MASTER OF BUSINESS ADMINISTRATION PROGRAM THE DEVELOPMENT OF A SUPPLY CHAIN STRATEGY FOR COMPETITIVE ADVANTAGE

Transcription

1 MASTER OF BUSINESS ADMINISTRATION PROGRAM THE DEVELOPMENT OF A SUPPLY CHAIN STRATEGY FOR COMPETITIVE ADVANTAGE THE TELESUR CASE by ROMANO DOULAT (SURINAME) Supervisor Philippe Leliaert 2008 This paper was submitted in partial fulfillment of the requirements for the Master of Business Administration (MBA) degree at the Maastricht School of Management (MSM) and the FHR Institute for Social Studies (FHR), March 2008 i

2 ACKNOWLEDGEMENTS This research study could not have been made possible without some individuals whom I would like to thank; First I would like to express my deepest gratitude to Philippe Leliaert, who guided me during this research study. Philippe, you shared your wisdom and guided me through this process, which was for me above expectation. It was an honor to have you as my supervisor. Second, a special thanks to Hans Lim A Po and Ollye Chin A Sen, and their team for providing Suriname with this opportunity for sharing and developing knowledge amongst professionals. Third, my fellow students from MBA III and Dennis Mac Donald from the MBA II program, who have supported me throughout the program, I have gained much knowledge and have embraced you as family. I would also like to express my gratitude to Dirk Currie, CEO of Telesur, Kenneth Muringen and Frans Eersteling, and the Telesur family, without whom, this would not have been possible. Thank you for investing in my future career development. Also a vote of thanks to Pascal Fonville from T Mobile, who has helped me gain insight in the T Mobile operations. Last but not least my family, you showed patience and support, words cannot express my deepest gratitude, thank you. Romano A, Doulat Paramaribo, March 2008 ii

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4 ABSTRACT The telecommunication market in Suriname has been formally liberalized on April 16 th On that date two new mobile services providers received their license to operate in the market. The Telecommunicatie Bedrijf Suriname, further to be named Telesur, who had been a monopolist for 25 years, developed a strategic document in which it laid down how it is to remain competitive in this new environment. Although strategic, tactical and operational objectives have been set for the various operating units, no such objectives have been identified for supply chain management. At present, the supply chain within Telesur is therefore not strategically exploitable as an instrument for competitive advantage. This research study was chosen to conduct a case study and develop a supply chain strategy for Telesur. In order to do so the following problem statement was stated What is an appropriate supply chain strategy in the case of Telesur? A research model was developed and combined with a benchmark study. The model was then validated within Telesur. The theoretical framework included comprehensive theory on supply and logistics management. These were applied to assess which supply chain strategy was appropriate for the current product groups. Furthermore the maturity levels of supply chain processes were examined, identifying disconnects related to the case subject s supply chain processes. Validation of theory demonstrates that Telesur should pursue efficiency as a strategy for its current supply chain. Still, the supply chain process elements PLAN, SOURCE, MAKE and DELIVER proved to be undeveloped. Furthermore disconnects were identified in the areas of demand management and forecasting, information integration, supply chain integration of systems and structures, and performance management. These were all symptoms of immature supply chain processes. During the research, specific constraints were discovered that have an impact on these business processes, namely economies of scale and supplier dependence. These constraints were considered when the supply chain strategy was developed. iv

5 TABLE OF CONTENTS ACKNOWLEDGEMENTS...ii ABSTRACT... iv TABLE OF CONTENTS... v LIST OF ABBREVIATIONS...viii Definitions...viii Abbreviations...viii List of Tables... ix List of Figures... ix List of Graphs... x CHAPTER 1 INTRODUCTION... 1 Section 1.1. Introduction... 1 Section 1.2. Preparatory Research... 1 Section 1.3. Problem Description... 3 Section 1.4. Scope and Limitations... 3 Section 1.5. Relevance of Topic... 4 Section 1.6. Research Model... 4 Section 1.7. Chapter Overview... 5 Section 1.8. Summary... 5 CHAPTER 2 LITERATURE REVIEW... 6 Section 2.1. Introduction... 6 Section 2.2. Supply Chain Management Evolution... 7 Section 2.3. Purchasing and Supply Management... 8 Section 2.4. Internal and External Supply Chains... 9 v

6 Section 2.5. Supply Chain for Strategic Advantage... 9 Section Supply Chain Strategy Assessment... 9 Section Supply and Demand Characteristics Section 2.6. Supply Chain Optimization Section Supply Chain Maturity Model Section The Supply Chain Operations Reference (SCOR) Model Section 2.7. Decision Making Framework Section 2.8. Summary CHAPTER 3 RESEARCH METHODOLOGY Section 3.1. Introduction Section 3.2. Definition of Research Problem Section 3.3. Definition of Research Purpose Section 3.4. Definition of Research Strategy Section 3.5. Data Collection Section 3.6. Application of Instruments Section 3.7. Interpretation of Results Section 3.8. Summary CHAPTER 4 BUSINESS CONTEXT Section 4.1. Introduction Section 4.2. Company Overview Section Company Profile Section New Identity and Strategy Section 4.3. Competitive Environment Section 4.4 Summary CHAPTER 5 RESEARCH FINDINGS Section 5.1. Introduction Section 5.2. Assessment of the Existing Supply Chain Strategy Section 5.3. The Supply Chain Maturity Model of Telesur vi

