CIPS Level 6

QUICK START GUIDE

Strategic Supply Chain Management

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First edition for new syllabus January 2007

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CHAPTER 1

Strategy and Strategic Process 1 What is strategy? Strategy has been defined in many different ways, and the range of definitions reflects significant differences in the way the process of strategy-making is understood.

Johnson & Scholes define strategy as ‘the direction and scope of an organisation over the long term: ideally, which matches its resources to its changing environment, and in particular its markets, customers or clients so as to meet stakeholder expectations’.

Grant defines strategy as a level of decision-making: ‘the overall plan for deploying resources to establish a favourable position’. Strategic decisions are long-term, important and not easily reversible: these characteristics distinguish strategic decisions from ‘tactical’ decisions.

Ohmae argued that corporate strategy is basically about competitive advantage: ‘an attempt to alter a company’s strength relative to that of its competitors in the most efficient way.’ Strategy must match the strengths of the Corporation with the needs of clearly-defined Customers in such a way as to achieve superior performance, relative to Competitors (the strategic triangle or Three Cs).

Mintzberg points out that strategy can be seen from different perspectives: as a Plan (the output of a systematic planning process); a Ploy (moves in the ‘game’ of outmanoeuvering comeptitors); a Pattern (emerging from actions adopted by the organisation); a Position (a way of identifying the organisation’s status within a given environment); or Perspective (a reflection of the organisation’s self-image and personality). Mintzberg’s Five Ps raise a key issue for strategic thinking: not everyone accepts the need to define a formal strategic plan!

Levels of strategic management There are three basic levels at which strategic management can take place. Corporate strategy is concerned with the scope of the organisation’s activities (what business are we in or should we be in?), and the matching of its capabilities and resources to its environment and stakeholders. Business (or competitive) strategy is concerned with how each strategic business unit within the organisation will go about achieving its competitive objectives. Functional (or operational) strategy is concerned with how the functions of the organisation (purchasing, production, marketing and so on) will support business strategy.

2 How is strategy formed? Planned or deliberate strategy The rational or strategic planning model assumes that the organisation takes a structured, formal approach to strategy and direction. Decision-makers at the top of the organisation determine objectives; gather and analyse internal and external data; identify and evaluate a range of options; select the optimum option to achieve the objectives; and develop systematic, co-ordinated plans to implement that option. These plans filter down to lower levels of the organisation. Actual results are compared with the plans, as part of a systematic monitoring and review process, so that control action can be taken if necessary.

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Such an approach provides impetus for environmental monitoring and decision-making, and encourages long-term, broad-scope thinking. It also provides a channel for communicating corporate vision to key stakeholders, creating a sense of shared purpose and direction. It has, however, been argued that this is an ideal model: decision-making is, in fact, constrained by lack of accurate information, lack of time, uncertainty about future conditions and the need to compromise or negotiate, and strategists must settle for a limited or bounded rationality.

Alternatives to formal strategic planning (Mintzberg) Strategies may be opportunistic or entrepreneurial, where an organisation takes bold advantage of changes in the environment or opportunities in the market place. Strategy development is dominated by the active search for new opportunities.

Strategies may be imposed if choice is constrained by environmental pressures and imperatives. An economic recession may impose a strategy of cost-cutting or divestment, for example, while the emergence of new technologies may force new product development.

Emergent strategies are ‘formed’ (rather than formulated) over time: they evolve in response to changes, luck (unintened positive results) and resources. Ad hoc choices are made at lower levels of the organisation, and those which work are retained, spread and spark off other ideas: essentially, a process of ‘learning by doing’.

It must also be recognised that not all intended strategies are realised: the underlying assumptions may turn out to be invalid; environmental changes or competitor action may make the plan irrelevant; or the strategy may be resisted until it is dropped or changed.

Logical incrementalism

Patterns of behaviour

Purely deliberate strategies may hinder learning and flexibility, but purely adaptive/emergent strategies defy control – and may be fragmented and even dysfunctional in the long run. So rather than divorcing planning from action (on the one hand) or muddling through (on the other), managers need to be both responsive to the realities of organisational life and constant environmental change and rational and deliberate in their decision-making.

Logical incrementalism (Quinn) is a deliberate policy of small-step (incremental) strategic changes, within an overall sense of strategic direction. A series of short-range plans allows constant small changes of direction in response to data and performance feedback, personal and political pressures and changing requirements. It also gives an opportunity to gather more information, build support, and co-ordinate changes across the organisation.

Chapter 1: Strategy and Strategic Process

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3 Strategic planning models The rational planning model The basic approach of rational strategic management was outlined earlier – and we will look at a specific model (ACI) below. Ansoff argued for the importance of systematic strategic planning. Without strategy, there is no proactive, purposeful search for opportunities – and no meaningful criteria for evaluating and selecting opportunities that present themselves. Perhaps most importantly, the firm will be unable to anticipate internal and external changes which will affect its competitive position.

Bryson’s Strategy Change Cycle Bryson argued that ‘strategic thinking and acting are more important than any particular approach to strategic planning…’. He put forward a model designed to be orderly/rational and dynamic (non-linear, fluid and cyclical, taking feedback into account) and participative (involving stakeholder views, preparation and participation). Designed particularly for public sector and non-profit organisations, with multiple stakeholders, the model emphasises a shared-power, political process to develop concensus.

4 The ACI model of strategic management An influential three-stage model was put forward by Johnson & Scholes: strategic analysis (A), strategic choice (C) and strategy implementation (I).

• Strategic analysis: understanding the strategic position of the organisation in terms of its external evironment, internal resources and the influence of stakeholders o Defining organisational purpose (what kind of organisation do we want to be?) o Environmental analysis and corporate appraisal (where are we now?)

• Strategic choice: o Objectives (where do we want to be?) o Strategies (how are we going to get there?) o Options analysis (are there alternative routes?)

• Strategic implementation: o Actions (how do we turn plans into reality?) o Monitoring and control (how will we know if we are getting there?)

5 Strategic management in context General principles of strategic management apply to most organisations, but their specific focus may differ. Key strategic issues for small businesses, for example, include establishing a customer base or competitive niche, raising finance and exploiting opportunities for growth. A multinational corporation raises issues of organisational structure and control and the management of diverse product/service portfolios. Key competitive decisions for a manufacturing organisation are likely to focus on product and price – while for service organisations the emphasis will be o less tangible factors such as culture and speed of response.

The key strategy driver for private sector organisations is competition. In the public and not-for profit sectors, there is a need to satisfy a more diverse group of stakeholders, including those who provide funding and those who ‘consume’ the services provided.

Strategic Supply Chain Management

CHAPTER 2

Strategic Analysis 1 The environment of strategic management The environment of an organisation includes both its immediate operating (or ‘micro’) environment (customers, suppliers and competitors) and general (or ‘macro’) factors in the society in which it operates. The ‘purchasing environment’ may be defined as those elements of the micro and macro environments which affect purchasing operations.

The environment offers threats (such as restrictive legislation, competitor initiatives or technological obsolescence) and opportunities (such as growth in market demand, technological improvements or increased skills in the labour pool). It is the source of key organisational resources (labour, supplies, funds, information and so on). It also contains interest or pressure groups which may attempt to influence the activities of the organisation.

2 Analysing the external environment In order for organisations to interact with their environments effectively, they must undertake systematic analysis of environmental factors, influences and trends.

PESTLE analysis The acronym PESTLE identifies the main categories of environmental factors which impact on organisations as: Political (eg government policy and public opinion); Economic (eg economic activity, interest/inflation rates, employment levels); Socio-cultural (eg demographics, consumer and lifestyle trends, social values); Technological (eg new products, processes, communications infrastructure, virtual organisation); Legal (law and regulation eg on contracts, consumer protection, employment, health and safety); and Ecological (eg environmental protection, sustainability, green consumerism).

Competitive analysis: Porter’s Five Forces model Michael Porter suggested that the extent of competition in an industry – and therefore its potential profitability – depends on the interaction of five competitive forces.

• New entrants to an industry may make it more competitive by expanding capacity (without necessarily increasing demand) and/or aggressive penetration strategies. Barriers to entry include economies of scale and other cost advantages for established competitors, start-up capital requirements, customer loyalty to existing brands and so on.

• Substitute products are alternative products that serve the same purpose, making it easy for buyers to switch, and limiting the price that a company can charge.

• Buyer power may make an industry more competitive by forcing down prices, or playing competiting providers against each other.

• Supplier power may be exercised to raise prices, squeezing industry profitability.

• Rivalry among existing firms will be more intense where there are many equally-balanced competitors; a slow rate of industrial growth; lack of product/service differentiation; high fixed costs; and/or high exit barriers.

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Chapter 2: Strategic Analysis

3 Analysing the internal environment The overarching structure of strategic planning may be expressed as: ‘Where are we now?’, ‘Where do we want to get to?’ and ‘How will we get from here to there?’

A position audit is a systematic examination of the organisation’s current state, in order to identify its strengths and weaknesses. It may include:

• A resource audit to assess the resources that the organisation owns, controls or can access to support its strategies. Resources are strategically significant if they are: scarce; vulnerable to supply fluctuations or disruption; critical to the organisation’s business or processes; and/or a source of competitive advantage (eg by differentiating the company’s product, protecting its cost structure or enabling it to innovate).

• A skills audit to assess the skills available to cope with current and future demands.

• A knowledge audit to assess the key knowledge or intellectual property that the organisation owns, controls or can access – and how effectively knowledge is created, shared, managed and retained within the organisation.

4 SWOT analysis Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis is a technique of corporate appraisal, used to assess the internal resources of an organisation to cope with and/or capitalise on factors in the external environment in which it operates. Data will be fed into this process from the external and internal environmental analyses discussed above.

SWOT is used to identify areas where strategic responses are required for the organisation to maintain or enhance its position in relation to the environment, by building on strengths and/or minimising weaknesses, in order to be able to capitalise on (or create) opportunities and to cope with (or learn from) threats.

5 Stakeholders Stakeholders are groups who have a legitimate interest or ‘stake’ in an organisation or project. Organisational stakeholders include: managers and employees (internal stakeholders); shareholders, financiers, customers, suppliers and distributors (connected stakeholders); and government, pressure groups, trade unions and the local community (external stakeholders).

