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BUILDING HIGH PERFORMANCE RELATIONSHIPS WITH SUPPLIERS
Douglas M. Lambert, Ph.D.Raymond E. Mason Chair in Transportation and Logistics
Fisher College of BusinessThe Ohio State University
Supply Chain ManagementSupply Chain Management
…is the integration of key business processes
from end user through original suppliers, that
provides products, services, and information
that add value for customers and
other stakeholders.
[The International Center for Competitive Excellence, 1994][The Global Supply Chain Forum, 1998]
Supp
ly C
hain
Man
agem
ent P
roce
sses
Tier 1Supplier
Tier 2Supplier Logistics
Purchasing Marketing & Sales
R&D
Customer Consumer/End-user
PRODUCT FLOWProduction Finance
Manufacturer
Information Flow
RETURNS MANAGEMENT
PRODUCT DEVELOPMENT AND COMMERCIALIZATION
SUPPLIER RELATIONSHIP MANAGEMENT
MANUFACTURING FLOW MANAGEMENT
ORDER FULFILLMENT
DEMAND MANAGEMENT
CUSTOMER SERVICE MANAGEMENT
CUSTOMER RELATIONSHIP MANAGEMENT
SUPPLY CHAIN MANAGEMENTIntegrating and Managing Business Processes Across the Supply Chain
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2 (1998), p. 2.
n
2
3
1
2
1
1
n
2
1
3
n
2
1
3 1
n
2
n
1
2
n
1
Con
sum
ers/
End-
user
s
n
Tier
3 to
n s
uppl
iers
Initi
al S
uppl
iers
Tier 1Customers
Tier 2Customers
Tier 3 toConsumers/End-users
Tier 2Suppliers
Tier 1Suppliers
Tier 3 toInitial
suppliers
n
1
n
1
n
Members of the Focal Company’s Supply Chain
Focal Company
Non-members of the Focal Company’s Supply Chain
Managed Process Links
Not-Managed Process Links
Non-Member Process Links
Monitored Process Links
Types of Inter-company Business Process Links
Tier
3 to
n c
usto
mer
s
1
n
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 7.
Sales Marketing Production
FUNCTIONAL INVOLVEMENT IN THE SUPPLY CHAIN MANAGEMENT PROCESSES
Information Architecture, Data Base Strategy, Information Visibility
Research &Developmen
t
Logistics Purchasing FinanceBusinessProcesses
DemandManagement Forecasting
Manufacturing Capabilities
Sourcing Capabilities
Competitors’Initiatives
Customer Relationship Management
LogisticsCapabilities
ManufacturingCapabilities
SourcingCapabilities
CustomerProfitability
AccountManagement
RequirementsDefinition
Customer ServiceManagement
Alignment of LogisticsActivities
CoordinatedExecution
Prioritization of Customer
Knowledge of Customer
Operations
Manufacturing Flow Management
ProductionPlanning
IntegratedSupply
Order FulfillmentNetworkDesign Made-to-Order Material
ConstraintsDistribution
CostRole of Logistics
Service in Marketing Mix
Product Development and Commercialization
ProcessSpecifications
MaterialSpecifications R & D CostProduct
DesignLogistics
Requirements
PriorityAssessment
Cost-to-Serve
TradeoffAnalysis
ProcessRequirements
EnvironmentalRequirements
DifferentiationOpportunities from
ManufacturingCapabilities
PrioritizationCriteria
Supplier Relationship Management
IntegratedPlanning
SupplierCapabilities
Total DeliveredCost
MaterialSpecifications
Capabilities Requiredfor Competitive
PositioningInbound
Material Flow
ManufacturingCost
CU
STO
MER
S
SUPP
LIER
SBusiness
Functions
Returns Management
Note: Process sponsorship and ownership must be established to drive the attainment of the supply chain vision and eliminate the functional barriers that artificially separate the process flows.
Information Architecture, Data Base Strategy, Information Visibility
Knowledge ofMarketing Programs
Product Design
Reverse Logistics
Capabilities
Remanu-facturing
Material Specification
Revenue & Costs
Source: Adapted from Douglas M. Lambert, Larry C. Guinipero and Gary J. Ridenhower, “Supply Chain Management: A Key to Achieving Business Excellence in the 21st Century”, unpublished manuscript as reported in Keely L. Croxton, Sebastián J. García-Dastugue and Douglas M. Lambert, “The Supply Chain Management Processes”, The International Journal of Logistics Management, Vol. 12, No.2 (2001), p. 31.
