Академический Документы
Профессиональный Документы
Культура Документы
2010 APICS
All rights reserved.
20 10 APlC
All rights reserved.
The APICS CSCP Learning System is printed on 30% post-consumer waste recycled paper.
2010 APICS
All rights reserved.
Course Overview
Welcome to the APICS Certified Supply Chain Professional (CSCP)
Learning System. Whether you are interested in professional development or
are pursuing the APICS CSCP credential, you will find the program to be a
complete, easy-to-use learning and reference tool.
+ Getting Started
Course materials
This course allows you to work at your own pace to increase your understanding
of supply chain and operations management and the APICS CSCP body of
knowledge. It includes four printed textbooks (called modules), which
correspond to the knowledge domains tested on the APICS CSCP exam. The
course also includes online practice tests and learning reinforcement activities.
Please check that you have received the four modules and your access code
(provided to you via e-mail) for the online course components.
If anything is missing or if you have not received your access code, please
contact APICS CSCP Learning System Customer Support at 888-266-9079 or
651-905-2664.
Enrolling in the
course
Before you use the Web components of the course, you must enroll:
1.
2.
3.
Accept the default setting "I am a new user." Click Enroll. Enter your first
name and last name. Create a user name and password between four and
eight characters long. Then click OK.
After enrollment, the access code is no longer needed. You will use your user
name and password to log in, so write this information in the space below.
APICS Certified Supply Chain Professional Learning System
User name:
Password:
Note that your access code is valid for one year after your first enrollment.
2010 APICS
All rights reserved.
Course Overview
Accessing the
program
Once you are enrolled, you can access and leave the program as often as you
wish. To access the program:
1.
Go to www.LearnCSCP.com.
You may exit the program from most screens by clicking Log Out. This
option allows you to leave the program and return at a later time to where
you left off. All current scores and your current place in the tests are saved.
You may start any activity over at any time. Ifyou start over in a test, your
current score is erased. Upon completion of that test, your new score is
saved and displayed on your report.
Online help
Learn more
The APICS CSCP Learning System combines printed material and online
software plus an instructor-led option to enhance your learning
effectiveness. Go to www.APICS.org/cscp to learn more about the
advantages of APICS membership, the power of certification, and the
various learning options.
2010 APICS
All rights reserved.
The APICS CSCP Learning System is based on the APICS CSCP Exam
Content Manual (ECM). Using a blend of printed text and online practice
testing and learning reinforcement activities, the course provides an enjoyable
and complete preparation method for the APICS CSCP certification exam.
You may complete the course in any order. The following describes the
recommended, step-by-step method.
ii
which the question was drawn. If you leave the test, you can reenter it and will
have the option to either continue or restart the test. You may also print any
page by using your browser's print function.
The test is timed to enable you to determine whether you are answering
questions at the pace needed to complete the APICS CSCP certification
examination within the time allotted. If you are interested in timing your test,
allow yourself an uninterrupted block of time.
When you have completed the pre-test, you see a chart that shows your moduleby-module score. You may use this chart to develop a study plan to help focus
your efforts on the modules you need to examine most thoroughly. Use the print
function on your browser if you want to print a copy of your pre-test results.
Demand Planning
Logistics
2010 APICS
All rights reserved.
111
Course Overview
e-Business
Module-specific tests contain 20 questions. You may take as many tests as you
like, as often as you like. After you answer each question, you will know
immediately if your answer is correct or incorrect along with the reasoning for
the correct answer. If you leave the test, you can reenter it and will have the
option to either continue or restart the test. You may also print any screen by
using your browser's print function. The test is timed to enable you to determine
whether you are answering questions at the pace needed to complete the APICS
CSCP examination within the time allotted.
After you have studied each module and taken the module-specific test, complete
the eFlashcards for that module. The eFlashcards are drawn from the glossary and
represent the terms identified as key or supplemental by the APICS Exam Content
Manual. The eFlashcards present a definition of a term, and you supply the term.
You may visit the Information Center to download a printable version of the
module-specific eFlashcards.
2010 APICS
All rights reserved.
After you have studied all of the modules, taken the module-specific tests, and
reviewed the module-specific eFlashcards, complete the eFlashcards across
modules. You may visit the Information Center to download a printable version
of these eFlashcards.
iv
from a different bank than you saw in the pre-test, so all the questions are new.
After you answer each question, you will know immediately whether your
answer is correct or incorrect and will see the reasoning for the correct answer to
help clarifY your understanding. The timing feature allows you to determine if
you are on track to complete the certification exam in the time allotted. If you
leave the test, you can reenter it and will have the option to either continue or
restart the test.
After you finish the post-test, you may view your report, which compares your
pre-test and post-test scores and your scores on questions related to each of the
four modules.
You may take the post-test as many times as you wish until you are satisfied
with your results. Each time you retake the post-test, your last score is erased
and your new score is saved. Your most recent score is available to you on the
report.
At any time, you may view an online report of your progress by clicking the
Report link. The report shows the dates you have completed tests as well as your
most recent pre-test, module-specific test, and post-test scores. You can use this
report to determine where you may have areas of strength or weakness to direct
further studying of the course.
2010 APICS
All rights reserved.
Course Overview
Pre-Test
I
Module 1
Module2
Module3
Module4
ModuleSpecific Test
ModuleSpecific Test
ModuleSpecific Test
ModuleSpecific Test
...
...
...
...
ModuleSpecific
eF!ashcards
ModuleSpecific
eflashcards
ModuleSpecific
eFiashcards
ModuleSpecific
eflashcards
eflashcards
...
Post-Test
...
Report
...
2010 APICS
All rights reserved.
vi
Introduction
There have been supply chains as long as there have been suppliers and
customers, but the evolving discipline of managing those chains for competitive
advantage belongs to recent decades. Even the term "supply chain" came into
common usage only toward the end of the 20th century.
As with many other phenomena occurring in that period of time, supply chains
and their management reflect the revolution in electronic communication and
the shrinking of the world into one global community-what author Tom
Friedman calls the flattening of the globe. There were supply chains when
primitive hunters brought back skins for transformation into garments for use or
trade. Marco Polo went east in search of trade routes to bring raw materials
from "the Orient" to Europe. But the scope, scale, and speed of supply chain
processes have all gathered revolutionary momentum-and businesses around
the world hasten to catch up or, in the case ofleaders like Toyota, Wal-Mart,
and Zara, to stay ahead. Their opportunities result from the flattening of the
global playing field and advances in technology; their discoveries contribute to
globalization and revolutionary technology.
Supply chain management may be a young discipline, but like those other
young disciplines, rocket science and brain surgery, it isn't a simple one. It also
resembles other youngsters in its rapid rate of development. Staying abreast of
the theoretical and practical aspects of supply chain management-even
keeping up with the vocabulary-requires constant attention.
This first module in the APICS CSCP Learning System, Supply Chain
Management Fundamentals, provides basic information that forms a foundation
both for the following modules in the course and for the continuous learning
you will do later to stay current with new developments.
2010 APICS
All rights reserved.
1-1
2010 APIC.
All rights reserved.
1-2
Describe the evolution of supply chain management globally and within companies
Identify specific ways in which supply chain management creates value for customers and
investors (customer value and financial value)
Define globalization and illustrate its impact on supply chain management.
Supplier
Producer
............ Primary
product
flow
Customer
............ Primary
product
flow
2010 APICS
All rights reserved.
1-3
Basic supply
chain: three
entities
Basic supply
chain: four
flows
The flow of physical materials and services from suppliers through the
intermediate entities that transform them into consumable items for
distribution to the final customer
The flow of cash from the customer back "upstream" toward the raw
material supplier
The flow of information back and forth along the chain (also back and forth
within the entities and between the chain and external entities, such as
governments, markets, and competitors)
2010 APICS
All rights reserved.
1-4
Supply chain
example
Manufacturing
supply chain
model
Exhibit 1-2 on the next page at least hints at the organizational complexity that
appears in corporate supply chains by adding a second tier of suppliers and
more distribution centers and customers. Notice that there are suppliers of
services as well as materials. Discussions of supply chains typically put
manufacturing at the center and suppliers of components to the iinmediate left.
It may be that component suppliers are the most crucial consideration when
designing and managing a supply chain for manufactured products, but utilities
and other services are not inconsequential contributors to the cost of operations.
2010 APICS
All rights reserved.
1-5
Information flow
Distributor
Cu stomer
Distributor
Cu stomer
Primary ........
-product flow
Primary
In the case of our lemonade stand, services most obviously include utilities,
transportation, warehousing, carpentry, and cleanup, among others.
Utilities, which are suppliers to all manufacturers, are crucial considerations
when locating plants and warehouses. If water and electricity (or natural
gas, or both) are not available at a proposed site, they cannot be readily
made available.
The exhibit also shows that Tier 1 suppliers have their own suppliers in Tier
2. The grocery store that supplies the lemons and sugar for the lemonade
has its material and service suppliers-and they have their suppliers, and so
forth. The sugar is not a raw material but a product with its own supply
chain that begins in a cane field (probably in a different country) and is
processed in a plant, shipped to a wholesaler, and distributed to the comer
store. No matter how far you travel toward the left, you will never run out
of new tiers of suppliers.
Even a raw material extractor, such as a coal mine, has its own suppliers of
extraction machinery and services. In fact, the coal mine may ship coal to a
generating plant that supplies power to the manufacturer that produces a
machine that is shipped to a distributor that sells mining equipment to the
same mine that began the process; supply chains can double back on
themselves. (Note: The APICS Dictionary, 12th edition, defines a distributor
as "a business that does not manufacture its own products but purchases and
resells these products.")
2010 APICS
All rights reserved.
1-6
Services also
have supply
chains
Although the traditional supply chain model was developed in manufacturing, the
service industry, too, has supply chains. According to the APICS Dictionary, 12th
edition, a firm in the service industry is "in its narrowest sense, an organization
that provides an intangible product (e.g., medical or legal advice)." More
generally, the Dictionary defines service industries as "all organizations except
farming, mining, and manufacturing [including] retail trade; wholesale trade;
transportation and utilities; finance, insurance, and real estate; construction;
professional, personal, and social services; and local, state, and federal
governments."
Service-oriented supply chains also require sophisticated management. Exhibit 13 illustrates, in simple form, the supply chain of an electric utility. It receives
products, services, and supplies of its own and dispenses its services into three
distribution channels: home customers, commercial customers, and other utilities.
Exhibit 1-3: Electric Utility Supply Chain
Fuel supplies
Electric transformers
Home customers
Facility maintenance
""--1Commercial customers I
I Programming services I
Jan.itoria l services
..
The flows in our lemonade stand example aren't quite as simple as might be
supposed, either. The "products" that move through the chain could include
materials, supplies, and the components used in the production of the lemonade.
Information flows may be fairly rudimentary: orders submitted by end users of the
product, by the distributor to the manufacturer, and by the manufacturer to the
supplier. There will be recipes and shopping lists, discussions of potential
demand, perhaps records oflast year's results. The flows of cash may be based
upon information contained in cash register or credit card receipts at the comer
store, mailed (or e-mailed) utility bills, and, of course, the mortgage payments
made on the manufacturing center/warehouse/residence. Quite possibly the utility
bills are paid electronically-a significant improvement in the velocity of that part
@ 2010 APICS
l-7
of the supply chain and a time saver for the accounting department (the mother,
when she pays the bills). Cash travels in several separate flows from the
manufacturer to suppliers of products and services and, of course, to the mortgage
company. There are also logistics concerns: transportation from one entity to the
other-perhaps drawing upon the private fleet of two cars-as well as the
warehousing decisions, which are more likely thought of as kitchen design in this
case. And, finally, the reverse supply chain-you'll read more about that later in
this module and in Module 2-exists to return any unacceptable lemons (or any
overstock), to recycle the peels into a composter, to reuse glasses and other
supplies after sterile cleansing, and to dispose responsibly of any packaging.
Our lemonade business avoids many complexities that confront a profit-making
enterprise. There are no competitors, for one thing, although competition is not
out of the question. Other children in the neighborhood might set up a business
to distribute store-bought lemonade, thus cutting out the manufacturer in the
kitchen and putting the supplier in charge of product design. Another stand
might be set up with "make-to-order" (the product is made after receipt of the
order) lemonade squeezed and sweetened to each customer's taste. There are
also no taxes, no regulations (at least none that the family takes into account),
and no labor contracts. All those complications might loom down the road,
however. Many global businesses began in someone's home office, garage, or
basement with the glimmering of an idea for, let us say, a computer operating
system or a new idea for consumer-to-consumer e-commerce. Perhaps Mom
comes up with a new twist on the old recipe for lemonade; a customer is
impressed and asks the girls to cater a party; someone at the party owns a
neighborhood store or restaurant ... and before long the family has purchased a
processing facility to supply fruit-based drinks to franchised "Thirst-Ade"
stands in three time zones and has direct links to farms around the world for
fresh fruit in all seasons. It's surprising how many challenges and opportunities
confronting the largest corporations and supply networks are anticipated-and
can be seen most easily-in a very simple model.
Notice one last aspect of this lemonade stand supply chain. Unlike many
traditional supply chains involving corporations, this one quite likely included a
good deal of collaborative planning (a process where supply chain partners
jointly plan key supply chain activities) in regard to demand forecasts (predicting
customer demand) and replenishment (replacing material in the supply chain), at
least involving the manufacturer and distributors. Finance may also have
contributed to the plans. Some of the problems that supply chain management
strives to overcome are implicit in a simple model-because the problems have
arisen as a direct result of the massive scale of modem supply chains.
2010 APICS
All rights reserved.
1-8
Summing up
There are many variations on the basic supply chain models presented so far.
Here are some basic points to keep in mind as the discussion continues and
grows more complex.
There are stakeholders outside the basic supply chain model that can
significantly affect its functioning for good or ill. These include, most
significantly, governments that may build infrastructure, enforce
regulations, levy (or forgive) taxes, and in various ways create a climate
in which businesses either thrive or stagnate. Other stakeholders include
the public at large and providers of knowledge, such as universities and
trade associations. (Information flows into a supply chain from such
sources as well as flowing back and forward among entities in the chain.)
Finally, competitors also affect the functioning of a supply chain in more
ways than one. Competition can not only threaten a chain; it can energize
it as well. And sometimes competing businesses directly foster each
other's growth by participation in trade associations and joint ventures.
Whenever a competitor creates an improved product or business process,
the entire marketplace is enriched by the new ideas.
2010 APICS
All rights reserved.
1-9
The definition of supply chain seems fairly solid when you consider the chain as
linked organizations-supplier, producer, and customer connected by product,
information, and payment flows. But the supply chain is more accurately viewed
as a set of linked processes that take place in the extraction of materials for
transformation into products (or perhaps services) for distribution to customers.
Those processes are carried out by the various functional areas within the
organizations that constitute the supply chain. When considered as a set of
processes rather than a succession of companies, the supply chain becomes just a
little more difficult to identify-let alone manage.
In this discussion of key processes, we'll outline one of the more widely known
process-oriented models: the Supply-Chain Operations Reference model. This
model was developed and is maintained by the Supply-Chain Council (SCC), a
nonprofit membership organization open to all interested corporations,
nonprofit organizations, government and military agencies, consultants, and
academicians. We'll also apply a version ofthe process model to service supply
chains, which have received much less attention than manufacturing chains.
But before we look at the model, we'll analyze several definitions of supply
chain management.
Beware of
conflicting
definitions
Not all authors agree on the definition of supply chain, and that can be a source of
confusion. In addition, you may see references to the supply chain that include
only the suppliers. In this view, supply chain management is restricted to supply
management. The rest of the chain (possibly excepting production) is called the
distribution chain and is subject to distribution management. For this course,
definitions of supply chain management (SCM) and related references integrate
the three functions-supply, distribution, and production-linked in a relationship.
Value chain
primary
activities and
the supply
chain
2010 APICS
All rights reserved.
1-10
1-11
APICS
definition of
supply chain
management
And, finally, the APICS Dictionary, 12th edition, defines supply chain
management as "the design, planning, execution, control, and monitoring of
supply chain activities with the objective of creating net value, building a
competitive infrastructure, leveraging worldwide logistics, synchronizing
supply with demand, and measuring performance globally." (Globally, in this
case, can mean either worldwide or applying to the chain as a whole rather
than to a particular entity within the chain.) There is really nothing in this
definition incompatible with others we've explored, except for possible
differences in opinion about what functions are and are not technically part of
the supply chain. Moreover, the APICS definition provides guidance on the
activities and objectives of supply chain management, and the course follows
that guidance.
Explaining all the parts of the APICS definition requires more than a sentence
or a paragraph. (In fact, it takes the four modules of this course to do so in
depth.) But there are a few things to note right away. Supply chain
management is about creating net value; early efforts at managing chains often
focused only on cost reduction-on making the chain leaner. Unfortunately,
these efforts sometimes reduced the ability to create value more than they
reduced costs, for a net negative effect. As we'll see, there's more to creating
value through intelligent management than simply squeezing costs out of one
or another activity in the chain.
The definition also assumes value-creating activities that transcend the
activities of particular entities in the chain-activities, for example, that are
planned and coordinated between two or more entities in the chain. This of
course raises the question of who will manage those activities, since a supply
chain isn't an entity like a corporation with its own management structure.
Supply chains are generally organized by one strong firm called a channel
master or nucleus firm-often a manufacturing firm, sometimes a powerful
retailer. Nevertheless, the chain has to produce value for more than one
stakeholder in addition to generating value for the consumers or investors.
Given the nature of groups, one would expect this to be a challenging task,
especially in "worldwide" chains; think of the rivalries that arise among the 50
United States, the 25 nations in the European Union, the three nations in the
North American Free Trade Agreement (Mexico, Canada, and the United
States), the various sects of any world religion, or the divergent personalities in
an extended family. As in all these other complicated enterprises, managing
supply chains requires a balancing act among competing interests.
2010 APICS
All rights reserved.
l-12
SCOR supply
chain process
model
The Supply-Chain Council (SCC) intends the SCOR model for use by its members
to enhance their understanding of their supply chains and associated processes and
to improve their supply chain performance. The SCC carefully defines the
boundaries within which the SCOR process model applies. Specifically, it does not
apply to all business processes, only to those involved in the supply chain as the
chain extends two tiers in both directions from the company at the core ("Your
Company" shown in Exhibit 1-4 on the next page).
SCOR Version 9.0 does apply to the following activities:
Product development
(SCOR does note some of the many links that can be drawn from processes in the
model to processes outside the model, such as product development. The product
flows from supplier toward customer in the basic model shown in previous
illustrations; that representation assumes that the product has already been
designed and tested for production. Nevertheless, the design of a product may
significantly influence the functioning of the chain, so supply chain representatives
should play a role in the design process, as you'll see in Module 2.)
Because all business activities are related throughout an organization, the SupplyChain Council is hosting efforts to build models of sales, design, and marketing
using the same logic as the model featured here.
2010 APICS
All rights reserved.
1-13
SCOR does not address the following but assumes that they exist:
Training
Quality
As shown at the bottom ofExhibit 1-4, the SCOR model refers to the members of
the supply chain pictured in our earlier exhibits, with slight modifications. At the
center is "Your Company." To the immediate right is the first tier of customers,
which can be either internal or external; to the left is the first tier of suppliers,
which, again, can be either internal or external. The model goes out two tiers in
both directions; the second-tier suppliers and customers are asswned to be
external. But the main focus of the model is on the chain's five management
processes: plan, source, make, deliver, and return. These processes-which are
not traditional functional areas or departments- exist within the member firms of
the chain. According to the SCOR 9.0 model, all five processes are carried out by
the central triad of chain members (which, after all, may be under the same
ownership and upper management). The members at each end of the chain (a raw
material supplier and a retail outlet, for example) perform only two processes (the
supplier's supplier handles only delivery and returns, while the customer's
customer manages only sourcing and returns). While the model focuses on "Your
Company" and two tiers of suppliers and customers, it can be applied to supply
chains containing many linked firms.
Exhibit 1-4: SCOR Supply-Chain Operations Reference Model
Suppliers'
Supplier
I
1
SupplierInternal or External
.---~~------~
Your Company
CustomerInternal or External
Customer's
Customer
2010 APICS
All rights reserved.
There is more to the SCOR model than the five process descriptions and their
relationships as illustrated in Exhibit 1-4. Later in this module we'lllook more
1-14
closely at the way the model can be used to describe, measure, and improve the
performance of supply chain processes in "Your Company." Membership in the
SCC is open to all types of global organizations. Many case studies are
available for download from the SCC Web site, including SCOR initiatives at
Charoen Pokphand, Daikin Europe, KPMG, Siemens, the U.S. Department of
Defense, and the University ofNew Zealand.
Five SCOR
processes
As you can see in Exhibit 1-5 on the next page, the more detailed descriptions
of the five main processes refer to such matters as product engineering,
warehousing, product inventories, and return of defective products.
We'lllook at the SCOR model again in Section C, "Managing the Supply
Chain," to show how it can be used in assessing a supply chain and measuring
progress toward achieving supply chain objectives. For now, take a look at the
descriptions of each of the five management processes in Exhibit 1-5.
The SCOR process model is not static. For example, the fifth process, Return, was
added after the first iterations of the model to recognize the growing importance
of the reverse supply chain, which accommodates the flow of products back from
the end user for replacement, warranty repairs, recycling, or disposal. What we
say in this course applies specifically to Version 9.0 of the SCOR model. We'll
come back to SCOR later when looking at supply chain management practices in
more detail.
The most important point to remember from this introduction to the model is the
focus on processes. Once you orient your strategic planning toward improving
processes rather than functional silos, everything changes. In organizations, the
term "silo" is a metaphor drawn from the large storage silos prevalent throughout
American agricultural communities. The use ofthe term generally implies a lack
of communication and common goals and suggests that each department in an
organizational chart is an individual silo that stands alone, without interacting
with any of the other departmental silos. A simple example of a process focus (not
functional silo) is applying SCOR in planning. You might ask a question such as
"How do we improve the way we make the product?" or "How do we bring
delivery more into line with customer demands?" Some answers will logically
come from traditional supply chain functions. The logistics manager may very
well have an answer to the question about delivery based on either traditional or
innovative thinking about transportation modes and schedules. But an engineer
might have an idea for changing the way the product is manufactured or
assembled to provide more consumer choice for the same cost; a component
supplier, if brought into the design process, might offer a suggestion about
materials that better suit the features that someone in marketing has identified.
2010 APICS
All rights reserved.
1-15
2010 APICS
All rights reserved.
1-1 6
Firms have generally pursued one of two types of supply chain management,
called vertical and lateral (or horizontal) integration. Vertical integration, or
vertical supply chain management, refers to the practice of bringing the
supply chain inside one organization. Henry Ford often receives mention as
an especially successful avatar ofthis approach. In the early days of the
automotive industry, Ford pursued a strategy of owning and controlling as
many links in the automobile supply chain as possible. While this structure
still persists in some companies, it generally went out of fashion as
corporations became vaster in scale and global supply chains became longer.
It's difficult for one corporation to gamer the expertise needed to excel in all
2010 APICS
1-17
Vertical
integration
1-18
Ownership
Management
Marketing/Sales
Finance
their in-house component suppliers. Rather than bringing all the functions
inside the walls of one corporation, large manufacturers and service
providers are now more likely to adopt a lateral supply chain strategy. In a
lateral chain, separately owned firms focus on core competencies such as
extraction or production and deal with each other through discrete
transactions or by longer-term contracts.
The primary benefit of vertical integration is control. A department or
wholly owned subsidiary with no independent presence in the marketplace
can't deal with competitors to sell its components or services at a higher
price. Its operations are completely visible to the parent company (at least in
theory) and can be synchronized with other company functions by
directives from the top. Its schedules, workforce policies, locations,
2010 APICS
All rights reserved.
l-19
Lateral
integration
Once corporate ownership abandons the idea of vertical integration and turns
instead to outsourcing various activities, it loses control ofthese aspects of the
supply chain and has to deal with separately owned companies as suppliers or
customers. Nevertheless, that's been the dominant trend in the evolution of
supply chain management during recent decades in North America and
elsewhere.
Some Japanese companies, on the other hand, favor an intermediate form of
integration called "keiretsu." The APICS Dictionary, 12th edition, defines
keiretsu as follows:
A form of cooperative relationship among companies in which the
companies largely remain legally and economically independent, even
though they work closely in various ways such as sole sourcing and
financial backing. A member generally owns a limited amount of stock
in other member companies.
Among the reasons for relying on a lateral supply chain, the following three
stand out:
2010 APICS
All rights reserved.
1-20
..
Despite the attractions of the lateral chain, however, the fact remains that
synchronizing the activities of a network of independent firms can be
enormously challenging. What each firm gains in scale, scope, and focus, it
may lose in ability to see and understand the larger supply chain
processes-or care about them.
Exhibit 1-7 hints at the complexity of a multi tiered chain- but only hints at
it. As you can see, "horizontal" doesn't quite capture the complexity of the
global supply network with multiple connections around the world and
information shared on networks connected all along the chain.