Stakeholder groups can apply pressure to influence organisations in different ways and to different degrees. The more influence a stakeholder has, the more likely it is that managers will have to take that stakeholder’s needs and wants into account.

Mendelow’s power/interest matrix is a useful tool for mapping stakeholders according to their power to influence purchasing activity and the likelihood of their showing an interest in it. Each quadrant has a recommended strategy (as shown). Key players (such as major customers and suppliers) are potential drivers or opponents of strategic change: they should be consulted and involved as early as possible.

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CHAPTER 3

Strategy and the Internal Context 1 Organisational structure Formal organisation structure is ‘the pattern of relationships among positions in the organisation and among members of the organisation. Structure… creates a framework of order and command through which the activities of the organisation can be planned, organised, directed and controlled.’ (Mullins)

Structure and strategy The structure of an organisation should ideally be designed to support its strategic objectives. So, for example, if a company has a strategy of innovation, it will need to design or develop a structure which facilitates multi-directional communication, fast decision-making and flexible resource deployment: a bureaucratic structure won’t allow the kind of networking and initiative that fosters innovation.

However, structure can’t always follow strategy in such a straightforward way. Structure is influenced and constrained by many other factors, including: the task or business of the organisation; the technology of the task; the size of the organisation and its geographical dispersal; its culture and management style; and a range of environmental factors. When the environment is subject to constant change, it is not possible to make radical, frequent structural alterations to match.

Strategy may partly follow structure, because structure is a major factor in the kinds of processes the organisation will be good at, and the kinds of opportunities it will be well-placed to exploit. So if you have a flexible, networked team-based structure, you are more likely to pursue entrepreneurial strategies, because you’re ‘set up’ to do so – and a pattern of behaviour may already have developed (creating an emergent strategy).

Effective organisation structure A ‘good’ organisation structure will (all other factors permitting) have: clear paths of reporting and accountability; effective mechanisms for multi-directional data flow and co-ordination; efficient chains of decision-making; minimal duplication of effort; soft ‘vertical’ barriers between functions; and in-built flexibility. It will be adapted to external and internal constraints and will reflect the corporate mission and market strategy.

Organisational configurations Mintzberg divides organisations into five broad types: simple (small, flexible organisations based on centralised control by a leader); machine or bureaucracy (hierarchical, formal, impersonal organisations, departmentalised by functional specialism and governed by rules and procedures); professional bureaucracy (more participative, in recognition of professional expertise); divisional (more or less autonomous SBUs co-ordinated by centralised strategic and support functions); and ad-hocracy (organic, decentralised structures of temporary, flexible project teams and networks).

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Chapter 3: Strategy and the Internal Context

Methods of organisation In a functional structure, tasks are grouped together according to the common nature or focus of the task, and the specialised skills, resources or technology required. Functional structures have the advantage of pooling and focusing specialised skills and knowledge, and allowing the sharing of technology, equipment and resources for greater efficiency.

Alternative methods of organisation include: geographical structure, where tasks are grouped according to the region in which the activity takes place, or within which target markets or market segments are located; and product/brand/customer structure, where tasks are grouped according to the product, product line, customer or brand they relate to. A divisional structure may be the logical extension of these methods of organisation, as units become large enough to support their own managerial overheads, and therefore to become more or less autonomous.

In a matrix structure, staff in different functions or regions are responsible both to their departmental managers, in regard to the activities of the department and to a product, project or account manager, in regard to the activities of the department related to the given product, project or account. Matrix structure combines the resource efficiency of functional organisation with the accountability and co-ordination of project/product organisation.

Organisational flexibility Modern trends in organisation aim to create flexible or adaptive structures, which can respond swiftly to environmental and strategic change. Examples include: the flattening (or delayering) of structures; chunking (team working); project management; horizontal structures (allowing work and information to flow freely across functional boundaries); network structures (loose, dyanmic, informal affiliations of autonomous and broadly equal units or organisations); and virtual organisation (where units collaborate, co-ordinate activities and share data using ICT as their main or only point of contact).

Centralisation and decentralisation The terms centralisation and decentralisation refer to the extent to which decision-making authority is kept close to the centre (or top) of the firm, and the extent to which related tasks and resources are gathered under a single functional authority or location.

Alfred Sloan pioneered the delegation of tactical and operational decisions further down the organisation, while retaining strategic policy decisions at corporate headquarters. ‘From decentralisation we get initiative, responsibility, development of personnel, decisions close to the facts, flexibility – in short, all the qualities necessary for an organisation to adapt to new conditions. From coordination [centralised control] we get efficiencies and economies.’

3 Power in organisations Power is the ability of an individual or group to exercise influence over others. French & Raven identified a number of different sources of power in organisational relationships: legitimate or position power (or authority); expert power (based on controlling valued expertise or knowledge); reward power (based on controlling valued resources); referent power (based on personal charisma and leadership quality) and coercive power (based on physical intimidation or threat of sanctions).

Indicators of power include factors such as: status, claim on resources (eg budget size), representation (eg in powerful groups), symbols (eg office size, level of hospitality given), negotiating arrangements (with external stakeholders) and so on.

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4 Organisational culture Organisation culture is a pattern of beliefs and expectations shared by the organisation’s members, producing norms which powerfully shape the behaviour of individuals and groups in the organisation. It has been summed up as ‘the way we do things around here’.

The ‘cultural school’ of strategic management (Mintzberg) emphasises that strategy formation is a process of social interaction, based on the beliefs and understandings shared by members of an organisation: strategic change must be based on a change in underlying values.

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Paradigm

Stories Symbols

Power structures

Organisation structures

Control systems

Rituals and routines

The cultural web is a way of representing ‘the taken-for-granted assumptions, or paradigm, of an organisation, and the behavioural manifestations of organisational culture’.

Cultural change can be supported by: consistent expression and modelling of the new values by leaders; changing underlying values and beliefs, through communication and involvement; and use of HR systems (eg recruitment, appraisal, reward, training) to reinforce the changes.

There are many models of organisation culture types. Harrison, for example, distinguishes between: power culture (centralised around a key figure, owner or founder); role culture (bureaucracy); task culture (out-put focused, horizontal project structure); and person culture (focused on individual members, eg barristers in chambers).

5 Values and ethics in purchasing Ethics are a set of moral principles or values about what constitutes right and wrong behaviour. At the corporate level, they address how an organisation interacts with its various stakeholders. At the individual level, they address how people act and interact within the supply chain: issues of objectivity, confidentiality, professional conduct and so on. The term ‘corporate social responsibility’ is used to describe a wide range of obligations that an organisation may feel it has towards the society in which it operates, in areas such as: sustainability and environmental responsibility, human rights, labour and community relations and supplier and customer relations – over and above mere legal obligations.

Purchasing ethics Buyers are, arguably, more exposed to ethical temptations than most professionals! They control large sums of organisational funds, and their decisions typically benefit some suppliers over others – creating an incentive to try and influence those decisions.

National and international bodies representing purchasing professionals have published ethical codes. The CIPS code, for example, emphasises the overriding principle that members should not use a position of authority for personal gain. Members have a responsibility to uphold the standing of the profession by their conduct both inside and outside their employing organisation. On a wider scale, the Ethical Trading Initiative is an alliance of companies, non-governmental organisations and trade unions working together to promote internationally-agreed principles of ethical trade and employment, as standards for ethical sourcing.

CHAPTER 4

Strategic Choice 1 Competitive strategies Competitive strategies focus on how the organisation will compete. Porter proposed a classic model for strategic choice at the business (SBU or product) level. It is based on broadly applicable competitive themes, so the strategies are ‘generic’ (rather than specific plans).

Porter suggested that competitive advantage is obtained either by providing comparable value to the customer more efficiently than competitors (low cost), or by performing activities at comparable cost but in unique or distinctive ways, creating more value for customers than competitors and commanding a premium price (differentiation). At the same time, an organisation can choose to apply either of these strategies either to a broad market or to a narrow-focused or targeted market (or market segment).

Porter identified the various permutations as three generic strategies:

• Cost leadership: seeking to become the lowest cost producer in the industry. For organisations competing in a price-sensitive market, this is the key strategic imperative. This enables them, if necessary, to compete on price with every other producer in the industry, to earn the highest unit profit margins. It raises barriers to entry to new competitors, and makes the firm less vulnerable to other competitive forces

• Differentiation: seeking to exploit a product/service that is perceived to be in some way unique in the industry. This is an obvious defensive response for an organisation faced by a strong low-cost competitor. The strategy is to gain advantage by differentiating the product from lower priced ones on the basis of some non-price factor, such as technology, reputation for quality, corporate social responsibility or service.

• Focus: targeting activities to a selected segment of the market, either by providing goods or services at a lower cost to that segment (cost focus) or by providing a differentiated product or service for the needs of that segment (differentiation focus or niche strategy). Focus strategies enable organisations to target their marketing mix decisions to the needs of specific customer groups, fostering customer loyalty and effective use of marketing resources

2 Directional strategies Product/market strategies focus on where (in which markets) the organisation will compete or the direction in which it will grow (hence the term ‘directional’ strategy). Ansoff developed the product/market matrix as a tool for marketers, but it can be used more widely as a tool of corporate-level strategic choice.

Note that directional strategies will not always be strategies of growth. Consolidation is a strategy of protecting and/or strengthening the organisation’s market share in its existing markets. Withdrawal may be desirable if the organisation has been unable to compete successfully, or if its priorities have changed.

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Protect/build strategies consolidate or increase (market penetration) market share with existing products in existing markets: eg by encouraging repeat purchase, advertising, competitive pricing or intensive distribution. This is comparatively low risk, as the market and products are known quantities.

Market development strategies seek new markets for existing products: eg by exporting, targeting new segments, or developing new uses. This can be used to prolong product life, but there is risk/cost involved in reaching new markets.

Product development strategies introduce new, modified or complementary products to existing markets, eg to increase market share, be an innovation leader, or utilise production capacity more efficiently. This utilises existing distribution networks – but there is risk/cost involved in launching new/modified products.

Diversification strategies develop new products for new markets. This carries the highest risk of unknown factors – but may be needed to refresh the product portfolio.