Technological Capabilities
Marketing Plan& Resources
Technical Service
Customer Knowledge
Customer Opportunities
Product/Service Gaps in Market
Sales GrowthOpportunities
Design for Manufacturability
Knowledge of Customer
Requirements
Knowledge of Customer
Requirements
CompetingPrograms in
Customer Space
Supp
ly C
hain
Man
agem
ent P
roce
sses
Tier 1Supplier
Tier 2Supplier Logistics
Purchasing Marketing & Sales
R&D
Customer Consumer/End-user
PRODUCT FLOWProduction Finance
Manufacturer
Information Flow
RETURNS MANAGEMENT
PRODUCT DEVELOPMENT AND COMMERCIALIZATION
SUPPLIER RELATIONSHIP MANAGEMENT
MANUFACTURING FLOW MANAGEMENT
ORDER FULFILLMENT
DEMAND MANAGEMENT
CUSTOMER SERVICE MANAGEMENT
CUSTOMER RELATIONSHIP MANAGEMENT
SUPPLY CHAIN MANAGEMENTIntegrating and Managing Business Processes Across the Supply Chain
Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2 (1998), p. 2.
Supply Chain Performance = Increase in Profit for A, B, C, and D
ManufacturerC
Retailer/End User
A
Wholesaler/Distributor
B
P&L forC as supplier
P&L forB as supplier
∆ Revenue- ∆ Cost∆ Profit
∆ Revenue- ∆ Cost∆ Profit
SupplierD
P&L forA as customer
∆ Revenue- ∆ Cost∆ Profit
P&L forB as customer
∆ Revenue- ∆ Cost∆ Profit
P&L forC as customer
∆ Revenue- ∆ Cost∆ Profit
Total Cost Reportfor D as supplier
∆ Cost = ∆ Profit
Source: Adapted from: Douglas M. Lambert and Terrance L. Pohlen, “ Supply Chain Metrics”, The International Journal of Logistics Management, Vol. 12, No. 1 (2001), p. 14.
CRM
SRMSRMSRM
CRMCRM
Customer Relationship Management (CRM) & Supplier Relationship Management (SRM): The Critical Supply Chain
Management Linkages
Supplier Relationship Management Process
Supplier Relationship Supplier Relationship Management ProcessManagement Process
Relationships with major suppliers are corporately managed as partnerships while purchase order transactions become simplified and integrated with the supply process.
Required Behaviors
Product/service agreements are developed and managed with key suppliers and segments of non-key suppliers.Teams work with suppliers to maintain costs and improve service.Goal is to improve the profitability of both the focus firm and the suppliers.Purchase order transactions are integrated with the supply process to improve productivity and all areas of supplier performance.
Supplier Relationship Management TeamsSupplier Relationship Management Teams
From
To
MISR&DMKTGLOGACCT
PurchasingMIS
R&DMKTG
LOGACCT
Sales
MISR&D
MKTGLOG
ACCT
Buyer Seller
MISR&DMKTGLOGACCT
Source: Keely L. Croxton, Sebastián J. García-Dastugue, Douglas M. Lambert, and Dale S. Rogers, “The Supply Chain Management Processes,”The International Journal of Logistics Management, Vol. 12, No. 2, (2001), p. 15.