Exhibit 1-7: Lateral (Horizontal) Supply Chain
Information flows
Primary
product flows
Stages of
supply chain
management
evolution
2010 APICS
All rights reserved.
Primary
cash flows
1-21
These initiatives will generally not be coordinated with one another, however,
and will therefore fall short of their potential for reducing costs, improving
margins, expanding markets, or delivering better products and services to end
users. Exhibit 1-9 provides an illustration of Stage 2 supply chain evolution, the
semifunctional enterprise. Information flow has been improved and functional
areas have been defined-but they tend to perform their functions one after the
other without collaborating on the most effective ways of creating value. There
are as yet no partnerships with customers and suppliers.
Exhibit 1-9: Semifunctional Enterprise
<111141----
~
~
Information ---IJII~
Marketing/
sales
Production
control
Materials/
products/services
<lllllfl----
Payments - - - -
When the nucleus firm concentrates only on improvements within its separate
departments, it may find its efforts wasted through lack of communication. For
example, market researchers and well-trained sales representatives may uncover
market opportunities among current and potential customers without being
provided an opportunity to share this information in a structured collaboration
with product designers. Warehousing may improve cost effectiveness by closing
inefficient facilities but fail to consider the impact of transportation costs.
Instead, transportation (or "traffic") is merely instructed to find carriers to travel
the new routes. Or they may add new machines only to find that the current
workforce is unable to use them properly or they aren't well adapted to the
layout or size of current facilities. Inventory management may reduce the
amount of warehoused stock to bring down costs but fail to consider the
consequences for order fulfillment, resulting in stockouts that drive away
customers. In any case, department managers are likely to continue competing
with one another for shares of the corporate budget without looking for ways to
interact more effectively to bring greater value to the customer and higher
returns to investors. In Stage 2, some functions may be automated-MRP
software, for instance, may put the bill of material in the computer to streamline
workflow. But new software in one department may be incompatible with
current software in other areas. Finally, if savings are achieved by any of these
intrafunctional efforts, management may pass them along entirely in reduced
prices for customers or returns to investors without reserving a portion for
continued improvement of products and processes.
10 2010 APICS
All rights reserved.
1-24
Stage 3:
integrated
enterprise
In the third stage of supply chain evolution, the individual firm begins to focus on
business processes rather than compartmentalized functions. Historically, this
shift in supply chain strategy is associated with the late 1980s and early 1990sthe same time that personal computers were becoming more powerful, reliable,
and affordable. In any firm, however, integration of internal processes through
cross-functional collaboration is an absolute necessity as a prelude to developing
end-to-end supply chain management. Exhibit 1-10 provides a visual
representation of a linked internal supply chain with collaboration between
functions and sharing of information through companywide enterprise resources
planning (ERP) software.
Exhibit 1-10: Integrated Enterprise
Materials/
products/services
~
~
<llllt---- Payments - - - - ; ~
--+
10 2010 APICS
All rights reserved.
1-25
Stage 4: extended
enterprise
Some authorities identify discrete steps between internal supply chain integration
and a fully networked supply chain. This presentation has no quarrel with that
approach but chooses for simplicity's sake to combine those steps into a
continuous process. This approach assumes that the most significant breakthrough
at this evolutionary juncture is the decision to extend at least one business process
beyond the boundary of the individual corporation. When the nucleus firm decides
to collaborate on planning, design, replenishment, logistics, or another business
process with one of its suppliers or customers, the barrier to developing the
extended enterprise from end to end of the supply chain integration has been
2010 APICS
All rights reserved.
1-26
breached. Of course, the process can stop there and progress no further toward the
fully integrated, end-to-end supply chain; without question, real-world supply
chains exist with various degrees of connectivity. Nevertheless, that first step,
because it involves a leap over the reassuring confines of the four corporate walls,
seems like the starting point for a process that can continue all the way toward a
completely integrated supply chain-as illustrated in Exhibit 1-11 .
Exhibit 1-11: Extended Enterprise
Materials/
products/services
....lift----
Payments _ _....,.
The process that may lead to an extended enterprise typically begins with an
exploratory collaboration between a channel master and one or several partners
in the chain-often a manufacturer and one component supplier or a retailer and
one supplier of finished goods. It may involve only one component or product:
the famous collaboration between Procter & Gamble and Wal-Mart began (as
we '11 see later) with diapers. If this first collaboration succeeds, it can lead to a
more fully networked relationship between the first two partners-more
products might be involved, more complete sharing of information across
integrated electronic networks, more formal team building and planning across
corporate boundaries, and so on. And that relationship can become the model
for other partnerships and, eventually, to multifirm collaborations that stretch
from retailer through manufacturer into one or more tiers of suppliers.
On the other hand, the first collaboration can also be the last one if the
arrangement fails to produce positive results for the weaker partner as well as
for the channel master. Early manufacturer-supplier linkages, for example, were
too often the result of coercion by the dominant partner, who was looking for
guaranteed on-time delivery of quality items at a relatively low price. Powerful
retailers, as well as channel-dominating manufacturers, can also exert
considerable leverage over their suppliers, gaining agreement on difficult-tokeep promises in exchange for access to enormous global markets. The more
powerful firm may, for example, rid itself of inventory holding costs by
requiring the suppliers to keep the inventory in its warehouse to ensure that
goods will be available for regular orders and for unexpectedly large orders.
True partnership requires a contract that benefits all stakeholders, including the
end customer, investors, and the immediate partners to the agreement.
2010 APICS
All rights reserved.
l-27
As in Stage 3, the new links forged in Stage 4 depend first of all on a conceptual
breakthrough, not on technology-with the exception of e-commerce. But in
Stage 4, technology enables the extended enterprise to reach fmther, to add new
partners, to move faster in response to market changes, and to operate with
broader scope than in Stage 3. Although technology is deeply embedded in the
extended enterprise, it has been a presence in all phases of supply chain
evolution. In Stage 2, MRP software put the bill of material on the computer,
making it possible to automate some aspects of planning. As software,
hardware, and users all grew more sophisticated, MRP matured into MRP II and
broke through the functional wall between finance and operations-thus
contributing to cross-functional developments in Stage 3 of supply chain
evolution. Building on that progress, MRP II merged with other functional
applications and transformed into ERP, enterprisewide planning software with
the potential to link the entire internal supply chain together on one platform.
After the pioneering work in such business-to-consumer enterprises as
Amazon. com, e-commerce has become a necessary part of all business planning. In
this and other ways the extended enterprise is inherently electronic-networked, in
other words, in every sense of the word. Networking, as a concept, refers to any
kind of links between people or entities; a network of supply chain managers could
meet once a month in a coffee shop to discuss business records scrawled on memo
pads. But in Stage 4, the networked enterprise is built on intranets, extranets, peerto-peer networks, the Internet, or a combination of those platforms. Partners begin
to synchronize their ERP systems across corporate boundaries (as noted earlier in
regard to Stage 3) so they can share data as necessary for their efficient
collaboration. A retailer may, for example, send information from the point of sale
(POS) to suppliers each time a customer purchases an item to trigger production of
a replacement. Dell Computer is able to fill orders taken on the Internet without
keeping its own inventory of machines because customers' specifications are sent
immediately through to component suppliers so the computer can be assembled to
order.
The progression in e-commerce advances predictably (and with increasing rapidity)
from static Web sites describing a firm's business all the way to interactive sites
that allow end customers to order products such as books and services such as
plane tickets and travel packages, to pay online, to track the shipping of their
goods, to communicate by e-mail with customer service in real time, and to
perform other functions related to their purchases. In these Stage 4 e-commerce
channels, electronic communication not only generates new possibilities, new types
of jobs, and advanced skill training; it can wipe out entire echelons ofthe supply
chain. As airlines began to sell their tickets directly online, for example, the need
>9
2010 APICS
All rights reserved.
l-28
for intermediaries such as travel agents and business travel departments rapidly
waned-until there was no need for an intermediary agent or even for a printed
ticket. (At roughly the same time, however, new jobs were generated for security
personnel to check passengers into terminals, and new machines were required to
x-ray luggage. As we'll see, planning for security is as inescapable a part of global
supply chain design as planning fore-commerce.) Behind the scenes of such
consumer-to-business e-commerce, there is also increasing business-to-business ecommerce taking place on wired and wireless networks.
In the global arena, competition no longer takes place only among individual
companies; whole supply chains are now battling one another for customers,
for workers, and for capital in multiple countries across the globe. Cooperation
among companies is integral, in other words, to competition among supply
chains. It just might be a revolutionary development.
Supply chain management, like any other type of business management, aims to
create value. That is easy to say, of course, but not so easy to do. In fact, it's not
even easy to define. "Value" is a concept that has fueled debate for centuries. The
APICS Dictionary, 12th edition, defines value broadly as "the worth of an item,
good, or service." While this merely shifts the discussion from the meaning of
"value" to the meaning of"worth," it usefully includes both goods and services. A
related concept, which is fundamentally important to supply chain management, is
"value added." Adding value to a good or service is the responsibility of each
entity and process in the supply chain. The 12th edition of the APICS Dictionary
offers two meanings for the term "value added," the second of which is more
relevant to this course:
1) In accounting, the addition of direct labor, direct material, and
allocated overhead assigned at an operation. It is the cost roll-up as a
part goes through a manufacturing process to finished inventory.
2) In current manufacturing terms, the actual increase of utility from the
viewpoint of the customer as a part is transformed from raw material to
finished inventory. It is the contribution made by an operation or a
plant to the final usefulness and value of a product, as seen by the
customer. The objective is to eliminate all non-value-added activities
in producing and providing a good or service.
Putting this second meaning of "value added" together with the definition of
"value," we can assume that value can be added at each step in a service-oriented
value chain as well as in a manufacturing-oriented supply chain. Note that "utility"
may not be the only value, or worth, of a good or service from a customer's point
of view. Price, availability, and attractiveness are also values to consider.
Cl 2010 APICS
All rights reserved.
1-29
There are, for one thing, methods of making money that may be forbidden for
social or ethical reasons. Many societies forbid certain activities because the
value they create for consumers or business owners does not justify the harm
they cause the community (which, after all, often includes the owners and
consumers). And this points out the fact that businesses have many
stakeholders-not only consumers and investors but also employees, the
community members at large, and the government as the people's
representative. In the case of global supply chains, multiple communities and
governments may have a stake in the way the business is conducted.
Measuring value
one stakeholder
group at a time
Supply chain activities can be beneficial to one "stakeholder" group while being
harmful to another. When planning any new supply chain activity or monitoring
continuing practices, it is important to identify all the stakeholder groups and
determine the impact the activity will have on each one.
The primary stakeholder in any business activity is the business itself. A
business must be profitable to survive and create value for any other stakeholder
group. A supply chain, however, may touch many businesses, not just one. And
each business will have its own view of the potential value of any particular
activity. As a simple example, a supplier may decide to increase profits by
raising the price of goods purchased by its downstream supply chain partners.
But the resulting negative impact on those partners and on the end customer
may make a price increase unwise.
2010 APICS
All rights reserved.
1-30
Balancing varied
stakeholder
values
2010 APICS
All rights reserved.
1-31
Stakeholder
Values
End customers
Investors
Lenders
Communities
Governments
Employees
Green supply
chain
management
The terms "green," "going green," and "design for green" all refer to another
stakeholder value that has assumed increasing significance in recent years. What
exactly does "green" entail? Green supply chain management (GSCM) has generally
been described as an expansion of the traditional supply chain focus of cost, quality,
and service to include environmental performance. Other, more formal definitions
describe it as integrating environmental thinking (innovative environmental
technologies that provide practical solutions to the environmental problems facing the
global community) into supply chain management and note how it relates to a wide
range of activities from cradle to grave of a product.
The APICS Dictionary, 12th edition, defines a green supply chain as follows:
A supply chain that considers environmental impacts on its operations and takes
action along the supply chain to comply with environmental safety regulations
and communicate this to customers and partners.
No one would dispute that all businesses have some impact on the environment. To
varying degrees, they use resources, produce waste, and emit pollution. And while
supply chains are not necessarily in business to solve global environmental problems,
"green" or "environmental" considerations have become prominent in supply chain
management decisions due to the following.
2010 APICS
All rights reserved.
l-32
Green supply chain management makes good business sense. Green can be used to do
the following.
Drive growth.
Worldwide, there are increasing expectations for organizations to meet broader
social obligations. Organizations must answer questions about how green their
manufacturing processes and supply chain are, what their carbon footprint is, and
how they recycle. Annual surveys of global chief operating officers conducted by
the international consulting firm McKinsey & Company confirm that companies
expect the focus on environmental performance to continue to grow. Fulfilling such
public responsibilities can increase customer loyalty, sustain market share, and
strengthen brand awareness (whereas ignoring them may lead to market decline).
Reduce costs.
Organizations are realizing cost savings by reducing the environmental impact of
their business processes. When a supply chain is reevaluated, from purchasing,
planning, and managing the use of materials to shipping and distributing final
products for environmental performance, savings are often found by implementing
green policies. An obvious example is reduced energy bills from energy efficiencies.
But there are more subtle, less tangible benefits such as reduced employee turnover
because of staff pride and loyalty. Close working relationships with suppliers on
green initiatives can lead to increased knowledge, integration, and cooperation and,
in tum, greater efficiencies and integration in the supply chain.
Increase profits.
Business opportunities abound in green supply chain practices. Eco-friendly
supply chain practices can increase profits with savings in per-unit and
transportation costs and reduce the amount of waste sent to landfills. A
European hardware chain has provided a testimonial about the profits it has
realized from green. Replacing polystyrene trays and plastic packaging for an
item with a slim cardboard box not only provided sufficient protection for the
product but cost less, was easy to recycle, and took less space than the tray,
allowing more units to fit into a shipping container in transport from China.
Cl 2010 APICS
All rights reserved.
1-33
Global financial investment managers have noted that robust analyses of businesses
now often include assessments of environmental initiatives. Without forwardlooking environmental policies and supply chain practices, an organization's
reputation may suffer.
While interest in the green supply chain movement has been mounting in the past
few years, supply chain environmental issues are not a new phenomenon. So how
are organizations, supply chains, and other stakeholders addressing green concerns?
Consider but a sample of environmentally directed supply chain management
practices shown in Exhibit 1-13.
Exhibit 1-13: Initiatives and the Green Supply Chain
Initiatives
Compliance
Examples
Education and
training
Logistics
Efforts are widespread to reduce fuel consumption . There is less use of air
freight ; increased use of rail transport, hybrid road fleets, and sea transport;
relocated warehouses; and reconfigured distribution centers .
Green
manufacturing
practices
Packaging
Organizations are replacing traditional packaging materials with more ecofriendly alternatives.
Sourcing
Innovative
technologies
Information sharing
2010 APICS
All rights reserved.
1-34
Not all supply chains are exposed to the same type or magnitude of environmental
pressures. Certainly, transportation and logistics have expe1ienced high-profile
scrutiny for leaving a big carbon footprint and contributing to the "manmade"
greenhouse effect (the enhancement of the earth's natural greenhouse effect by the
addition of greenhouse gases from the burning of fossil fuels-mainly petroleum,
coal, and natural gas). Yet some would say that many manufacturing operations
have a more significant impact than distribution processes. There's a perception
(right or wrong) that products manufactured and imported from China have a
heavier carbon footprint than those produced locally. Regardless of who are the
laggards or innovators in environmental practices, green supply chain management
is here to stay and adds important stakeholder value.
Supply chains and supply chain processes exist not only in for-profit companies but
also in many nonprofit, charitable, governmental, and military organizations
comprising flows of materials, funds, and information.
The discussion that follows focuses on three types of value that supply chains can
(and must) create: financial value, customer value, and social value.
Financial
value
2010 APICS
All rights reserved.
1-35
2010 APICS
All rights reserved.
1-36
Customer
value
Affordability
The votion of affordability naturally calls up visions of discount bins and dingy
department stores. This is misleading for two reasons. First, almost all products
and services have an appropriate price level, not just items of modest value. (One
2010 APICS
1-37
might suspect that people for whom "money is no object" are generally spending
someone else's money.) There are billionaires who drive pickup trucks, because
that's the vehicle priced right for the quality of transportation they desire. There
are people of modest means who pour substantial portions oftheir net worth into a
Porsche or a Cadillac. Even Porsche is cost-conscious in its choice of outsourced
manufacturing that can speed up or slow down production to match variations in
customer demand. People will pay more for a brand like Porsche-but there is a
limit. The supply chain has to invest in the processes, people, and technology
appropriate to creating a product at the right price. Second, the supply chain
process that delivers items at the everyday low price may itself be of
extraordinarily high quality, since the objective of keeping goods affordable
demands complete efficiency in the supply chain. Competition for this market
drives supply chain managers to develop collaborative design processes that result
in specifications for products of good quality that can be efficiently manufactured
from readily available materials. Efficiency does not generally arise from poorly
trained workers, low-bid suppliers, indifferent design engineers, and halfhaphazard process management.
Availability
For some products or customers, availability is a paramount value and the supply
chain has to be designed to deliver products and services right on time. This may
affect not only the placement of inventories but also the selection of transportation
modes (overnight delivery, refrigerated containers, etc.) .
Service
There is an indistinct line that separates product and service. An automobile is a
product, for example, but it competes with transportation services (planes for long
trips, buses around town). Moreover, the delivery of the automobile to the
customer is wrapped in services-financing, dealer preparation, sales, wananty
agreements, and, perhaps, available repair and replacement services at the
dealership. In recent years, the reverse supply chain, also called the service chain
by some authors, has grown in importance. An effective supply chain management
process will ensure that service issues are incorporated in the product design stage.
Collaborative design will include input from marketing, manufacturing, and
supply to create a product that is easy to repair. At the same time the team will
develop the reverse chain that takes products back for repair, replacement, or
recycling-and is up and running on the day the product is introduced.
2010 APICS
All rights reserved.
Environmental impact
Consumers and customers influence supply chain practices on many levels.
Such is the case with green, as green consumers and green customers often spur
environmental supply chain innovation.
1-38
involvement in quality, health and safety, packaging, delivery schedules, and the
like. Other customers may make market- or contract-driven green demands of
suppliers to address environmental issues. In both cases, the green customer's
requests of suppliers are areas the customer attributes to be the supplier's
responsibility or within the supplier's sphere of influence. And, in either case,
when compared to the vast majority of green consumers, green customers tend to
be more technically focused. Typical examples of green customer concerns are the
technical and economic merits of protocols, policies, and programs or the
feasibility of new or existing technologies in meeting regulatory compliance.
Many environmental concerns and policies do not have the force of regulatory
requirement. In this case, suppliers may not have pressure or incentive to
address environmental issues. Further, small suppliers may not have the
resources. A customer may not necessarily be responsible for a supplier's
activities, other than liabilities for products and services purchased. But the
broad implications of sustainable development, emerging technologies, and
changing social attitudes about. green supply chain practices is an increasing
concern from a strategic perspective in many industries. Suppliers who
disregard environmental issues imply that they are laggards in innovation and
potentially have poor management and control mechanisms. This, in tum, can
expose green customers to risk.
The emphasis on one value or another (quality, affordability, availability, service,
or green) will depend upon the nucleus firm's market strategy. A retailer whose
strategy is to serve a mass market with everyday low prices may have a different
approach to all these values than a manufacturer whose intent is to market luxury
goods at the high end of the income scale. No firm that wants to remain
C 2010 APICS
All rights reserved.
1-39
Social
value
Supply chains are also judged on their contribution to the public and the
governments that (sometimes) represent their wishes. Generally speaking, a supply
chain's contributions to society come from three factors.
2010 APICS
All rights reserved.
1-40
f)
2010 APICS
All rights reserved.
1-41
size of the middle class in developing nations around the world means new
markets for goods and services. Automobiles proliferate on newly paved roads in
China and India, replacing bicycles and pedestrians. Cell phones and laptop
computers are staples of commerce and social interaction around the globe.
More efficient transportation technologies enable the shipment of perishable
and fragile goods long distances. A sign advet1ising "fresh seafood" in a
restaurant in the middle of a continent provides one example. Perishable
produce travels around the globe, making all fruits and vegetables perpetually
"in season." Third-party logistics providers constantly refine their expertise in
packaging and transporting all types of goods through the maze of
international customs and regulations. With the help of these providers,
companies large and small can send and receive goods efficiently and securely
around the world.
Broadband transmission through the Internet facilitates the outsourcing of
services once geographically restricted by the time required for mailing
documents. X-rays can be analyzed and returned in a country half a world away
from the patient. Computer "help desks," similarly, can be located anywhere
that has the infrastructure. Some countries even specialize in providing complex
medical procedures to patients who fly from distant lands.
A combination of factors makes this possible at a competitive price. When a
multinational company flies its employees to another country for medical
procedures, the transactions involved exemplify new markets, new resources,
and new pools of labor made possible by the "interdependence of economies."
The
challenges of
globalization
2010 APICS
All rights reserved.
1-46
dramatic changes in the scale of global supply chains is probably the top reason
that supply chain management and logistics have now become boardroom and
CEO level concerns in most companies." As one global supply chain runs
leaner and faster, others will have to slim down and catch up.
The same issue of The Supply Chain Digest Letter contains advice about how to
meet the challenge of global supply chain management. Specifically, it describes
"The 10 Keys to Global Logistics and Trade Management Excellence."
1.
2010 APICS
All rights reserved.
1-47
2010 APICS
All rights reserved.
l-48
Define "corporate strategy" and "supply chain strategy" and explain the need to align the two
strategies
Explain the strategic importance of customer focus and the demand-driven supply chain
Outline the elements that must be present to support alignment of supply chain and corporate
strategy, including organizational design, supply chain processes, global metrics, technology
and systems, and people
Explain the need to be able to alter or abandon strategies in reaction to specified changes in
the business environment or in the business itself
List supply chain competitive priorities and explain the importance of each to the future
direction of supply chain management
Define enterprise resources planning (ERP) and identify the issues to resolve when designing
an ERP system
Outline risk management strategies that focus on security and continuity of operations.
There's a kind of magic in some words, "strategy" and "strategic" among them.
Place "strategic" in front of the name of any business process and suddenly that
process acquires an aura of great importance. Strategic sourcing sounds so much
grander than mere sourcing (let alone procurement). Strategic objectives cry out
to be achieved in a way that simple objectives do not. Strategic planning sounds
considerably more sophisticated and powerful than plain old planning.
There's a reason those words have such power, and it's not mere rhetorical
bluster. Strategy, originally a military term, is how generals marshal all
available resources in pursuit of victory. Strategy wins football games and chess
matches- or loses them. Corporate strategy, if intelligently conceived and
masterfully carried out, governs all of a corporation's processes and brings it
success in the global competition for markets.
And if corporate strategy is, like military strategy, the marshaling of all
resources, then it becomes clear that the corporation's supply chain (SC) can be
its most potent strategic resource. Designing and building the right supply chain
may just be the most powerful way to gain an edge on the competition, to move
faster, deliver more value, and be more flexible in the face of both steady
change and surprises. From that perspective, supply chain strategy is corporate
(f
2010 APICS
All rights reserved.
corporate and supply chain thinking than the noun "strategy." The noun implies
something static. In a world of whirlwind change, the adjective may just be a
little more practical and even more magical. The strategic thinker stands ready
to seize whatever opportunity arises, to make whatever change is necessary, in
pursuit of an underlying goal or even a vision. The strategic thinker will, in fact,
drop an underperforming strategy at a moment's notice when chance delivers a
new opportunity.
When a young fellow named Bill Gates talked IBM into letting him keep the
rights to develop his own markets for his quick and dirty operating system
called DOS, IBM thought that was all right. They had a strategy for selling
hardware. DOS just made the hardware run. Gates built the software engine for
IBM, but he was thinking strategically-looking at every situation for the
hidden possibilities. IBM didn't see the wider world of software development
independent of their metal boxes. They missed a huge strategic opportunity;
Gates saw it and seized it. By the time IBM caught on and developed OS/2, it
was too late to catch Microsoft. The rest, as they say, is history; or maybe it's
magic.
In this section, we'll explore some fundamental aspects of corporate and supply
Collaboration
+Corporate Strategy
In its definition of strategy, the APICS Dictionary, 12th edition, tells us that "the
strategy of an enterprise identifies how a company will function in its
environment. The strategy specifies how to satisfy customers, how to grow the
business, how to compete in its environment, how to manage the organization and
develop capabilities within the business, and how to achieve financial objectives."
How hard can that be?
1-52
Goals of
corporate
strategy
Let's begin parsing that definition with the part about satisfying customers. The
main point to keep in mind is this: Whatever strategy the corporation adopts to
satisfy customers, grow, compete, organize itself, and make money, the supply
chain has to operate to further those goals. To give a simple example, if
customers are clamoring for deeply discounted prices on durable, high-volume
goods with stable demand, a supply chain strategy that invests heavily in speedy
delivery is very likely to be wasting the corporation's money. (However, with
supply chains eve1y decision takes place within a matrix of decisions, so you
can never say never about any individual strategy. Speedy delivery might
somehow fit in with a successful overall approach. But the focus of investment
seems likely to be off the mark in the example.)