Related diversification reflects ‘directions’ for growth: horizontal integration (development into activities competitive with or complementary to present activities); backward vertical integration (undertaking activities concerned with inputs to the existing business) or forward vertical integration (undertaking activities concerned with outputs of the existing business).

Unrelated diversification (into completely new product markets) allows risk to be spread over several businesses, and may offer opportunities to capture markets through innovation. Because of the risks of unfamiliarity, however, strategists often seek diversification that allows the organisation to capitalise on existing marketing, technical, distribution or other resources.

3 Methods of developing strategies Having decided on the strategic direction it wishes to pursue, the organisation must consider methods by which it can put the decisions into effect.

• Internal (or organic) development: the organisation pursues the chosen direction using the resources of the existing entity, or by acquiring or deploying additional resources for its use. This will usually be a cheaper and more controllable option than the alternatives, but may not offer radically new opportunities.

• Merger (two companies voluntarily pool the ownership interests of their respective shareholders) or acquisition (one firm buys the equity stake or assets of another company). The assets of two organisations are integrated and jointly managed, offering economies of scale and scope, access to resources, and a relatively high degree of control.

• Alliances and partnerships. An organisation’s opportunities may be significantly enhanced by alliances with other businesses, through such factors as: access to the other party’s overseas distribution channels, customers, expertise and technology; reduction in the effects of competition; economies of scale in joint activities; and sharing of financial and operational risk. Popular inter-organisational forms include joint ventures (or consortia), strategic alliances, subcontracting (and similar arrangements, such as outsourcing, franchising and licencing agreements), and affiliations or networks.

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Chapter 4: Strategic Choice

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4 Strategy evaluation and selection Evaluating strategic options Once an organisation has identified its options for future strategic development, it must evaluate them: this is a cornerstone of the rational planning model.

Johnson, Scholes & Whittington identify three key evaluation criteria.

• Suitability. Does the strategy fit the situation identified in the strategic and corporate appraisal? Does it solve the problem? Does it fit the situation and the culture?

• Feasibility. Can the strategy be implemented? Will it work in practice? Feasibility may take various forms: Practical (can it be done?), Economic (can we afford it?), Social (will it be accepted?) and/or Technical (can it be done using existing methods?).

• Acceptability. Will the strategy be acceptable to key stakeholders?

Selecting the optimum strategy Strategy selection may be achieved by four different processes. Strategists may exercise a planned approach, using formal tools of analysis, and attempting to decide whether the options considered are likely to achieve the specified objectives. However, choices may be enforced where adoption of a particular strategy is necessitated by forces outside the organisation, overwhelming normal planning routines. Strategies may be imposed by top management after little or no discussion with lower levels (a command approach) – or, as we saw in Chapter 1, different areas of the organisation may adopt incremental changes based on their own experiences and adaptations (a learning approach).

5 Reviewing the strategy process Strategy evaluation is part of the process of strategic choice, or selecting between strategic options: it is part of the strategic planning process. However, there is also a related discipline: review of the strategic process itself, following the implementation of a given strategy (or on a periodic basis) in order to learn from problems, mistakes and experiments (and their successful and unsuccessful outcomes) for next time.

The strategic management process may be reviewed and evaluated on several levels, over time, to derive useful learning – both to make real-time adjustments to the current strategy or implementation action plans (if the strategy is off-course or running into trouble, say) and to improve the process for the next strategic planning cycle.

• Was the strategic management approach (rational, logical incremental, emergent, imposed) suitable?

• How effectively and efficiently was the chosen approach carried out?

• How effectively were stakeholder relationships managed through the process?

• How effectively and efficiently was the chosen strategy implemented, or put into action? What could have been done (at any stage of the process) to improve this?

• Is the implemented strategy effective: is it in fact accomplishing the strategic intent and objectives for which it was chosen?

CHAPTER 5

Strategic resources 1 The resource-based approach to strategy As we have seen, systematic strategy formulation includes an analysis of the internal and external environment of the organisation. However, there are two views as to which of these sets of variables has a greater or more lasting impact on competitive advantage. A positioning-based approach suggests that the source of an organisation’s competitive advantage is mainly in how it achieves strategic ‘fit’ with its external environment, exploiting opportunities and minimising threats. In this ‘outside-in’ approach (typified by the work of Porter), you start with environmental conditions, identify product/market opportunities and adapt the organisation to exploit them.

A number of writers have argued that competitive advantage based on positioning is not sustainable, because of the speed and unpredictability of environmental change: lasting competitive advantage comes from the ability to adapt flexibly and swiftly such change. Moreover, positioning is based on generic sources of advantage which can eventually be duplicated by competitors: lasting competitive advantage comes from having capabilities that competitors do not have and cannot easily imitate.

The resource-based approach therefore suggests that the source of an organisation’s competitive advantage is mainly in how it exploits its distinctive internal resources and competencies, setting strategic objectives based on what they enable it to do. In this ‘inside-out’ approach, you start with the organisation’s strengths, and seek an environment that will enable you to exploit them: the organisation will change environments to suit what it does best – rather than changing what it does best to fit the environment.

In order to be advantage-creating, resources must be valuable (capable of creating customer value), rare and in high demand, inimitable or non-replicable, and difficult to substitute. ‘Resources’ are closely bound up with ‘competencies’: the activities or processes through which the organisation deploys or utilises its resources – or what the organisation does with what it has. A unique, value-adding resource will often create a distinctive competence.

2 Resources to support corporate strategy According to Grant, effective strategy implementation involves selecting strategies that exploit the organisation’s principal resources and capabilities; ensuring that these resources are fully employed; and building the organisation’s resource base for the future.

People as a strategic resource Most business functions depend on human knowledge, relationships, decisions or activity. Knowledge, skill and creativity increasingly represent a value-adding, scarce and difficult to imitate resource – and therefore a potential source of sustainable competitive advantage.

The growing complexity of the social and business environment has also placed HR issues at the centre of organisational objectives: quality; social responsibility; the need for organisational learning and flexibility. HR issues have had to be more closely integrated into the strategic plans of the organisation.

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Chapter 5: Strategic Resources

Short-cycle activities may be required to maintain competitive advantage through the human resource: for example, using objective setting, performance appraisal, rewards and training to ensure that people are able to support and implement strategy in the short term. At the same time, long-cycle activities are required to provide a capability platform for future development and competitiveness: for example, through leadership, culture, workforce development, organisational learning, and organisational development.

Finance as a strategic resource Financial management embraces a number of strategic objectives. Does the firm’s financial structure support a secure asset base, the liquidity to meet on-going commitments, the ability to pay shareholders acceptable dividends and the potential for investment in the future? What are the financial expectations of key stakeholders?

Key areas of decision making include the funding of strategy development (through cash flow management and supplementary finance), capital investment appraisal and cost reduction (which may be a key component of a strategy).

Financial resources are planned and controlled using budgets, cost estimates; cost-benefit and break-even analyses; and so on. You should have covered these and other financial management techniques in your studies for Finance for Purchasers.

Information as a strategic resource Information strategies have a key role in developing core competencies and competitive advantage, by enabling the organisation to create product/service features valued by customers, and to differentiate its offerings (particularly in the area of service).

Developments in information processing are transforming value chain relationships by replacing paper-based processes with electronic processes and extending the functions that the business can offer (eg virtual communities, e-commerce and so on). In terms of structure and management processes, ICT supports new patterns of work organisation, allows virtual teamworking, enables co-ordinated decentralisation and facilitates delayering.

Management information (and Management Information Systems) is a key resource in its own right, because it enables managers to plan and control all the other resources effectively, efficiently, and in the light of changing environmental factors and other variables.

Technology

In addition to information and communications technology, there are many other technology applications that may create strategic capability and competitive advantage, including design, engineering, production and storage/transport applications. A range of strategic issues is raised by such technology, including: its impact on competitive forces in an industry; its potential to create core competencies (eg if innovations are patented); whether technology will be developed in-house or acquired by merger or alliance; and how work will be organised around the technology.

Physical resources Physical resources include plant and machinery; raw materials, parts and components; accessories and consumables; transport fleets; buildings and facilities and so on. Purchasing, supply and logistics managers have a key role in sourcing, developing, efficiently deploying and utilising, maintaining and replacing these items.

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At the most basic level, managers will have to ensure that equipment, machinery and materials are available when required by tasks. This may, of course, include highly complex planning processes and systems, such as Materials Requirements Planning (MRP), Manufacturing Resources Planning (MRPII) and Enterprise Resource Planning (ERP).

3 Resource planning To achieve planning objectives, it is essential for purchasing to appraise the relevant supply markets, covering the following major areas in respect of each material or class of materials. Demand analysis will be used to estimate likely materials usage in the period ahead; vendor analysis to evaluate the performance of current suppliers; and market analysis to appraise general supply conditions in the market.

This research is conducted (on an on-going or project basis) to provide information on which the organisation can plan to adapt to changes in the supply environment, and to secure competitive advantage by means of early information on innovations.

Purchasing managers also have a responsibility to push back the planning horizon so that more long-term considerations are given full weight. This has become particularly important in recent years because of scarcity of resources in some areas of supply, combined with increased international competition.

4 Resource control Control mechanisms identified by Johnson, Scholes & Whittington include:

• Direct supervision: the direct control of strategic decisions by one or a few individuals, typically focused on the effort put into the business by employees.

• Planning systems, which define resource requirements and allocations, and monitor their utilisation to identify deviations which require correction. The classic example is a system of budgetary control, but other planning systems include standardisation of work processes and computerised enterprise resource planning systems.

• Performance targets, which focus on outputs such as revenue, profit or quality. The performance of the unit is evaluated according to its ability to meet defined targets – allowing it discretion on how resources can be allocated to achieve them.

• Social and cultural control: ways in which norms and expectations of behaviour become standardised in a group. Peters and Waterman argued that a handful of guiding values – if compelling and widely shared – represented a powerful (and not generally resented or resisted) mechanism of control.

• Self control, which depends on personal motivation, without direct intervention. People behave in desired ways because they understand the need to do so, and are willing to commit themselves to the good of the team.

• Internal market mechanisms: a formalised system of ‘contracting’ for resources between units in an organisation as internal suppliers/customers.