7 Section 5.4 The SCOR model Applied within Telesur Section As Is analysis using SWOT Section As Is Analysis for Material and Information Flow of Telesur Supply Chain Definition Matrix Section 5.5. Potential for Profitable Growth Section Determine What to Benchmark Section Determine Benchmark Partners Section Supply Chain Maturity Model Benchmark Section Take Actions to Improve Section 5.6 Summary CHAPTER 6 CONCLUSIONS AND RECOMMENDATIONS Section 6.1. Conclusions Section 6.2. Recommendations BIBLIOGRAPHY APPENDIX 1.0.: SUPPLY CHAIN OPERATIONS REFERENCE MODEL APPENDIX 2.0.: ORGANIZATION CHART APPENDIX 3.0.: SUPPLY CHAIN OF TELESUR APPENDIX 4.0.: SCOR CARD METRICS APPENDIX 5.0.: ORGANIZATIONAL CHART OF SUPPLY CHAIN APPENDIX 6.0: SUPPLY CHAIN ORGANIZATION CHART APPENDIX 7.0.: FLOW OF PREPAID CALLING CARDS APPENDIX 8.0.: PROCESS FOR PURCHASING PREPAID CALLING CARDS APPENDIX 9.0.: QUESTIONAIRRE SUPPLY CHAIN MATURITY MODEL APPENDIX 10.0.: STAGES OF PURCHASING SOPHISTICATION APPENDIX 11.0.:DECISION MAKING FRAMEWORK FOR SUPPLY CHAIN STRATEGY vii

8 LIST OF ABBREVIATIONS Definitions Supply chain management: is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer (Chase et.all, 2006), i.e. from the point of procurements all the way to the point of sale to the consumer. Purchasing: the objective of purchasing is to acquire materials and services of the right quality in the right quantity at the right price at the right time from the right source (Alan Raedels, 2000). Abbreviations CCOR DCOR DRP ERP LIFO MRP MRP2 MS SCOR SIM Telesur Customer Chain Operations Reference Model Design Chain Operations Reference Model Distribution Requirement Planning Enterprise Resource Planning Last In First Out Material Requirement Planning Manufacturing Requirement Planning Mobile Services Supply Chain Operations Reference model Subscriber Identity Module Cards Telecommunicatie Bedrijf Suriname viii

9 List of Tables Table 2.1 Decision Making Framework Table 4.0 Distribution of Revenue in % Table 5.1. Percentage of level 1 processes Table 5.2. Supply Chain Definition Matrix Table 5.3 List of Suppliers at Telesur Table 5.4 SCOR Card results Table 5.5 Benchmark Performance Metric Comparison Telesur Table 5.6 Disconnect Summary Table 5.7 Company Comparison Table 5.8 Data Summary Table 5.9 Customer Facing Metrics Telesur Availability List of Figures FIGURE 1.0 Research Model FIGURE 2.0. Topics related to chapter 2 FIGURE 2.1. The Product Positioning Grid FIGURE 2.2. Demand Uncertainty Matrix FIGURE 2.3 The Maturity Model FIGURE 2.4 SCOR Process Elements FIGURE 2.5 General Benchmark Stair Case FIGURE 3.0.Topics Related to Chapter 3 FIGURE 4.0. Topics Related to Chapter 4 FIGURE 5.0 Topics Related to Chapter 5 FIGURE 5.1 The Product Positioning Grid FIGURE 5.2 Maturity of Supply Chain Process FIGURE 5.3. Supply Chain Maturity Model Comparison between Telesur and T Mobile FIGURE 6.1. Topics Related to chapter 6 ix

10 List of Graphs Graph 1.0 Revenue Distribution Graph 5.0 Revenue Year on Year Growth Telesur x

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12 CHAPTER 1 INTRODUCTION Section 1.1. Introduction This case study presents the analysis of the supply chain within Telesur in Suriname. The need for research became evident after complaints of internal and external customers. Complaints from internal customers mostly concern a lack of collaborative planning leading to misalignment between marketing, planning and operations. These were also supported by real cases of mismatch between demand and supply. Section 1.2. Preparatory Research To discover what the main problem at hand was, some preparatory research was done. This desk research led to the discovery of a dissertation written by the purchasing manager addressing general problems with purchasing Daal (2007). His research study contained a questionnaire, with the following conclusions: Purchasing can contribute significantly to the performance of Telesur The Purchasing Department is not performing well enough to satisfy Telesur s needs The purchasing function needs to be reorganized as soon as possible Telesur should have centralized purchasing Delivery of the right materials are important The Purchasing Department should provide for an uninterrupted flow of goods required to operate the business. According to general principles of purchasing, companies must prepare themselves against disruptions in the supply chain (Kraljic 1983). In an interview with author, the procurement manager acknowledged that Telesur did not prepare well enough against supply chain disruptions and meeting customer expectations. Implementation of an Enterprise Resource Planning (ERP) module could resolve the problems. However, elements of supply chain strategy were not included in corporate strategy, resulting in the management of disparate parts of the organization rather than a total supply chain approach. The existing manner of managing the supply chain resulting in the following symptoms: 1