A supporting point to keep in mind is this: Unless a supply chain is vertically
integrated within one company, it will contain a number of independent
organizations, each with its own goals, processes, operations, technology, and
strategy. So, when we refer to the necessity of aligning supply chain strategy
with corporate strategy, we have to be specific about which corporation's
strategy we mean. In general, the reference is to the strategies of a channel
master or nucleus firm. Traditionally, that's the manufacturer of a product-the
company that sits right at the center of the chain (or network) with suppliers in
tiers on one side and customers on the other. But the dominant firm, with the
dominant strategy, may instead be a large retailer, in which case the strategies
of the supplier-manufacturers have to align not only with their own corporate
goals but with their customer's corporate and supply chain strategies. The
suppliers of suppliers also have strategies to be brought into alignment. Finally,
the strategies, once aligned, have to do two things: serve the end customers'
needs and be profitable for the chain as a whole and each company individually.
Strategy:
customer
focus and
alignment
When it comes to supply chains, it's what's good for the customer that countsnot what's good for the nucleus company or even what seems to be good for the
supply chain itself. Supply chain management ought to be all about giving the
final customer the right product at the right time and place for the right price. It
isn't necessarily about the most advanced product or service, nor is it always
about the lowest price, the fastest time, or the most convenient place. It's about
the balance of quality, price, and availability (timing and place) that's just right
for the supply chain's customer.
Is determining what's right in all those measures easy? Well, no, of course it isn't.
And achieving all those values wouldn't be easy, either, even if they were
completely obvious, which they seldom are. Only two things are obvious. First,
serving the end-user customer is the primary driver of supply chain decisions.
And, second, the organizations in the supply chain have to make a profit and stay
2010 APICS
All rights reserved.
1-53
in business to serve the customer. Design engineers-or, better yet, design teams
from across the network--design products that are right for the end customer (and
can be sold profitably). Market research looks for the true, and not always
obvious, needs in potential consumers that the supply chain can be engineered to
satisfy profitably. Logistics strategy begins with data about customer demands for
availability--of materials, components, service, or finished products, depending
upon the customer- and then it looks for ways to move products in a costeffective way with acceptable risk. Decisions are never just about product features
or just about price or just about speedy delivery. They are about the right features
at the right price on the right schedule. DOS was not a great operating system; it
was just the right operating system for the time and the market.
As we saw in the previous section, there are other stakeholders who also have to
be brought along for the ride. In fact, "customer" is a complex concept in relation
to supply chains, because there are multiple customers with different stakes in the
process. When we talk about customer focus, we mean the end user, the consumer
of the product. But only the retailer actually sees the end user and has a direct
relationship with that person or entity. Everyone else in the supply chain has a
more immediate customer just downstream to our right in the supply chain
diagram. If the supply chain is completely aligned in its focus on the end
customer, then, at least in theory, serving the customer just to an organization's
downstream side would automatically serve the end user and also be in the
supplying organization's best interest as well as the interest of investors.
Moreover, within each supply chain partner there are internal "customers" whose
needs also must be aligned with corporate and supply chain strategies. Each
manager must understand his or her role in making the supply chain profitable,
and staff, too, must be rewarded, motivated, and trained in alignment with the
needs of the supply chain's end customer. The society at large and the government
that (sometimes) codifies social value in its laws and regulations must also be
served. Ultimately, what's good for the supply chain is good for the customer,
within the limits set by those other stakeholders. But achieving that happy
alignment of all strategies along the chain requires strong leadership, constant
attention, and, perhaps, a little magic.
Consider the case with green supply chain management. By many accounts,
successful green supply chain management requires a very strategic mindset,
involving numerous personnel and financial resources and a commitment from
suppliers from first to lower tiers of the supply chain as well as consumers further
up the supply chain. There needs to be cooperation between different departments
in a company (e.g., purchasing and environmental or design departments) and
collaboration between the different departments within a company and their
2010 APICS
All rights reserved.
l-54
Strategy:
forecastdriven
enterprise
2010 APICS
All rights reserved.
1-55
How well does this work? Let's say you don't want to be placing large bets on the
accuracy of all those forecasts. Here's what happens:
The distributor forecasts demand based on past orders from its retailers. Now,
those demand patterns have a wider variability than the demand pattern at the
retailer's checkout counters. Why? Because of that safety stock. Sometimes
the safety stock accumulates because demand is less than the forecast, and this
means that the retailer's next order is for less than its forecast-or perhaps it
doesn't have to order at the usual time at all, because it has a glut of diaperswhich it probably sells off in a promotion. The upshot of all this is that the
small variations in end-user demand are magnified at the distributor.
Up the chain, the manufacturer of those diapers looks at the demand pattern
from the distributor and makes its own forecasts, which show an even wider
swing in variability.
And (you get the picture) so it goes up the chain with ever-wider swings in
variability until it hits that cotton farm.
This pattern of variability is called the bullwhip effect, and it affects all manner of
supply chains that are based on serial forecasting by each independent division or
firm that touches the product as it travels from raw material to finished retail item.
If you imagine snapping a bullwhip and watching the ripples widen as they move
away from your hand, you can picture the trend line of the supply chain's
bullwhip effect. Exhibit 1-15 provides a different sort of graphic representation of
the bullwhip effect. The snakelike ripples aren't graphed, but the increasing
distortion in demand patterns is described as it moves up the chain from the retail
customer toward the raw material supply.
2010 APICS
All rights reserved.
1-56
...
1' actory
.
@
.
...
"
Di tritutor
us to mer
Strategy:
demanddriven
enterprise
2010 APICS
All rights reserved.
1-57
In the demand-driven chain, no product is produced until an order comes inmoving the "push/pull frontier," as it's called, back up the chain at least to the
plant. Instead of producing to the forecast and sending finished products to
inventory, the production process doesn't begin until information comes in
based on sales. There is, in other words, no fixed production schedule in a
strictly demand-driven supply chain. Product is turned out only in response to
an actual order, "on demand," in other words. Note however that on the supplier
side of the plant forecasts still determine delivery of raw material. The art of
forecasting remains crucial, even in a demand-driven chain.
The challenge in changing from forecast-driven to demand-driven, from push to
pull, is reducing inventory without also lowering customer satisfaction. When a
demand-driven system is set up and managed properly, it can actually enhance
customer service while reducing costs. But stockouts are a risk. As always with
supply chains, the decision to switch to a demand-pull process trades one type
of risk for another. In the forecast-push process, the risk is related to the buildup of inventory all along the chain. Not only does inventory cost money while it
sits in a retail stockroom, distribution center, or preproduction storage area; it
runs the risk ofbecorning obsolete or irrelevant for a number of reasons. In a
world of rapid innovation, inventory obsolescence is a very real threat. Cisco
Systems, for years an exemplar of successful and innovative supply chain
management, had to dispose ofUS$2.25 billion worth of useless inventory
when the dot-com bubble burst at the beginning of this millennium. All those
season close-out sales you see in clothing and department stores are a way of
clearing out the overstock. Bookstore remainder tables (which are much less in
evidence than they were a decade or two in the past) are a sign of inventory
overhang caused by failed forecasting. Magazine distributors used to destroy
huge quantities of monthly magazines 12 times a year when they came back
from retail outlets. Those are the results of producing to forecasts no one trusts
and purposely overstocking to be sure of meeting unexpectedly high demand.
The risk in the build-to-order model, on the other hand, is that orders will begin
to come in above capacity and all along the chain there will be expensive
activity to run the plant overtime, buy more and faster transportation, or sweettalk customers into waiting for their orders to be filled or substituting a different
product. (Running short of stock is also a risk in the forecast-driven chain.
Forecasts can be wrong in either direction. That's why the safety stock builds up
at each point where orders come in.)
Building a demand-driven enterprise can require significant changes in all
supply chain processes.
2010 APICS
All rights reserved.
1-58
'
Agility
Because the inventory buffers leave the supply chain, the trade partners
need to develop agility-the ability to respond to the variability in the flow
of orders based on sales. The plant, for example, may have to undergo
considerable change if it has to produce several different kinds of products
under the new circumstances. When building to forecast, a plant can run a
larger volume of each product to send to inventory. But when building to
order, the plant may have to produce several different types of products in a
day. There will be no room for long changeover times between runs of
different products; therefore, equipment, processes, work center layouts,
staffing, or siting-or all these things-may have to change to create the
capacity required to handle the new system.
2010 APICS
All rights reserved.
1-59
To return to the simple model ofthe lemonade stand, make-to-forecast might mean
that Mom mixes a batch of lemonade just before the stand opens based on the
number of customers from the previous day. (That would be a "naive forecast," as
you' 11 see in Module 2.) If the forecast is wrong-say, the weather turns bad
midway through "business hours"-there will be leftover lemonade, which most
likely won't be problematic unless the operators drink too much of it and spoil
their appetites. The other possibility is that demand will overwhelm supply and
perhaps Mom has gone to pick up big sister at soccer practice and customers go
away thirsty. With forecasts being so unreliable, the lemonade stand proprietors
might decide to switch to a make-to-order schedule. After each sale, they could call
in to the kitchen to update the lemonade manufacturer, who would probably want
to keep a few glasses ahead. Inventory could be made much smaller, if not
eliminated. The drinks might be a bit fresher. There would be a tradeoff in cost,
however, because more trips from kitchen to stand would be required.
(Transportation and warehousing always have to be balanced.) Raw materialslemons, sugar, water-would still be purchased on forecasts, since running to the
comer store for more lemons would be wasteful of time and money. The sisters
might also decide to move part of production closer to the customer by adding
sugar to taste. But "postponement" is another topic for Module 2.
Strategy:
number of
supply chains
When we're drawing pictures of supply chain models, it's customary to assume that
one chain connects each partner to the next. In fact, one firm can have more than
one supply chain, depending upon the number and type of products that are passing
along the chain and other variables. For a product with a complex bill of material
(many parts that combine into many components to make the final product), a
manufacturer may be bringing in materials from many suppliers. And these
materials might range from low-priced commodities to fragile or sophisticated
materials that require special shipping and handling. Suppliers might range from
small specialized firms to raw materials giants larger than the manufacturer. Some
are key accounts; some might be occasional buyers . The finished products may be
sold through several very different channels-e-commerce, printed catalogs,
commercial, and retail. These variables may combine in different ways, each
suggesting its own type of supply chain strategy. We'll consider some effective and
ineffective alignments of supply chain types and product variables.
In "What Is the Right Supply Chain for Your Product?" Marshall L. Fisher
distinguished two types of products that call for different supply chain strategies:
functional and innovative. They differ as follows.
Functional products that change little from year to year have longer life cycles
(perhaps more than two years), relatively low contribution margins, and little
l-60
variety. Because demand for them is stable, they are fairly easy to forecast, with a
margin of error in the 10 percent range, very few stockouts, and no end-of-season
markdowns. The appropriate supply chain for these products should emphasize
predictability and low cost with performance indicators such as the following:
Product design that strives for maximum performance and minimal cost
Excess buffer capacity and significant buffer (or safety) stock of parts or
finished items
Suppliers chosen for speed, flexibility, and quality (rather than cost)
The key performance indicators for each supply chain differ because of the
product characteristics. Aggressively reducing lead times, for example, is
appropriate for innovative products but would be irrelevant for functional
products that can be manufactured and delivered on predictable schedules in
high volumes. Inventory reduction makes good sense as a performance
indicator for supply chains if the product is functional but not if it's
innovative. Because margins are low on functional products (those markets
tend to be very competitive), cost reduction in the supply chain is essential.
Innovative products, on the other hand, with their high margins and
unpredictable demand, justifY extra expense for holding costs. (Fisher also
proposes, however, that manufacturers of innovative products can look for
other solutions to the problem of unpredictable demand, such as aggressively
2010 APICS
All rights reserved.
1-61
reducing lead times and producing products to order rather than for
inventory.) The same class of product, the author argues, can be either
innovative or functional. Automobiles fit that description, with a low-priced,
no-frills car like a base model Chevrolet Cobalt or Hyundai Excel
representing the functional end of the spectrum and a Porsche representing the
other end. Similarly, coffee can be functional- as anyone who has worked in
an office knows, in which case it should be available quickly at a low price
with perhaps cream and sugar as options. At a high-end coffee shop, on the
other hand, patrons are willing to endure longer lead times and pay more
money for their coffee, but they want variety in return.
The idea that the same type of product can be either functional or innovative
implies that one company might have more than one supply chain. And that's
the contention of Jonathan Byrnes, a professor at MIT. Writing in the Harvard
Business School's Working Knowledge, Byrnes asserts that one supply chain
is not enough; two, three, or more would be preferable. "One size fits all"
supply chains may have been sufficient in the past, he believes, when that was
the competitive norm, but new information technology makes it possible to
have multiple, dynamic chains that can accommodate different product and
information flows.
Byrnes breaks products into three categories: staples, seasonal products, and
fashion. Much like Fisher's functional products, staples (white underwear is
Fisher's example) have steady, year-round demand and low margins. He
advises stocking them only in retail outlets in small quantities and
transporting them in truckload quantities. (A full truck, as you'll see in
Module 2, is more cost-effective for the shipper than a partially loaded
vehicle.) Fashion products are like Fisher's innovative items with
unpredictable demand. Zara, the Spanish clothing manufacturer mentioned
earlier, has two supply chains, one for staples and the other for fashion
clothing. To get the fastest response time, Zara uses European suppliers for
the fashion items. But for the more predictable demand items, it uses eastern
European suppliers that have poor response time (not a concern) and lower
cost. In addition to varying the supply chain by product type, Fisher
recommends several other variables to consider-store type and time in
season or product cycle. Demand varies considerably over the life cycle of
many products. The same item might have infrequent demand at first, more
stable demand in its maturity phase, and falling demand at the end of its life
cycle. With more than one supply chain, the nucleus firm can move its
products from one chain to the other in response to changing variables, such
as type of channel or life-cycle stage.
2010 APICS
All fights reserved.
1-62
Supply chain
verSUS SUpply
chain?
Let's look at the different ways in which experts interpreted the SC vs. SC
idea first and then see why supply chains literally cannot be competitors in
some industries.
Three ways to
compete with
supply chain
strategy
While most of the assembled experts believed that, indeed, the future belongs
to competing supply chains, analysis of their responses revealed considerable
divergence of opinion about the meaning of the terms used in the description of
competing supply chains. As the authors point out, if we're not all speaking the
same language in these fundamental matters, we can get ourselves and our
supply networks out of alignment.
2010 APICS
All rights reserved.
1-63
When we talk about supply chains competing against other supply chains, we
might be referring to any (or all) of the following situations:
Almost equally popular was the view that competition will be carried out
between, or among, individual companies on the basis of their supply chain
management capabilities. This sounds like a subtle difference from the
literal view, but it does have application in the real marketplace of
competing companies. One company, while it might not be entirely distinct
from another in its choice of suppliers, for example, might still excel in
some area of supply chain management, such as array of product choices,
reliability, or price based on the skill with which the company integrates its
2010 APICS
All rights reserved.
1-64
2010 APICS
All rights reserved.
1-65
Limits on SC vs.
SC competition
The Rice and Hoppe view of supply chain vs. supply chain competition offers
support for the idea that there are not universal supply chain models and that the
best configuration for any firm is the one that conforms to its corporate strategy.
But it also reinforces a cautious view about the current and future possibilities
for supply chain vs. supply chain competition in the literal sense.
Here are some of the limitations they envision:
2010 APICS
All rights reserved.
1-66
When one partner invests in its suppliers to build a partnership that brings
unique value to their shared customer, it may be investing in capabilities
that also benefit competitors who use the same supplier.
The authors also point to some perhaps even more daunting limitations.
Industries with a small number of dominant suppliers do not provide fertile
ground for coordinated supplier-customer relationships. Supply networks, when
they do form, may lack the central authority necessary to mount a campaign
against competitors-unless they are vertically integrated chains under unitary
corporate ownership. Finally, the authors cast doubt upon the practical benefits
of coordinating a chain across more than three tiers--one tier upstream and one
down. Going beyond those boundaries, they believe, creates a complex,
inflexible system.
Nevertheless, true supply chain competition may still be feasible in a limited
number of situations-when the competitors are vertically integrated, when the
companies in the chain have sole-source suppliers, and in fragmented industries
with suppliers wholly dedicated to one or another chain. And beyond that,
competitors will still depend upon their supply chain strategies to differentiate
themselves and realize their goals. It's just not quite as simple a proposition as
the common wisdom might make it seem.
Building
collaborative
relationships
Building blocks of
collaborative
relationship~
2010 APICS
All rights reserved.
1-67
Features and
benefits of
collaboration
Clearly visible sharing of both the benefits and the burdens of the
relationship
Benefits
Lower costs
Improved quality
Better customer service
Reduced inventories
Rapid project results
Reduced cycle times and lead times
More effective working relationships
Enhanced commitment to one another
2010 APICS
All rights reserved.
1-68
Management
tasks
The first task for managers who wish to build collaboration is to designate
relationship goals and plan the steps necessary to reach them. Managers should
begin this process by determining the specific contribution of each party and the
criteria for measuring that contribution. Obviously, total profits should be one
of the criteria, but there should be other specific measures, including
nonfinancial contributions. The criteria should be flexible enough to allow each
party to use innovation to meet its goals. In early stages, relationships should
emphasize equity in profits among all parties. Equity will help motivate all
parties to work toward the good of the whole.
The second task is to define roles for each party, taking care to avoid redundant
efforts. Conflicts can occur if these roles make one party more dependent upon
another than they wish to be. To alleviate this common problem, networks should
avoid sequential interdependence, in which the second party cannot begin work
until the first party is done. Instead, they should establish reciprocal
interdependence, in which the exchange of tasks and services occurs in both
directions. Examples of this include CPFR (collaborative planning, forecasting, and
replenishment). Although mutual interdependence is more complex to manage, it
can also provide much greater rewards.
Since no contract can cover all contingencies, the third task is to create a policy for
resolving conflicts. If a conflict is serious enough to require amending the contract,
negotiations to do so should include all affected parties. Many firms prefer to
resolve differences through informal negotiation rather than by revisiting the
contract. All parties to the contract should agree upon a plan to govern such
negotiations to ensure that they aren't too informal. The plan should call for regular
meetings among key managers and cross-enterprise teams, and it should include
guidelines for referring problems to the highest level necessary to resolve the
conflict. Either the contract should specify how finance and IT establish rules for
transactions, or a policy and procedures guide should do so. Contracts, policies,
procedures, and informal conflict resolution must be sensitive to cultural
differences. In the United States, courts can resolve conflicts without detriment to
long-term relationships among parties to a contract. The opposite is true in most
Asian countries.
Finally, managers must stay involved after the design phase. The best design will
fall apart if not constantly maintained, and top management must not abdicate its
responsibility for adhering to the collaborative arrangements. Without management
commitment, each party tends to revert to its own self-interests. Weaker parties in
the relationship may bear the brunt of problems; without an effort to maintain
equity, the relationships will tend to fall apart. The design's benefits and flaws will
be easier to see if monitored, and managers should continually adjust the plan in
response to any problems that arise in practice.
2010 APICS
All rights reserved.
1-69
Barriers to
collaboration
Suboptimization
When supply chains are not truly connected at the planning level, each part
of the supply chain will work to maximize its own profits or to increase
other measures at the expense of the supply chain partners. When this
occurs despite the recommendations of a holistic optimization tool, it is a
double loss because the investment in global planning is being put to waste.
For example, when a product is available in limited amounts, retail orders
must be monitored across the chain. If each store is allowed to determine its
own order quantity, the result might be overstocking of locations that order
early and stockouts elsewhere. Transportation costs are another area
commonly suboptimized.
2010 APICS
All rights reserved.
L-70
that can be built. If the firm is not willing to invest in a technical and social
change process, the only alternative may be to find a more willing or able
partner who can keep up with the network's collaboration curve.
Technology barriers
When potential partners have incompatible systems, it increases the
difficulty of sharing data, especially when one or more companies uses very
old legacy or ERP systems that do not adapt well to the newer integration
solutions such as business process management (BPM), discussed in
Section A of Module 4, or Web services, discussed in Section D of Module
4. Incompatible and/or antiquated hardware infrastructures can also prove a
barrier to collaboration.
Power-based relationships
Rather than building relationships based upon trust and mutual benefit, the
nucleus firm may use its leverage to dictate the te1ms of relationships to the
other members. While the profits of the nucleus firm increase, other
members of the network may suffer losses. When this occurs, the
disadvantaged partners may rebel. Resistance may result in redundancy,
loss of overall profitability for the chain, or an actual reversal of the power
relationship. Once in power, the mistreated party may retaliate instead of
using the opportunity to develop equitable relationships along the chain.
Underestimated benefits
When collaboration is seen as another type of process reengineering, the
partners generally measure the results in reduced cost and cycle time rather
than return on investment (ROI). Simply measuring efficiency increases
will fail to see some of the true long-term benefits of collaboration. This
may lead managers to reject a collaborative venture based on a failure to see
such gains as removal of reduplicated efforts, enhanced innovation, and
better use of total system assets and processes.
Culture conflicts
Cultures tend to be egocentric and thus tend to resist external collaboration.
They feel that their ways are the best ways of doing things and will often
reject a different way without even considering it. Culture conflicts are
increased when each company relies on its own sources of information and
is unable to see the impact of its choices on other areas of the network.
When companies don't see the negative results oftheir actions, they can't
learn from their mistakes.
2010 APICS
All rights reserved.
1-71
Levels of
communication
Communication between partners can take place on different levels; not all
collaborations depend upon the same degree or intensity of communication.
We'll consider four levels of communication.
2010 APICS
All rights reserved.
1-72
Levels of
collaborative
intensity
Strategic importance
The primary sourcing consideration is the strategic importance of the
product or service. If the company cannot afford to make mistakes, it should
produce the item in-house, even ifthis is more expensive. If the company
lacks internal capability, it should form an alliance with one or more firms
that can make the item or perform the service. Multiple sources provide a
backup. Commodity products, by contrast, are widely available and have
little strategic importance and should be purchased at arm's length at the
lowest available price. This includes modular products and overhead items
such as electricity.
Complexity
The next factor is the complexity of the item and of the process steps
required to produce it. Strategic alliances may be needed for very complex
items simply because of the level of collaborative planning needed to get
the item right in the necessary time frame. Examples include military
technologies such as missiles. Many contractors may need to form strategic
alliances to get all of the components to work together and to provide the
appropriate level of security. Airplanes also require alliances for many
major systems, although minor systems can be sourced through lower-level
relationships.
Number of suppliers
The number of suppliers available for a product or service will also
determine how much the company should escalate the relationship. When
very few or only one supplier is available to produce the specific
component or good required, the company may need to form a strategic
relationship in order to guarantee continued availability of the item. For
example, Canon is one of the only producers of high-quality engines
2010 APICS
All rights reserved.
l-73
suitable for use in laser printers, so HP has a strategic alliance with them for
this part even though the two compete on printer sales directly. Focusing
only on price or time to market with such a supplier would be a mistake.
Uncertainty
Finally, uncertainty is a primary concern in building relationships.
Uncertainty is the risk that the good or service may not be available or
may have strong fluctuations in price or quality. Even if there are
hundreds of suppliers offinished lumber on the market, there may be
great variability in quality and in precision of milling. If a manufacturer
that uses this lumber advertises its superior quality of lumber as a selling
point, then it is well advised not to simply buy at arm's length but to
develop a partnership with one or more suppliers who can meet these
stringent levels of quality. They may be able to have a middle-level
relationship or even purchase on a private exchange if such a service
provides prequalification as a value-added service, however.
If an item combines more than one of these categories, such as few suppliers
and uncertainty, then the need for higher collaborative intensity is stepped up
quickly. Strategic importance can be considered one part of the perspective,
while the supply chain challenges of complexity, number of suppliers, and
uncertainty can be grouped together to form a second perspective. Exhibit 117 shows how this creates four basic categories of goods.
Exhibit 1-17: Strategic Impact Versus Supply Chain Difficulty
Low Supply Chain
Difficulty
Low Strategic
Importance
Commodity
materials
Bottleneck materials
High Strategic
Importance
Leveragable
materials
Direct/core
competency materials
As mentioned before, cost reduction is the priority for commodity items. These
items are best purchased at arm's length. Bottleneck materials are also of low
strategic importance, but efforts must be made to ensure that the need for these
items is fulfilled. Therefore some level of ongoing relationship may be called
for. Items of high strategic importance but low difficulty levels call for
collaboration to maximize both cost savings and reliability through means such
as bulk purchasing by multiple members of the supply chain. Items of high
2010 APICS
All rights reserved.