CHAPTER 6

Aligning Corporate Strategy 1 The hierarchy of objectives Vision or strategic intent Vision is ‘strategic intent, or the desired future state of the organisation… an aspiration around which a strategist, perhaps a chief executive, might seek to focus the attention and energies of members of the organisation’. In order to be effective in uniting people and inspiring committed effort, a vision needs to be compelling: attractive, influential, meaningful and shared (preferably on a widespread basis).

Vision, as an overarching sense of what the organisation is about or is seeking to achieve, is a cornerstone of transformational change: change which affects the basic strategic direction of a business. It allows clarity in the communication of strategic intent, and measure of control coherence (or focus), by creating a sense of direction and simple rules for action.

A hierarchy of objectives The general objectives of the organisation cascade down to the more specific objectives of business units, groups and individuals.

Mission statement describes purpose, business area and key values, in qualitative terms.

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Goals: desired future state (‘where we want to get to’)

Objectives: specific targets to pursue (‘what we need to do to get there’)

5

ng particular

y, targets, resources, over short term (up to 1 year)

ust be co-ordinated with each

Strategic plans apply to whole organisation, focusing on the broad direction over long term (3-years)

Tactical plans apply to particular functions, focusion tasks required to pursue strategies inmarkets, over medium term (1-2 years)

Operational plans apply to departments and units, focusing on detailed activit

2 Strategic alignment If an organisation is to achieve its corporate and strategic change objectives, the plans set for each unit and function – while specific to their own roles – mother so that they contribute towards the overall objectives.

15

Strategic Supply Chain Management

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s. Objectives for strategic change are designed to

ing that the plans of every unit in an organisation are co-ordinated with those of others, so that they work effectively together – and present a

ment

ns. It can also be expressed through the organisation’s mottos, slogans and stories about itself; its corporate

e modelling of leaders and influencers.

rocess whereby individual goals are integrated with the corporate plan, as part of an on-going

erformance review involving all levels of management.

ividual and team performance, and support organisational culture. All of these objectives help to foster goal-

gr plementation of corporate strategy.

e McKinsey 7S framework (like the cultural web discussed in Chapter 3), is a useful

cation of the firm’s resources

, tools and processes that standardise work and

ver rates and so on

ns

• Shared values (like the ‘paradigm’ in the cultural web) are the underlying guiding beliefs and assumptions that shapes the way the organisation sees itself and its purpose.

Vertical alignment is about ensuring that the goal of every activity contributes towards the overall or higher objectives of the businesreflect the organisation’s mission: they are, in turn, expressed as functional objectives – which are, in turn, expressed as unit objectives.

Horizontal alignment is about ensur

consistent, coherent face to the world.

3 Securing commitCommunicating the vision Vision can be expressed overtly and specifically in mission and value statements; annual reports and shareholder meetings; and other stakeholder communicatio

image, identity and branding; and th

Management by objectives MbO is a systematic approach to integrating functional and corporate plans: a p

programme of goal-setting and p

Rewards and incentives Ensuring commitment to corporate goals is also a key role of the organisation’s reward system: salaries/wages, financial and non-financial incentives, benefits and so on. Rewards enable the organisation to recruit and retain quality labour, motivate ind

con uent behaviour, to support the im

4 The 7S framework Thframework with which to assess the ‘fit’ of strategy with various organisational sub-systems.

• Strategy is a chosen course of action leading to the alloover time in order to reach defined goals

• Structure refers to the formal organisation structure

• Systems refer to proceduresinformation flow in the organisation (including IT systems, but also business processes, policies and rules and so on)

• Staff are the human resources of the organisation: their abilities and motivation, team dynamics, flexibility, turno

• Style refers to corporate image, organisation culture and management style: patterand norms of behaviour

• Skills refer to the distinctive capabilities of key personnel or the organisation as a whole (eg in knowledge transfer, innovation and so on)

CHAPTER 7

Managing Strategic Change 1 Types of strategic change Incremental and transformational change Incremental (or evolutionary) change is often used as a proactive approach, building on the existing situation (or status quo) in small steps over a long period of time. This is the basis of business improvement strategies such as kaizen (continuous improvement) and Total Quality Management. Because it requires only realistic, small operational improvements, it can be implemented from the ‘bottom up’, eg through suggestion schemes and quality circles. This makes it a particularly effective approach for building up organisational learning and core competencies – and therefore building the organisation’s general responsiveness to ongoing environmental change.

Transformational (or revolutionary) change is often a reactive approach, responding to ‘disruptive’ change, crisis or the need for a completely new paradigm. It seeks to overthrow the status quo and introduce radical transformation in a relatively short period of time: the basis of business improvement strategies such as Business Process Re-engineering (BPR). Because it requires discontinuous and sweeping change across organisational structures, it can only be implemented from the ‘top down’, with top management vision and leadership.

Strategic drift One risk of incremental change is that it may lead to strategic drift: managers may not be able to see that more drastic action is required in response to environmental change. Symptoms of strategic drift include: complacency, and the repression of questioning and challenge; a conservative culture; an inward focus, with inadequate attention to the external environment; widespread inertia and resistance to change; and deteriorating performance.

2 The change context A number of contextual factors will be taken into account in deciding whether the organisation has the ability to achieve the desired change and how it should be managed. Johnson, Scholes & Whittington identify key contextual factors as: power (the leader’s power to impose change); time (how quickly change is needed); scope (what degree of change is needed); readiness (the workforce’s preparedness); preservation (what aspects of the status quo need to be retained); capacity (what change resources are availability); and capability (what skills are available to implement change).

3 Forces for and against change Forcefield analysis Lewin recognised that at any time in an organisation there exist both forces for change (driving forces, pushing towards a preferred state) and forces for maintaining the status quo (restraining forces, pushing back towards the way things are). The interplay of these forces

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Strategic Supply Chain Management

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determines the current state of the organisation (where the forces balance each other out, creating a temporary equilibrium) and the pace and direction of change (if one set of forces is stronger than the other) at any given moment.

Having diagnosed the strength of each force, managers can select change management strategies and styles for strengthening driving forces (‘adding forces in the desired direction’), or weakening restraining forces (‘diminishing the opposing forces’), or both.

Drivers of change Internal triggers for change are factors that cause organisational disequilibrium: in order for equilibrium to be re-established, some element of the system will have to change. Triggers include: questioning of authority; poor performance and competitive pressures; new leadership; changes in strategy; and an injection of new knowledge or resources.

External forces for change are factors in the the organisation’s competitive (‘micro’) and wider (‘macro’) environments. These may include: economic opportunities and threats; changes in the market and/or labour pool; ecological concerns; technological developments; the opening of international markets; and amendments to law and regulation.

Resistance to change Organisations often talk about ‘resistance to change’, but resistance may be directed against the change strategy or the change agent rather than the change itself. It is also worth noting that resistance may be welcomed as a form of feedback from those affected by change to those managing it, and used constructively to modify the change strategy.

Common sources of resistance to change include self-interest (investment in the status quo); misunderstanding and lack of trust; contradictory assessment of the need for or impact of change; and low tolerance of change in general.

Barriers to organisational change Organisational conditions and dynamics identified as barriers to change include: internal focus (rather than sensitivity to the environment); bureaucratic structure/culture (formalised, hierarchical, stability-oriented); centralised power and organisational politics (stifling unity of direction); security-seeking or risk aversion; management cultures based on deference/status (reducing participation) or blaming (creating risk aversion); and lack of resources (financial and managerial) for change.

In addition, change programmes often fail (Kotter) because they are too complex; fail to build stakeholder support; lack clear vision; fail to communicate the vision; allow resistance/barriers to gather; fail to build in short-term wins (creating momentum and confidence); stop short; or fail to embed changes in the corporate culture.

4 Managing strategic change The planned change model Lewin developed his force field model to draw up a three-step model for changing human behaviour.

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• Stage 1: unfreeze the existing restraining and driving forces which preserve equilibrium.

Chapter 7: Managing Strategic Change

19

• Stage 2: introduce imbalances which allows driving forces to outweigh restraining forces.

• Stage 3: refreeze the driving/restraining forces to hold the new equilibrium in place, through consolidation or reinforcement of the new behaviour.

It is worth noting that Lewin’s model is considered less applicable in fast-changing or turbulent business environments, where ‘freezing’ may be seen as counter-productive, hampering flexibility and responsiveness. Some organisations may need to exist in a constant state of unfreezing and changing, without rehardening policies, procedures and practices.

Change management styles Johnson, Scholes & Whittington identify five broad styles for overcoming resistance.

• Education and communication: based on promoting and justifying the reasons for the change and the benefits expected to accrue from it.

• Collaboration. Stakeholders are more likely to support changes if they ‘own’ them through having participated in the decision-making and implementation process.

• Intervention. A change agent drives, co-ordinates and controls the overall change process, while delegating elements of the process to project or task force teams.

• Direction. The change agent uses personal managerial authority to establish a clear strategy and map of how change will occur: top-down change management.

• Coercion. The change agent imposes the change, more or less as a ‘fait accompli’, and threatens some form of penality or sanction for failure to comply.

In addition, as suggested by the cultural web, managers can manipulate factors such as routines, symbols and political (power) processes to drive and support change.

5 Strategic change roles Change agents are individuals or teams who are appointed or empowered to drive a change programme: change programme or project managers, external change management consultants, and functional managers pursuing change objectives.

Strategic leaders may focus on their strategic role (the strategy approach); developing people who can take responsibility for managing the corporate strategy locally (the human assets approach); development core competencies in the organisation (the expertise approach); controlling organisational performance (the control approach); or their role as change champions or drivers (the change approach). Middle managers have a key role in communicating and interpreting strategy and taking responsibility for its implementation: allocating resources; monitoring performance; and managing people at the departmental level. They may also be able to influence strategy development, by providing feedback to strategists and/or driving incremental strategies arising from operational needs and initiatives.

External consultants are often used to help formulate new strategies, and to plan and facilitate change programmes. They may be asked to diagnose the change context, act as project planners, facilitate the processes of project teams, workshops and forums; and so on. The advantages of using external agents is that they are dedicated to the change programme, are more likely to be objective, and may better represent a range of stakeholder interests. They may also have technical expertise in research and change interventions.