13 1. Shortages of equipment at customer premises. 2. Both stock shortages and stock surpluses 3. Lost sales to customers. Daal (2007) used action research for his case study, for hypothesis testing of what managers that contributed to the supply chain thought of the role of purchasing. These observations showed that there are indeed deficiencies within operations and that these usually result in a mismatch between demand and supply such as shortage of capacity for customer premises equipment. Although these cases were known to exist among supply chain functions, they were not recorded properly. On the other hand the research of Daal was only based on the front end of the supply chain, i.e. purchasing, on which he based his general recommendations. He stated that purchasing must become strategic, but purchasing was still in a developing phase. Other documentation included a report of consultant Fernando Kneese (2003). The report s purpose was to evaluate the telecommunications company of Suriname and included a segment on the supply chain process. Kneese (2003) laid down the following deficiencies related to the existing supply chain. For the purpose of objectivity, his statements were not revised: 1. Lack of trained personnel, 2. Lack of clear technical and functional specifications, 3. Lack of integrated purchase team for the negotiations, 4. Lack of procurement system, 5. Lack of integration with the supply chain, 6. Lack of adequate input from ordering departments or from the budget, 7. Lack of communication between the Procurement department and other departments. Some additional facts were included in the report: The Supply Chain process consists of demand and supply management, procurement, logistics and warehousing. Depreciation costs represent over 33 % of Telesur s revenue, while procurement costs build up to 53 % of Telesur s revenue. Demand posed by normal business, operations and maintenance activities make the supply chain process operationally important. 2

14 Finally, he asserted that Marketing demand and newly developed telecommunications technologies make the supply chain process strategically important. Clearly Kneese illustrated in his report how important the supply chain processes are, however no clear policies were developed to address the issues with the supply chain. He focused more on disconnects, but the report lacked a clear understanding of strategic actions to be taken. Although the disconnects should be turned into opportunities, he did not develop that point of discussion. One of his main conclusions was that the logistics infrastructure was poor. Section 1.3. Problem Description The aforementioned disconnects exemplify the fact that Telesur was not able to adequately manage and configure the supply chain and lacked clear policies on supply chain management. This gave reason to question whether a formerly monopolistic company operating in a fully competitive environment would remain competitive under these circumstances. The main problem at hand is a lack of supply chain visibility, and of an understanding of how the supply chain could contribute to the company s strategic advantage. This led to the following problem statement What supply chain strategy is appropriate for Telesur? The following central questions must assist in answering the problem statement; 1. What are the appropriate instruments for supply chain analysis? 2. What are the main characteristics of the existing supply chain? 3. What are the supply chain disconnects of Telesur relative to the best practices in the telecommunications industry? 4. What supply chain strategy can be applied based on the results of the supply chain analysis? Section 1.4. Scope and Limitations The research will be conducted in the period September 2007 up to February 2008 and has been validated for one company only. Another case subject will be studied for benchmark purposes only. The research study is only based on the external supply chain, thus for the goods and services obtained for the external customers. 3

15 Section 1.5. Relevance of Topic This case study presents the analysis of the supply chain within Telesur. The findings of this research are relevant for purchasing managers, operation managers and organizations that are in need for strategic actions for their supply chain operations. Section 1.6. Research Model The foundation of this research framework lies in three models, namely (1) the product portfolio grid, (2) the Maturity model and (3) the SCOR model. These models are derived from literature on supply chain management, logistics and supply management. For benchmarking purposes a best-inclass comparison will be used to assist in identifying the current position of Telesur within the industry. A combination of benchmark results and application of the aforementioned models will be of importance to answer the problem statement. Figure 1.0 depicts the methodology. FIGURE 1.0 Research Model 4

16 Section 1.7. Chapter Overview The paper has been structured as follows; Chapter one described the motivation and main problem areas that have led to this research. Chapter two conceptualizes supply chain management and describes the necessary instruments needed to answer the problem statement. Chapter three describes which research strategy will be used to answer the main problem. Chapter four describes the business context. Chapter five applies the identified models Chapter six concludes with recommendations. Section 1.8. Summary Chapter I described the considerations which have led to this research study on Supply Chain Management. The methods that will be applied to develop a supply chain strategy were laid down. The process to answer which supply chain strategy is appropriate for Telesur is structured in six chapters. 5

17 CHAPTER 2 LITERATURE REVIEW Section 2.1. Introduction This chapter describes and discusses related theory on supply management, supply chain management and logistics management (figure 1.0, chapter 1). The answer will be given to the following central question What are the appropriate instruments for supply chain analysis? First the chapter describes supply management which relates to purchasing and the supply characteristics of the supply chain. Second, Chapter 2 also discusses what instruments are available for assessing the existing supply chain of a company. The chapter continues with tools that are used to assess the level of maturity of supply chain processes. To conclude the chapter, theory is described that helps determine what a company s current performance level is compared to the industry it operates in. The results on literature in this chapter should lead to instruments which can be used to analyze the existing supply chain of Telesur. In the following section theory on the evolution will be discussed. In figure 2.0 the highlighted boxes summarize the topics to be discussed. FIGURE 2.0. Topics related to chapter 2 6