1-74
strategic importance and high difficulty call for strategic partnerships to ensure
availability and quality.
Sometimes firms do not heed these factors and end up buying at arm's
length to get the lowest price for items that are critical in one or more of
these ways. Sometimes the cost of the process of checking goods for
defects or repairing them or for resolving problems with customers after
resale is quite a bit higher than the cost savings found by switching from
supplier to supplier. Some damage to reputation may be irrevocable but
hard to measure. Companies must add these costs to the cost of the product
when determining how much they are actually spending.
Strategic
planning
The success of the supply chain in achieving its two-sided goal of creating
customer value and financial value rests upon sound strategic planning in the
following areas:
Organizational design
People
2010 APICS
1-75
orporarc trategy
Competitive priorities
(cost, quality, time,
price, etc.)
apabil itiescurrenr, needed, plan
Organizational
design
f---------~
2010 APICS
All rights reserved.
l-76
:'
2010 APICS
All rights reserved.
1-77
Supply chain
processes
Supply chain management covers a series oflinked processes. It's true that
organizations have always been involved in managing such functions as
planning, buying, manufacturing and delivering products, and getting paid. But
supply chain management (and organizational design) have evolved from control
of discrete business functions like procurement, manufacturing planning, and
logistics to an emphasis on business process excellence and the management of a
network of relationships tied together by complex information flows .
Although management of any one activity or link in the chain may be
straightforward, effective supply chain management requires mastery of the
connected processes.
Systems and
technology
An important part of the evolution of supply chain management has been the
development of sophisticated software that can automate various supply chain
activities. A perhaps even more important advance in technology has been the
development of integrated networks- intranets, extranets, and the Internet. And
still in progress is the evolution of software that can use networks to tie together
the various software applications associated with specific activities within supply
chain processes. Enterprise resources planning packages from competing
software consulting (or vending) companies have steadily advanced from the
ability to manage operations in one plant to enterprisewide integration and on to
cross-company functionality. In addition to automation and networking, made
possible by the computer revolution, other technologies have come along that
can feed information into the networks for instant access by all users. Bar codes
on products and radio frequency devices implanted within can pick up sales data
and send them instantaneously throughout a network for use in revising forecasts
and triggering operations along the chain. Such data can also be fed into
databases for marketing analysis to gain insight into customer behavior. Along
with global positioning, RFID makes it possible to track SKUs anywhere in the
world to provide customers with information about the progress of shipments and
to alert shippers and consignees to any difficulties that require actions (perhaps
using supply chain event management software).
The hardware to run these complex applications continues to advance in power
and speed, even as it becomes more affordable. There have been, and still are,
2010 APICS
All rights reserved.
1-78
2010 APICS
All rights reserved.
1-79
See the supply chain as one continuous entity made up of linked processes.
Understand the corporate business model and its alignment with the supply
chain.
Manage costs skillfully for the chain as a whole (understand net value).
Identify and buy or develop technology to provide the entire chain with access
to data and the ability to transfonn the data into information for use in realtime management of supply chain process flows (visibility and velocity).
2010 APICS
All rights reserved.
1-80
Supply chain
metrics
Future desired performance (to show how close or far away you are)
A competitor's performance
Summing up
Taken together, the five elements just discussed support the success of a supply
chain:
Organizational design
The organization is integrated and has progressed from function to process
orientation.
2010 APICS
All rights reserved.
1-81
People
People are deployed who can see the end-to-end chain as a single entity and
manage accordingly.
Metrics
Measures are in place to assess performance against a relevant standard and
identify strengths to encourage and weaknesses to amend.
And all this has to take place in conformity with law and regulations-including
taxes, tariffs, licensing requirements, and terrorist-related security policies.
We'll look at those matters in some detail in the next section.
Once you have a strategy in place and are sure it is properly aligned with
corporate strategy, you need to have the flexibility to change that strategy when
circumstances warrant taking a new direction.
Changing
strategy:
when and why
Having an excellent supply chain strategy in place with the interests of all firms
in the chain aligned and focused on the customer: What could be better? The
ability to change strategies in response to the inevitable changes in the
competitive environment, for one thing. There are at least three common
reasons to alter a supply chain strategy:
We 'lllook at examples of each reason for change and the role played by
innovation.
Change in market
conditions
2010 APICS
All rights reserved.
1-82
Change in
business direction
2010 APICS
All rights reserved.
1-83
the new models and what sort of buyers might be interested in them. They
suspected that new market segments might be attracted to the offbeat styling,
technical inventiveness, and "green" characteristics of the Prius-customers
who were not interested in their more conventional, family-oriented vehicles.
Instead of allocating cars to dealers based on past performance, they sent
Priuses from the production line to central distribution centers for shipping to
dealers only in response to customer orders forwarded on the Internet. With the
larger pool of cars in central locations, they reduced the risk of stockouts caused
by unexpectedly large consumer demand in any one region. Toyota also allowed
for customization of cars at the distribution centers in response to requests for
specific features-a postponement strategy made possible by modular design.
The system was more expensive, but it provided the required flexibility in
delivery. The percentage of the new model sold in northern California far
exceeded the usual percentage allocated there, while sales in the southeast were
far less than demand patterns for other Toyota models would have predicted.
Without the centralized logistics setup, the Prius would no doubt have gone
immediately out of stock on the west coast while sitting unsold on car lots in the
southeast. So the investment in a new supply chain strategy provided net value
when compared with the probable costs of redirecting cars from the southeast
all the way across the country to California, while likely losing customers due to
the resulting delays.
Anticipated
change in market
As the case of the Prius indicates-and to a degree the strategies of Zara and
Mango-supply chain strategies can be determined to anticipate changes in
demand rather than waiting until they come as a surprise. This might be
considered an advanced form of forecasting, and since forecasts are always
wrong, a very risky strategy. A clothing design operation has no choice in the
matter, since it has to anticipate trends in fashion on a continuous basis. If the
new look will depend on natural fabrics instead of synthetics (or vice versa),
new suppliers will be necessary, and they will have to be under contract before
the season begins. The effectiveness of the European clothiers is in creating a
design process that allows revamping supply strategies at the last possible
minute when real data are beginning to replace forecasts. Toyota, too, was
proactive in setting up a new supply chain in advance of Prius sales. The Prius
itself was part of an innovative approach to the marketplace in anticipation of
new demand patterns resulting from environmental consciousness and the
potential impact of rising petroleum prices.
In similar fashion, forward-looking companies such as British Petroleum,
General Electric, and Florida Power and Light have been developing-perhaps
far in advance of practical application-alternative energy technologies that will
2010 APICS
All rights reserved.
1-84
Pursue cost efficiencies and increased velocity but not at the exclusion of
flexibility. The strategy of shipping only in full truckloads or full containers
cuts transportation costs, but it can also leave a pattialload of product waiting
at the dock when it should be on the road to a stocked-out facility
downstream.
Develop multiple supply chains that are approptiate to each product line.
Some companies, to achieve those full truckload shipments, will mix
products. While that's a good strategy for speeding up delivery of some
products in the mix, it may be highly inefficient for others. Take the highdollar, lightweight items out of the truck, train, or container and fly them to
their destination. Choose suppliers that give you what each product line
needs-speed to market, quality at a higher p1ice, or ability to change
direction rapidly.
Watch trends in demand at the consumer end of the chain, not just at the
next stop downstream. Visibility to the end of the chain can speed up
response to changes in the market.
2010 APICS
All rights reserved.
1-85
Design products for maximum supply chain flexibility. Put suppliers on the
design team to offer help in creating modular designs, allowing fewer
components to be assembled into more products. Time the assembly to
happen as close to actual orders as possible.
Differentiation
lC 20 10 APICS
All rights reserved.
1-86
Niche marketing
Firms can choose to develop products and services for a mass market or for a
relatively small slice of a larger market-a market niche. Some examples of
niche market approaches include
Designing for a limited age group, such as children or senior citizens with
1-87
Perhaps the most obvious example of responsiveness is the fast-food industry that
grew up in the last half of the 20th century, led by McDonald's. Diners at fine
restaurants will happily wait half an hour for their foie gras, but employees on short
lunch breaks become impatient with even a few minutes in line as their sandwiches
are prepared. In the early days of the Prius automobile-a highly differentiated
car-buyers were known to wait for months for a new vehicle. (The same
phenomenon occurred when the Volkswagen "Beetle" first came to the United
States, where it was both highly differentiated and low-cost option.) But
businesspeople or diplomats on assignment expect a rental car or limousine to be
ready immediately when they arrive at the airport. Manufacturers of clothing
prosper or go bankrupt by their ability to bring the latest seasonal designs to market
rapidly. Perishable products, such as raw food items, must be delivered rapidlyunlike preserved foods. Services may also compete on the basis of speed by cutting
time spent waiting on the phone, standing in line, or processing paperwork.
Supply chains designed for responsiveness may rely on substantial supplies of
safety stock to avoid outages. (Overstocked seasonal items typically go on sale at
the end of the season.) They may also have multiple warehouses to place products
nearer to users. Third-party providers of rapid transportation-such as package
delivery services-were developed to suit the needs of such supply chains.
Visibility,
velocity,
variability,
variety, and
volume
Often called "the three Vs" of supply chain management, visibility, velocity, and
variability are key elements of successful supply chain strategy. (Visibility was
discussed earlier in this section.) No matter what the specific competitive
priority, the goal of supply chain management is to increase visibility and
velocity while reducing variability. The future of supply chain management lies
in continued pursuit of that goal. In addition, supply chain managers should
attend to two other Vs: variety and volume. Variety refers to the mix of products
and services in a portfolio that must alter to meet changes in customer demand.
Similarly, a supply chain must be flexible enough to expand and contract volume
to meet changes in demand for mass-customized products and services.
2010 APICS
All rights reserved.
1-88
Definitions
Benefits and
drawbacks
Increased visibility along the supply chain benefits supply chain partners and
the end customer in more ways than one. The term "visibility" can refer to the
literal ability of a supply chain manager or employee to see the results of
activities occurring in the chain; it can also refer to technological "awareness"
rather than human seeing. For example, point-of-sale data may be "visible" to
computers in warehouses, the manufacturing plant, and suppliers' facilities.
Data about a sale can instantaneously trigger appropriate actions in all those
places automatically. Shipments are scheduled from the warehouse to replenish
the retailer's shelves, manufacturing produces another unit, and suppliers
release parts to the manufacturer. With all these actions prompted automatically
and instantaneously by technology, the supply chain partners can realize
savings in cost and time. Better visibility has resulted in greater velocity.
Velocity, like visibility, enhances supply chain performance. Methods of increasing
the velocity of transactions along the supply chain include the following:
Relying on more rapid modes of transportation (if there is a net benefit after the
increase in transportation costs)
Eliminating activities that don't add value, thus reducing the time required to
accomplish supply chain activities
Speeding up the flow of demand and cash as well as the velocity of inventory
(The more rapidly payments are received from customers, the sooner the money
can be put to work in the business or deposited at interest. Information about
demand changes is crucial when the competitive strategy is responsiveness.)
2010 APICS
All rights reserved.
1-89
Unlike visibility and velocity, variability affects the supply chain negatively.
Supply chain management aims to reduce variability in both supply and demand
as much as possible. The traditional hedge against variability is safety stock. If
greater visibility along the chain results in greater velocity, supply chain
managers should also be able to reduce the amounts of safety stock required to
match supply to spikes in demand. As the "news" about increased purchasing
speeds more rapidly up the chain, distribution and production to meet the
demand can get off to a faster start. Flexibility in matching variety and volume to
fluctuations in demand is also facilitated by enhanced visibility and velocity.
Demand variability, known also as the bullwhip effect, has already been
described and will appear again in Module 2. Supply variability is like a mirror
image of demand variability. Instead of rippling in ever higher peaks up the
chain from the customer end, supply variability increases in waves down the
chain. It starts with small amounts at the resource extraction sites and culminates
in the largest amounts at the retail end of the chain. For example, any variability
in the supply of a raw material, such as an agricultural product that is dependent
upon fluctuating growing conditions, can result in even more widely fluctuating
purchase orders for that raw material from buyers down the chain. A shortage in
supply during one period may result in overpurchasing in the next period, with
the excess accumulating in warehouses as safety stock. Buyers depending upon
the supply will increase or decrease their purchase orders to reflect the variability
of materials, parts, and products available to them, with the variability growing
at each point in the chain. The accumulating excesses will in turn trigger
underpurchasing. Thus variability increases along the chain.
2010 APICS
All rights reserved.
1-90
fact not all ERP software provides the same capabilities or the same level of
performance. An ERP system with excellent technological characteristics might
be inappropriate for either a company's strategy, operations, or both. Buying or
building the ERP system, therefore, requires careful consideration of the
company's competence and needs, including its supply chain management
requirements.
The ERP core
Varieties of ERP
Cl 2010 APICS
All rights reserved.
1-91
Is the system right for the size of our firm and budget?
Does the system include the right modules for our business? (A service firm
will not need the manufacturing module, for example.)
Is it better to buy from one ERP provider, from several "best of breed"
providers, or to combine the two approaches?
Is the "best practices" model built into the system right for our strategic
objectives and capabilities, or will it require too much training and business
reengineering?
2010 APICS
All rights reserved.
1-92
.,
backup for Mom in the kitchen, a second or third source for supplies besides
that comer store, and an arrangement with big sister to watch the stand when
little sister has to be away from it. These redundancies and contingency plans
could go quite a ways toward ensuring the steady operation of the lemonade
stand in the face of some potential disruptions. A bit of research and
contingency planning could help avoid disruptions caused by weather or
inadvertent violations of the law. Finally, a word to that overly aggressive
patrolman might help with the neighborhood graffiti artists and bullies.
The potential problems with a lemonade stand, though it is a vety small
microcosm to be sure, accurately mirror many of the risks that threaten real-world
supply chains in the global marketplace. Consider a few not-so-hypothetical risks
for global enterprises.
Example: A Canadian company that manufactures electric motors
recently established new relationships with global vendors to
accommodate booming international demand. A few seemingly justified
shortcuts were taken in the initial site inspections to expedite the selection
process. Subsequently, poor-quality issues have skyrocketed and external
failure costs from having defective products in the field and shipped to
customers are eroding profits and damaging the firm's reputation.
Example: A multinational medical device manufacturer experiences
numerous service problems resulting from technology incompatibilities
with business partners and third parties. The root cause-a lack of open
standards and problems with business process integration .
Example: Shipping seasonal textile goods made in Southeast Asia to a
global retailer involves multiple parties, transportation modes, and port
calls. Along the way, a political uprising paralyzes air freight and a labor
dispute disrupts operations at a major port of call.
Example: An earthquake and ensuing pandemic in Central America take
a major supplier's operation offline indefinitely. Because of the Just-inTime manufacturing interdependencies, the effect ripples throughout
supply chain operations.
Supply chain
risk
terminology
2010 APICS
All rights reserved.
1-93
Devise methods to lessen risks before they become a costly problem for the
enterprise.
Supply chain
risk
categories
Different conventions exist for categorizing supply chain risks. The APICS
Dictionary, 12th edition, defines a risk category as "a cluster of risk causes with
Insufficient quality
Labor shortages
Unreliable suppliers
Supply shortages
Machine breakdowns
Political instability
Incompatible/inflexible technology or
technology disruptions
Uncertain demand
Transportation delays
Terrorism or wars
Natural disasters
Large variability in demand
Service failures
Compliance risks
Legal/regulatory risks
Customs risks
2010 APICS
All rights reserved.
1-94
The point is that there are many potential supply chain risks-internal and
external, operational, financial, social, and political. Risk is a common concern in
supply chain management. The practice of identifying risks and categorizing them
is a fairly common first step. Assessing and quantifying risks and developing
robust end-to-end strategies to address the risks comprise the next phase.
Risk profile
A risk profile is influenced by such factors as specific risk level and the
organization's own tolerance for risk.
Risk level is commonly described using the following equation:
Risk Level = Probability of Occurrence x Magnitude of Loss
Some risks are so unlikely or their effects so minimal that the organization will
choose to accept them. Risk acceptance is defined in the APJCS Dictionary,
12th edition, as "a decision to take no action to deal with a risk or an inability to
format a plan to deal with the risk." For example, a change in the political
administration of the United States could impact a multinational organization's
supply chain activities there, but the probability is extremely unlikely and there
is really nothing the organization can do that would mitigate the effects.
However, if an organization's success depends on its relationship with the
current regime in a politically unstable country, it may be prudent to avoid the
risk and locate suppliers elsewhere. As theAPICS Dictionary, 12th edition, tells
us, risk avoidance is "changing a plan to eliminate a risk or to protect plan
objectives from its impact."
Organizations tend to have characteristic tolerances for risk such as risk-tolerant
or risk-averse. To understand the continuum, contrast a risk-tolerant
organization that manufactures a basic commodity such as gravel or lumber
(where the benefits of accepting risk outweigh the potential harm) with a riskaverse pharmaceutical company (where a risk like contaminated raw ingredients
or improperly certified suppliers could lead to deaths, lawsuits, substantial
negative publicity, or a drop in share value).
2010 APICS
All rights reserved.
1-95
The SCC notes that risk must also have a time dimension or a specific time
horizon (e.g., day, month, and year) and a specific perspective or view that
defines the scope (e.g., boundaries, what's not included, etc.).
Risk
prevention
Strategies to address supply chain risk should include a risk response plan and
risk response planning. The APICS Dictionary, 12th edition, defines both terms
as follows.
Risk response plan: A document defining known risks including
description, cause, likelihood, costs, and proposed responses. It also
identifies current status on each risk.
Risk response planning: The process of developing a plan to avoid risks
and to mitigate the effect of those that cannot be avoided.
Risk prevention strategies typically involve four fundamental actions:
Assess risks.
Assessing risks
Balance risk
management and
cost.
Designing a secure supply chain, one that can keep functioning despite disruptive
events, is another form of supply chain flexibility. You don't want to lose the
ability to keep products and information flowing to customers without disruption
because part of your cost-management initiative has been to eliminate disaster
planning. Every company buys insurance as a prudent investment. Yet many
companies forgo contingency planning to save money-or simply out of neglect.
Invest in security.
2010 APICS
All rights reserved.
1-96
Prepare for
disruption.
Make contingency planning a part of your supply chain strategy and consider
the following tactics:
Make certain supply chain professionals own the contingency plans and are
specifically responsible for keeping them current and implementing them if
the need arises.
Don't rely only on extra stores of inventory. There can never be enough of
it to cover all potential problems and it, too, is vulnerable. You need
alternate processes to keep functioning after a disaster.
Research best practices in your industry and globally. Require supply chain
partners to do the same in your service contracts with them and have them
submit written contingency plans. Like all other supply chain processes,
contingency planning should cross company and functional boundaries.
While each organization will have specific responsibilities in a disaster, all
their activities will have to be coordinated.
Develop a sourcing process that takes the loss of each key supplier into
account and includes specific alternatives.
Track your shipments with RFID and global positioning. You can't
implement a contingency plan until you know you have a problem.
Test your plans and train employees and managers to understand and
implement them.
2010 APICS
All rights reserved.
1-97
Share risks
among supply
chain partners.
Surviving a disaster requires collaboration. Make certain that all supply chain
partners are prepared to work in concert and play their parts reliably.
Coordinated response after a disaster is more than a companywide or
enterprisewide responsibility. In the aftermath of earthquakes in Japan, SevenEleven Japan proved itself an indispensable source of supplies and logistics for
devastated areas. Before Hurricane Katrina deluged New Orleans and other
locations along the U.S. Gulf Coast, Wal-Mart had a fleet of trucks in place
and ready to roll into stricken areas with supplies. A strong supply chain is
more than good business; it's good citizenship.
Risk
management
guidelines
SCM Implications
Source: Adapted from "Keeping Ahead of Supply Chain Risk and Uncertainty, "
published by Accenture and Oracle
Risk
management
best practices
2010 APICS
All rights reserved.
1-98
Creating a list of potential events that could disrupt or harm any aspect of the
supply chain's performance
Monitoring and reviewing identified risks using a predefined time and process in
order to prevent them from disrupting or harming the supply chain's
performance
Quantifying risk to understand where the greatest risks may exist in order to
prioritize resources for risk mitigation and management; measures include
likelihood and impact
Sourcing risk
mitigation
strategies
Crisis
communication
planning
Supply chain
information
Managing supply chain information networks to minimize the risk to the supply
chain; includes information sharing with partners as well as internal locations ;
helps all parties to be quickly informed of a real or potential disruption and
respond quickly and appropriately to minimize the disruption impact
Supply chain
network
Source: Supply Chain Risk Management Team, Supply-Chain Council , Inc., 2009
2010APICS
All rights reserved.
1-99
Explain the use of corporate and supply chain strategy to drive supply chain decision making,
including the make-or-buy decision
Describe the principles underlying successful management of people in the supply chain
Outline the use of metrics to guide supply chain management, including key performance
indicators (KPis), balanced scorecard, and SCOR metrics
Outline the financial impact of supply chain management decisions on costs and profits
Identify the impact on supply chains of significant regulations, including the Sarbanes-Oxley
Act and others.
After developing corporate and supply chain strategies, the firm-or the trading
partners collectively-need to support the broad strategies by defining
measurable objectives for each manager along the chain. To borrow from the
SCOR model, the process is still in the "plan" phase, when objectives are
defined. This phase sets the direction for all the other processes-source, make,
deliver, and return. Strategy and objectives are developed first at top
management levels and filter down through the levels of management on each
trading partner's organization chart.
At every level, managers are responsible for synchronizing results in their areas
with the supply chain and corporate strategies. For example, if strategy at the
business level were to develop a recycling program for an aging line of
products, the sales and operations team might develop a forecasting program on
the marketing side to estimate the numbers of returned products, while
operations would check available capacity and perhaps recommend
modifications in current facilities and hiring policies. At the tactical level,
recycling plant managers might develop lean six-sigma processes (more about
lean and six sigma in Section D) to ensure an efficient, reliable process.
Possibly some of these functions would be outsourced to a specialist; a logistics
provider, for instance, might take over planning and execution of the reverse
logistics aspects of bringing the returned products in from consumers to the
recycling facility. Customer relations could be creating a strategy and specific
objectives for developing a customer base to purchase the output of the
2010 APICS
1-103
recycling facility. And all these activities should be supported by relevant flows
of communication and training, and, of course, tied to the financial plan.
Metrics would be developed for the key elements of the plan, such as response
times for pickup and delivery of returns after receiving notice from a drop-off
point that returned products were ready to be picked up. Finance would be
involved, of course, to cost the various operations and determine the breakeven
point when the operation could become profitable. Metrics would cut across
functions and organizations, and multifunctional teams would coordinate each
process.
Above these levels there would be an overarching strategic intention to support
the supply chain's growing image of environmental responsibility, thereby
enhancing the loyalty of its ecology-minded customer base.
Customer and
market
decisions
Technology
decisions
Since technology has become the powerful force that extends supply chain visibility
across multiple echelons while providing world-shrinking velocity, it always
deserves serious consideration as an aid to achieving strategic objectives. But
technology is also expensive to install, sometimes difficult to learn ("user-friendly"
is a term of art), and, for some, downright threatening. Know what you're getting
into before inviting the cable stringers into your office complex with their long drill
bits and crimping tools. But if your strategy requires velocity for acceptable order
fulfillment, if your incoming stream of payments is floating through the government
2010 APICS
All rights reserved.
1-104
mail instead of zipping electronically into your bank account, if your customers
expect to shop at a Web site-then you need the cables and servers and software to
get the job done. In any event you need to remain competitive. You don't want to
be the last typist in a wired world.
Technology is available to increase the velocity and accuracy of information flows,
cash flows, checkout processes, inventory tracking, production scheduling ... and
virtually any process of any length inside the supply chain. Whatever the process
you're aiming to improve, technology can almost certainly help. But it has to be
selected by specialists who know what is current and can guide process
stakeholders in choosing the right hardware and software at the right price to
conform to overall strategy. The collateral effects of new technology have to be
taken into account as well. The theory of constraints tells us that there is no point in
buying expensive hardware and software to speed up the flow of information,
materials, or payments if they will just be sent speeding into a bottleneck (or
constraint) that will stop their progress. When developing a technology benefit-cost
analysis, be sure to consider costs of future upgrades. Hardware and software both
have abbreviated life cycles; keeping up with improvements adds to the costliness
of a system. Finally, complex enterprisewide software can be a great help in
synchronizing activities along the supply chain. Like all complex solutions,
however, it can create its own set of problems; once you put in place an
enterprisewide software system, you can find yourself locked inflexibly into its
assumptions and unable to make process improvements without also altering the
technology-at considerable expense. More than great technology, you need the
right technology applied to the right process by the right people.
Process
decisions
A supply chain is a set of processes, and they can be fine-tuned to suit each
customer segment. When planning improvement initiatives, select the processes
that are central to the supply chain strategy, measure and benchmark them, and
focus your attention on one process or a small manageable number of processes.