CHAPTER 8

The Role of Supply Chain Strategy 1 Functional, business and corporate strategies Purchasing and supply chain strategies must align with business and corporate strategies: firstly, to support and enable their achievement; and secondly, to justify and reinforce purchasing’s increasing strategic role and contribution.

2 Integrating supply chain strategies Various processes may be implemented to ensure that supply chain strategies are integrated with corporate strategy. A formal procurement plan may be developed as part of the corporate plan. Purchasing managers may be involved in the corporate planning process: through board-level representation or less formally by consultation and networking. The main board of directors may also provide guidance and retain power of authorisation.

3 The contribution of strategic SCM The Supply Chain Management (SCM) approach The term Supply Chain Management describes ‘the management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole’ (Christopher). Key features of this approach are supply chain relationships, business processes (sequences of activity from original suppliers to end users) and integration (co-ordination across functional lines and corporate-entity boundaries).

Many writers argue that SCM focus has moved from competition between firms to competition between supply chains. The potential contributions of SCM include: reduced non-value-adding activities throughout the supply chain; reduced cycle times; improved service quality and responsiveness; enhanced quality; reduced total costs; and improved supply chain communication, with further planning and co-ordination benefits.

The contribution of purchasing/supply strategy More generally, supply chain strategies can contribute to a number of key objectives.

• Quality. At a strategic level, this may involve supplier relationship management, supplier selection and development policies, quality management and continuous improvement strategies and the establishment of systems for controlling supplier performance.

• Cost reduction and control. This may involve: contribution to make/buy and investment decisions; sourcing strategies to reduce materials, transaction and inventory costs; quality management; and collaboration with suppliers on cost reduction.

• Innovation. This requires the development of supply chains that are primarily market-responsive, rather than physically efficient.

• Delivery. This requires: management of the supply base to minimise supply risk; inventory strategies to meet service levels while controlling costs; and so on.

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4 Strategic make/do or buy decisions A focus on core competencies has led many companies to buy in products, components or assemblies previously produced in-house, and to outsource a range of support functions.

Broadly speaking, the advantages and disadvantages of strategic outsourcing (‘buy’ strategies) can be summarised as follows.

Advantages: • Support for downsizing • Allows focused investment of resources on

core/distinctive competencies • Leverages the specialist expertise,

technologies, resources and economies of scale of suppliers

• Enables synergy through collaborative supply relationships

Disadvantages: • Costs of services and contract management • Loss of control and difficulties ensuring

service standards • Potential for reputational damage • Loss of in-house knowledge and

competencies • Loss of control over intellectual property • Ethical issues of downsizing

Make/do or buy decisions require the input of many different functions and supply chain collaborators. The purchasing and supply function may be particularly well placed to assess the implications of the ‘buy’ option, because it is familiar with the supply market; supplier capabilities, capacity and compatibility; and likely comparative costs. It will also have a key role in the successful implementation and control of any outsourcing (buy) strategy, through supplier evaluation and selection, price negotiation, quality and service level specification, contracting, and on-going contract and relationship management.

5 Organisational competence As we saw in Chapter 5, competencies are the activities or processes through which the organisation deploys its resources effectively. Core competencies are distinctive value-creating skills, capabilities and resources which add value in the eyes of the customer; are scarce and difficult for competitors to imitate; and are flexible for future needs. Hamel & Prahalad argue that ‘senior managers must conceive of their companies as a portfolio of core competencies, rather than just a portfolio of business and products’.

A transaction cost approach argues that the decision of whether to make/do or buy depends on comparison of the transaction costs of each option. The most important determinant of transaction cost is ‘asset specificity’: the extent to which an asset’s value depends on a particular business relationship remaining intact. With highly specific assets, it will be more efficient to perform the activities within the firm. If assets are non-specific, it will be more efficient to perform activities by contracting in the market-place. Where there is medium asset specificity (assets are complementary, but not entirely dedicated to the specific relationship between the partners) there is the hybrid option of supply chain collaboration.

Relational competence analysis (Cox) similarly suggests that a firm can use asset specificity, linked to competence specificity, to determine the most appropriate type of supply relationship. The buyer-supplier relationship will vary according to the extent to which the buyer relies on the supplier for the provision and development of specialist expertise or core competencies. If a supplier can offer significant complementary competencies, investment in collaboration (or even shared ownership) may be justified. But if there are many suppliers with similar levels of capability, simple competitive leverage can be applied.

CHAPTER 9

Structures and Processes for Strategic Supply Chain Management

1 Aligning structures and processes Many factors influence the design of the purchasing function, including: its size, status and role in the organisation; how purchasing accountabilities are subdivided; the structure and culture of the organisation; and the strategic objectives of purchasing and supply.

Lysons & Farrington highlight several key structural issues in purchasing and supply:

• Increasing integration of materials-related activities within a single management framework. This is reflected in the shift from materials management to logistics management (planning and controlling the flow of materials, services and information from point of origin to point of consumption) and supply chain management.

• An emphasis on business processes: horizontal sequences of activities involved in transforming inputs into ouputs or delivering product/services to customers. Processes cut across vertical boundaries between functions (and organisations within supply chains).

• The existence of diversified and/or geographically dispersed multi-SBU organisations, highlighting the decision of whether to centralise or decentralise purchasing and supply.

2 Centralised, decentralised and mixed structures Centralised purchasing has key advantages in allowing: specialisation and development of purchasing staff; consolidation of requirements (for cost savings); greater co-ordination and standardisation of purchasing activities; avoidance of competition and conflict between purchasing divisions; and the availability of skills and resources for purchasing research.

However, there are also significant advantages in devolving purchasing responsibilities to local level, including: maximised communication and co-ordination between purchasing and operating departments; quicker response to operational needs and changes; relationships with locally based suppliers; and smaller volume purchases (reducing costs and risks of inventory).

Most commentators suggest a mix of centralised and decentralised purchasing in practice, with higher level activities (policy-setting, supplier selection, investment appraisal, contract negotiation) carried out by purchasing specialists, and small/local/emergency purchasing carried out by local purchasing functions.

More specific mixed structures include a CLAN (centre-led action network) approach. Procurement staff are located in different business unit, reporting primarily to local mangement, with secondary responsibility to a head-office procurement centre. The procurement centre leads and co-ordinates the network, by formulating policy, setting standards and encouraging best practice. Elements of centralisation, decentralisation and matrix structure are therefore used to achieve co-ordinated devolution.

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3 Trends in purchasing organisation and processes We have already identified several key trends, such as: the increasing scope and integration of supply responsibilities; the increasing strategic importance and involvement of purchasing and supply management; an increasing use of strategic alliances and partnerships (to develop complementary competencies); the development of horizontal structures to streamline processes; an increasing role in the management of the ‘extended firm’ (eg in the form of outsourced activities); and an increasing use of ICT systems to integrate and streamline supply structures and activities.

4 Using cross functional teams Cross-functional teams bring together individuals with different specialisms, so that their competencies and resources can be pooled or exchanged, and/or so that their (potentially divergent) goals and interests can be represented and integrated. An example might be a procurement strategy team or cost reduction task force. On-going cross-functional working is often organised as a matrix structure. Project teams, on the other hand, are typically cross-functional teams set up to handle specific strategic developments, tasks relating to particular processes or accounts, or audits/investigations.

Cross-functional teams are a key tool for co-ordinating work flow and communication across vertical organisational boundaries. They increase team members’ awareness of the big picture – and therefore help to align functional objectives with overall strategy. They also enable a wider pooling of viewpoints and resources, which can generate innovative and integrative solutions to problems. It should be noted, however, that there cross-functional team working is time-consuming and complex, with challenges posed by ambiguous authority structures and conflicting interests.

5 Using inter-organisational networks A network may be defined as ‘a series of strategic alliances that an organisation creates with suppliers, manufacturers and distributors to produce and market a product’. There are no direct contractual or financial obligations shaping these relationships: they are purely based on collaboration and communication with a view to mutual advantage in areas of mutual interest.

Lysons & Farrington distinguish between stable networks (in which a core organisation contracts out some of its functions to selected supply or distribution partners, enabling it to focus on its core competencies) and dynamic networks (in which a ‘broker’ organisation puts together a flexible network of designers, producers, suppliers and distributors which can be mobilised for different projects, as required).

The advantages of networks is that they allow organisations to focus on their core competencies, while taking advantage of other expert contributions and potential synergy through co-operation – without the constraint of formal financial or contractual obligations. This is balanced by their fluidity and lack of control: network members may compete with each other (particularly if innovations and intellectual property is shared within the network), and networks are vulnerable to breakdown as partners disconnect.

CHAPTER 10

Supply Chain Strategies We group strategies by their syllabus-defined themes (supply relationships, cost, quality and repositioning), but bear in mind that these overlap in practice: quality improvements should also reduce costs, for example. Consider, too, how far any given strategy fits the particular details of an organisation: not every strategy will be feasible or beneficial in every context.

1 Developing supplier relationships At one end of the spectrum of buyer-supplier relationships there are competitive (or adversarial) relationships, in which buyer and supplier compete for share of value. At the other end of the spectrum there are collaborative relationships, which which buyer and supplier work together (more or less closely) for mutual benefit.

The SCM concept is based on the recognition that an organisation is just one link in a chain extending from original suppliers to end consumers: competitive advantage depends on increasing value and reducing waste throughout the chain. Recent decades have seen an attempt by buyers and suppliers to integrate their activities more closely, share more information, and explore more co-operative long-term opportunities for mutual advantage.

The strategic issue is to decide which type of relationship is most appropriate to the organisation’s objectives. Organisations often prioritise their purchases to identify strategic items, for which more collaborative supplier relations may offer: security of supply; support for innovation and development; and continuous process, service and quality improvement. However, closer co-operation may not be feasible or beneficial in all circumstances. It may result in supplier complacency or dependence, over-reliance on a singe supplier (and vulnerability to supply risk), reputational damage by association, or loss of control over intellectual property. Or it may simply not be warranted routine purchases.

Supplier relationship strategies

At a strategic level, supplier relationship management is about deciding how many suppliers to maintain in the supply base (ie single or multiple sourcing); what upstream and downstream activities the firm will seek to integrate or control; what kind of relationships will be developed with suppliers; whether and how information technology (eg e-procurement platforms) will be used to develop integration; and what kinds of structures and processes need to be designed to support the chosen relationships.

