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IS3223
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 1
IS3223: IT and Supply Chain Management
Key supply chain conceptsSourcing and Procurement
Topics
Key supply chain concepts Sourcing and procurement Market segmentation Integrating online and offline sourcing
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 2
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 3
What is Supply Chain Management?
Supply chain management involves the coordination of physical activities that enable the delivery of products to the end customer. This value chain encompasses sourcing and procurement of raw materials, production or procurement of intermediate products, production of finished products, delivery to the end customer, and after sales support for maintenance and returns
Source: Textbook page 4
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 4
Raw material suppliers
Manufacturing Distribution centers
Retail stores
A Typical Supply Chain
Raw materials suppliers End customers Finished Goods
ManufacturerRetailers
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 5
Traditional Supply Chains Have Evolved…
Barriers Between Companies
Sharing of information between each party,
TOFROM
TO
Raw materials suppliers Retailers End customers Finished Goods
Manufacturer
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Collaborative Supply Webs
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 6
Raw materials suppliers Retailers
End customers Manufacturers
Simultaneous sharing of information in value networks
Effective Supply Chain Management involves handling three flows
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 7
Flow of Products
Flow of Payments
Return of Products
Information Flow
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 8
Scope of Supply Chain Activities: Functional View
Sourcing and procurement Manufacturing Product design Warehousing Distribution Inventory management
Purchasing Trading Production Materials Management Distribution Import / Export After sales
Common job functions / Descriptions
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 9
Historical Development of SCM
In the 1970s, the focus was on operations performance Logistics function was simply warehouse and transportation Focus on costs of warehousing, trucking and shipping No strategic view
In the 1980s, the focus was on re-engineering Lower operating costs Reduce use of assets Integration of warehousing and transportation functions within the
company
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 10
Historical Development of SCM
In the mid 1990s, globalization led to dispersed manufacturing and global sourcing How to coordinate operations in many different countries How to take a strategic overall view of operations Long-term planning became necessary Opportunities for cost reduction and efficiency improvements from
shifting business operations and better coordination
Focus on collaboration, visibility and information sharing Better matching of demand and supply (inventory reduction to
JIT)
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 11
Historical Development of SCM
In the 21st century, supply chains continued to become more strategic Global supply chains Supply chain network design Total cost of operations
Supply chain disruptions from 9-11, natural disasters and SARS outbreak led to huge losses from global operations From “Just in Time” to “Just In Case” Insufficient inventory; lack of raw materials, shutdown of factories;
stoppage of transportation Planning for disruptions and emergencies in developing countries
became critical Emergence of social trends: “Green” and environmentally-friendly
supply chain And not forgeting, the impact of new technologies on supply chain
coordination
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 12
What is a Beaver?
From the “Chronicles of Narnia” Movie, http://www.sonypictures.com/imageworks/films/narnia/index.html
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 13
A Beaver’s Life has Analogies to Company Operation
What is the optimal mix of production, storage, and distribution?
Selecting the right place to live
Cutting down trees
Building dams
Building waterways
Finding the right branches and leaves
Storing food for winter
Where to locate the factory?
Where to source raw materials from?
How much to manufacture? What is the production
schedule?
How to distribute the products?
How much products to store?
What is a product life cycle?
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1
Introduction of product
Growth and expansion phase
Decline of product demand
Maturity
End of product life
Time
14
Example: Recording media life cycle
Records Cassettes CDs
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 15
Videotapes DVDs Blu-rays
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1
Product lifecycles in different industries
Introduction of product
Growth and expansion phase Decline of product demand
Maturity
End of product life
Stable industry
Fast changing industry
Product 1 Product 2 Product 3
16
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Topics
Key supply chain concepts Sourcing and procurement Market segmentation Integrating online and offline sourcing
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 17
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 18
Sourcing and Procurement
All those activities associated with:•identifying material needs•locating & selecting suppliers•negotiating business terms •monitoring supplier performance
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 19
Goals of Purchasing
Provide an uninterrupted flow of materials, supplies & services required to operate the organization
Keep inventory investment & loss at a minimum Maintain adequate quality Find or develop competent suppliers Standardize, where possible, the items bought Purchase required items and services at lowest ultimate
price reach to potential sources
Sourcing and Procurement becomes a strategic tool to achieve competitive advantage in cost, product design, and inventory management
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 20
Materials needsidentification Writing product
specifications
Tender / Request For Proposal (RFQ) /Request For Quotation (RFQ)
Source(s) Selection
Negotiation on terms
Goods Receipt
Continuous vendorevaluation and improvement
Typical Procurement Cycle
QualityCheck
1.
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 21
Catalogues Trade Journals Trade Directories Past Supplier Files Exhibition and conferences Word of mouth
Information Sources
Sales Representatives Samples Visits to Suppliers
These are more easily enabled by Internet marketplaces and websites
But physical interaction is still key to building trust and quality control
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 22
Class Exercise: Choosing suppliers systematically What type of criteria would you use for making decisions?