~&'
2010APICS
All rights reserved.
1-105
region best suited by climate, culture, resources, tax policy, etc., to support each
specific activity. At this writing, it remains to be seen whether rising fuel and
transportation costs will put a limit on the length of supply chains.
Trends in
outsourcing
Choosing
activities to
outsource
2010 APICS
All rights reserved.
1-106
it should carefully consider the effect on its image before letting a third-party
provider take over its delivery functions-even if logistics isn't a core activity.
A detailed process for considering core competencies in the make-or-buy decision
is described in Customer-Centered Supply Chain Management (Kuglin, 1998). As
an example, assume that an enterprise is considering contracting with a supply
chain partner, yet to be identified, to provide its customers with overnight orderto-delivery service. Kuglin's process might be adapted as follows.
The marketplace needs overnight delivery and the enterprise already can
meet that need as a core competency. In this case, the enterprise might
choose to market its capability to raise awareness in the marketplace. (It
will "make" rather than "buy" overnight delivery.)
The marketplace does not need overnight delivery, in which case the
enterprise may not need to maintain, develop, or buy that capability.
The marketplace needs overnight delivery, but the enterprise is not able
to provide it as a core competency. This situation triggers the final step,
which is the make-or-buy decision either to develop the capability or to
find a supply chain partner who can do so as a core competency.
ll,}
2010 APICS
All rights reserved.
1-107
10 2010 APICS
All rights reserved.
1-108
Landed cost includes all those related expenses that must be added to the
purchase price of materials or services to make a fair comparison among similar
items obtained from different locations. In addition to purchase price, items
shipped in from another country are subject to logistics costs, such as duties,
taxes, fees for various intermediary services, insurance, and special packaging
costs. There may be costs associated with extra employees. Expatriates
(employees sent abroad to work in a country other than where they live) may be
needed to manage the new relationships.
If the goods from domestic and foreign sources are of equal quality and cost
becomes the main consideration, landed cost provides a basis for a meaningful
comparison. These features oflanded cost are captured in the APICS Dictionary,
12th edition, definition: "product cost plus the costs oflogistics, such as
warehousing, transportation, and handling fees." (Landed cost is covered again
in Module 2 in connection with global logistics.)
Landed costs are different from line haul costs. Line haul costs are cost elements
(within physical distribution) that vary by distance traveled and not by weight
carried (e.g., fuel, drivers' wages, wear and tear on the vehicle).
Justification for
and benefits of
outsourcing
Economies of scale
A third-party provider with core competency in the outsourced activity may
be able to increase the number of orders efficiently processed from the
customers of the outsourcing enterprise, thus expanding market share.
Risk reduction
Outsourcing transfers risks, such as demand uncertainty, to the third-party
provider. The provider may be better equipped to manage demand
uncertainty by spreading forecasts over a larger number of customers. (It
may handle many more orders than those brought in by any one of its
clients.) The outsourcing provider may also be able to react more rapidly to
changes in customer demand.
2010 APICS
All rights reserved.
1-109
Clearer focus
As noted earlier, an enterprise outsources an activity only if it is not a core
competency (in most cases). It does so to increase its ability to focus on its
core activities.
Network planning
Inventory control
Supply contracts
Outsourcing and procurement strategies
Product design
Customer value
These issues are all covered in more detail throughout this course. They are
briefly introduced in the following discussion.
Network
planning
2010 APICS
All rights reserved.
1-110
Inventory
control
Supply
contracts
2010 APICS
All rights reserved.
1-111
Traditional thinking emphasizes making the greatest possible profit for the
enterprise without regard to the impact on suppliers. Suppliers look for the price
that will yield the highest margin for them without regard to customer needs.
Buyers look for the lowest price without regard to impact on the supplier.
Contracts may cover only short-term transactional arrangements.
Supply chain thinking requires a strategic view of sourcing that focuses on the
long-term success of all partners along the chain. Pricing, discounts, delivery
timing, and related matters can be established cooperatively, taking into account
the needs of supplier and buyer. The emphasis is on establishing alliances rather
than simply making a series of transactions, pitting suppliers against one another
to drive down prices. The pressures in contemporary markets, from both
customers and suppliers, necessitate the forming of alliances that contribute to the
profitability of an integrated supply chain as well as each partner. Among the
strategies used to integrate supply chains are information sharing, internal as well
as external integration, and the formation of various types of partnerships.
Strategic sourcing and establishment of supply chain alliances are explored in
depth in Module 3, which covers customer and supplier relationship management.
Outsourcing
and
procurement
strategies
Product
design
In traditional practice, product (or service) design may be carried out in isolation
from other areas of an enterprise and without involving supply chain partners.
Module 2 looks in depth at the design process and the way it can be enhanced by
involvement of other departments, functions, and supply chain partners. By
including perspectives such as those of marketing, production, and logistics,
designers can develop products that are better matched to customer needs,
cheaper to build, easier to transport and store, and easier on the environment.
In striving for an effective and efficient supply chain, there is also a need to plan
for the product life cycle in product design. Increasingly, supply chain managers
incorporate environmental concerns in their plans from the beginning (for
products and for the processes they use to make them). Environmental life cycle
analysis looks at the environmental impact of a product (or service) up and down
the supply chain-starting from raw material extraction through manufacturing,
use, and final disposal. Multiple supply chain processes are involved, such as
1-112
Customer
value
The most important consideration when designing goods and services is the
ultimate customer. What does the customer consider to be of value? Is it low
price? Some specific feature or combination of features? Is it timely delivery? Is
it safety or comfort? Is it some combination of these or other considerations?
The ultimate consumer of a product or service cares nothing about the processes
within the chain----design, quality control, logistics, lean manufacturing, and so
on. The customer cares only about the result of these processes. This may be
obvious, but it is also surprisingly easy to forget.
Some of the challenges in providing value to the end customer are
Information
technology
and decision
support
systems
-, 2010 APICS
All rights reserved.
1-113
Key
performance
indicators
(KPis)
10 2010 APICS
All rights reserved.
l-114
KPis for merchandizing products include market share, volume growth, and
total supply chain inventoty turns. (Note that inventory has to be aggregated
across the supply chain.)
Replenishment KPis include order fill rate, on-time delivery, and order
fulfillment lead time.
Balanced
scorecard
Metrics provide a way to keep score, so it was only natural that someone would
create a business-related scorecard. If your objective is to improve order fill rate
from 93 percent to 98 percent, then you've created a contest with its own rules
and an ultimate goal that signals an end to the game. Sure enough, in 1992 Robert
S. Kaplan and David Norton introduced the balanced scorecard (BSC). Initially
designed to give managers a comprehensive view of business performance, it has
since been adapted to the design and measurement of supply chain performance.
2010 APICS
All rights reserved.
1-115
Customer perspective
Financial perspective
Exhibit 1-22: The Balanced Scorecard (BSC)
Customer
Perspective
Goals
Measures
Goals
Business Process
Perspective
Goals
Measures
Financial
Perspective
Measures
Goals
Measures
2010 APICS
All rights reserved.
Customer perspective
The customer's view of the business clearly has value for assessing the
current performance and future prospects of the business. Measures such as
on-time delivery or even more subjective measures such as satisfaction with
customer service or impression of reliability are important to track.
l-116
Key elements in a
balanced
scorecard
initiative
, 2010 APICS
All rights reserved.
Financial perspective
The traditional way of judging business performance relied on such
measures as cash-to-cash cycle, return on investment, and debt-to-equity
ratio. But financial measures are retrospective, and they don't always
provide a true indication of the current state of affairs, much less of future
performance (as prospectuses are required to remind us). Kaplan and
Norton wanted to give managers a tool that would encourage a broader,
more future-oriented view. Nevertheless, a balanced scorecard approach
must always include the financial perspective; bottom-line results are still
the final measure of success.
Develop goals and measures consistent with the corporate and supply
chain strategies.
There's a temptation to use the balanced scorecard as a brainstorming tool
without understanding that the four areas need to be mutually reinforcing
and aligned with strategy. They aren't catch-all containers for random
suggestions. If the supply strategy is to penetrate a new, high-end market
with an innovative electronics gizmo, then the business process perspective
might be to develop a more rapid product innovation cycle linked to
measures of process innovation and design workshops in the innovation and
learning area, reduced delivery cycles in the customer perspective area, and
a profitability measure in the financial area.
1-117
Setting up a balanced scorecard initiative is no job for novices. The first time
around it can be worthwhile to bring in outside expertise. Still, even a highly
sophisticated consultant cannot substitute for support at the executive level;
outsiders are not always immediately accepted if employees aren't convinced
that management is behind the initiative.
Level 1 SCOR
metrics
20!0 APICS
All rights reserved.
1-118
It has been developed and refined by dozens of major firms and applied in
initiatives available to
SCOR metrics and
performance
attributes
Exhibit 1-23 shows the nine Level 1 metrics in the right-hand column. In the lefthand and middle columns, it names and explains the supply chain performance
attribute measured by each metric. The first performance attribute, for example, is
supply chain reliability, defined as "delivering the correct product, to the correct
place, at the correct time, in the correct condition and packaging, in the correct
quantity, with the correct documentation, to the correct customer." The metric for
assessing reliability is perfect order fulfillment. It is measured, as you'll see in the
explanations that follow, as the percentage of total orders that were delivered
perfectly (correct place, amount, conditions, etc.). Once the supply chain has a
percentage score for its perfect order fulfillment performance (its reliability), it
can then research the industry (or the world) to determine its ranking among
relevant organizations and decide whether to undertake an improvement initiative.
The computer system can be used to execute reliable fulfillment.
Exhibit 1-23: SCOR Metrics and Performance Attributes
Performance Attribute
Performance Attribute
Definition
Level 1 Metric
Supply chain
responsiveness
The effectiveness of an
organization in managing assets
to support demand satisfaction;
includes the management of all
assets: fixed and working capital
2010 APICS
All rights reserved.
1-119
The attributes of a successful supply chain, as the exhibit shows, are the
following:
Asset management
As you can see, the supply chain performance attributes cover more than strictly
financial performance. Reliability and responsiveness are "customer-facing"
qualities ofthe chain and would be appropriate to measure and, if necessary,
improve if the overall strategy focused on customer loyalty. Flexibility
measures the supply chain's ability to meet unexpected increases in demand or
to avoid negative consequences of a decline in demand. Flexibility metrics face
both inward to the chain and out to the customer. Supply chain cost and asset
management metrics bring the overall assessment down to earth with measures
of financial effectiveness and profitability. These metrics are useful if the
strategy focuses on financial returns.
The selection of metrics depends, as noted, upon the supply chain strategy; there
is no requirement that all Level 1 metrics have to be applied simultaneously. In
fact the opposite is more likely to be true. Since the metrics are intended to
apply across boundaries, any initiative will require thorough explanation at the
very least to all those managers affected in the different functional areas and
companies. Improving supply chain responsiveness, for example, might involve
multiple suppliers, altered production processes, even product redesign to
achieve the ability to put more product into customers' hands on short notice or
to get the product there faster. To achieve greater overall velocity might require
that one link in the chain actually underperform in the interest of boosting
performance elsewhere. Shipping might have to rely on more expensive
transportation, for example. These tradeoffs have to be carefully negotiated with
those involved, and rewards may have to be shared in such a way that the
2010 APICS
All rights reserved.
1-120
interest of each stakeholder is brought into alignment with that of the overall
enterprise. Strong leadership from above is paramount. A pilot project is helpful
if it starts at the most manageable level and has a good chance of quick success.
Applying one metric across two or three supply chain partners is not too modest
a project. Remember that underlying the Level 1 metrics are further levels of
metrics to provide guidance that is more specific and more complex.
The specific definitions of the Levell metrics follow, along with formulas to
calculate them, when appropriate.
Supply chain
reliability
2010 APICS
1-121
Supply chain
responsiveness
The order fulfillment cycle time is the sole Level 1 measure of supply chain
responsiveness. Average actual cycle time is the average speed at which the
supply chain delivers products to customers. Cycle time for individual orders
may vary.
For each individual order, this cycle time starts with the order receipt and ends
with customer acceptance of the order. The order fulfillment cycle time consists
of a gross component and a net component and is calculated as follows:
Order fulfillment process time approximates order fulfillment lead time (the
minimum amount of time to fulfill a customer order in the absence of
inventory). Dwell time is the amount of time an order spends waiting to move
from one stage of processing to another stage.
The formula for calculating average actual cycle time for a group of orders is
the following:
Average Actual Cycle Time =
Sum of Actual Cycle Times for All Orders Delivered I Total Number of Orders Delivered
Supply chain
flexibility
Flexibility in the supply chain is its ability to respond to market changes and
remain competitive. Although the attribute is described as "flexibility," it is
measured in two different ways on the upside; one metric is called
"adaptability" and one is called "flexibility."
Upside supply chain flexibility is defined as the number of days required to
achieve an unplanned sustainable 20 percent increase in quantities delivered.
The flexibility metric, in other words, measures the speed with which an
organization can increase its production by 20 percent and maintain that
pace. It is an "upside" measure because the market, the demand, has moved
upward. If the firm is unable to meet the new requirement within an
acceptable number of days, of course, stockouts may result followed by loss
of clients.
Upside supply chain flexibility refers to the least amount of time required to
achieve the unplanned sustainable increase when considering source, make,
and deliver components. It should be noted that the most inflexible firm in
the supply chain might limit the flexibility of the entire chain.
2010 APICS
1-122
The other metric for measuring upside flexibility of the chain is called
"adaptability." Instead of referring to time required to achieve a given
increase in production, it refers to the maximum amount of increased
production the organization could achieve and sustain in a fixed amount of
time. Upside supply chain adaptability is defined as the amount of
increased production an organization can achieve and sustain in 30 days'
time. In other words, if unexpected orders come in with the requirement that
they be filled within 30 days, what total amount of new product can the
organization produce in that time?
The calculation of upside supply chain adaptability determines the largest
sustainable quantity increase that can be achieved when considering source,
make, and deliver components.
Supply chain flexibility is also measurable on the downside. It refers to the
ability to handle a reduction in orders rather than an increase. Downside
Supply chain
costs
The two metrics at Level 1 for measuring the costs of operating the supply
chain-all direct and indirect expenses from end to end of the chain-are
supply chain management cost and cost of goods sold. Taken together, they
account for the costs of all SCOR processes; that is, they cover the costs to
plan, make, source, deliver, and return.
Supply chain management cost (SCMC) is defined as all direct and indirect
expenses associated with operating SCOR business processes across the
supply chain.
The calculation of supply chain management cost involves finding the sum
of the cost to strategize and plan, the cost to source, the cost to deliver, and
the cost to return.
Exhibit 1-24 illustrates the scope of SCMC in SCOR Levels 1 through 4.
Note that costs to make are shaded in gray to indicate that they are not
included in SCMC.
2010 APICS
All rights reserved.
1-123
to get paid), or low levels of payables (the firm is not benefiting from keeping
money invested as long as possible before making payments). If unnecessarily
high inventmy levels are the problem, the firm can reduce the cycle time by
improved forecasting and JIT initiatives to reduce inventory (consistent with
avoiding stockouts).
Return on supply chain fixed assets measures the return an organization
receives on its invested capital (e.g., plant and equipment) in supply chain fixed
assets. This includes the fixed assets used in plan, source, make, deliver, and
return. It is calculated as follows:
Return on Supply Chain Fixed Assets =
(Supply Chain Revenue- COGS- Supply Chain Management Costs) I Supply Chain Fixed Assets
SCOR 9.0 also has applicability to risk management and the potential to
improve supply chain risk management (SCRM). Earlier discussions of risk
management referenced the results of the global multi-industry risk
management project approved by the SCC. The project reports that using SCOR
as a risk management foundation can improve supply chain risk management
through
Faster implementation
The alignment of risk management to four of the five SCOR processes and
select performance attributes are shown in Exhibit 1-26 on the next page. It
should be noted that some attributes will require ongoing definition. But many
organizations should be able to make initial inroads with these enabling
measurement categories.
Supply chain risk management has become an increasingly more critical aspect of
global supply chain strategy. These are all reasonable initial metrics. And while it
takes some time to build a critical mass of available benchmark data to reasonably
map an organization to other similar organizations, the effort is worthwhile.
2010 APICS
All rights reserved.
1-126
Source
Make
Manage supply chain make risk-the
process of managing risks related to
producing products on time at a
reasonable cost with good quality as
well as planning and implementing
responses to make risks .
Deliver
Manage supply chain deliver risk-the
process of managing risks that could
impact the company's ability to deliver
product on time at a reasonable cost
and quality.
Source: Supply Chain Risk Management Team, Supply-Chain Council, Inc., 2009
2010 APICS
All rights reserved.
1-127
GreenSCOR
Reliability
The ability to deliver the correct product. Reduces waste from product
discards and reduces air emissions and fuel use from extra transportation
for returned products. Proper documentation enables all players in the
supply chain to keep better track of hazardous materials or toxins that are
embedded in certain products, thus allowing them to arrange for proper
storage, handling, and disposal.
Responsiveness
The environmental impacts that affect the speed of material movement,
including regulatory or pollution control steps within a process.
Flexibility
The degree to which a firm can meet the environmental demands of its
customers. This pertains to the products, their production, transportation
and recyclability, etc.
Costs
The costs of environmental compliance and cleanup as well as energy
costs.
Asset management
Managing assets in a manner that reduces environmental impacts and
reduces internal costs.
2010 APICS
All rights reserved.
1-128
If supply chain management can reduce the amount spent without reducing
customer service or revenue, then it certainly contributes to the company's
financial performance. Saving money hasn't gone out of fashion, and the
enterprise realizes a gain when costs go down just as surely as when revenues
go up (assuming in both cases that all else remains the same). Profit is simply
the difference between money earned and money spent.
That view of supply chain management is being replaced by a more positive,
and more complex, approach to supply chain management's contribution to the
bottom line. In this section we'lllook at the financial impacts of supply chain
management decisions.
Financial
statements
Two financial statements that help managers and investors track the financial
results of supply chain decisions are the balance sheet and the income statement.
These statements have two different, but complementary, functions. The APICS
Dictionary, 12th edition, defines the two financial statements as follows:
Balance sheet: a fmancial statement showing the resources owned, the
debts owed, and the owner's share of a company at a given point in time
Income statement: a financial statement showing the net income over a
given period of time
Balance sheet
The balance sheet acquires its name from the fact that it has two major sections
that have to be in balance-assets on the one hand and liabilities and equity on the
other. To take a simple example, say a company raises US$500,000 by issuing
stock and US$500,000 by borrowing from a bank or issuing bonds to purchase
US$1 million of equipment. Its balance sheet would show US$1 million in assets
(the equipment) and US$1 million in liabilities and shareholders' equity. Exhibit
1-27 on the next page displays a sample balance sheet for a publicly traded
company that shows how this works on a larger scale.
The balance sheet in the exhibit contains many more items than hard assets,
such as equipment and real estate, for example, receivables-money the
company has not been paid by customers-as well as inventory that has not yet
been sold and prepaid insurance. Inventory valuation reflects the value of the
inventory at either its cost or its market value. Because inventory value can
change with time, some recognition is taken ofthe age distribution of inventory
(APICS Dictionary, 12th edition). The liabilities and equities side shows similar
items, such as accounts payable and accrued expenses-debts that have not yet
been paid by the company.
2010 APICS
All rights reserved.
1-129
December 31, Y1
US$24,628
US$36,125
429,949
385,273
Other receivables
18,941
15,210
80,532
ASSETS
Current assets:
Cash and short-term investments
Trade receivables, net of US$30K allowance
Inventory
252,567
215,619
Prepaid insurance
7,500
814,117
7,500
659,727
209,330
209,300
(75,332)
133,998
(63,402)
145,898
US$948,115
US$805,625
US$175,321
US$165,200
2,500
1,200
36,000
36,000
145,000
111,993
358,821
314,393
Long-term debt
117,343
120,000
476,164
434,393
100,000
100,000
Shareholders' equity:
Common stock, US$1 par value
Additional paid-in capital
Retained earnings
50,000
50,000
321 ,951
221,232
471,951
371,232
US$948,115
US$805,625
Note: Y1 and Y2 dividends per share US$1 paid US$.25 per quarter; 100,000 shares of common stock
outstanding.
The balances in this balance sheet are US$948,115 for both assets and liabilities
and shareholders' equity on December 31 in Year 2 and US$805,625 in Year 1.
Balance sheets generally allow comparisons such as these to highlight trends.
Managers and potential investors will study the numbers in the two columns to
assess the changes in long-term and short-term liabilities , shareholders' equity,
and other measures. In the exhibit, for example, XYZ has considerably more
shareholders' equity in year 2 than in year 1 (US$471 ,951, up from US$371 ,232) .
2010 APICS
All rights reserved.
1-130
It has less long-term debt- but considerably more in current liabilities. The
Income statement
December 31 , Y1
INCOME
SALES, NET
US$1 ,986,456
1,187,652
1,020 ,503
798,804
801,823
472 ,360
471 ,375
84 ,372
556,732
75,323
546,698
242,072
255,125
(16,453)
(16,523)
Less:
Cost of goods sold
GROSS PROFIT
Operating expenses:
Selling , general, and
admin istrative expenses
Depreciation and amortization
(2 ,600)
(1 ,900)
Income taxes
(22,300)
(23,646)
(41,353)
(42,069)
US$200,719
US$213,056
(0
2010 APICS
All rights reserved.
1-131
income, which is even less than gross profit or operating income. The net income
reflects the payment of interest and taxes and the effects of other expenses or
mcome.
Tax savings
and the
supply chain
One relatively new aspect of supply chain management is tax planning to reduce the
global tax liability of the extended enterprise. Paying less in taxes around the world
translates into increased eamings per share. (As we just saw, taxes are subtracted
from revenues when calculating net income-the bottom line on the income
statement.) By aligning tax planning with supply chain efficiency initiatives
companies can, if they're in the right circumstances, realize a double bonus of
increased operating efficiency and significant tax savings. Some of these savings
may contribute to cash flow in the short term, thus providing an immediate benefit
from investments in the process. This strategy applies for the most part to large,
multinational organizations that are in the midst of modifying their supply chains,
giving them the oppottunity to locate assets and operations in low-tax countries.
Procurement
and taxes
Taxes and
logistics
networks
Organizations can also realize tax savings by combining tax planning with
logistics reengineering projects. Some large companies review their networks
every five years or so to see if they can find ways to improve product flows for
efficiency's sake. While they're cutting lead times, reducing manufacturing
costs, and shaving transportation outlays, they can also reduce their global tax
2010 APICS
All rights reserved.
l-132
Taxes and
information
technology
Organizations
Roles
2010 APICS
1-133
2010 APICS
All rights reserved.
1-134
Outside of areas and managers specifically designated for the supply chain,
other areas need to know about supply chain strategies and understand their
roles in furthering the success of those strategies. Here is a list of some areas
that contribute to the supply chain without (arguably) belonging to it:
Finance validates cost savings from supply chain activities and identifies
the impact of supply chain initiatives on corporate performance indicators
such as return on investment (ROI). Finance also assesses the impact of
inventory improvements on cash flow and working capital requirements.
Legal performs timely and effective reviews of supply chain contracts and
assesses the risks and impacts of supply chain strategies.
Leadership and The literature of organizational development includes a great deal of theorizing
management
about the differences between leadership and management; current training
programs for managers often include a leadership component. While it is easy to
generate controversy about subjects as complex as management and leadership,
few would dispute the need in supply chain activities for both great managers
and inspiring leaders.
2010 APICS
All rights reserved.
l-135
Managers perform the roles on the organizational chmi: They develop objectives in
line with strategies and run their departments by hiring the right people for the
jobs, communicating responsibilities clearly, solving problems, coaching their
people in how to handle difficult situations, and promoting the needs of their
people to management up the corporate ladder. In a supply chain situation,
managers must all know how to cross functional boundaries and interact with other
managers and staff outside their departments. Managing in the supply chain takes
teamwork skills that may not have been emphasized, or even recognized, in
traditional, functionally organized firms.
Leadership, whether it is inborn or teachable, exists outside the organizational chart
and is not always present in a manager, even a good one. There are employees and
managers with leadership abilities on the shop floor and in executive suites. You
find out who they are in moments of crisis. They are the ones who suddenly know
what needs to be done and who naturally attract followers to solve the problem.
Leaders may be terrible managers-but they are likely to have the gift of assigning
management to someone else and inspiring great accomplishments from that
person. It would be an understatement to say that supply chains require leadership,
both in moments of stress and for the long term. Supply chains are dynamic, and
the longer they get, the riskier they are. Companies with great supply chains will
have great leaders at or near the top. These leaders will have a vision that drives
them to mold their organization and its partners into an effective unit to bring great
products to the end customers in uniquely appropriate, efficient ways. And they
will inspire effective management and innovative leadership all along the chain.