Process Interfaces
Customer Relationship Management
Customer Service Management
Demand Management
Order Fulfillment
Manufacturing Flow Management
Product Development & Commercialization
Returns Management
Strategic Sub-Processes
Review Corporate, Marketing, Manufacturing and Sourcing
Strategies
Identify Criteriafor Categorizing Suppliers
Provide Guidelines for the Degree of Customization in the
Product/Service Agreement
Develop Framework of Metrics
Develop Guidelines for Sharing Process Improvement Benefits
with Suppliers
Operational Sub-Processes
Differentiate Suppliers
Prepare the Supplier/Segment Management Team
Internally Review the Supplier/Supplier Segment
Identify Opportunitieswith the Suppliers
Develop the Product/ServiceAgreement and
Communication Plan
Measure Performance and Generate Supplier
Cost/Profitability Reports
Implement the Product/Service Agreement
Supplier Relationship Management
Customer Relationship Management
Strategic Sub-ProcessesProcess Interfaces Activities
Customer Service Management
Demand Management
Order Fulfillment
Manufacturing Flow Management
Product Development & Commercialization
Returns Management
The Strategic Supplier Relationship Management Process
Review Corporate, Marketing, Manufacturing and Sourcing
Strategies
Identify Criteriafor Categorizing Suppliers
Provide Guidelines for the Degree of Customization in the
Product/Service Agreement
Develop Framework of Metrics
Develop Guidelines for Sharing Process Improvement Benefits
with Suppliers
Outline metrics of interestRelate metrics to the supplier’s impact on profitability and the profitability for the supplier
Identify product & service components that are key to the organization’s success now and in the future
Profitability / Growth / StabilityTechnologyCapacityInnovationQualityVolume purchasedCriticality / service level requiredSophistication / Compatibility
Consider quality/cost implications of various differentiation alternativesSelect boundaries for degree of differentiation
Outline options for sharing the benefits of process improvement
The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
Potential
Categorizing Packaging Suppliers at Masterfoods USA
- Under development- Intensive care- Temporary- Not in stable stage- Either a niche/core supplier
that the company can grow- Open relationship- Long term relationship- Large % of spend- Focus on our business
- Not a current supplier- Reasons for interest:
• Size• Technology• Innovation• Diversity
Unique offering
Niche
Core
Assessment
The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
Bottlenecks
Cooking Oil
Strategic
ChickenBeef
Promotional Sauces
Non-Critical
Straws
Leverage
CupsNapkins
Low Volume of Spend High
Low
Com
plex
ity fo
r Wen
dy’s
H
igh
Comparing Suppliers on Complexity and Volume
Source: Judy Hollis, Vice President, Wendy’s International
Improve product quality
Improved order fill rates
Improve manufacturing processes
Reduce cost of direct material
Improve plant productivity
Reduce purchased goods inventories
Reduce work in process inventories
Reduce finished goods inventories
Improve asset utilization and rationalization (warehousing & plant)
Improve investment planning and deployment
Increase productivity
Reduce freight and indirect labor/warehousing costs
Optimize physical network/facilities
Reduce order management costs
Reduce general overhead/management/administrative costs
Reduce information systems costs
Reduce human resources costs/improve effectiveness
Supplier Relationship Management’s Impact
%
Net Profit
Profit from Operations
Taxes
TotalExpenses
Gross Margin
Cost ofCapital
Inventory
TotalAssets
CurrentAssets
FixedAssets
OtherCurrent Assets
–
–
++
Sales
EconomicValueAdded
=
Cost of Goods Sold
Source: Adapted from Douglas M. Lambert, and Terrance L. Pohlen, “Supply Chain Metrics,” The International Journal of Logistics Management, Vol. 12, No. 1 (2001), p. 11.
×
–
–
Capital Charge
How Supplier Relationship Affects Economic Value Added (EVA®)
Is costdependent onunit volume?
Isresource
dedicated to aspecificproduct
line?
Place incontribution
pool
ChargeApplicableSegment
ChargeApplicableSegment
Variable
Non-Variable
Indirect
NO
NO
YES
YES
Assigning Costs to SegmentsAssigning Costs to Segments
SUPPLIER PROFITABILITY ANALYSIS:SUPPLIER PROFITABILITY ANALYSIS:A CONTRIBUTION APPROACH WITH CHARGE FOR ASSETS EMPLOYED
SUPPLIER A SUPPLIER B SUPPLIER C SUPPLIER D
COST OF GOODS SOLD
VARIABLE MARKETING & LOGISTICS COSTS:
ASSIGNABLE NONVARIBLE COSTS:SALARIESADVERTISING INVENTORY CARRYING COSTS LESS:
GROSS MARGIN
TRANSPORTATIONRECEIVINGORDER ROCESSING
SALES
PLUS: DISCOUNTS AND ALLOWANCESMARKET DEVELOPMENT FUNDSSLOTTING ALLOWANCESCO-OP ADVERTISING
NET MARGIN
Other Costs(will depend on situation)
CHARGE FOR ACCOUNTS PAYABLE
CONTRIBUTION MARGIN
SEGMENT CONTROLLABLE MARGIN
Other Costs(will depend on situation)
The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
The Three Components of Total Costs
Warranty costsCustomer dissatisfaction costs
Environmental costsProduct liability costs
• Post-Ownership Costs
Risk costsConversion costsSupply chain/Supply network costs
Downtime costsCycle time costsNon-value-added costs
• Ownership Costs
Planning costsTaxes
Purchasing priceQuality costsFinancing costs
• Acquisition Costs
Sysco Sales and Earnings HistorySysco Sales and Earnings History
0
5
10
15
20
25
30
FY70
FY71
FY72
FY73
FY74
FY75
FY76
FY77
FY78
FY79
FY80
FY81
FY82
FY83
FY84
FY85
FY86
FY87
FY88
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
0
100
200
300
400
500
600
700
800
900
SalesNet Earnings
5 Yr. CAGR: Sales = 11.3% Net Earnings 19.1%
10 Yr. CAGR: Sales = 10.1% Net Earnings 14.5%
20 Yr. CAGR: Sales = 14.6% Net Earnings 16.0%
30 Yr. CAGR: Sales = 16.6% Net Earnings 18.1%
Sales(Billions)
Net Earn.(Millions)
* All net earnings data is before accounting changes.