18 Section 2.2. Supply Chain Management Evolution While conducting secondary research the author came across theory on supply chain evolution. Supply chain management has evolved over the years from purchasing to a more strategically important supply chain function. In the 1950 s and 1960 s manufacturers wanted unit production cost reduction as the primary operations strategy (Tan, 2001). A decade later first materials requirements planning (MRP) and then manufacturing resource planning (MRP-2) were introduced followed by intense global competition in the 1980 s. Globalization forced manufacturers to produce goods and services at lower cost, higher quality, and with greater design flexibility. Therefore, manufacturers realized the importance of strategic buyer and supplier relationships. Tan postulated that in the 1990 s the evolution continued with best practices in managing corporate resources to include strategic suppliers and the logistics function in the value chain. Although his research findings were only based on manufacturing, Tan (2001) concluded that supply chain management evolved along two paths. The first was based on a logistics perspective and the second on purchasing. The one that evolved along the logistics path was based on the transportation and logistics perspective of merchants. This perspective focused more on location and logistics rather on transformation. The second one was the purchasing and supply perspective, which included buyer and supplier integration. Integration of information management systems between buyers and suppliers should lead to an increase in productivity and reduce cycle times. The ultimate goal of integration between buyers and suppliers was to increase customer satisfaction and increased market share. After these two paths Tan discovered a third theory that dominated literature which was one that describes all value adding activities. Further research found confirmation in the works of Elram (van Goor, 1999), Gelderman (1983), and Handfield and Nichols Jr. (2002). First Elram described supply chain management more as managing and controlling distribution channels in order to achieve customer goals through efficient maximization of resources. Second, Gelderman s theory was related to purchasing and supply management. In one of his journals he stated Purchasing must become supply chain. Third, Handfield and Nichols Jr. (2002) and Jacobs (2006), state that the supply chain encompasses all organizations and activities associated with the flow and transformation of goods from the raw materials stage through to the end user, as well as the associated information flows. Material and information flows both up and down the supply chain. Handfield s focus is more on value creation by supply chain integration. Although different definitions have been developed over the years, the 7

19 commonality between these definitions is that of managing material and information flows from suppliers to buyers, aligning demand and supply, which in general stays the same. Therefore the following general definition of supply chain will be used: the supply chain includes all processes that put the products in the hands of end users. Section 2.3. Purchasing and Supply Management In this section the importance of purchasing is discussed mainly because it is part of the front end of the supply chain. Disruptions in the supply chain could be reduced or even eliminated if the strategic role of purchasing is acknowledged. The objective of purchasing is to acquire materials and services of the right quality in the right quantity at the right price at the right time from the right source (Raedels, 2000). The definition of right has changed since purchasing must become supply management (Kraljic, 1983). The definition of right has another dimension to it because a value assessment of the role of purchasing today leads to three stages of purchasing (Raedels, 2000). First the traditional purchasing function looks at the price alone. The tactical role of purchasing then looks at leveraging volume from multiple to single sources. The strategic role, finally, looks at total value. Today total value is key to establishing the necessary supply strategy. Kraljic states that the company s need for supply strategy firstly depends on the strategic importance of purchasing in terms of the value added by product line, the percentage of raw materials in total cost, and their impact on profitability. Other than Raedels he elaborates on the four stages of purchasing sophistication (appendix 11.0). In his model he states that the higher the degree of market complexity the greater the importance of purchasing. Supply strategy depends secondly on the complexity of the supply market gauged by supply scarcity, pace of technology, monopoly or oligopoly conditions, entry barriers logistics cost and materials substitution. Given these theoretical facts, it is to be stated that the strategic advantage of the supply chain depends on the phase in which purchasing exists. 8

20 Section 2.4. Internal and External Supply Chains Supply chain management distinguishes internal and external supply chains. Elaborating further on Handfield s and Nichols Jr. s (2002) definition of supply chain integration, it is important to distinguish value creation by internal organizational members and external stakeholders. In their book Supply Chain Redesign, they made a distinction between internal and external supply chain, which differs from Elram and Stevens (van Goor, 1999). An internal supply chain is a part of the supply chain occurring within an individual organization. According to Handfield and Nichols, internal supply chains are complex, since different types of strategies and organizational structures require different supply chain configurations. These are dependent on the types of goods and services which they deliver. Once the internal supply chain is understood, the analysis will extend to the external part of the supply chain. External supply chains consist of suppliers and end customers. This study is limited to the goods and services provided to the external customers. Section 2.5. Supply Chain for Strategic Advantage Organizations can develop or improve their competitiveness by bringing supply chain thinking into their company strategy. Making supply chain management strategic means aligning all operations and information systems with company strategy (Ayers, 1999). In his article Ayers proved how supply chains can become strategic, based on the dimension of demand characteristics. Demand characteristics are based on product functionalities which have been determined by the consumers. He elaborated further on themes of Marshall Fisher and Michael Porter (Ayers, 1999) and he used their portfolio model to prove how demand characteristics are fundamental for supply chain strategy (figure 2.0). This resulted in the Product Positioning Grid. Section Supply Chain Strategy Assessment The main objective of the Product Positioning Grid is to help analyze what supply chain strategy is appropriate for an organization depending on the products it sells. Ayers explained how this assessment should take place. The Product Positioning Grid is a framework that assists managers in 9

