customer needs such as resupply time or product mix adjustment matches with customer requirements in each such area. Consider techniques such as supplier managed inventory, supplier integration, and consignment stocking. Pay particular attention to the quality of demand forecasts throughout the supply chain. 7. Drive down purchase costs. Capture cost saving opportunities and share benefits with contributing supply chain members. Pay attention to the differing cost management and purchase strategy needs of various categories of purchases. For example commodities, specialty items, custom-made items, MRO materials. Service purchases can be similarly categorized. Consider purchases in the broadest possible sense do not exclude anything which is purchased by the organization, material or service. A recent article on cost savings in the supply chain suggests a two-pronged approach to identify achieving value-enhancing cost savings opportunities throughout supply chains. Sources of savings can be obtained by either: 1) changing what is purchased or sold or how and when it is purchased or sold, processed and delivered to the point of use, or 2) increasing the velocity of material in supply chains to reduce the time from point of entry to the chain to final consumption or sale (Kauffman, 2003). Another recent article on cost savings in the supply chain focuses on sources of savings beyond the "first level" or "easy" savings and identifies two requirements for achieving such cost savings: 1. an organized approach, and 2. use of techniques that work (Crimi and Kauffman, 2003).

4 8. Bring About Change. Change management. Transforming supply chains involves a collateral change management effort. This includes the following activities: Seek Top Management mandate with visible support. Identify local sponsors and supporters of supply chain change early in the transformation process. Use coordinated communication efforts to develop a dialog about the benefits and obstacles to implementation. Target quick wins and immediate opportunities. Focus on overcoming obstacles to implementation by creating a cross-functional approach(team) to address issues. Perform a competitive advantage review in order to leverage the core competencies of the supply chain members. Develop a supply chain agenda, manage the overall program and frame goals to address major gaps in supply chain performance. Develop a business plan that will integrate the activities of the supply chain members. Formulate key performance metrics and measurements, tracking quarterly. Review results and make modifications as necessary to achieve supply chain optimization. Step by Step Approach for Transforming Global Supply Chains, A "best practice" Framework. 1. Form a cross-functional global supply chain value development team Include all affected parties, internal and external The team composition may change as development and implementation proceeds 2. Identify needs and opportunities for supply chain value transformation Determine the requirements your supply chain must meet o Commodities, materials, services o Dollar value and physical quantity of materials and services procured o Importance of commodities, materials, and services to achievement of company strategic objectives o Performance metrics for qualification and evaluation of suppliers o Determine what constitutes value to all members of the supply chain. Determine where such value is developed or added. o Identify value trade-offs for each member of the supply chain.

5 Determine the current status of your supply chain "as is" o Suppliers of materials and services o Customers (who, where, what products) o Commodity markets (major markets procured from) o Current performance, problem areas o Competitiveness (cost, quality, delivery, responsiveness) o "Fit" of your current supply chain with your operational requirements When determining supply chain requirements and current status, use a framework such as the isource Global Enabled Supply Chain Map (isource Business, August- September, 2003). The main components of this particular framework include the following items: o Order/Demand capture o Supply chain planning o Supply chain event management o Sourcing o Trading exchanges o Commodity team and supplier collaboration o Spend analytics and supply strategy o Content management o Auctions o Procurement o Supplier relationship management o Content management o Marketplaces o Fulfillment o Order management o Call center operations o Sales and marketing support o Warehousing, inventory management and deployment o Logistics o Inventory management in motion or at rest o Physical management of movement of goods and resources o Transportation o Payment o Electronic funds transfer o Procurement cards o Customer Relationship Management o Content management o Channel management and customer analytics o Reverse logistics/material and/or merchandise returns All of these are operational dimensions of supply chains which must be identified, considered, and included in any determination of value-determination, requirements, and assessment of current status and potential improvements of supply chains. 3. Determine commodity/service priorities for globalization consideration based on needs and opportunities

6 4. Identify potential markets and suppliers and compare to "as is" markets, suppliers, and supply chain arrangements, operations, and results 5. Evaluate/qualify markets and suppliers, identify supplier pool (determine best ones based on likely total cost of ownership (TCO), and best potential to meet or exceed expectations and requirements) 6. Determine selection process for suppliers, e.g. request for proposal (RFP), bid invitation, point system, past performance, references, reverse auction, negotiation, etc. 7. Select suppliers or confirm current suppliers 8. Formalize agreements with suppliers 9. Implement agreements 10. Monitor, evaluate, review, revise as needed REFERENCES Crimi, Thomas A., and Ralph G. Kauffman, "Looking for Cost Savings in the Supply Chain," Inside Supply Management, vol. 14, no. 3, March 2003, Institute for Supply Management. Hughes, Jon, Mark Ralf, and Bill Michels. Transform Your Supply Chain, International Thomson Business Press, London, isource Business, "The Global Enabled Supply and Demand Chain Map, Version 6.0", vol. 4, issue 5, August-September 2003, Cygnus Business Media. Kauffman, Ralph G. "Cost Savings in the Supply Chain," Business Briefing: Global Purchasing & Supply Chain Strategies 2003, World Market Research Centre Ltd., London, 2003 Monczka, Robert, Robert Trent, and Robert Handfield. Purchasing and Supply Chain Management, 2nd ed., South-Western, Cincinnati, OH, Porter, Michael E., Competitive Advantage, The Free Press, New York, NY, 1985.

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