Examples of strategic relationship management models include Supplier Relationship Management (SRM), Customer Relationship Management (CRM), Vendor Managed Inventory (VMI), supplier development, partnership sourcing and network sourcing.

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Chapter 10: Supply Chain Strategies

2 Cost reduction and improvement Cost reduction will be a key objective to support the financial goals of the firm. Emmett argues, succinctly, that cost strategies are about ‘knowing what the costs really are and then looking at how to reduce them’. At a strategic level, supply chain management may secure cost reductions through measures such as:

• Restructuring: delayering, downsizing or horizontalising purchasing structures; centralising (for scale economies) or decentralising (for reduced transport costs)

• Process engineering or re-engineering, to streamline and integrate processes

• Outsourcing or off-shoring non-core competencies, where value can be obtained at less cost and/or the organisation can divest itself of assets

• Developing supplier relationships for cost and price advantages

• Applying ICT and automation technologies

• Developing ‘lean’ supply and production, eliminating wastes from operational processes

There is frequently a trade-off between cost objectives and quality/service/delivery objectives: cost/price and ‘value’ are not the same thing. Value for money is an important strategic objective, particularly in the public and non-profit sector. It may be defined as the optimum combination of whole-life cost and the quality necessary to meet the customer’s requirement.

3 Quality improvement Quality is a critical success factor for most businesses, because it determines customer satisfaction – the ultimate source of competitive survival and advantage. Early definitions focused on product quality, defined as fitness for use, fitness for purpose, or simply conformity to requirement (‘meeting specification’). However, quality has many different tangible and intangible dimensions, and later definitions have emphasised that quality must always be understood from the customer’s perspective.

The cost of quality includes both the cost of ensuring and assuring quality (prevention and appraisal costs) and the loss incurred when quality is not achieved (internal and external failure costs). Current zero-defects philosophies are based on the perception that losses incurred as a result of poor quality are higher than the costs of securing quality.

Quality management strategies

Quality control is based on the concept of defect detection. It embraces a range of techniques and activities ued to: monitor a batch of items at each step of the supply and production process; identify items that are defective or do not meet specification; scrap or rework items that do not pass inspection; and pass acceptable items on to the next stage of the process. Quality control has limitations. A very large number of items has to be inspected to prevent defective items from reaching customers – and arguably, this does not in fact improve quality: it is a case of ‘locking the door after the horse has bolted’.

Quality assurance is a more integrated approach, based on defect prevention. It includes the full range of systematic activities used within a quality system to ‘assure’ or give the organisation adequate confidence that items and processes will fulfil quality requirements.

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Quality assurance programmes may build quality measures and controls into: product designs; the drawing up of materials specifications and contracts; the evaluation and selection of quality-capable and improvement-seeking suppliers; communication and feedback mechanisms with suppliers; supplier training (where required to integrate quality systems); motivation of employees and suppliers to maintain and continually improve levels of performance.

Total quality management (TQM) is an orientation in which quality values and aspirations are applied to the management of all resources and relationships, in order to seek continuous improvement and excellence in all aspects of performance. Key principles of TQM include: zero defects; process alignment; integration and involvement of the whole value/quality chain; cross-functional teamworking and empowerment; a drive for continuous incremental improvement (kaizen); and best practice sharing.

4 Supply and value chain positioning The supply chain consists of the links between tiers of suppliers who feed into the organisation (downstream activities) and tiers of intermediaries or distributors who act as the interface between the organisation and its customers (upstream activities). This can also be seen as a value chain, each link of which aims to create or add value for the end consumer.

The concept of repositioning an organisation within the chain implies the extension of its operations or control to a wider range of upstream or downstream activities (by backward or forward integration) – and a greater share of responsibility for creating and adding value. This may be achieved by organic development, or by merger/acquisition or strategic collaboration with organisations one step up or down the chain.

Repositioning may help an organisation to extend its core competencies and capacity. It may also enhance competitive advantage by allowing the organisation to appropriate for itself the benefits of buyer/supplier power, and/or by creating or strengthening barriers to entry.

Ideally, an organisation may seek to position itself so as to:

• Acquire and leverage value-adding, and difficult-to-imitate resources and competencies

• Dominate the supply chain to deter competitors and appropriate a larger share of value

• Occupy the stages/activities of the supply chain with the best potential profit margins

• Gain synergies which support organisational learning and new strategic directions.

5 Innovative supply chain thinking Emmett usefully highlights the need for firms to ‘think differently’ about supply chain management. The old approach is based on linear thinking, where relationships are seen only in terms of immediate upstream and downstream links. Network thinking is a newer approach. However, the emergent – or innovative – supply chain approach involves systems thinking. It focuses holistically on the whole supply chain, recognising the complex interactions that affect all the players and offer synergies.

CHAPTER 11

The Supply Chain Concept 1 Supply and the supply chain

Information (orders, and schedules)

Supplier’s suppliers

Supplier

Firm

Customer

Customer’s customers

Goods & services

Payment

In a general sense, ‘supply’ is simply the act or process of providing something or making something available. The ‘supply chain’ is therefore ‘the network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer.’ (Christopher)

In the era of mass production, the balance of power lay with large manufacturers. The assumption was that a compliant sales market could be exploited by pushing standardised products onto consumers, and a compliant supply market by applying commercial leverage. In the latter decades of the twentieth century, however, globalisation, consumerism and other pressures forced the recognition that supply needs to be driven by demand – not the other way around – creating more complex value- and quality-chain relationships.

Many writers now argue that it is necessary to distinguish between the supply chain (which may be seen as ‘pushing’ flows through the chain from the supplier’s end) and the demand chain (effectively ‘pulling’ flows through the chain from the customer end).

2 Supply chain metaphors Using the metaphor of a chain usefully emphasises the serial or sequential nature of co-operation, mutual dependency and the linkages or interfaces between participants.

Many writers, however, argue that a firm is linked to multiple players, who are also likely to be linked to other firms in their own roles as suppliers, customers or competitors. This more complex set of interrelated transactions and contacts can better be depicted as a network or web. This metaphor raises the possibility of a wider range of collaborations and synergies.

Supply chains are also sometimes referred to as pipelines or channels, emphasising that they provide a containing structure for flows of materials, goods, information and so on. This analogy also helpfully raises ‘push’ and ‘pull’ issues: whether flows are driven by supply-side (push) or demand-side (pull) factors. The metaphor of the river likewise emphasises the flow nature of supply, and provides the terminology ‘up- and down-stream’.

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3 Types of supply networks and chains Harland identifies four ways in which the term ‘supply chain’ can be understood:

• The internal supply (or value) chain describes the processes which integrate all the business functions and units responsible for the flow of materials and information into and through the organisation. Viewing internal processes as a supply chain in its own right highlights aspects such as process alignment (and the need for horizontal work and information flows), the internal customer concept and Porter’s value chain concept (which is specifically intra-firm in focus).

• Dyadic supply relationships are direct two-sided relationships between customers and suppliers. This used to be the main way in which supply chains were viewed, focusing on how the firm could secure and exploit the technical contribution of its immediate up-stream suppliers, and what it could offer to its immediate down-stream customers.

• Inter-business chains describe the simple chain model: a linked sequence of contributors from suppliers’ suppliers, to suppliers, to the focal firm, to its customers and its customers’ customers – and eventually the end consumer.

• Inter-business networks describe the various interrelationships of suppliers (and their own customer and competitor networks) and customers (and own their supplier and competitor networks). This is a more complex view of the extended or virtual enterprise.

4 Evaluating supply chain management ‘SCM is the management of relations and integrated business processes across the supply chain that produces products, services and information that add value for the end customer…’ (Jespersen & Skøtt-Larsen). It consists primarily of collaborative, integrative relationships across the supply chain, which may take the form of product/process information exchange, operational linkages (or ‘technical bonds’), co-operative definition of norms and expectations and relationship-specific adaptations and investments.

The benefits claimed for an SCM approach may be recapped as follows.

• Reducing non-value-adding activities throughout the supply chain • Reducing cycle times: supporting innovation and supply chain agility • Improving responsiveness to customer requirements • Giving access to complementary resources and capabilities • Enhancing quality and service • Improved supply chain communication, and resulting planning and co-ordination benefits • Reducing total costs (eg via better planning and elimination of wastes)

It is important to be realistic about the benefits claimed for SCM – and to analyse its feasibility and applicability to any given organisation. Some identified limitations of SCM include:

• The need for sufficient resources and systems to develop suppliers effectively • The need for internal support and supplier willigness – which may not be readily available! • The risk of over-investment in relationship-specific assets and dependence on a smaller

supply base (vulnerability to opportunistic behaviour, supplier failure or supply disruption) • Potential loss of informational and intellectual assets and distinctive competencies • Difficulties measuring the effectiveness of (or business case for) SCM co-operation • Problems in fairly distributing the gains and risks of co-operation among partners.

CHAPTER 12

Analysing Supply Chains 1 Internal supply chains The internal supply chain concept suggests that an organisation needs to focus its efforts on the efficiency and effectiveness of internal process flows. This may be its sole focus – or a necessary preparation for developing effective dyadic relationships or wider inter-business supply chains and networks.

A number of tools may be used to increase the efficiency of flows in the internal supply chain, including cross-functional team-working, quality/value circles, project or matrix management and Customer Relationship Management (CRM) systems, which are designed to integrate a number of customer-touching information systems via a centralised database. Various integrated planning and control systems can also be used to link demand- and supply-side information systems: Materials Requirement Planning (MRP), Manufacturing Resources Planning (MRPII) and Enterprise Resource Planning (ERP).

2 External supply chains

The distinction can be made between supply chains based on interface (interactions or transactions, where organisations ‘touch’ at their boundaries, often via single contact points) and those based on integration (where organisations ‘overlap’ their boundaries through shared processes and information systems, and multiple points of contact).

External customer/supplier links

The nature of linkages (interface or integration) is bound up with more general questions of buyer/supplier relations. Jespersen & Skøtt-Larsen describe four levels in SCM co-operation: functional integration (internal supply chain); co-operation (closer cooperation with suppliers and customers); relationship management (increasing synchronisation across the supply chain or network); and integrated business processes (in a virtual network).