21 understanding the nature of demand for their products. Based upon the product functionalities a supply chain that could best fit that demand would then be developed (Chase et al., 2006). The model consists of characteristics such as product life cycle, demand predictability, product variety and lead times of services. Ayers explained that products are categorized either as being functional or innovative making it less difficult for managers to understand the nature of demand. Functional products have longer life cycles, with low contribution margin, whereas innovative products have shorter life cycles of only few months. This framework determines product competitiveness by the supply chain that delivers the product. The foundation of the product grid lies in its functionality, reliability and value-formoney (Figure 2.1.). The framework is interpreted as follows: Quadrant A in the grid is categorized as products being best in class performers with excellent supply chain processes. C is categorized as products being sold in a market where competition is intense with little difference amongst these products. Supply chain innovation is required to compete in the market, since these products are no longer the standard for product excellence. B is categorized by products that are nearly at the end of their product life cycle, with inefficient operations. Products categorized as D products on the left side are at the end of their life cycle. Organizations must pursue the position of product group A, making them products with excellent products and supply chains. FIGURE 2.1. The Product Positioning Grid Source: Ayers,

22 A and B are categories equivalent to innovative products and Porter postulates that these product categories command higher contribution margins, requiring supply chain design based on availability (Ayers, 1999). Product categories C and D match functional products, requiring efficient supply chains with low contribution margins. To conclude this segment it is to be stated that the application of this grid leads to identifying the appropriate supply chain strategy of an organization. Section Supply and Demand Characteristics In addition to the Product Positioning Grid, Hau Lee (Chase, et. all 2006) describes the supply dimension for devising a supply chain. Lee s framework, which is also portfolio based, expands on Fisher s demand characteristics as stated by Ayers and underlines the supply dimension with the same. He describes supply chain strategies that mitigate risk as follows (figure 2.2): FIGURE 2.2. Demand Uncertainty Matrix Source: Operations Management For Competitive Advantage Efficient supply chain strategies: strategies aimed at creating the highest cost efficiency, eliminating non-value added activities, and deployment of optimization strategies. Risk-hedging supply chain strategy: strategies aimed at pooling and sharing resources in a supply chain so that the risks in supply disruptions can be shared. 11

23 Responsive supply chain strategy: strategies aimed at being responsive and flexible to the changing and diverse needs of the customers. Agile supply chain strategy: strategies aimed at being responsive and flexible to customer needs, while the risks of supply shortages or disruptions are hedged by pooling inventory and other capacity resources. According to theory they are agile since they have the ability to be responsive to the changing diverse and unpredictable demands of customers and minimize supply chain disruptions, reducing risk both at the front end and the back end of the supply chain. However in companies where processes have not evolved into mature stages, hedging and pooling to a certain extent, could lead to increased supply chain disruptions. For example, pooling on each others stock could also mean that one business unit has not properly planned its material requirements, which could lead to a bullwhip effect 1. The latter could have negative implications for customer service. So in this research another interpretation applies: Agile supply chain strategies should lead to shortened response times and production flexibility. Lee (Chase et al., 2006) states that it is more challenging to operate an organization with a supply chain strategy that is in the right hand side of the grid. Similarly it is more challenging to operate a supply chain that is in the lower row (Figure 2.2). He determined that the supply chain will improve if the uncertainty characteristics of the products are moved from the right column to the left or from the lower row to the upper by standardizing supply chain processes. In addition to the Product Position Grid organizations need to include Lee s Demand and Supply Uncertainty Matrix to assess their existing supply chain strategy. Section 2.6. Supply Chain Optimization In the previous section instruments have been discussed which can be applied to assess an organization s supply chain strategy that best fits according to product and demand characteristics. Knowledge of the most appropriate strategy is not sufficient though, because it only says something about where the organization is leading its business practices to. Yet an organization must assess if 1 The Bullwhip effect is caused by fluctuations in demand, which as a result is causing stock shortages to become stock overs. 12