An earlier section of this module explored the evolution of supply chains from a
state of multiple dysfunction toward total integration. From a slightly different
perspective, supply chains can be seen as evolving toward a state of complete
synchronization. While integration implies fully formed relationships along the
chain, synchronization refers to the timing of supply chain events. The root
meaning of the word "synchronization" is "contemporary"-existing at the same
time. In a fully synchronized supply chain, one event triggers another
instantaneously. Tom Friedman, in his book The World Is Flat, provides an
example of synchronous movement along the Wal-Mart supply chain.
A consumer will lift [a product] off the shelf, and the cashier will scan it
in, and the moment that happens, a signal will be generated. That signal
will go out across the Wal-Mart network to the supplier of the productwhether that supplier's factory is in coastal China or coastal Maine. That
signal will pop up on the supplier's computer screen and prompt him to
make another of that item and ship it via the Wal-Mart supply chain, and
the whole cycle will start anew.
1-136
Key success
factors
2010 APICS
All rights reserved.
The key success factors in the synchronized supply chain resemble closely the
success factors identified earlier for the integrated enterprise; they can be
summarized as follows:
Right organization
The synchronized supply chain is process-oriented, with integrated
partnerships among buyers and suppliers and each partner focused on its
core competencies.
Right processes
Manufacturing is streamlined through approaches such as lean and JIT,
and vendors cooperate to create simultaneous production.
Right people
Through hiring, training, and restructuring, partners along the supply
chain create a workforce and management with the skills and
understanding to focus on supply chain goals and processes.
Right technology
The synchronized supply chain takes full advantage of the Internet and
other technologies necessary to make supply chain processes run rapidly
and reliably. According to David F. Ross, synchronization of the
electronic supply chain "is about transmitting e-information as fast as
possible through the supply channel and interlinking all network nodes
to achieve a seamless supply chain response to the customer"
(Introduction to e-Supply Chain Management, 2003)
Right measures
The synchronized supply chain will engage in continuous process
improvement and have in place appropriate measures to identify progress
toward goals related to the right organization, the right processes, the
right people, the right technology, and the right measures.
1-137
Security
issues
Keeping shipments secure from loss, damage, theft, and vandalism has always been
a concern for businesses, whether strictly domestic or in the export-import area. The
growing threat of terrorism has added a new sense of urgency to these long-standing
security worries.
Key security issues include the following:
C-TPAT
(Customs-Trade
Partnership
Against
Terrorism)
Complying with global antiterrorism initiatives, including the United States' CTPAT (Customs-Trade Partnership Against Terrorism) initiative
Keeping supply chain information systems secure from denial of service attacks
Assess the firm's own supply chain security in accordance with C-TPAT
guidelines that encompass procedural security, physical security, personnel
security, education and training, access controls, manifest procedures, and
2010 APICS
All rights reserved.
1-138
Communicate the C-TP AT guidelines to partners in the supply chain and work
toward including the guidelines in relationships with those companies.
Access to the C-TP AT membership list (This provides members with access to
C-TPAT-certified providers that may be appropriate to their supply chains.)
C-TPAT began offering partnership admission to importers and carriers with intent
to expand enrollment to all supply chain participants. Business partners cooperate
with customs in developing security guidelines, with the explicit intention of
keeping costs down and reflecting a realistic business perspective. C-TPAT
participants that don't comply with these guidelines may have their benefits
suspended or the participation canceled. Otherwise, C-TP AT creates no new
liabilities beyond existing trade laws and regulations.
Compliance
issues
Tariffs and taxes (which are covered in Module 2 along with other exportimport issues)
Financial reporting
2010 APICS
All rights reserved.
1-139
organizations such as the U.S. Food and Drug Administration (FDA), the U.K.
Medicines and Healthcare Products Regulatory Agency (MHRA), and other similar
regulating organizations also affect supply chains in the pharmaceutical area.
Sarbanes-Oxley
Act (SOX)
The Sarbanes-Oxley Act (SOX) was part of the U.S. government's response to
corporate financial scandals involving major companies. The focus of the act is on
corporate governance, and its aim is to protect investors by adding to the scope of
disclosures already required by U.S. securities laws. Segregation of duties to
prevent conflicts of interest ranks high among the act's concerns. For example, the
person (or unit) acting as buyer in a transaction should not also be the seller or any
associate of the seller who might profit from the transaction.
The U.S. Securities and Exchange Commission (SEC), established by the Securities
Exchange Act of 1934, is responsible for SOX and for corporate compliance with it.
CFOs and CEOs of publicly traded companies-the firms covered by the 1934
act-are very much aware of SOX and its impact on their firms.
Two provisions of the act, Sections 401 and 404, are especially relevant to supply
chain management. In brief, these two sections require, respectively, that quatierly
and annual reports must disclose ce1tain off-balance-sheet transactions (401) and
must also provide detailed descriptions of certain internal control systems (404).
While 401 has limited applicability to some supply chain contracts, 404 is broadly
relevant to many supply chain processes, including outsourcing arrangements. Firms
that move aggressively in the direction mandated by Section 404 of SOX have a
chance to improve the management of their supply chains and gain a competitive
advantage on their rivals.
Section 401 is an addition to the U.S. Securities Act of 1934, which applies to all
publicly traded companies. It requires disclosure of "material off-balance-sheet
transactions, arrangements, obligations (including contingent obligations), and
other relationships of the issuer [i.e., the company itself, an issuer of securities]
with other. .. entities or persons" if these arrangements may have a current or
future material effect on the fum's financial condition, operations, etc. This
especially affects service contracts, such as those typically written with ocean
carriers, and vendor-managed inventory (VMI) arrangements undertaken to hedge
risk and move assets off the balance sheet. (VMI involves a supplier's retaining
control, and sometimes ownership, of inventory at the customer's location rather
than selling it to the customer for subsequent resale. We'lllook more closely at
VMI arrangements in Module 2.)
Section 404 directs the SEC to prescribe rules requiring annual reports to include
an intemal control report that does two things: 1) states management's
2010 APICS
1-140
2010 APICS
All rights reserved.
1-141
the fine can be up to US$5 million and 20 years in prison. While SEC authority is
limited to bringing civil suits against rule breakers, the commission also works
closely with various law enforcement agencies to develop and bring criminal cases
when warranted by corporate misconduct, such as fraud and insider trading.
Material content
reporting and
sustainable trade
practices
2010 APICS
All rights reserved.
Energy to produce
1-142
The company has also been developing a list of "ingredients" to include with
each product, as food manufacturers list ingredients on their packaging. Since
there are on average 55 pat1s per shoe, that task has proved difficult.
The U.S. Food and Drug Administration (FDA) has developed regulations
requiring more thorough documentation of the chain of custody or "pedigree" of
drugs. Supply chains are affected in the documentation and information that
must accompany pharmaceutical products as they move from company to
company, including distribution centers and carriers. Supporting legislation is
being phased in by separate states.
Other
environmental
concerns
Not only the products exchanged in trade but the packaging and shipping
materials involved are potentially problematic. Wooden pallets, for example,
have become controversial for a variety of reasons. China and the European
Union have both issued restrictions on incoming materials packed on pallets
made of soft woods that may contain harmful insects. Chemical treatments to
sterilize the wood have come under fire for themselves being hazardous. Aside
from harboring harmful pests, the pallets themselves can be a significant source
of waste if they are used only once and discarded (as many have been designed
to be used). The wood itself is still a resource, even in pallets that cannot be
repaired or reused and should be recycled.
Solutions to the problems with wooden pallets include the following, among
others:
Sterilizing the wood with heat or chemicals (if not themselves harmful)
Using pallets made of materials other than soft woods, including plastic and
corrugated cardboard
2010 APICS
All rights reserved.
1-143
Reasons for
adopting
continuous
improvement
SCM is process-oriented.
Supply chain management is itself process-oriented. The basic units of the
supply chain are not products or services that emerge from the chain; they
are the processes that flow along the chain among functions and partners.
2010 APICS
All rights reserved.
1-152
Without data, you don't know what customers value, so you can't design
processes with any assurance that you're targeting their needs. Without tracking
data, you can't tell if you're succeeding or failing. Data are crucial as a basis for
executive decisions at the highest level and also for refining and controlling
operations at the most minute level. Without accurate financial data, you can't
assess the contribution of process improvements toward improving the bottom
line. If you don't have data to assess the condition of the supply chain, you're
left to guess at what needs to be improved.
This section covers supply chain visibility and the analysis phase that begins an
improvement initiative. The two are closely related.
Visibility
Visibility means being able, figuratively , to see what's happening in the supply
chain. In traditional, functionally oriented fim1s, silo walls obstruct "horizontal"
visibility outside one 's own department. ("Vertical" visibility also tends to be
limited. Management may be able to see downward to activities at the tactical
level, but visibility upward may be limited to information framed as directives and
performance reviews.) The further supply chain partners can see through functional
walls and also upstream and downstream into the activities taking place in other
tiers of the chain, the better chance they all have of synchronizing their operations
to produce value for the customer.
For example, with global positioning and satellite communications, logistics
managers can track individual items as they are shipped across the world to
customers in foreign countries. In fact, anyone in the chain with the necessary
technology, including the customer, can be given access to this information. This
real-time visibility into customer shipments gives logistics managers the ability to
react to difficulties long before they could have just a few years ago. Of course the
same technology, combined with the Internet, gives carriers such as UPS and their
competitors the ability to let their customers track their own packages online.
Visibility, in this case, enhances customer service.
Sharing real demand data along the chain is another example of visibility. Whereas
the traditional "push" systems of distribution sent materials and goods out on a
predetermined schedule and relied on inventory to provide goods for new orders,
current "pull" systems can reduce inventory to very small amounts and wait for
orders to come before assembling a product. That process depends upon partners
upstream from the retailer having the ability to "see" customer orders. In a
networked supply chain, actual demand can become instantly and simultaneously
visible to everyone on the network. Such data sharing can bring other information
into view, such as schedules and capacity. Significant changes in schedules or
2010 APICS
All rights reserved.
1- 153
resources can be communicated instantly across the chain to give all partners time
to revise their operations and remain synchronized with each other.
One obstacle to visibility along supply chains has been the unwillingness of
partners to share information. Consequently, implementing process improvement
requires building trust across the functions and partners who are party to the
process involved. A small-scale pilot project can be helpful in demonstrating the
value of change. Once pattners see that data sharing can work to their advantage,
they are more willing to provide that all-important visibility into their operations.
And, most appropriately in the present context, data used to measure supply chain
performance against key indicators can be made much more easily available to
continuous process improvement teams. Visibility is one key to successful
improvement initiatives.
Process
analysis
Continuous improvement is directed from the top down and implemented from
the bottom up. Selecting processes for improvement is a job for top
management. It's they who are accountable for the strategic direction of the
fitm, and so it is they who decide the priority order of process improvement.
But once that is done, a team should form that includes employees, especially
those who operate within the process itself. Implementation of quality initiatives
is a companywide process (or a supply-chain-long process) and should involve
employees at all levels. The team's first step is to describe the process in depth
and then analyze the process to find the root causes of inferior performancethe fundamental reasons it isn't contributing to achieving supply chain goals.
We'lllook at some of the standard techniques for defining a process and
analyzing it to uncover the cause of its malfunction.
Process mapping
20 10 APICS
All rights reserved.
l-154
..
each step in a process, the map can include other useful information such as the
duration of each step, required resources, responsible positions, and financial
impact. Process maps can be produced with pencil and paper, but they can also
be put into various types of software, including Microsoft Visio, SigmaFlow,
iGrafx, or even PowerPoint, Excel, or Word.
Exhibit 1-29 shows a typical process map in the form of a flowchart, depicting
the order fulfillment process.
Exhibit 1-29: Process Map of the Order Fulfillment Process
Emer
order
Order
bl ck
real<!
l'<.v
shipm~m
No
Perform
goods
reate
master
data
\lC
Creal.:
invoice
Identify the
pattern
After carefully and completely describing the process, a next step is to identifY the
pattern of variability. These data have to be gathered over a period of time, not in a
brainstorming session. Error tracking is especially pertinent to the six-sigma
approach. Methods include control charts and defect measurement.
Control chart
The control chart, according to the APICS Dictionary, 12th edition, provides "a
graphic comparison of process performance data with predetermined computed
limits." Such charts are useful because they provide a visual method for
tracking process variance. This activity is called statistical process control (or
2010 APICS
All rights reserved.
l-155
statistical quality control) and is defined in the APICS Dictionary, 12th edition,
as "the application of statistical techniques to monitor and adjust an operation."
The data in the control chart usually consist of samples from a regular sequence
in a production process. The chart allows the project team to see quickly when
variation from the targeted value spikes to an unacceptable level-a level that
customers would consider defective. Exhibit 1-30 illustrates a control chart with
a center line (CL) representing the mean value and upper and lower control
limits (UCL and LCL) establishing the boundaries of acceptable performance.
ln this chart all the opportunities fall within the acceptable range.
Exhibit 1-30: A Control Chart
' - - - - - - - - - - - - Thnc
The control chart might track process outcomes in one of several ways. A
straightforward type of control chart tracks numbers, such as size of a
component. In that type of chart, the control limits would establish the
maximum and minimum variance in terms of a measure such as millimeters.
The numbers in another chart might measure wait time at an ATM, in which
case there might be only an upper control limit since an absence of waiting
would not be considered a defect by the customer. Another type of chart might
record percentages, such as the percentage of times some event occurs in each
sample. This approach is especially appropriate if samples are not the same
size. Control charts are useful for managing a process as well as fixing it.
Defect measurement
Defect measurement is a straightforward method of accounting for the
number of defects that represent product or service failures. The emphasis is
on the customer's definition of a defect, so there must be in place a
measurement system that allows insight into customer responses. Visibility,
again, is crucial. You can't fix what you can't see.
Customer complaints are one method of gaining information. Focus groups
are another method, one that allows more control than merely tracking
customer complaints without having a chance to question the customer
directly. A focus group, led by a trained facilitator and observed by
representatives of the process improvement team, can establish more
reliable data about customer experiences than a collection of complaints.
2010 APICS
All rights reserved.
l- 156
Finding root
causes
Once the process improvement team has identified the flaws in the process, they
need to look for the root causes of the problems. Convening a focus group is
one way of probing for causes. Root cause analysis helps uncover the original
cause that might lie underneath more-superficial complaints. A Pareto diagram
can help identify the causes that can be attacked most efficiently and effectively
with scarce resources.
Pareto diagram
The Pareto diagram is based on Pareto's law, "a concept developed by
Vilfredo Pareto, an Italian economist, that states that a small percentage of a
group accounts for the largest fraction of the impact, value, etc." (APICS
Dictionary, 12th edition). Closely associated with Pareto's law is the 80-20
rule, which "suggests that most effects come from relatively few causes;
that is, 80 percent of the effects (or sales or costs) come from 20 percent of
the possible causes (or items)" (APICS Dictionary, 12th edition). Pareto
diagrams can be used to isolate possible sources of customer complaints or
other problems and locate the 20 percent of the sources that are causing the
most trouble. (The percentages are, of course, variable.) You get the most
return on your investment if you can eliminate a large percentage of
problems by attacking a small number of causes.
Pareto diagrams can be applied to any measurable data, including currency
units, time, opinions, accidents, etc. The chart in Exhibit 1-31 illustrates the
general shape of a Pareto chart, with the larger bar representing the major
causes of a phenomenon. In this case, 80 percent of the complaints were
attributable to problems with finish as opposed to weight or shape. The
place to focus money and effort, therefore, would be in making
improvements to the finishing process.
Exhibit 1-31: Pareto Diagram
r-.,;
"
Occurrence
o;o
80
'I
~
'J
15
Finish
Weight
IL
I
Shape
"\.
Etc.
Attribute
2010 APICS
All rights reserved.
1-157
Cause-and-effect diagram
A cause-and-effect diagram is a method of organizing factors (causes) that
affect a problem or process being investigated (effect). This type of diagram
may also be called an Ishikawa diagram, after the person who first
developed it, or a fishbone diagram, as the elements of the diagram
resemble the skeleton of a fish.
The goal of a cause-and-effect diagram is to identify all of the possible
causes of an effect and then select the most likely ones for further
investigation.
The graphic in Exhibit 1-32 illustrates a cause-and-effect diagram showing
commonly cited categories of causes (environment, people, materials,
measurement, methods, and equipment). For every cause, there are usually
several underlying subcategories (such as equipment failure, caused by lack
of maintenance). The development of a cause-and-effect diagram is a
repetitive process that requires going back and forth to identify causes and
effects. A cause-and-effect diagram links an effect with the possible causes
of the effect. The idea is to find the root cause of the effect in order to
correct and solve the problem.
Exhibit 1-32: Cause-and-Effect Diagram
Effect
Cause
Environment
Materials
People
Aud its
Problem
No P.O. Numbers
on Raw Material
Invoices
No maintenance
per formed
Measurement
2010 APICS
All rights reserved.
Methods
Equipment
l-158
Once the project team has gathered and analyzed data on the nature of the process
and the source of significant problems, they have a solid basis for designing
countermeasures to eliminate the problems or reduce their negative effects to an
acceptable level. A countermeasure to the problem of finish identified by the
Pareto diagram in Exhibit 1-31 might look like this: Increase quality of finish on
dinnerware by implementing a new glazing process with a target of a 20 percent
increase in the customer survey satisfaction index. (You would of course have to
have a particular finish process in mind.) But how does an enterprise arrive at a
goal like increasing customer satisfaction by 20 percent? One answer to that
question is benchmarking, a method for setting goals and measuring progress,
which is the subject of the next section.
2010 APICS
All rights reserved.
1-159
Competitive
benchmarking
({.!i
2010 APICS
All rights reserved.
1-160
Best-in-class
benchmarking
With the best-in-class benchmarking strategy, a firm looks to the best anywhere to
develop a goal for improvement. Widening the search for a benchmark makes it
possible to find even more dramatic and inspiring possibilities. Accounts payable
doesn't differ radically from industry to industry; Ford might have been able to find
an even more efficient model for the process than Mazda's by looking outside the
car industry. Even in areas where at first the dissimilarities seem an overwhelming
barrier, a best-in-class approach may still help develop the most inspiring goals. A
major health care provider in Minnesota revamped the procedures in its endoscopy
clinic by bonowing from Toyota's lean production system. While receiving some
criticism for borrowing assembly-line methods to improve delivery of a service, in
fact the provider not only enabled doctors to reduce the backlog of patients waiting
for exams, it allowed the doctors to have at least as much time with each patient.
The improvements also saved substantial money. The decision to process patients
witli th_e_siriie effiCieiicy-Toyota achieves -in its manufacturing plants turned out to
be good for the doctors, the patients, and the clinic. The health care provider
benefited from getting outside its own industry- not only for a benchmark but for
innovative process improvement techniques.
Process
benchmarking
In sum, benchmarking your goals against the best in your industry or the best in
class provides an effective way to choose realistic yet inspiring goals. It's only
natural to have more faith in your ability to reach a goal if you know someone
else has been there before. Not long after Roger Bannister reset the benchmark
for running a mile at slightly less than four minutes, other runners not only
broke four minutes but ran past Bannister's own mark.
2010 APICS
All rights reserved.
1-161
It's worth noting that Bannister himself did not use another runner's performance
as his benchmark. He reached beyond any other cunent or historical mile runners
for a pioneering goal. Sometimes, even the best-in-class mark may be too limited a
goal for a firm to follow. Someone-or some enterprise- has to be first. But even
a pioneer like Bannister followed a strategy of continuous improvement to reach
his goal. He got there through years of training, continuously shaving small
amounts oftime offhis previous performances until he surpassed the speed that
some believed was physiologically impossible. He reached his goal, quite literally,
one step at a time.
I
Just-in-Time
(JJT)
Key concepts:
Have inventory only when
necessary
Reduce setups, lot sizes, and
lead times
Reduce waste (materials, time,
labor, etc.)
Move from work order to
continuous flow environment
Vendor scheduling
Plant maintenance
Total quality management
ix igma
Key concepts:
No more than 3.4 defects per
million opportunities
Defects defined from customer
perspective
Keep process variability within
"six sigmas" of the target value
Train at all levels
Le
Key concepts:
TIT production
Quality designed into the
product'process
Empowered teams
Eliminate inventories
Banish waste and strive for
perfection
Safe, orderly workplace
2010 APICS
All rights reserved.
1-162
Six sigma
2010 APICS
All rights reserved.
1-163
six sigmas (or standard deviations) from the target value. That will leave only
3.4 opportunities Uust over 0.0003 percent) that result in defects.
Exhibit 1-34: Six-Sigma Control
I
I
I
99.9997% of
1 ..1- - 1
___.,
'
I'
I
'
I
I
I
I
I
I
'
I
I
Elements of six
sigma
Target
2010 APICS
All rights reserved.
Customer
The definition of quality-that is, the acceptable rate of defects-is in the
mind of the customer. Customer expectations might include outstanding
performance, reliability, competitive price, on-time delivery, excellent
service, and so on. All these areas provide opportunities for defects that
may drive a customer to your competitor.
Process
When assessing a process, the company has to adopt the customer's
mindset-an "outside-in" view of the company's performance. The goal is
not only a low number of errors but also consistent performance. That is,
the performance should remain very close to that number of errors and not
show a great deal of variability in either direction. For instance, an airfreight carrier with on-time performance that stays right around an
acceptable level may create more customer satisfaction than a carrier that
has the same average on-time rate but is very enatic and unpredictable, with
1-164
Employee
Full employee participation has been a principle of quality systems since the
early work of W. Edwards Deming. When it comes to customer satisfaction,
there are no irrelevant employees (or processes). Bank tellers, receptionists,
and file clerks (or data entry specialists) may occupy low rungs on the
corporate ladder, but their "defects" tend to be highly annoying and visible
to the customer. A company fully committed to the six-sigma approach will
offer training at all levels. Six-sigma initiatives typically are directed from
the top but implemented "from below," by employee teams.
Training in six-sigma tools and techniques takes place at different levels,
with the possibility of certification at the level of green belt, black belt, and
master black belt. People with any of the three "belts" have sufficient
knowledge of quality standards,-design and development procedures, and
statistical analysis that they can lead process design or process improvement
projects. Black belts and master black belts operate as full-time employees;
master black belts primarily engage in teaching. Green belts may be
consultants or employees with other responsibilities.
Six-sigma
process and tools
Six sigma has developed a similar model to guide the creation of new processes
(as opposed to conducting an improvement initiative): Define, Measure,
Analyze, Design, Verify (DMADV).
Because of its statistical basis, six-sigma analysis depends heavily upon
thorough, reliable, measurable data. Without that level of visibility, there can be
no determination of the rate of defects. Some of the fundamental six-sigma
2010 APICS
All rights reserved.
1-165
Control chart
Control charts provide a visual representation of variance to allow the
business to see quickly when variance falls outside acceptable control limits.
Defect measurement
Defect measurement tracks the number of defects that represent product or
service failures from the customer's perspective.
Pareto diagram
The Pareto diagram is based on the familiar Pareto principle, also known as
the 80-20 rule, according to which 80 percent of problems (or other
2010 APICS
All rights reserved.
1-166
Carefully mapping and analyzing the process provided visibility into the actual
experience of customers, allowing the bank to revamp the process and
determine what measures of quality were important to customers-as opposed
to the preferences of the bank.
Eliminating
waste
Just-in-Time (JIT)
2010 APICS
All rights reserved.
1-167
JIT Philosophy
JIT Benefits
Waste reduction
Storage, inspections, queues at work centers, and defects all fail to add
value while costing money and slowing down production. Through
continuous improvement, JIT targets each of these conditions for step-bystep elimination. (Waste reduction is also a lean goal.)
Variability reduction
Continuous improvement includes elimination of variability discovered in
the system no matter what the source, internal or external. The source might
be inaccurate engineering drawings, equipment that fails to perform up to
standards, or going into production without understanding customer
requirements.
being "pushed" from behind. Raw materials are extracted and sent to
manufacturing. Materials and components move away from workstations
2010 APICS
All rights reserved.
1-168
when the operation there has been completed. Manufacturing ships goods
out when they are in finished form. All of this activity takes place in
accordance with schedules determined in advance on the basis of forecasts.
JIT takes the opposite approach and "pulls" items through the system when
they are needed, not according to preset schedules. Materials don't move
from supplier to plant until requested. Similarly, work-in-process (WIP)
doesn't move from one work center to another until a signal indicates that
the time is right. Lots sizes are kept small, and orders are entered more
frequently. This reduces or eliminates any inventory waiting to be
processed. And that in tum brings quality problems to light more quickly.
Defects in materials can be hidden when there are inventory buffers; a
defective component can be discarded and another taken from the safety
stock. But in JIT there is no buffer, so there are no quick substitutions
possible when a defective component comes on line. Therefore, a defect
causes a slowdown and signals the need for process improvement.