Another aspect of this topic concerns the mechanisms by which links can be established and maintained. Integration may take the form of information integration, co-ordination and resource sharing and/or organisational relationship linkages. Major enabling technologies include electronic data interchange (EDI) and the Internet, supporting e-sourcing, e-procurement, e-commerce and e-business systems.

Tiered supply structures

One of the implications of a firm’s strategic positioning in the supply/value chain is the ‘tiering’ of its supply chain. The organisation deals directly only with its first-tier suppliers: second-tier suppliers deal with first-tier supplier. The firm will have a limited number of first-tier supply relationships, and can focus on developing these as long-term partnerships. This is particularly important, because the top-level purchaser is effectively sharing responsibility for supply chain management and improvement, value adding and innovation with its first-tier suppliers.

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Closed loop supply chains A number of EU directives have shifted the responsibility for disposal and recycling of end products to producers. This has given rise to closed-loop supply chains, where the end-users effectively become suppliers of goods (once past their useful life) back to the manufacturer.

Reverse logistics is the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin, for the purpose of recapturing value or proper disposal. Plans must be made for the collection and repair/recycling/disposal of goods.

3 The role of customers We have already identified the key role of customers as creators and drivers of demand, ‘pulling’ flows through supply chains – both external and internal. You should also be able to draw on a relatively sophisticated awareness of market dynamics and customer behaviour from your studies of Marketing for Purchasers. The key point to note here is that downstream relationships are as important as upstream relationships for supply chain management.

Increased awareness of the organisation’s role as supplier (not just as customer to its own suppliers) may focus strategic attention on a number of key areas, such as customer service, relationship marketing and customer relationship management.

Distribution channels A channel of distribution is the network of intermediaries involved in getting goods from the point of production to the point of consumption. Channel management involves a range of strategic decisions about: whether to distribute direct to the customer or via intermediaries; what types of distributor should be used (retailers, wholesalers, agents, franchises and so on); how many of each type (for example, selective or exclusive distribution); and how specific intermediaries should be selected and managed.

4 Forecasting demand in supply chains In a traditional interfaced supply chain, information about demand from the final customer is often fed back down the chain one link at a time. Each firm will plan to meet demand from its immediate downstream customer – often building in safety or buffer stock as a protection against unforeseen fluctuations in supply or demand. This distortion of demand (known as the Forrester effect) is amplified at each step upstream in the supply chain, causing increasingly exaggerated peaks and troughs in demand (the ‘bullwhip’ effect).

The main way to minimise this effect is to increase visibility of supply and demand factors across the supply chain: exchanging forecasts, production plans and inventory data – and generally integrating information systems as far as possible.

5 Private sector supply chains The main influence on strategic decisions in a private sector firm is the achievement of commercial objectives (generally, profitability or shareholder wealth). Related to this is a strong pressure to secure competitive advantage. The core constituency served by a private sector firm generally consists of a relatively small and clearly identified group: shareholders, employees, customers and supply chain partners. This helps the firm to be focused in its strategy, since it is usually clear which outcomes will benefit these key stakeholders.

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In the manufacturing sector, the value of materials bought on a regular basis is likely to be a high proportion of total purchasing spend: strategies therefore typically focus on a slim supplier base, with close relations between buyers and suppliers (particularly for strategic items).The effective management of demand, supply and quality issues throughout the supply chain is essential to ensure a steady flow of consistently high-quality output.

The FMCG (fast moving consumer goods) sector is a sub-sector of manufacturing in which competitive forces are particularly strong. The vast proliferation of choice in such markets places a particular value on short product lifecycles and brand differentiation: the supply chain will need to be particularly agile in order to supply distinctive and constantly changing materials, ingredients, packaging and so on.

The distinctive feature of retail supply chains is the direct relationship between the retail buyer and the final consumer. Supply chain management will be focused on securing the timely availability of a wide variety of products in response to customer demand. Supplier relations have typically been less durable in resale than in manufacturing, but there is a trend towards closer relationships, through technological integration (eg EDI and EPOS), training of retail sales/service staff by manufacturers, and supplier contribution to retailers’ advertising and display costs. Retail supply more clearly corresponds to a network model than a chain model.

Perhaps the key point about service supply chains is the importance of people in delivering service and differentiating service providers. Training, motivation, empowerment and cultural values are important factors in service supply. Supply chain management will also contribute to competitive advantage through cost efficiency and the integrated management of information. Since services are increasingly about the supply and management of information, many service functions can be computerised, networked and/or outsourced.

6 Public sector supply chains Public sector organisations have a primary orientation to achieving defined service levels within defined budgetary constraints: a less intensely competitive environment which allows greater information exchange and buyer collaboration. The range of stakeholders is more diverse: this creates a more complex network of stakeholder expectations and relationships. Public sector procurement is also governed by EU Directives. Compulsory competitive tendering has an influence on supply chain management: supporting fair supplier selection and maximising value-for-money purchasing – but limiting potential for long-term supply relations.

The differences between private and public sector supply need not be overemphasised, however. Strategic issues such as integration, e-procurement, strategic sourcing, customer service and cost reduction are priorities in both sectors. Some key issues are highlighted by particular examples cited in the syllabus.

• Defence procurement takes place in a complex environment, with multiple stakeholders, a high degree of change and uncertainty, fast paced technological development, extremely high costs – and a range of political and social pressures. The Strategic Defence Review (SDR) introduced a ‘smart acquisition strategy’ based on clear identification of customer groups, integrated project teams and an open partnership approach to supplier relations.

• Health services procurement has also been through major reforms, bringing the provision of services more in line with the needs of customers (ultimately, the patients), by introducing a clearer separation between those who provide the services and those who purchase them. This also has the effect of introducing competition, purchasing disciplines and control over the use of resources.

CHAPTER 13

The Global Supply Market 1 The nature and impact of globalisation Globalisation is the increasing integration of internationally dispersed economic activities. This integration may involve the globalisation of:

• Markets, as global access to media and travel have (arguably) created a convergence of consumer tastes, so that major brands can be sold worldwide, essentially without modification for particular geographic markets

• Production, as developed countries outsource the production of finished goods and components (and the delivery of services) to countries with lower labour costs

• Finance, with facilities for the movement of finance across borders, through foreign direct investment and an increase in joint ventures and multi-national corporations.

Drivers of globalisation Globalisation has been driven by factors such as: improvements in transport technology and ICT; the reduction of trade barriers through trading blocs and agreements; the icreasing number of multi-national corporations; convergence in cultural values and consumer tastes; and the business benefits of larger markets, economies of scale, outsourcing to low-cost-labour economies, moving beyond intense domestic competition, extending product lifecycles by introducing products to new markets and so on. These factors may be categories (Yip) as market, cost, government and competition factors.

The impact of globalisation Proponents of globalisation argue that international trade stimulates economic activity, creating employment and resulting standard-of-living benefits. It may also stimulate foreign investment in developing countries’ technology, infrastructure and education, and improvements in human rights and labour conditions. Meanwhile, global consumers benefit from increased choice and competitive pricing. It has also been argued that international trade is a primary mechanism for positive international relations.

The other side of the argument is that globalisation exploits labour and consumers in developing nations; encourages debt, urbanisation and environmental damage; and undermines governments in the management of their own domestic economies. It squeezes small, local businesses out of markets, with negative effects on competition, communities and cultures. Meanwhile, in high labour-cost nations, off-shoring brings job and skill losses.

2 Drivers of change in global supply chains We have already identified environmental drivers of change, as key factors in supply strategy formation – and you may be able to think of many more, using the PESTLE framework. Such factors include increased competition, pressures for cost reduction, technological development, shorter product lifecycles, changing customer demands, ‘green’ and ethical pressures, and trends towards supply chain collaboration and global outsourcing.

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3 Global supply chain strategies One strategic decision will be the extent of concentration: whether the organisation will source from a small number of international supply markets (to exploit country-specific advantages and economies of scale) or from a wider global range (eg to minimise supply risks and supply a wider range of local sales markets).

There are also a number of alternative configuration strategies for global sourcing: these are essentially centralisation/decentralisation and co-ordination decisions. To minimise the risks of dependence on a single source, for example, and to maximise sensitivity to local supply market conditions, the hub of the buying organisation may choose to delegate responsibility for source selection and management to overseas subsidiaries: such an approach to supply might be called ‘global localisation’ (or ‘Think global, act local’).

Acquisitions, mergers and joint ventures are a key entry point to international markets. Vertical integration is particularly difficult in an international context, however, because of the potential for cultural incompatibility. Many international players therefore prefer to reap the benefits of supply chain repositioning by entering into less binding strategic alliances with key suppliers (and distributors) in overseas markets.

In terms of market globalisation, one of the key strategic choices will be between globalisation/standardisation (the firm provides the same offering/branding worldwide) and adaptation (the company changes its product and marketing mix to suit local needs and conditions). There are advantages to both approaches – although the trend has swung back towards adaptation, allowing more competitive targeting of local markets.

4 Arguments for and against global sourcing International sourcing can offer significant benefits including: access to resources which may not be available at the right price in local supply markets; flexibility to switch sources of supply where necessary; competitive price and cost savings (due to scale economies, sourcing efficiencies and specific country factors); less onerous constraints and costs in relation to environmental protection, health and safety and so on; getting the best leverage from technologies for virtual organisation, e-sourcing and e-procurement; and ability to compete with competitors who are benefiting from these advantages!

Now for the downside: the reasons why not every company sources internationally – and why the decision to source internationally must be taken, with care, at a strategic level! The problems of international or global sourcing include:

• The costs of identifying, evaluating and developing new sources of supply • High transaction costs (given time zone differences, documentation and so on) • Transport risks, costs an delays • Currency management issues, exchange rate risk and payment risk • Tariff and non-tariff barriers to trade • Supply risks posed by factors such as political instability and natural factors • Differences in legal frameworks and complexities of international dispute resolution • Differences in ethical standards and the cost and complexity of managing them • Differences in language • Differences in cultural values and norms.