24 the supply chain processes of the organization have been sufficiently developed to lead the company towards gaining competitive advantage. This is a question of whether the organization has the capabilities to govern its supply chain processes according to the strategic objectives. Section Supply Chain Maturity Model Literature study led to theory on the Maturity Model, which was described and applied by McCormack and Lockamy (2004). Both state that companies reach greater levels of performance when they focus strategically on their business processes. This was also the foundation for McCormack s research on the Maturity Model. This model assesses the supply chain processes and produces results on which strategies for organizations to move from poor supply chains processes to best in class (Figure 2.2). The model conceptualizes how process maturity relates to the Supply Chain Operations Reference Framework, which will be discussed further in section The method used to obtain the aforementioned result is usually through surveys. In this research study it will be applied to assess the case subject s stage of maturity. In another journal, McCormack stated that the model is not directly related to supply chain processes but encompasses components related to the definition, measurement, management and control of business processes in general (McCormack et al., 2007). The maturity model is a tool which is used to investigate the relationship between supply chain process maturity and overall supply chain performance. The model consists of five stages, describing an organization s growth towards effective processes and process maturity. With each level of maturity comes an increasing level of predictability, capability, control, effectiveness and efficiency. The first stage depicted in the model is Ad hoc. Ad Hoc is characterized as an unstructured supply chain, without clear targets and process measurement. In the second stage Defined, process performance is more predicable, but often the organization does not achieve defined targets. At both previously described stages supply chain cost are high and job function traditional. The next stage is Linked, linking processes and functional team members to each other sharing common goals and making a supply chain more strategic. Supply chain costs begin decreasing slightly, and targets are often achieved through performance measurement systems. 13

25 FIGURE 2.3 The Maturity Model Source: McCormick 2006 The fourth stage Integrated is an integrated approach towards supply chain management, based on clear performance measurements, advanced supply chain practices and a collaboration between suppliers and customers that leads to collaborative planning and forecasting. McCormack concludes with the fifth phase, which is named Extended or Evolved. Extended is client focused and is based on multi-organizational supply chains, with extended processes and recognized authority throughout the supply chain. McCormack emphasizes that skipping stages is counter productive, for as each stage is a building block for the next. If application of the Maturity Model results in the identification of less developed processes then the next step is to determine what the underlying causes are and what the implications could be for the business processes in question. Other steps should be how these disconnects could be removed, leading to improvement and optimization of the processes from for example defined to integrated. To assess what disconnects relate to the supply chain processes and how optimization should take place the Supply Chain Operations Reference model (section 2.6.2) is applied. 14

26 Section The Supply Chain Operations Reference (SCOR) Model In this section the Supply Chain Operations Reference Model will be discussed giving more insights into how supply chain processes can be optimized. The Supply Chain Operations Reference model, further to be named the SCOR model was developed by the Supply Chain Council and became relevant to this study because it provides an integrated, disciplined approach for supply chain optimization. SCOR utilizes a business process reference model that links process description and definition with metrics, best practice and technology (Elram et al, 1999; see also appendix 1). SCOR is part of the Integrated Business Reference Model consisting of Design Chain Operations Reference Model (DCOR) and Customer Chain Operations Reference Model (CCOR). Worldwide almost 750 companies, mostly American based organizations, use the SCOR model for supply chain optimization. The model is built around five distinct process groups: PLAN, SOURCE, MAKE, DELIVER and RETURN. The Supply Chain Council defined the processes as follows: 1. PLAN; are processes that balance aggregated demand and supply to develop a course of action which best meets sourcing, production and delivery demand. 2. SOURCE; procurement of goods and services to meet planned actual demand. 3. MAKE; these processes include manufacturing of goods to the desired state to meet actual demand. Some organizations find it difficult to visualize and measure a services supply chain (Swartwood, 2006). The author therefore asserts that MAKE includes the workflow combining the goods and labour that will finally result in a service. 4. DELIVER; these processes are used to provide finished goods and services to meet planned or actual demand. Functions related to this process are distribution management, transportation management and order management. Referring to Swartwood, delivery of services is a combined effort of human capital and goods. 5. RETURN; processes related to receiving returned goods. The research study will be limited to the first four relevant processes PLAN, SOURCE, MAKE and DELIVER at level one, given the relevance for the case subject. By definition there are no RETURN processes when services are concerned. Level one refers to the first level of process description. Since strategy development is the main focus, the other levels for example level two, three, will not be described in this research study. 15

27 FIGURE 2.4 SCOR Process Elements The SCOR approach contains elements that are based on basic benchmark steps. Handfield and Nichols Jr (2002) cite Cook who postulates that benchmark analysis contains an effective means of determining the supply chain performance compared to those of other organizations. Comparing practices and procedures from other businesses to the best in class helps identify the necessary improvements to be made. SCOR is based on these general seven steps for benchmark analysis. Figure 2.4 depicts the staircase which is in this research is named the SCOR benchmark staircase for supply chain optimization. The same benchmark staircase will be applied, instead of the original model because of the lower degree of complexity. FIGURE 2.5 General Benchmark Stair Case Source: Supply Chain excellence (2003), Supply Chain Integration (2002) The benchmark staircase will be used combined with some elements of the original SCOR model. In each stage of benchmark the elements will be described. Application of SCOR should result in detecting strategy drivers: Identify As Is situation The As Is analysis uses SCOR elements to describe the existing situation of the company which are: 16