Elements of JIT -for continuous improvement
JIT isn't limited to activities in the production facility. Here are some of the
Suppliers
Some supply chains have always included a JIT component. Fine restaurant
JIT layout
Another way to reduce waste is to lay out the production facility in such a
1-169
Inventory reduction
"Inventory is evil," in the words of Japanese JIT guru Shigeo Shingo. In
some instances inventory may be a necessary evil, but Shingo's strong
statement captures the spirit of JIT. Operations managers may begin
instituting JIT by reducing inventory to the bare minimum necessary for
efficient operation. With no "safety stock," everything in the system has to
work almost perfectly to avoid breakdowns . Continuous improvement finds
ways to eliminate variability and defects so the system will work without
inventory buffers. Lot sizes must be kept small to avoid accumulation of
inventory, and that brings down costs of holding and handling items in
storage or in queues. However, as holding costs go down, setup costs tend
to rise-small, frequent lots mean more setups. So reducing setup time is
another JIT improvement project.
Scheduling
Good communication is essential for efficient scheduling. In JIT, schedules
are widely communicated within organizations and along the chain,
improving suppliers' ability to be responsive to orders.
Two particular types of schedules are favored in JIT: level and kanban.
2010 APICS
All rights reserved.
1-170
In sum, JIT is a version of quality that begins with the idea that inventory is "evil"
and proceeds from that perception to the task of continuously improving all aspects
of the plant and the supply chain to eliminate inventory, waste, and variability. JIT
supply chains "pull" materials, work-in-process, components, and finished goods
into each facility and operation, from extraction through final sale. (The alternative
is to "push" items from one point to the next before they are requested, so they wait
in warehouses or queues until the next facility or workstation is ready for them.)
The goal is to have materials arrive defect-free and just in time for use or for sale.
2010APICS
1-171
methods of mass production were used to build merchant and war ships. But
most lean resources credit Henry Ford as the first person to truly integrate an
entire production process when he created what he called "flow production" in
1913. Ford's techniques, however, lacked flexibility; they were intended to
produce only black Model T automobiles. During the 1930s, Toyota revised
Ford's concepts to provide both continuity in process flow and a wide variety in
product offerings. This became known as the Toyota Production System (TPS).
We will examine key aspects of the Toyota system throughout this discussion of
lean.
Lean thinking has applications all along the supply chain-from eliminating
unnecessary steps in product design to aligning suppliers' processes with the
delivery schedules required for lean manufacturing. Waste, in the world oflean
thinking, is anything that fails to add value in the eyes of the customer. Recall
the six-sigma case we looked at earlier. Bank customers did not value the
mailing of deposits to a local address as the bank thought they might. Instead,
they wanted quick postings to their accounts. Therefore the added service the
bank provided-mailing to a local address with express shipping to a central
depository-was a waste. It aimed to increase value provided to customers, but
instead it added a wasteful feature that customers didn't want. Waste can refer
to unnecessary materials, equipment, processes, features, plant, personnel,
time-any operational element that can be eliminated without reducing the
value provided to the customer.
For example, consider taking an airline flight as a supply chain process. Airlines
have many suppliers and provide many services beyond just the flight itself. If we
looked only at the value-added portion of the supply chain, the actual flight itself,
we might consider only how to get the plane from Point A to Point B faster.
However, if we look at the total supply chain, we would find that there are many
areas of waste in the non-value-added areas. And if we reduce the wastes in these
areas, we can get more benefit than if we concentrated on just the flight. Areas of
waste in this example include getting to the airport, parking, getting inside the
terminal, waiting to check in, checking in, getting to security, waiting in the
security line, passing through the security process, etc. These non-value-added
times can be more than the actual flight itself. Just as importantly, as airlines have
discovered, reducing these non-value-added costs and times for their customers
has not only made the customers happier; the airlines have experienced lower
costs. Checking in and selecting seats online are two examples of ways that
airlines have reduced their costs while reducing non-value-added wait time for
their customers. This is a definite win-win for the supply chain and for the
customer.
2010 APICS
All rights reserved.
l-172
Likewise, a supplier of retail goods to a major retailer can "lean" its supply
chain by using point-of-sale data from its customers to create replenishment
orders to ship the right amount of product directly to each store. This eliminates
the bullwhip effect and helps keep inventory levels lower than ifthey were
using only forecasting methods to drive their processes.
Lean initiatives are fueled by a specific set of tools and techniques. For
example, lean production often goes hand in hand with JIT and, as the banking
example described above shows, is also compatible with six sigma. Exhibit 1-36
outlines the main features of lean production.
Exhibit 1-36: Lean Production
Lean
Production
! - - - --
1 - - - ---+
'--- --
Implementation:
1. Map the final assembly process.
2. Clean and organize areas to be changed.
3. Install kanban pull scheduling between order entry and final assembly.
4. Work backward in the production process using kanban to link final assembly to internal and
external component suppliers.
5. Reduce setup times and batch sizes.
6. Reduce defects.
7. Do employee training.
Lean objectives
Lean supply chains strive to achieve the following objectives.
2010 APICS
All rights reserved.
1-173
The perfectly lean system would have none of the foregoing, and it also
would reduce distances that parts and employees have to travel to avoid
wasted time and wasted steps.
Increase velocity.
Velocity refers to the time it takes to provide value to the customer. As
noted earlier, velocity in supply chain management is "the relative speed of
all transactions, collectively, within a supply chain community." The
definition goes on to state that "a maximum velocity is most desirable
because it indicates higher asset turnover for stockholders and faster orderto-delivery response for customers." Through the use of JIT and other lean
techniques, velocity produces products and services only as fast as
customers want them.
Increase profitability.
Increased profitability results when non-value activities are reduced and
volume is added without adding resources.
2010 APICS
l-174
and participation at all employee levels, and more teamwork. Job titles are
typically reduced and worker flexibility thereby increased.
In lean supply chains, organizations find suppliers whose methods will synchronize
with lean requirements and develop long-term relationships with them.
(Developing relationships with partners rather than seeking low bids for every
project is a fundamental lean principle.) Organizations educate suppliers to
understand and be willing to play a role in creating value for customers by
streamlining processes.
Lean principles
Lean Thinking, a book by James P. Womack and Daniel T. Jones (1996), identifies
five principles that epitomize lean. These core lean principles are summarized in
Exhibit 1-37. General implications for supply chain management are included.
Exhibit 1-37: Lean Principles
Principle
What are the actions that create value flow? One-piece or continuous,
smooth flow is the ultimate objective. When striving for smooth flow,
problems that must be dealt with become visible.
Pull scheduling replaces what is used and drives actions toward a maketo-order environment (versus push production scheduling). In pull, each
successive step in an overall process signals the preceding step that it
needs more material/product to work on and triggers the predecessor to
produce the needed material/product. In a pull environment, no one
upstream function or department should produce a product or service until
the customer downstream asks for it.
2010 APICS
All rights reserved.
1-175
House of Toyota
The House of Toyota is a framework commonly used to explain the entire scope
of lean. The House of Toyota graphic was created by Taiichi Ohno and Eiji
Toyoda of Toyota to help explain the Toyota Production System to employees
and suppliers.
In Exhibit 1-38 we see a typical representation of the House ofToyota.
Exhibit 1-38: House of Toyota
One-piece flow
Pull systems
Culture of
Continuous
Improvement
Respect for people
Safety
Morale
Manual or
f!Utomllted line to p
Separate opcn!lor
and machine
acri lties
l\list11 kc-prqofiog
ln-51Ation .;untrol
The metaphor of a house was used to convey stability. Operational stability (the
house foundation) implies stable demand and processes through leveling,
standardized work, and processes improved through kaizen.
The APICS Dictionary, 12th edition, tells us that leveling (also referred to as
load leveling, capacity smoothing, or level loading) is defined as follows.
Spreading orders out in time or rescheduling operations so that the
amount of work to be done in sequential time periods tends to be
distributed evenly and is achievable. Although both material and labor
are ideally level loaded, specific businesses and industries may load to
one or the other exclusively (e.g., service industries).
In the Toyota Production System, "heijunka" is the Japanese term akin to
leveling. The APICS Dictionary, 12th edition defines it as part of the Just-inTime philosophy and "an approach to level production throughout the supply
chain to match the planned rate of end product sales."
2010 APICS
1-176
Standardized work (or standard work) has been compared to the steps in a
dance; it defines tasks (such as content, sequence, and timing) to achieve an
optimum process in the time available. And, as noted at the stati of the
continuous improvement content, the APICS Dictionary, 12th edition, defines
kaizen as the Japanese term for "continuing improvement involving everyonemanagers and workers. In manufacturing, kaizen relates to finding and
eliminating waste in machinery, labor, or production methods."
The House ofToyota roof contains the primary goals ofTPS achieved by
eliminating waste.
Best quality
One-piece or continuous flow improves quality because the next
(downstream) process uses the piece shortly after it has been produced at
the previous (upstream) process. Unless there is batch processing, there
will be very few pieces produced with a defect because a defective item
should be found soon after it is made. (If there is batch processing, a
quality problem could potentially be replicated throughout the entire
batch before it is found in a downstream process.)
Lowest cost
A premise of lean is that the least amount of waste will result in the
lowest costs. It should be noted, however, if standard cost accounting is
used for lean projects, the results will actually make it appear as though
many lean efforts are having a seemingly negative financial effect on the
organization. A lean accounting system is required. Where traditional
accounting measurements focus on overhead (e.g., machine utilization,
cost variance, budget adherence), lean measurements focus on delivery
to the customer (e.g., through cycle time and inventory turns). Lean
accounting also necessitates different types of financial, behavioral, and
core process performance metrics. A lean metric is one "that permits a
balanced evaluation and response--quality without sacrificing quantity
objectives" (APICS Dictionary, 12th edition).
2010 APICS
All rights reserved.
l-177
Just-in-Time (JIT) andjidoka are two important lean concepts. They are shown
as the outer pillars in the House of Toyota. The house will not stand without
both pillars.
Just-in-Time
As we read earlier in the continuous improvement content, JIT is an
approach that allows delivery ofthe right items at the right time to the right
place in right amounts. Takt time, one-piece flow, and pull systems
facilitate JIT. We have already discussed the general principles of one-piece
flow and pull systems. Takt time needs further explanation.
When a lean system is ticking along at the perfect rate, its production of
finished goods is exactly synchronized with the rate of customer demand.
This reduces inventories to a minimum, eliminating all but work-in-process
and in-transit inventories. The heartbeat of such a synchronized system is
called takt time. Derived from the German word for musical meter, takt
time is computed as follows:
Available Production Time
Takt Time= - - - -- - - - - Customer Demand
For example, say that customer demand for wrist watches is running at
1,000 units per day and available capacity is rated at 700 minutes per day;
takt time would be .7 minutes per watch (700 minutes divided by 1,000
watches). The production system would then have to be designed to
produce a watch every 42 seconds (.7 x 60 seconds), or capacity would
have to be increased.
The end result of JIT is that each process produces only what is needed by
the next process in continuous flow.
Jidoka
The second pillar is jidoka, a Japanese term that can be loosely translated as
"automation with a human touch." In the House of Toyota, j idoka is
facilitated by line stoppage, the separation of operator and machine
activities, mistake-proofing, and in-station (visual) control.
Jidoka is sometimes referred to as "intelligent automation" or
"autonomation." It is the ability to stop production lines, by human or
machine, in the event of problems such as equipment malfunction, quality
issues, or late work. Typical applications in manufacturing are specially
equipped machines that stop a process immediately when a problem occurs
and signal for help. Operators stop work and correct the problem.
2010 APICS
All rights reserved.
1-178
2010 APICS
All rights reserved.
1-179
2010 APICS
All rights reserved.
1-180
In general the kaizen blitz includes basic training, analysis (usually a flowchart
of the process to be redesigned), and the design itself. A related term, kaizen
event, is defined in the 12th edition of the APICS Dictionary as follows:
A time-boxed set of activities carried out by the cell team during the
week of cell implementation. The kaizen event is an implementation
arm of a lean manufacturing program.
Kaizen, as we know, is the Japanese word for continuous improvement, and it
signifies a carefully designed, evolutionary process. The blitz is something of
an anomaly, therefore, and is not without its dangers. For one thing, the quick
turnaround time allows for only superficial training in analysis and design
methods without attention to the subtleties or tradeoffs. A kaizen blitz can be
most useful at the beginning of a lean or TQM initiative to provide a quick
demonstration of the possibilities of reform and thus convince skeptics that
change can be beneficial. But the very success of a blitz can also lead to
negative consequences. TQM, lean, six sigma, and JIT all take months or years
to achieve their objectives and are applicable to whole systems, not to local
procedures~ rhe
Five Ss
Order and organization are important in lean. The five Ss (often referred to as
the 5 Ss or 5S) are five terms beginning with "s"-sort, simplify, scrub,
standardize, and sustain. They are sometimes referred to by the Japanese
equivalents: seiri, seiton, seiso, seiketsu, and shitsuke. The purpose ofthe five
Ss is to make everything about the workplace orderly and clean and keep it so.
2010 APICS
All rights reserved.
1-18 I
Description
Sort
Sort means to separate needed items from unneeded ones and remove the
latter.
Sorting and organizing the work area , leaving only the essential paperwork,
tools, and other materials necessary to perform daily activities, improves
communication between workers and increases product quality and productivity.
Simplify
(set in order)
Scrub
(shine)
Standardize
Sustain
The five Ss create a workplace suitable for lean production. They convey
the message that quality starts with people in the organization and provide
a framework for a workplace that is clean, uncluttered, safe, and organized,
where people become empowered and engaged.
2010 APICS
1-182
Mura
Muri
2010 APICS
1-183
As lean strives to identify waste from the customer's perspective and determine
how to eliminate that waste, these tools help to make processes more
standardized, effective, and efficient.
Waste
Overproduction
Characterized by ...
Production ahead of demand; delivering products before they are
needed
Example: A quantity greater than needed (or earlier than needed) is
requested .
Waiting
Transportation
Waiting for the next production step; a delay between the end of one
activity and the start of the next
-Example: Queues build-up because of poorly synchronized
processes and inventory accumulates between processes.
Moving products that are not actually required to perform the
processing; unnecessary transport resulting in added cost
Example: Material is stored far from where it is used, requiring
wasteful system transactions.
Inappropriate
processing
Unnecessary
inventories
Unnecessary
motion
Defects
Scrap or rework
Example: Scrap results from material produced outside of
specifications.
Unused people
skills
2010 APICS
All rights reserved.
l-184
Be sure to include the four general areas of the balanced scorecard: business
process improvement (which you should have covered in the design of your
initiative), customer considerations, financial impact, and growth and learning.
Growth and learning can be crucial to the success of supply chain process
improvements.
Establish baseline measures for each KPI and set targets (using benchmarks as
you did for process improvement).
The master plan contains all improvements in sequence and delineates the end
of implementation and the beginning of the continuous improvement for each.
Project plans schedule all steps required to achieve the targets for each KPI, set
deadlines, and assign accountability for achieving results.
2010 APICS
All rights reserved.
1-185
improvement initiative involves so they can develop their own objectives and
strategies to contribute to a synchronized effort. For instance, if you are
moving toward a lean or JIT approach to production, you will need the
cooperation of suppliers in your efforts to reduce inventories and squeeze all
waste out of the system.
Consider conducting a pilot.
A successful pilot study with a limited number of firms may inspire confidence
in other supply chain partners and make full implementation easier. In effect,
the outcome of the pilot sets a benchmark for the rest of the partners.
Address change management issues.
Change can be enormously disruptive across a large organization if it isn't
handled properly. To ease a firm, let alone several supply chain partners, into a
TQM project, the team, along with executives, must prepare the ground
carefully before the initiative and maintain communication during, and possibly
long after, implementation. Some organizational and personal issues may hinder
progress toward goals ifthey aren't addressed in the-beginning.
These include the following:
Growth and learning will most likely have to be integral to the initiative.
People must not be introduced to new roles and new expectations without
being thoroughly prepared. Training can take different forms depending on
roles and responsibilities. New skills may best be learned in a person-toperson or classroom context with follow-up on the job. New procedures may
best be taught on the job with easy-to-use job aids for reinforcement. (If the
processes are computer-based, the training should also be computer-based.)
2010 APICS
All rights reserved.
1-1 86
All firms involved in the revised process will have to work together in true
partnership, sharing information and adjusting their strategies with an eye to
the success of the overall chain and the positive impact on the end customer.
Information sharing may have to be approached diplomatically, with an
emphasis on what can be gained in terms of enhanced value for the customer
and smoother operation of the chain.
Work under
the improvement umbrella
The most successful continuous improvement programs rely on more than one
technique. Lean and JIT, for example, are completely compatible in their goals
of squeezing waste out of all processes in the supply chain. When a lean system
is running on takt time, in fact, JIT delivery of supplies is virtually a necessity
to honor the commitment to zero accumulation of inventory in production
queues. At the same time, six-sigma attention to the reduction of errors keeps
the focus on achieving high-quality processes, not just fast ones. Errors
inevitably introduce waste into a process.
In 2005, the U.S. Navy initiated a process improvement project with a kaizen
event that demonstrates the compatibility of the techniques described in this
section. The process that needed improving was the "J&A," Navy-speak for
"Justification and Approval to Limit Competition." The J&A applies to the
Navy's acquisition (or sourcing) process and is used to justify sole-source
contracting. It affects every contract specialist in the Navy's air force
(NA V AIR), yet studies found that the policy was confusing to new personnel
2010 APICS
All rights reserved.
1-187
even after training and was subject to divergent interpretation. The result was
variability and poor quality in sourcing. The prescription for change was lean
six sigma, with its focus on reduction of variability and waste.
With the assistance of a black belt lean six-sigma consultant, NAV AIR
conducted a kaizen event. Participants sketched out a value stream map of the
current J &A process, including a detailed list of "touch times" (six-sigma
oppmtunities for error), waiting times, reviews, and "re-do loops" to document
total cycle time. It tumed out that the J&A process had 26 steps and 17 rework
loops, for a cycle time that varied from 27.75 to 129 days. The next step was to
create a future value stream map eliminating wasteful steps and reducing errors,
if possible to zero. The result of their efforts was a template to eliminate the "redo loops" and to make the process so easy to understand that no prior training
would be necessary for perfect completion of a J &A. One link in the template,
for instance, provided complete guidance on conducting a market survey-a
requirement of the process for which there was previously no instruction or
explanation. The new template reduced the number of steps from 26 down to 11
to 13 and the number of rework loops from 17 to zero. Total cycle time dropped
50 percent, to a maximum of 40.5 days and a minimum of 16. The benchmark
for the new J&A process was set to no stops and no "re-dos."
Summing up
2010 APICS
All rights reserved.
1-188
Bibliography
The following materials were used during the development of this module.
APICS. Advanced Supply Chain Management (CD-ROM). Chicago, Illinois: APICS.
APICS. APICS Dictionary, 12th edition. Chicago, Illinois: APICS, 2008.
APICS. Global Sourcing Workshop Series, Version 1.0. Chicago, Illinois: APICS, 2008.
APICS. Lean Enterprise Workshop Series, Version 1.0. Chicago, Illinois: APICS, 2008.
Ayers, James B. Handbook of Supply Chain Management. Boca Raton, Florida: St. Lucie Press, 2001.
Bowersox, Donald J., David J. Closs, and M. Bixby Cooper. Supply Chain Logistics Management,
third edition. Boston: McGraw-Hill Irwin, 2010.
Byrnes, Jonathan. "You Only Have One Supply Chain?" Working Knowledge, August 1, 2005.
Cash, Raheem, and Taylor Wilkerson. "GreenSCOR: Developing a Green Supply Chain Analytical
Tool." Report LG 101 T4. McLean, Virginia: Logistics Management Institute, March 2003.
Chorafas, Dimitris N. Integrating ERP, CRM, Supply Chain Management, and Smart Materials. Boca
Raton, Florida: Auerbach, 2001.
Clark, Donald. "Continuous Process Improvement Page." www.nwlink.com/~donclark/
perform/process.html.
Colehower, Jonathan. "Achieving Supply Chain Visibility." International Conference Proceedings.
Chicago, Illinois: APICS, 2003.
Colley, John L., Jr., Jacqueline L. Doyle, and Robert D. Hardie. Corporate Strategy. New York:
McGraw-Hill, 2002.
"Creating Value through Strategic Supply Management." www.atkearney.com/index.php/
Publications/creating-value-through-strategic-supply-management.html?q=
creating+value+through+strategic+supply+management.
Eisenhardt, Kathleen M. "Time Pacing: Competing in Markets That Won't Stand Still." Harvard
2010 APICS
All rights reserved.
1-196
Bibliography
Eskew, Michael. "Profiting Through Environmental Supply Chain Management." Executive Speeches,
August/September 1999.
Ferguson, Brad R. "Implementing Supply Chain Management." Chicago, Illinois: APICS, 2000.
Fisher, Marshall L. "What Is the Right Supply Chain for Your Product?" Harvard Business Review,
March-April 1997.
Forman, Marianne, and Michael S0gaard J0rgensen. "Organising Environmental Supply Chain
Management. Experience from a Sector with Frequent Product Shifts and Complex Product Chains:
The Case of the Danish Textile Sector." GMI, Spring 2004.
French, Ewan. "Green by Design." Logistics & Transport Focus, June 2007.
Friedman, Thomas L. The World Is Flat. New York: Picador/Farrar, Straus, and Giroux, 2007.
"Goal: A Green Supply Chain: 2009 Green Supplier Directory." Purchasing, February 2009.
"'Green' Supply Chain Movement Hits a Speed Bump." Industry Week, April2009.
Hall, Jeremy. "Environmental Supply-Chain Innovation." GMJ, Autumn 2001.
Harrison, Teny P., HauL. Lee, and John J. Neale, editors. The Practice of Supply Chain Management:
Where Theory and Application Converge. Norwell, Massachusetts: Kluwer Academic Publishers
Group, 2003.
Heizer, Jay, and Bany Render. Principles of Operations Management, fourth edition. Upper Saddle
River, New Jersey: Prentice-Hall, 2001.
Helmers, Lori R. "The Elastic Green: Protecting the Environment and the Bottom Line." Global Trade
Services at JPMorgan Chase, BNP Media, 2008.
Institute of Management Accounts. CMA Learning System, Book 2a: Management Accounting and
Reporting. Montvale, New Jersey: Institute of Management Accountants, 2004.
Irving, Dan, Gary Kilponen, Raffi Markarian, and Mark Klitgaard. "Innovations: A Tax-Aligned
Approach to SCM." Supply Chain Management Review, April2005
"Keeping Ahead of Supply Chain Risk and Uncertainty," 2008, www.oracle.com/applications/
scm/accenture-oracle-risk-pov-white-paper.pdf.
"Key Elements of Quality ... Customer, Process and Employee." www.ge.com/sixsigma/
keyelements.html.
Khoo, Hsien H., and Trevor A. Spedding, Ian Bainbridge, and David M. R. Taplin. "Creating a Green
Supply Chain." GMI, Autumn 2001.
Kuglin, Fred A. Customer-Centered Supply Chain Management: A Link-by-Link Guide. New York:
AMACOM, 1998.
2010 APICS
All rights reserved.
1-197
Kuglin, Fred A., and Barbara A. Rosenbaum. The Supply Chain Network@ Internet Speed: Preparing
Your Company for theE-Commerce Revolution. New Yark: AMACOM, 2001.
Landvater, Darryl. "What Is Time-Phased Planning?" Supply Chain Management Review,
November/December 2001.
Light, Elizabeth. "A Green Supply Chain." NZ Business, April2002.
Martin, AndreJ. "Capacity Planning: The Antidote to Supply Chain Constraints." Supply Chain
Management Review, November/December 2001.
McCormack, Kevin P., William C. Johnson, and William T. Walker. Supply Chain Networks and
Business Process Orientation: Advanced Strategies and Best Practices. Boca Raton, Florida: St.
Lucie Press, 2002.
Mongelluzzo, Bill. "Green for 'Green'-Investment 'Angels' Put Up Money for Environmental
Technology at Ports." The Journal of Commerce, June 16, 2008.
Muzumdar, Maha, and Narayan Balachandran. "The Supply Chain Evolution: Roles, Responsibilities,
and Implications for Management." Chicago, Illinois: APICS, 2001 .
Nokia Web site, www.Europe.nokia.com.
Oliver Wight Web site, www.oliverwight.com.
O'Sullivan, Denis. "What Is the Reality of Environmentally Friendly Supply Chains?" Logistics &
Transport Focus, October 2008.
Poirier, Charles C. Advanced Supply Chain Management: How to Build a Sustained Competitive
Advantage. San Francisco: Berrett-Koehler Publishers, 1999.
Poirier, Charles C., and Stephen Reiter. Supply Chain Optimization: Building the Strongest Total
Business Network. San Francisco: Berret-Koehler Publishers, 1996.
Reese, Andrew K. "Building the Green Supply Chain." Supply/Demand Chain Executive, October/
November 2007, www.sdcexec.com/print/Supply-and-Demand-Chain-Executive/Building-theGreen-Supply-Chain/1$1 0015.