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 23
Typical Vendor Selection Criteria
Quality technical specifications design product life ease of maintenance and repair Reliability of product
Financial financial stability payment terms
Capability production capability on-time delivery availability of goods
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 24
Typical Vendor Selection Criteria
Terms of deal pricing leasing and discounts support and maintenance lifetime cost
Services training vendor attitude warranty
Modularity of product Open source Able to fit into existing product architecture
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 25
Typical Vendor Selection Criteria
Reputation Certification
Industry certifications: example ISO Government certifications: example GMP, BizSafe Government regulations: example licenses
Exclusivity / partnership Not working with competitors Sharing of information
Incentives Rebates Loyalty program Extensions of incentives to other partners (“twinning” / “code-sharing” /
network partners)
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 26
Developing Supplier Profiles for Evaluation
Total
Bot. 20% Top 20%* * * * ** * * * ** * * * ** * * * ** * * * *
* * * * *
* * * * *
* * * * *
* * * * ** * * * *
QualityPrice Delivery scheduleDesignFinancial stabilityProduction capacityISO Certification
...
Weighting on attribute20%20%10%...
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 27
Ranking suppliers
Total
Bot. 20% Top 20%* * * * ** * * * ** * * * ** * * * ** * * * *
* * * * *
* * * * *
QualityPrice Delivery scheduleDesignFinancial stabilityProduction capacityISO Certification
...
Weighting on attribute20%20%10%...
Ideal supplier pool•Drop•Ask for corrective action
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 28
Strategic Sourcing Developments
Global sourcing Sourcing from larger pool of suppliers globally Gain access to more variety, better quality, or lower –price products Coordinate global sourcing with global spread of manufacturing
Demand consolidation Combine purchasing requirements across different units Standardize the use of parts and product specifications Creation of centralized purchasing office Higher volumes of purchasing make it easier to negotiate discounts
with suppliers
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 29
Strategic Sourcing Developments
Supplier base consolidation Working with fewer suppliers, on a partnership basis Purchase more volume per supplier Easier to negotiate lower prices Ease of management of fewer suppliers
The Internet gives rise to the “Long-Tail” Broader range of products can be carried New niche markets and niche demands
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Procurement Models Used by Global Companies
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 30
Source: “2012-13 Global Chief Procurement Officer Survey”, Capgemini Consulting, assessed on http://www.capgemini.com/resource-file-access/resource/pdf/2012-13_global_chief_procurement_officer_survey.pdf
A clear majority on centralization and consolidation
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 31
Case: Global Sourcing at Walmart Procurement Services US-based mega-retailer, started in 1962 For fiscal 2005, record revenues of US$312.4 billion and net income
of US$11.2 billion, with more than 1.6 million employees More than 3,800 stores worldwide Generates 20% revenues internationally Successful pioneer of “Everyday Low Prices” concept, known for its
low pricing and wide selection of goods
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 32
Wal-Mart Procurement Services
Global Procurement Services is responsible for identifying new suppliers, sourcing new products, building partnerships with existing suppliers and managing the global supply chain of Wal-Mart's direct imports
Dedicated team of more than 1,600 staff Source products from more than 70 countries around the world, from
27 offices located in 23 countries Procurement Tools
Bulk purchases, and volume discounts Target pricing Benchmarking price with competitor products Benchmarking price reductions for similar products annually
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Purchasing at Toyota
Global Purchasing Division based in Toyota Motor Corporation, Japan, where Purchasing Chief Officer located.
Three regional organizations – based in USA, Europe, and South East Asia Each responsible for procurement for the operations in their respective
regions Regional procurement is made up of 3 units:
Vehicle Parts and Components purchasing. Supplier Production Management (new project preparation) Projects and Strategic Planning
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 33
Source: “A localised, collaborative supply chain – Toyota’s vision of the future?”, The Valuechain.net, May 5, 2011, accessed at http://thevaluechain.net/2011/05/05/a-localised-collaborative-supply-chain-toyotas-vision-of-the-future-an-interview-with-mark-adams-vice-president-toyota-motor-europe-purchasing/
Topics
Key supply chain concepts Sourcing and procurement Market segmentation Integrating online and offline sourcing
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 34
0
2000
4000
6000
8000
10000
12000
0 2 4 6 8 10 12
Product
Demand
Product Type
Market Demand for Products
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1
If we plot a graph of market demand for different products, there will be top selling products and lowest selling products, typically following an 80/20 rule: 20% of products account for 80% of sales
35
Example: Market Demand for Cars in USA
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
No.