FY03 Sales +11.9%; Net Earnings +14.5%
Source: Neil Theiss, Senior Director, Supply Chain Management, Sysco Corporation.
CUSTOMER A
NET SALESCOST OF GOODS SOLD (VARIABLE MFG. COST)
MANUFACTURING CONTRIBUTION
VARIABLE MARKETING & LOGISTICS COSTS:SALES COMMISSIONSTRANSPORTATIONWAREHOUSING (HANDLING IN AND OUT)
ORDER PROCESSINGCHARGE FOR INVESTMENT IN ACCTS. REC.
CONTRIBUTION MARGIN
ASSIGNABLE NONVARIABLE COSTS:SALARIESSEGMENT RELATED ADVERTISINGSLOTTING ALLOWANCESINVENTORY CARRYING COSTS
SEGMENT CONTROLLABLE MARGIN
CHARGE FOR DEDICATED ASSETS USED NET SEGMENT MARGIN
SPECIAL PACKAGING
COST OF GOODS SOLD
VARIABLE MARKETING & LOGISTICS COSTS:
ASSIGNABLE NONVARIABLE COSTS:SALARIESADVERTISING INVENTORY CARRYING COSTS LESS:
GROSS MARGIN
TRANSPORTATIONRECEIVINGORDER ROCESSING
SALES
PLUS: DISCOUNTS AND ALLOWANCESMARKET DEVELOPMENT FUNDSSLOTTING ALLOWANCESCO-OP ADVERTISING
NET MARGIN
CHARGE FOR ACCOUNTS PAYABLE
CONTRIBUTION MARGIN
SEGMENT CONTROLLABLE MARGIN
SUPPLIER ASupplier Customer
CHARGE FOR DEDICATED ASSETS USED NET SEGMENT MARGIN
The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
COMBINED CUSTOMERCOMBINED CUSTOMER--SUPPLIER PROFITABILITY ANALYSIS:SUPPLIER PROFITABILITY ANALYSIS:A CONTRIBUTION APPROACH WITH CHARGE FOR ASSETS EMPLOYEDA CONTRIBUTION APPROACH WITH CHARGE FOR ASSETS EMPLOYED
“ I ask my executives to run the business as if it is the only asset their family has, they can’t sell it, and they are going to own it for 100 years.”
Warren BuffettBerkshire Hathaway
Customer Relationship Management
Operational Sub-ProcessesProcess Interfaces Activities
Customer Service Management
Demand Management
Order Fulfillment
Product Development & Commercialization
Returns Management
The Operational Supplier Relationship Management Process
Differentiate Suppliers
Prepare the Supplier/Segment Management Team
Internally Review the Supplier/Supplier Segment
Identify Opportunitieswith the Suppliers
Develop the Product/ServiceAgreement and
Communication Plan
Measure Performance and Generate Supplier
Cost/Profitability Reports
Implement the Product/Service Agreement
Manufacturing Flow Management
Perform supplier profitability analysis or total cost analysisAssess potential growth, strategic value and drivers
Identify Account/Commodity ManagerSelect team members
Product purchasedSales growthCriticality of supplier
Sales opportunitiesCost reduction opportunitiesService improvement opportunities
Develop and follow implementation planMeet regularly with key customers
Measure by supplier and for the supplierRevenue CostsProfitability Other: service, quality
Report performance
Outline and draft the PSAGain commitment of the company’s functions Gain supplier acceptance of PSA Agree on a communications and continuous improvement plan
The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission
2) What processes should belinked with each of these
key supply chain members?
1) Who are the key supplychain members with whom
to link processes?
3) What level of integration and management should be applied
for each process link?
Supply ChainManagementProcesses
Supply ChainNetworkStructure
Supply ChainManagementComponents
SUPPLY CHAIN MANAGEMENT: Elements and Key DecisionsSUPPLY CHAIN MANAGEMENT: Elements and Key Decisions
Source: Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 4.