28 Description of internal and external profile, which is used to describe the scope of business. Internal profile first looks at the organization chart, then at the identification of all locations in operation. SWOT; using a simple strengths, weaknesses, opportunities and threats analysis a better understanding exists of the current state of business using the external and internal profile. Identification of suppliers and customers using the 80/20 rule. Suppliers are categorized by the amount of capital spent, while customers are categorized by the company s related earnings. Identify As Is material and information flow. The second step of the SCOR framework is process mapping of existing material flows from suppliers to customers. After mapping these processes a performance spreadsheet is developed measuring the company s performance in each of the four processes, PLAN, SOURCE, MAKE and DELIVER. An organization s material flow is accompanied by an information flow, which according to the SCOR model consists of six SCOR level three transaction types. The third phase of SCOR model maps the information flows, which are purchase order, work order, sales order, return authorization, forecasts-plan and replenishment orders. In general the purchase orders move through: S1.1 Schedule product deliveries, S1.2 receive product S1.3 verify products S1.4 transfer product S1.5 authorize supplier payment The SCOR uses the Staple yourself transaction analysis, that has the objective to collect data from the existing supply chains material flow. Each movement is followed physically from the moment its starts until the moment it ends. This is measured by performance indicators technology and productivity. Technology refers to the information tools utilized to complete the tasks identified in the process step. The next three items on the worksheet are factors in calculating transaction productivity. Productivity refers to three simple metrics: volume, cycle time and yield. Volume is the number of transactions of the primary output over a specified period of time. 17

29 Cycle time is defined in two ways. Event time is the time spent on the tasks from start to finish assuming no lag time. Elapsed time is the actual time that passes from start to finish including any lag time; for instance it could take a material handler one hour to complete all four tasks without waiting time, but four hours in elapsed time. Yield is the number of transactions requiring no rework. It is measured as a percentage of the total. This concept places a value on purchase, work and sales orders that need to be reopened to change or complete data, such as bad addresses, incorrect unit prices or terms, wrong quantities. The As Is analysis is summarized in a performance spreadsheet of which the objective is to collect and analyze key SCOR level two metrics for each location. Supply chain metrics are exemplified by Bolstorff and Rosenbaum (2003) and summarized in appendix Determine what to benchmark Bolstorff and Rosenbaum explain that measuring an organization s supply chain does not only mean measuring KPI s that are important to internal stakeholders, but also important to shareholders and end customers. They state that based upon this assumption a SCOR card matrix must include performance measurement indicators relevant to customer, shareholders and the internal organization. The indicators under which the organization is benchmarked against best in class are for example availability and delivery performance. As mentioned before, an explanation of these metrics are summarized in appendix 4.0 followed by a brief explanation. Application of this framework should result in the mapping of existing processes and in visibility of disconnects between processes. 3. Determine benchmark partners The SCOR card is an instrument which provides such useful comparison. It produces metrics for the company that is then compared against the industry s SCOR card, determining the organization s current competitive position. Competitiveness is determined by positioning an organization at three levels namely a level of advantage, a level at parity and a superior level. Statistically the gaps between the three levels can be measured by calculating the parity gap and the competitive requirement gap. The parity gap is the gap between the industry s average and the company s actual performance. The parity gap is measured by subtracting the actual performance of the company from the industry s average. The competitive requirement gap is 18

30 the gap between the actual performance of the company and the best in class performances. If the comparison results in a disadvantage, then these are presented as negative values. The result of this methodology is the foundation for determining the organizations strategy driver. The abovementioned benchmarking steps are the only ones to be used in this chapter. The other four steps are relevant for chapter 5 where the research results will be presented. In this chapter the information gathered from questionnaires will be discussed. Improvements relative to the benchmark will also be presented. To conclude this segment, literature reviews of SCOR have in general been positive; however the SCOR model contains limitations; 1. Dan Swartwood s adaptation of SCOR (2006) proved the model to be normative for industrial companies. The commonality between manufacturing and services supply chain is the degree of certainty in the chain. Application of the model in a services company may be hampered by the complexity of multiple supply chains. The input of the supply chain might differ depending on the desired outcome, for example for education the output is intellectual. This proved to be a limitation. 2. SCOR does not specifically address sales and marketing (demand management), or research and development, or product development. If the research discovers problems in demand management, further research is needed. Section 2.7. Decision Making Framework In this section all relevant theory described in the previous sections will be contextualized in a decision making framework. Before doing such, first two factors will be described that influence the decision making process leading to the appropriate supply chain strategy. The first factor that influences strategy development is related to supply management. Kraljic (1983) used the comprehensive portfolio matrix to reduce supply vulnerabilities. He explained volume to be the main determinant of a company s bargaining power, because economies of scale yield a decisive competitive cost advantage. For companies with fewer economies of scale, high supplier dependency would apply. Second, the author will refer to McDonald (2006) who adapted 19