Sol
d
Car Model
Source: “In‐Depth: The Year’s Best Selling Cars, Michell, Jacqueline, Forbes Dec 03, 2008, http://www.forbes.com/2008/12/03/2008‐car‐sales‐forbeslife‐cx_jm_1203cars.html
Top 10 cars
Bottom 10-cars
36
0
2000
4000
6000
8000
10000
12000
0 2 4 6 8 10 12
Product
Demand
Product Type
In the Past We Concentrate on Top Products
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1
Traditional marketing emphasis
37
0
2000
4000
6000
8000
10000
12000
0 2 4 6 8 10 12
Product
Demand
Product Type
The “Long Tail” of Market Demand: Capturing New Markets
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1
There is always some demand for a different type of product!
Traditional marketing emphasis
New markets emerge as product range increase
38
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PG Goh / NUS IS3223 / 2014 - 2015, Sem 1
Product Proliferation
“They can have any car they want as long as it’s black”Henry Ford, 1920s
Mass Production Mass Customization
“Have it your way”Burger King
Almost every consumer product out there now gives people capability to individualize, and usually there are increasing number of choices – this creates more difficulties for manufacturing and logistics
39
The Rise of Global Procurement and Manufacturing Centers Based out of Asia
In Sep 2009, LG announced plans to build a new LCD factory in Guangzhou, costing around US$3b, over a period of 2 years
Samsung has set up 10 international procurement centers in China, including Shanghai, HK, Shenzhen, and Tianjin
In 2007, BMW established an International Purchasing Office out of its India headquarters at Gurgaon, with a focus on development of exports from India to the BMW Group International Production Network
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 40
Sources: http://www.chinasourcingnews.com/2009/09/03/461601-lg-plans-new-lcd-factory-in-guangzhou/http://www1.cei.gov.cn/ce/doc/cenlx/200606141756.htmhttp://www.uniindia.com/unilive/unisite.nsf/a84d3708d90e164865256ca3002939b6/8d3f7933947449b56525756f000abf11?OpenDocument
Topics
Key supply chain concepts Sourcing and procurement Market segmentation Integrating online and offline sourcing
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 41
Case: Global Sources
HK-based, B2B online marketplace in China, connecting buyers and sellers
Trade facilitator using English language Started in 1970 and launched “Asian Sources” magazine Reports and magazines are organized by industry sector Listed on Nasdaq since 2000 Revenues of US$231.7m, and net profits of US$32.9m in 2012 Large number of quality international buyer groups, including the
world’s top 20 retailers
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 42
Sources: http://www.corporate.globalsources.com/PROFILE/BGROUND2.HTMhttp://www.chinaimportexport.org/comparison-of-chinas-major-e-commerce-platforms/
Diversified online and offline presence
Successfully extended from physical presence to online presence
Combination of website sourcing, trade publications, and offline sourcing events such as trade expos and “Private Sourcing Events”
Revenue sources from both online and offline
Online revenues make up half of its total revenues
Revenues from exhibitions have been increasing the last three years
Print revenues are decreasing, as might be expected
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 43
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Mitigating online procurement risk
To tackle the issue of trust, set up: Pre-screening of suppliers Pre-match buyers and sellers Video meetings between buyers and suppliers Authentication of suppliers set up in 2007 working with international
certification body Bureau Veritas Combine online presence with physical presence in exhibitions and
trade shows
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 44
Global Sources Video
http://www.youtube.com/watch?v=RB2PP10QI-k
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 45
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 46
Case: Kozmo.com -- the problem of e-Fulfillment
Delivery after sale is challenging
Many companies have come and gone trying to crack the problem
Picture source: http://www.howwesavedthepostoffice.com/kozmo_is_currently_experien-793895.jpg
Kozmo.com
Set up in Mar 1998 Targeted at “hungry and lazy” 25 to 30 year olds in cities Value proposition: free delivery within one hour of wide array of
products Tried to go public but unable to get investor demand Went bankrupt and closed in 2001
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 47
What would you like to buy online if you are in your dorm, delivered to you in one hour?
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 48
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 49
Their Story
High cash infusions A lot of hype and expectations for
transforming industries Over optimistic demand projection based on
“hi-tech” cities Rapid expansion into national coverage, with
high facilities investment Unmet demand expectations
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 50
Key Lessons Learnt
Unrealistic demand projection Over investments in warehousing facilities Over investments in state-of-the-art logistics technology
picking systems, inventory management, routing and scheduling Over-rapid expansion
Poor inventory control SKU proliferation Too much inventory per SKU
Unprofitable product sales Higher total cost of product sale than selling price of products Free delivery irregardless of order size
PG Goh / NUS IS3223 / 2014 - 2015, Sem 1 51
What Kozmo said (after the fact)
Expand incrementally Provide incentives to use different time windows Charge for minimal orders Reduce number of line items Concentrate on fast moving, impulse buys Package common bundles of goods together Plan for selling a product profitability
Source: “Anatomy of a dotcom”, Wu, John C.,Supply Chain Management Review, November 2001