Reeve, James M. "The Financial Advantages of the Lean Supply Chain." Supply Chain Management
Review, March/April2002 .
Ross, David F. Introduction toe-Supply Chain Managem ent: Engaging Technology to Build MarketWinning Business Partnerships. Boca Raton, Florida: St. Lucie Press, 2003.
2010 APICS
All rights reserved.
l-198
Bibliography
Rowat, Christine. "Collaboration for Improved Product Availability." Logistics & Transport Focus, April
2006.
Seuring, Stefan A. "Green Supply Chain Costing: Joint Cost Management in the Polyester Linings Supply
Chain." GMI, Spring 2001.
Sheffi, Yossi. The Resilient Enterprise. Cambridge, Massachusetts: MIT Press, 2007.
Supply-Chain Operations Reference-Model (SCOR)- Overview, www.supply-chain.org/galleries/public-
Vachon, Stephan. "Green Supply Chain Practices and the Selection of Environmental Technologies."
International Journal ofProduction Research, Vol. 45, Nos. 18-19, 15 September-! October 2007.
2010 APICS
All rights reserved.
l-199
This cumulative course index covers all four modules of the APICS CSCP Learning System. The page
numbers used in the index include the module number, for example, 1-48 refers to page 48 of Module 1.
assemble-to-order strategy, 2-85-2-86, 2-91, 292
assembly sites, comparing, 2-266
assortment
planning software, 4-90--4-91
in warehousing, 2-207
ATA Camet, 2-246
ATP (available-to-promise), 2-95, 4-72
auctions, and B2B marketplaces, 4-146--4-14 7
audits, technology, 4-32
Auto ID, 2-216-2-217
Auto-ID Center, 4-112
automated guided vehicle systems (AGVS), 2212
automated sorting devices, 2-213
automated storage and retrieval systems
(AS/RS), 2-213-2-214
automatic communication and pick signals, 4-78
automatic communication technologies, 4-1094-110
automatic identification and data capture, 4-38,
4-77--4-78, 4-107--4-118
automation in warehouses, 2-208-2-218
availability
and customer service, 2-192
ofproducts/services, 1-38
available inventory, 2-94
available time, in measuring capacity, 2-121
available-to-promise (ATP), 2-95, 4-72
A WB (airway bill), 2-247-2-248, 2-249
A
ABC inventory analysis, 2-133-2-134
account management, 3-52, 3-53
acquisitions, 1-72,3-72,3-73,4-132
active tags, 4-115
advanced optimization tools, 4-70--4-86
advanced planning and scheduling, 4-71--4-7 4
affordability, ofproducts/services, 1-37-1-38
aftermarket
sales, 3-84-3-85
savings in, 2-224
agents (analytical tool), 4-26--4-27
aggregation layer of B2B/B2C e-business, 4-13 5
agility
among supply chain partners, 1-59
improvement in, 3-130-3-131
AGVS (automated guided vehicle systems), 2-212
AI (artificial intelligence), 4-27--4-28
AIDC. See automatic identification and data
capture
air transport, 2-174-2-176
airway bill (A WB), 2-247-2-248, 2-249
algorithms, genetic, 4-28
alliances
global, 3-76-3-77
strategic, 3-72, 3-73-3-85
analysis, statistical, 4-26
analytical applications, 3-128
analytical tools, 4-19--4-29
anticipation inventories, 2-206
application layer ofB2B/B2C e-business, 4-135
APS. See advanced planning and scheduling
artificial intelligence (AI), 4-27--4-28
AS2, 4-101
A SIRS (automated storage and retrieval
systems), 2-213-2-214
2010 APICS
All rights reserved.
B
B2B commerce. See business-to-business
commerce
B2B exchanges/marketplaces, 4-140--4-149
B2C commerce. See business-to-consumer sales
1-200
c
calculators, 4-26
call centers, 3,.56
capable-to-promise (CTP), 4-72
capacity, 2-114
control, 2-114, 2-115,2-124, 2-128
management, 2-114-2-128
measuring, 2-121-2-124
planning, 2-89- 2-91, 2-114, 2-115, 2-116-2124, 2-128
rated, 2-122- 2-123
requirements planning (CRP), 2-116, 2-117,
2-120-2-124, 2-128
Camet, 2-246
carousels, 2-212
earners
common,2-182-2-184
contract, 2-184
exempt, 2-184-2-185
legal types of, 2-181-2-185
motor, 2-167-2-169, 2-176
private, 2-182
selection of, 4-81
transportation goals of, 2-162
carrying costs, 2-13 7
cash-to-cash cycle time, 1-125- 1-126
cause-and-effect diagram, 1-158
ceo (chief customer officer), 3-23
CDW (customer data warehouse), 3-49
0 2010 APICS
All rights reserved.
1-201
2010 APICS
All rights reserved.
1-202
2010 APICS
All rights reserved .
1-203
D
dangerous goods. See hazardous materials
data
accuracy,4-13,4-18-4-19
aggregation, 4-17
analysis, 4-13, 4-19-4-29
2010 APICS
All rights reserved.
l-204
data (continued)
ancillary, 4-15
batch, 4-16
capture, 4-14-4-16
cleansing, 4-18
collection of, 4-12, 4-14-4-18
dicing, 4-28
dictionary, 4-8
formats, 4-1 06
manipulation language, 4-8
mining, 4-26
networks, external, 3-55
normalization, 4-18
providing access to, 4-12-4-13
real-time, 4-4-4-5,4-16
slicing, 4-28
transpmtation/integration, in radio frequency
identification, 4-117
types of, 4-16
use, 4-11-4-30
validation, 4-17-4-18
visibility of, 4-13
volume, 4-14
warehouses, 3-49,4-10
database management system (DBMS), 4-8, 49-4-10
databases, 4-8-4-11
datamarts, 4-1 0
data-oriented middleware, 4-3 7
DBMS (database management system), 4-8, 49-4-10
decision support systems (DSS), 1-113, 4-24-426
declared value, 2-255
decline stage in product life cycle, 3-35
decoupling, 2-13 0
defect measurement, 1-156, 1-166
delivery
requirements, in contracts, 3-86
scheduling, 4-81
Delphi method, 2-18-2-19
demand, components of, 2-4
demand, definition of, 2-4
demand, dependent, 2-15-2-16, 2-96-2-97, 2137
demand enhancement, 3-129-3-130
2010 APICS
All rights reserved.
1-205
distance
and demand variability, 2-8
and economics of transportation, 2-185
distributed processing, 4-7
distribution, 3-130
inventory, 2-111
requirements planning (DRP), 2-110-2-113,
4-74--4-76
distributor, 1-6
integration, 3-81-3-82, 3-136
resistance to implementation of
customer/supplier relationship
management, 3-136
DMADV (Define, Measure, Analyze, Design,
Verify) process, 1-165
DMAIC (Define, Measure, Analyze, Improve,
Control) process, 1-165
dock receipt, 2-248
documentation, export-import, 2-244-2-248, 2258-2-259
downside supply chain adaptability, 1-123
DRP (distribution requirements planning), 2110-2-113, 4-74--4-76
DSS (decision support systems), 1-113,4-24--426
due diligence, 4-36
Dutch auctions, 4-146
duties, customs, 2-257
duty drawbacks, 2-255
E
EAI (enterprise application integration), 4-37--441
EBS (electronic business systems) backbone
functions, 3-113-3-114
e-business
collaboration, 4-130--4-134
communication, 4-131--4-132
costs/drawbacks, 4-126--4-127
joint processes, 4-130--4-134
requirements for success, 4-129--4-130
return on investment, 4-127--4-129
strategy, 4-122--4-123
terminology, 4-121--4-122
e-business supply chain vs. traditional
supply chain, 4-125
2010 APICS
All rights reserved.
1-206
F
fat clients, 4-99
Federal Express, 2-179
feedback questionnaires, 3-59
file transfer protocol (FTP), 4-101
fill rate, 2-192
financial performance, managing supply chain
for, 1-128-1-133
financial statements, 1-122-1-132
financial value, creation of, 1-3 5-1-3 7
finished goods inventory, 2-132
fishyback service, 2-180-2-181
five Ss and lean supply chain thinking, 1-181-1182
fixed order point, 2-141
fixed order quantity, 2-139
flexibility and operational performance, 2-193
fluctuation inventory. See safety stock
forecast error, 2-31-2-33
forecast-driven enterprise, 1-55-1-57, 1-58
forecasting, 2-5, 2-12, 2-14-2-34
extrinsic techniques, 2-19, 2-33
intrinsic techniques, 2-19,2-20-2-33
naive, 2-22, 2-28
principles, 2-14-2-15
qualitative approaches, 2-16-2-19
quantitative approaches, 2-19-2-34
service sector, 2-34
forecasts
avoiding multiple, 2-11
mix, 2-14
foreign trade zones, 2-256-2-258
forklift trucks, 2-209
forward auctions, 4-146
foundation layer ofB2B/B2C e-business, 4-135
"four Ps" of marketing, 3-25-3-31
2010 APICS
All rights reserved.
G
general trading companies, 2-236
genetic algorithms, 4-28
global alliances, 3-76-3-77
global locations, evaluation of, 2-267
global logistics, 2-153, 2-231-2-232
declared value, 2-255
documentation, 2-244-2-248, 2-258-2-259
duty drawbacks, 2-255
export-import participants, 2-232-2-239
foreign/free trade zones, 2-256-2-258
harmonized system classification codes, 2253-2-254
import costs, 2-255, 2-257
import licensing, 2-259-2-260
Incoterms, 2-240-2-243, 3-86-3-87
landed/hidden costs, 2-265-2-266
locations, evaluation of, 2-267
packaging concerns, 2-248, 2-250-2-251
risk, hedging, 2-260-2-264
trade agreements, 2-251-2-252, 2-256
Global Reporting Initiative (GRI), 1-142
global sourcing, 3-67-3-68, 3-85-3-89
global track and trace, 4-83
globalization, impact on supply chain
management, 1-45-1-48
government, transportation goals of, 2-162-2163
graphical user interface (GUI), 4-11
green supply chain, 1-32, 1-41-1-44
green supply chain management, 1-32-1-35, 154
GreenSCOR, 1-128
GRI (Global Reporting Initiative), 1-142
1-207
H
handling, and economics of transportation, 2187-2-188
harmonized system classification codes, 2-2532-254
Harmonized Tariff Schedule (HTS), 2-253- 2254
hazardous materials (hazmat), 2-67,2-188- 2-191
heads-up displays, 4-110
hedging risk, 2-260- 2-264
hidden costs, 2-265- 2-266
historical analogy, 2-17
Hofstede's dimensions of culture, 3-9,3-10
holding costs, 2-13 7
horizontal integration, 1-18, 1-20-1-21
horizontal trade exchanges/marketplaces, 4-144,
4-145
House ofToyota, 1-176-1-179
HTML (hypertext markup language), 4-1 00
HTS (Hrumonized Tariff Schedule), 2-253-2254
HTTP (hypertext transfer protocol), 4-100
hybrid modes of transportation, 2-177-2-181
hybrid production strategy, 2-84
hybrid trade exchanges/marketplaces, 4-144-4145
hypertext, 4-100
hypertext markup language (HTML ), 4-100
hypertext transfer protocol (HTTP), 4-100
2010 APICS
All rights reserved.
1-208
2010 APICS
All rights reserved.
J, K
jidoka, 1-178-1-179
JIT. See Just-in-Time
joint processes, and e-business, 4-130-4-134
joint replenishment, 2-42
joint ventures, 3-74
Just-in-Time, l-162, 1-167-1-171, 1-178, 2-107,
2-127, 2-128
kaizen, 1-148, 1-177, 1-180-1-181
kanban, 1-170-1-171, 2-126-2-127
keiretsu, 1-20
key performance indicators (KPis ), 1-114-1115, 1-185, 1-187
knowledge management, 3-53
KPis. See key performance indicators
L
labeling shipments for export, 2-250
labor management systems (LMS), 4-85
land bridge, 2-181
landed cost, 1-108-1-109,2-265-2-266
landfill, disposal in, 2-227
LANs (local area networks), 4-8
lateral integration, 1-18, 1-20-1-21
lateral supply chain management. See lateral
integration
LIC (letter of credit), 2-261-2-264
lead time, 2-10, 2-93, 3-80, 3-132-3-133
leadership compared to management, 1-135-1136
lean supply chain thinking, 1-162, 1-171-1-172,
2-127-2-128
five Ss, 1-181-1-182
House ofToyota, 1-176-1-179
jidoka, 1-178-1-179
and Just-in-Time, 1-178
kaizen event/b1itz(smJ, 1-180-1-181
objectives, 1-173-1-175
principles, 1-17 5
value stream mapping, 1-180
waste, 1-183-1-185
legacy systems, 4-37, 4-53
legal authority in contracts, 3-89
less-than-truckload (LTL) segment of trucking
industry, 2-168, 2-169
1-209
M
MAD (mean absolute deviation), 2-31-2-33
magnetic stripes, 4-109
maintenance/repair/operations (MRO) inventory,
2-132
make-or-buy decision, 1-105-1-110
make-to-order strategy, 2-85, 2-91, 2-92
make-to-stock strategy, 2-85, 2-91
malfunction recovery and operational
performance, 2-193
management compared to leadership, 1-135- 1136
2010 APICS
All rights reserved.
1-210
..
0
Object Naming Service (ONS), 4-114
object-oriented databases, 4-10
objectives of supply chain management, 1-1031-104
offsetting, 2-105
offshoring, 3-67-3-68
off-site delivery centers, 3-120
OLAP (online analytical processing), 4-284-29
Oliver Wight checklist, 1-161
ongoing supplier relationships, 3-72
online analytical processing (OLAP), 4-28-4-29
online sales, 3-55
ONS (Object Naming Service), 4-114
operational execution, 4-6, 4-43-4-44
operational performance and customer service,
2-192-2-193
operational planning, 4-6, 4-43
operating system (0/S), computer, 4-7-4-8
operations planning/control, 2-77-2-79
capacity management, 2-114-2-128
distribution requirements planning, 2-110-2113
inventory management, 2-128-2-144
master production scheduling, 2-87-2-96
material requirements planning, 2-96-2-11 0
sales and operations planning (S&OP), 279-2-87
N
NAFTA. See North American Free Trade
Agreement
naive forecasting, 2-22, 2-28
"nervousness" in material requirements planning
system, 2-106-2-107
net profit, 1-30
2010 APICS
All rights reserved.
1-211
performance
alerts, in measuring supplier performance, 3108
criteria, in contracts, 3-87
enhancing supplier, 3-100-3-110
operational, and customer service, 2-192-2193
reports, 3-108-3-109
speed of, 2-192
periodic counting, 2-135-2-136
perishables, packaging for, 2-250
personal insight, as qualitative approach to
forecasting, 2-1 7
physical inventory, 2-136
pick-to-light systems, 2-213, 4-109
picking systems, 2-212-2-213
piggyback service, 2-180
pipeline inventory, 2-130-2-131
pipeline management applications, 3-53
pipelines, 2-173-2-17 4, 2-17 6, 2-177
placement, 2-48-2-49, 3-28-3-30
planning horizon, 2-93-2-94
planning time fence, 2-94
poka-yoke, 1-179
poor quality, costs of, 1-152
portals, 4-149--4-151
post-implementation review (ofiT projects), 436--4-37
postponement, 2-13, 2-68, 2-206
post-shipment analysis, 4-82
predictive chum model, 3-36
price, 2-48, 3-27
in contracts, 3-86
fluctuations, 2-10
low, as competitive strategy, 1-87-1-88
stability, 2-12- 2-13
private carriers, 2-182
private fleet management, 4-80--4-81
private trade exchanges/private marketplaces, 4142, 4-143
private warehouses, 2-202
pro forma commercial invoice, 2-246
problem resolution channels in contracts, 388
problem tracking, 3-56
p
P2P (peer-to-peer) network, 4-40--4-41
PAB (projected available balance), 2-94-2-95
PAC. See production: activity control
package delivery services, 2-177-2-180
packaging, 2-49, 2-188, 2-248, 2-250-2-251
pallets, 1-143
Pareto diagram, 1-15 7, 1-166
participant resistance to customer/supplier
relationship management, 3-135-3-137
partnerships, 3-72, 3-73
passive tags, 4-115
patterns, identifying, 1-15 5-1-15 6
payment terms in contracts, 3-87
PCDM (product content data management), 485--4-86
peer-to-peer network, 4-40--4-41
penalties in contracts, 3-88
perfect order fulfillment, 1-121
2010 APICS
All rights reserved.
1-212
2010 APICS
All rights reserved.
Q
QR (quick response) program, 2-35, 3-80
qualitative approaches to forecasting demand, 216-2-19
quality, 2-196
assurance, in contracts, 3-87
costs of poor quality, 1-152
improvement process for suppliers, 3-110
of products/services, 1-3 7
quantitative approaches to forecasting demand,
2-19-2-34
queries, 4-26
questionnaires for customer feedback, 3-59
quick response (QR) program, 2-35, 3-80
quotation management, 3-53
R
radio frequency devices, 4-108
radio frequency identification, 2-215-2-217, 4112-4-118
rail transport, 2-164-2-167, 2-17 6
random variation, 2-4
rapid response, 2-196
rated capacity, 2-122-2-123
rating supplier performance, 3-106, 3-107-3-109
rationing, 2-10-2-11
raw materials inventory, 2-131
RCCP. See rough-cut capacity planning
real-time data, 4-4-4-5, 4-16
recycling, 2-66-2-67, 2-227
relational databases, 4-9
remanufacturing, 2-73
resistance to customer/supplier relationship
management, 3-135-3-137
resource management, 2-119
resource planning, 2-90, 2-116, 2-117, 2-118
resource requirements planning, 2-117-2-119, 2128
resource use, reducing, 2-226
response management, 3-54
1-213
2010 APICS
All rights reserved.
5
SaaS (Software as a Service), 4-94--4-95
S&OP (sales and operations planning), 2-79-287
safety stock, 1-55-1-56, 2-9-2-10,2-130, 2142-2-144
sales and marketing, technology for, 3-51-3-55
sales and operations planning (S&OP), 2-79-2-87
sales force automation (SFA), 3-52-3-53
sales force consensus estimate, as qualitative
approach to forecasting, 2-17
sales process/activity management, 3-53
Sarbanes-Oxley Act (SOX), 1-140-1-142
SCEM (supply chain event management), 4-874-90
scheduling
delivery, 4-81
and Just-in-Time, 1-170-1-171
SCM. See supply chain management
SCMC (supply chain management cost), 1-1231-124
scope creep, 4-36
SCOR model. See Supply-Chain Operations
Reference model
scorecards, in measuring supplier performance,
3-108
SCV (supply chain visibility) systems, 4-88--489
seasonal index, 2-29-2-30
seasonality, 2-4, 2-7, 2-20
Section 401 (SOX), 1-140, 1-141
Section 404 (SOX), 1-140-1-141
security
issues, 1-138-1-139, 3-115,4-133
requirements in contracts, 3-88
segmentation, customer, 3-24, 3-39-3-44
sell-side e-commerce, 4-13 7--4-13 8
semifunctional enterprise stage of supply chain
management development, 1-22, 1-23-1-24,
4-44--4-45, 4-46, 4-61
semipassive tags, 4-115
service channel technology, 3-55
service industries, 1-7
service sector forecasting, 2-34
service-minded customers, 3-42-3-43
l-214
..
2010APICS
All rights reserved.
1-215
2010 APICS
All rights reserved.
supply chain
asset management, 1-119, 1-125-1-126
benefits of information technology, 4-3
competition between supply chains, 1-63-167
costs, 1-119, 1-123-1-125
defined, 1-3, 1-9
development, stages of, 4-44--4-4 7
dynamics, 2-5-2-13
e-business supply chain vs. traditional
supply chain, 4-125
flexibility, 1-119, 1-122-1-123
green, 1-32, 1-41-1-44
and information technology, 4-2-4-7
Internet-enabled, 4-123--4-125
managing for financial performance, 1-1281-133
master planning, 4-43
metrics, 1-81
networks, integrated, 3-126-3-129, 3-137-3143
number of supply chains, 1-60-1-62
processes, 1-10- 1-17, 1-78
reliability, 1-119, 1-121
responsiveness, 1-119, 1-122
strategy, 1-75-1-86
synchronization, 1-136-1-137
and taxes, 1-132-1-133
traditional supply chain vs. e-business
supply chain, 4-125
and value chain, 1-10- 1-11
values, 1-29-1-35
visibility systems, 4-88--4-89
supply chain event management (SCEM), 4-874-90
supply chain management
comprehensive system, 4-41--4-4 7
creating value through, 1-29-1-44
defined, 1-10- 1-12
elements of, 1-110-1-113
evolution of, 1-17-1-29
green, 1-32-1-35, 1-54
impact of globalization, 1-45-1-48
innovative technologies, 4-69-4-95
lateral, 1-18, 1-20-1-21
objectives, 1-103-1-104
1-216
technology
audits, 4-32
customer readiness to adopt, 3-44
in customer relationship management, 313
decisions, 1-104-1-105
existing, 3-8
infrastructure, 4-7-4-11
mitigating risk in implementation, 4-36
in supplier relationship management, 3-13,
3-110-3-115
in supply chain management, 3-128
trends, 4-93-4-95
temporary storage, 2-160-2-161
terrorism, 4-4
thin clients, 4-99
third-party logistics (3PL), 2-153,2-218-2-220,
3-79-3-80
three "V s" of supply chain management, 1-881-90
throughput time, 2-126
time fence, 2-93-2-94
time series models. See intrinsic forecasting
techniques
TL (truckload) segment of trucking industry, 2168-2-169
TMS. See transportation: management
systems
TNT Logistics, 2-179
TOFC (trailer on flatcar), 2-180
total cost of ownership (TCO), 3-68
total quality management (TQM), 1-14 7, 1-148
tow tractors with trailers, 2-211
towlines, 2-210
TQM (total quality management), 1-147, 1148
track and trace, global, 4-83
trade agreements, 2-251-2-252, 2-256
trading exchanges, use of supply chain event
management, 4-90
trailer on flatcar (TOFC), 2-180
transfer of ownership in contracts, 3-86-3-87
transportation, 2-12,2-152,2-158-2-193
costs, and inventory, 3-132
costs, and lead time, 3-132-3-133
decision makers, 2-161-2-163
T
tactical information, 4-5, 4-6-4-7
tag read errors, 4-116-4-11 7
tags, EPC, 4-115-4-116
takt time, 1-178
tangible costs, 4-34-4-35
target costing, 1-88
taxes
and information technology, 1-133
and logistics networks, 1-132-1-133
and procurement, 1-132
savings, 1-132
TCO (total cost of ownership), 3-68
technological areas, integration among, 3-55-356
technological limitations to implementation of
customer/supplier relationship management,
3-134-3-135
2010 APICS
All rights reserved.
l-217
transportation (continued)
economics, 2-185-2-191
inventory, 2-152
legal types of carriers, 2-181-2-185
management systems (TMS), 3-82-3-83, 479--4-84
modes of, 2-163-2-181
network design, 4-80
trend adjustment, 2-28-2-29
trends, 2-4, 2-20
truckload (TL) segment of trucking industry, 2168-2-169
u
UDDI (Universal Description, Discovery, and
Integration), 4-103
United Nations Recommendations on the
Transport of Dangerous Goods (UNRTDG),
2-190
United Parcel Service (UPS), 2-178-2-179
Universal Description, Discovery, and
Integration (UDDI), 4-103
Universal Product Code (UPC), 4-111
universality, 2-71
UNRTDG (United Nations Recommendations
on the Transport of Dangerous Goods), 2-190
UPC (Universal Product Code), 4-111
UPS (United Parcel Service), 2-178-2-179
up-selling, 3-37-3-38, 3-54
upside supply chain adaptability, 1-123
upside supply chain flexibility, 1-122
U.S. Customs and Border Protection, 1-138-1139
U.S. Food and Drug Administration, 1-143
utilization, in measuring capacity, 2-122
W, X, Y, Z
W3C (World Wide Web Consortium), 4-100
wagon cranes, 2-211-2-212
WANs (wide area networks), 4-8
warehouse management systems (WMS), 2-214,
4-76--4-79
warehouses, 2-152-2-153,2-194-2-196
capabilities, 2-204-2-208
equipment, 2-208-2-214
location, 2-200-2-201
number of, 2-197-2-200
ownership, 2-201-2-204
software, 2-208-2-209, 2-214-2-218
warehousing, value-added, 2-195-2-196
v
value, 1-29, 1-37-1-40, 1-113
value added, 1-29, 3-69
value-added networks (VANs), 4-66
value-added tax (VAT), 2-255
value-added warehousing, 2-195-2-196
value chain compared to supply chain, 1-10-111
value profile, 3-42
2010 APICS
All rights reserved.
1-218
2010 APICS
All rights reserved.
1-219