31 the Kraljic purchasing portfolio model to remoteness. McDonald proved how Kraljic s portfolio model applies to industrialized countries. He cited Nellore and Söderquist (2000), who rationalized the purchasing portfolio dimension as being experience based. Poor logistics, economies of scale and remoteness will be considered during strategy development. The second factor relates to ownership. Literature research on supply chain management does not specifically address corporate ownership as a factor yielding risk. In the 20 th century a redefinition of the role of the government was needed to expand industrial activity (Jayashankar, 2007). Jayashankar explains that the government should perform the role of facilitator and companies need to endeavor a strategic management approach. The abovementioned factors are included in the decision making framework which will be used to lay down the organization s status quo and develop an appropriate supply chain strategy. The framework contains the Product Positioning Grid (cf Section 2.5), the Maturity Model (cf Section 2.6.1) and the SCOR model (cf Section 2.6.2). For the Product Positioning Grid the product life cycle, contribution margin and product functionalities determine the supply chain strategy that best fits an organization. This is necessary for organizations that have never made their supply chain visible. When visibility is realized then the Maturity Model is needed to determine the stage of development for supply chain processes. The results of the maturity model are then used to determine how this affects operations. Finally, the SCOR model then assists in identifying disconnects. Disconnects which could affect strategy development and execution. In the end the framework must lead to pursuing the existing supply chain strategy which has been determined using the Product Positioning Grid. Other actions of an organization could for example also lead to a change of strategy. In conclusion an organization must consider the factors related to the decision making framework in order to develop a supply chain strategy that best fits its overall business strategy. 20

32 Table 2.1 Decision Making Framework Framework Dimension Factors Source Product portfolio grid Demand Product life cycle, Contribution margin, Product functionalities Ayers, J. Demand and Supply uncertainty Demand and supply Stage of purchasing sophistication, Product functionalities, Economies of scale Kraljic, P., McCormack, Supply Chain Maturity Model Process maturity Process maturity McCormack, SCOR model Performance Process elements, Performance metrics, Government ownership Bolstorff, P., Rosenbaum,., Jayashankar. Decree C-38. Section 2.8. Summary The objective of this chapter was to provide an answer to the central question What are the appropriate instruments for supply chain analysis? To answer this question literature was reviewed on the evolution of supply chain management as a science. Supply chain management evolved along three paths, namely logistics, supply management and value creation. Literature also revealed two dimensions to the supply chain, the demand and the supply sides, that are fundamental for strategy development. The demand side looks more at the demand characteristics of products. The supply side on the other hand looks more at mitigating supply risk. The Product Positioning Grid, the Supply Chain Maturity model, and the SCOR model are appropriate tools to determine a foundation on which a supply chain strategy is developed. The Product Positioning Grid determine which supply chain is appropriate for business, given the services provided to the market, categorizing products as functional or innovative. Applications of their models induce strategic actions for organizations. The maturity model assesses the current stage of supply chain processes, while SCOR identifies disconnects in the existing supply chain. Reviewing these models, it became clear that they are all limited in certain cases. They are normative and apply for industrialized countries; adaptation is required for specific cases. Factors related to supply management and ownership were added to a developed decision making framework. 21

33 CHAPTER 3 RESEARCH METHODOLOGY Section 3.1. Introduction In this chapter the methodology is described that was used to systematically answer the problem statements. Guidance for this research study was obtained from literature by Piet Verschuren and Hans Doorewaard. The methodology must result in strategic directions for the case object. FIGURE 3.0.Topics Related to Chapter 3 Section 3.2. Definition of Research Problem The main problem of the case subject is that the supply chain strategy is unclear. The characteristics have not been laid down properly and also disconnects have not been identified. The research subject, Telesur, is therefore unable to use the supply chain strategically as an instrument to gain competitive advantage. Section 3.3. Definition of Research Purpose The purpose of this research is to develop an appropriate supply chain strategy and determine the current state of the supply chain state. Visibility of the existing supply chain also remains an objective. 22

34 Section 3.4. Definition of Research Strategy A sequential case study is required to answer the central questions, studying first the case subject and then selecting a best in class subject for comparison. Given the time constraint only one research subject was included. Literature will be combined with practice using input from cross functional staff. The staff members are directly related to the case subject s supply chain process elements PLAN, SOURCE, MAKE and DELIVER. Using inductive comparison a supply chain strategy will be developed based on the research results. First, the main observations such as supply chain disruptions and performance management will be validated using interviews. This will be followed by testing against a larger sample size, the information gathered from the one on one interviews. The sample contains 16 employees from 9 departments. The same selected staff members serve as sources of information from questionnaires and information related to material, work and information flow. Section 3.5. Data Collection Primary information will be collected through interviews and observations. Secondary information is available using existing documentation as laid down in chapters 1 and 2. The involvement of the cross functional members is essential, for as the research progresses they will be learning by implementing. The members will be appointed supply chain agents, communicating the objectives, the acquired results and contribution and role to this study, to their subordinates. Except for other information in this research, financial figures were used from the year 2006 as the most recent available figures. Section 3.6. Application of Instruments Understanding the current supply chain characteristics requires a thorough analysis, applying the theoretical framework described in chapter 2. First the Product Portfolio Grid will be used to identify which supply chain strategy is required for each of the product groups. Second, the assessment according to the Maturity Model will depend on the following criteria: state of process - structures, availability of key performance indicators and of functional descriptions. 23