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At the strategic level, buyers will need to establish policy guidelines (eg on ethics and risk management) and implement on-going environmental monitoring and research. They will also need to make key strategic decisions about the configuration of the supply network: eg using agents, freight forwarders, logistics lead providers, strategic alliances or local SBUs to manage supply chain relationships. No single supplier relationship model is likely to be effective across the board, and supplier evaluation, contracting and management is likely to be complex: once again, the need is for centre-led, co-ordinated decentralisation.

5 Regulation of the global supply market The World Trade Organisation (WTO)

The WTO (formerly the General Agreement on Tariffs and Trade, or GATT) is dedicated to promoting free trade between nations, by reducing tariff and non-tariff barriers to trade, and ensuring that measures applied to one nation are applied equally to all. It contains high-level policy making councils (covering Trade in Goods, Trade in Services and Trade-related Intellectual Property Rights) and a number of subsidiary bodies, such as: the Disputes Settlement Body and the Trade Policy Review Body.

Economic integration Economic integration can take various forms. A free-trade area (such as EFTA and NAFTA) represents the least restrictive economic integration: all barriers to trade among members are removed, and no discriminatory taxes, tariffs or quotas are imposed. A customs union (such as the Andean Pact) is further integrated by members also applying a common tariff to imports from non-member nations. A common market (eg the European Union) is the closest form of integration, in which commercial law is also drafted centrally.

The European Common Market was set up in 1957, based on ‘four freedoms’: free mobility of goods, services, labour and capital. Important features of the current European Union include: a common foreign and security policy and approach to justice and home affairs; economic union; mobility of labour; a single regime for patent protection; and a common regime for public procurement.

6 Obstacles to international trade Tariff and non-tariff barriers to trade

International trade is often subject to barriers in the form of taxes and duties (tariffs) and non-tariff measures, including import quotas, complex customs procedures, government subsidies to domestic producers and currency exchange controls.

The usual reason for such barriers is to protect domestic (or trading bloc) industry from the effects of outside competition – a policy called protectionism. In recent years, as we have seen, there have been efforts to reduce protectionism, because it inhibits economic growth, and leads to political ill will.

Cultural barriers to trade Distinctive national cultures may be a source of competitive advantage in domestic and international markets (eg because of ‘fashions’ for the products or management techniques of particular cultures). However, they may also be a source of difficulties in cross-cultural business relationships (because of failure to understand underlying needs and expectations).

CHAPTER 14

Lean and Value-adding Supply Chains

1 Value and added value Value is the ‘worth’ of the product or service: what it costs to produce and what the customer is willing to pay for it. The term ‘added value’ refers to a product being given greater worth as a result of supporting processes: customer service is an obvious example.

From an accounting perspective, added value is total revenue minus total costs of all activities undertaken to develop and market the product or service: the amount of economic value that has been added to the organisation’s resources. From a marketing point of view, added value resides in the bundle of tangible and intangible benefits that customers desire from a product: enhanced features, quality, brand image, exclusivity, availability, service levels and so on.

2 The value chain Porter’s value chain model maps total value as a combination of the value added by the activities of a business unit.

Activities within the value chain are interdependent: each element can affect the costs or effectiveness of another in the value chain, forming what Porter called linkages. These require co-ordination in order to optimise the flow of value.

The individual firm’s value chain does not exist in isolation:

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a firm can secure competitive advantage by managing the linkages within its supply network. This wider value chain is known as a value system or value network.

The value chain usefully highlights internal activities that add value – notably an integrated materials management or logistics approach. It also highlights the need to co-ordinate activities effectively. Perhaps most importantly, it reinstates the customer as the focal point of the supply chain and the ultimate measure of value.

Hines argues, however, that the model encourages an individual-firm focus on profitability rather a whole-chain focus on consumer satisfaction. Despite its recognition of linkages, it is not highly integrative, showing interfaces between separate activities, rather than integration. The primary/support distinction also misrepresents the importance of some functions.

3 Value adding strategies In broad terms, value can be added by ‘performing… strategically significant activities better, differently or more cheaply’: generic strategies of differentiation, focus and cost leadership.

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Key strategic issues include: deciding which parts of the value network have greatest profit potential; make/do or buy (outsourcing) decisions; who might be the best partners in various parts of the value network – and what kinds of relationship will best leverage their potential. Another aspect of adding value along the supply chain is concerned with eliminating waste.

4 Lean supply Lean thinking has its origins in Japanese production operations. It is a three-pronged approach that incorporates a belief in quality, waste elimination and employee involvement, supported by structured management and information systems.

Key principles of lean thinking include: specifying value from the customer’s perspective; eliminating non-value-adding activities and processes; linking value-adding activities effectively; operating just in time production; and removing success layers of waste. Taichi Ohno identified ‘seven wastes’ that could be targeted in manufacturing operations in order to achieve lean supply: over-production, unnecessary transportation, waiting time, unncessary motions, over-processing, excess inventory and defects/corrections.

Lean supply may be defined as: ‘the elimination of duplication of effort and capability in the supply chain, combined with a philosophy of continuously increasing the expectations of performance and self-imposed pressure to excel.’ (Lamming) This is generally achieved by recognition of mutual dependence and common interest between customer and supplier, collaboration on cost reduction (based on cost transparency) and so on.

The benefits claimed for lean supply include: the progressive removal of wastes, reducing costs and improving quality; closer collaborative relationships within the supply chain; benefits of cross-functional teamworking, involvement and flexibility within the organisation; reduced inventories, shorter cycle/delivery times and better resource utilisation; and fewer defects.

Lean supply chains do, however, have their limitations – and are not suitable for all organisations in all circumstances. The reduction of wastes can reduce capability to respond flexibly to contingencies, eg by removing buffer stocks. There may be a narrow focus on reducing cost rather than enhancing quality, service and creativity. Smaller suppliers may be deterred by the costs and risks. New & Ramsay also identify a number of detrimental effects of lean supply for consumers and wider stakeholder groups.

5 Agile supply Agility implies proficiency at dealing adequately with change or unexpected events, such as supplier failure, the need to expedite an urgent order to a customer – or profitable opportunities in the marketplace. Christopher argues that ‘the key to agile response is the presence of agile partners upstream and downstream of the focal firm’.

Agile supply chains streamline the flow of materials and information, often via integrated information systems, virtual team-working and the rapid formation of alliances. They also respond swiftly to changing needs of the market, eg through rapid product development, the use of e-commerce to improve direct contact with customers, or postponing the final configuration, assembly and distribution of products (late customisation).

Cox argues that lean philosophy is most powerful when the winning criteria are cost and quality, whereas agility is paramount where service and customer value enhancement are key.

Where lean supply attempts to minimise inventory, agile thinking is more ready to accept stock eg to support very short lead times. Agile supply also often depends on fluid virtual networks – rather than lean supply’s emphasis on long-term partnerships.

CHAPTER 15

Power and Responsibility in Supply Chains

1 Power in supply chains Various sources of power (discussed in Chapter 3) can be applied to supply chain relationships. Legitimate power may be exercised by an organisation, for example, by virtue of formal delegated authority, contract terms, or the ruling of a higher authority. Expert power may be exercised by specialist service providers or patent owners. Reward power may be exercised by buyers – or suppliers who control access to strategic supplies. Referent power may be exercised by a firm which has a strong brand or reputation.

Coercive, arbitrary or abusive exercise of power in supply chains is generally discouraged. It may be unlawful or unethical – and it is generally counter-productive: adversive forms of power may secure short-term compliance, but generally cause resentment, resistance and loss of potential for long-term relationship.

Supplier and buyer power Power is essentially exercised in supply chains to appropriate or claim a larger share of the value or value gains created by the process. According to Porter:

• The bargaining power of buyers/customers is relatively high when: they are limited in number and/or large in size relative to supplying firms; products are undifferentiated or substitutable (so it is easy to switch brands); their spend is a high proportion of the supplying firm’s revenue; or there is backward integration.

• The bargaining power of suppliers is relatively high when: they are limited in number and/or large in size, relative to buying firms; their product is strategically important to the buyer’s business, highly differentiated and not readily substituted; the volume purchased by the buyer is not important to the supplier; or there is forward integration.

Cox et al depicts the key issues of power and dependency in supply chains in a matrix:

B is dominant over

A

A and B are interdependent

A and B are independent

A is dominant over B

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to A

Importance of A’s resources to B

Interdependence creates the need to secure long-term collaboration and commitment, usually in the form of some form of partnership arrangement. It usually also implies that the item being supplied is of strategic importance to the buyer, due to factors such as: its criticality to the product; its low substitutability; the degree of risk in the supply market; and the potential for mutual benefits in collaborating with suppliers on cost reduction or quality improvement.

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2 Ethical considerations in supply chains We have already raised one key ethical consideration, in the decision of how far power and dependency can be exploited in supply chain relationships. Other ethical issues include: the use of information (including confidentiality); fair dealing (in relation to payment, appraisal of tenders and so on); and not offering or accepting gifts or inducements which may be perceived to influence the recipient’s decision-making. Guidelines on such matters are often included in professional and corporate codes of ethics.

Wider issues have also come into prominence in recent years. The concept of corporate social responsibility argues that corporations have ethical responsibilities towards connected and external stakeholders impacted by their activities. Ethical sourcing policies focus on the human rights and labour practises in developing countries: ethical monitoring of suppliers presents many challenges – but is seen as vital to the management of reputational risk.

3 Socio-economic goals pursued through supply chains Socio-economic issues are increasingly a concern to organisations as public opinion emphasises the need for large enterprises to be good ‘corporate citizens’. Some organisations may have a ‘compliance based’ approach to ethics which strives merely to uphold minimal requirements set by law and regulation. However, the term ‘corporate social responsibility’ (CSR) covers policies which the organisation adopts for the good and wellbeing of stakeholders, taking a more proactive ‘integrity based’ approach.

Although corporate objectives may primarily be financial, particularly in the private business sector, many firms now also set social responsibility objectives, in relation to matters such as: environmental responsibility, human rights, equal opportunities, diversity, corporate governance, environmental and social sustainability, ethical trading, biodiversity – and impact on wider society (employment, consumer debt, infrastructure development and so on).

Environmental issues Recent decades have seen an unprecedented upswing in public concern over environmental issues. An important feature of environmental policies is cooperation with suppliers, to encourage sharing of best practice and adoption of standards across the supply chain.

Areas of environmental concern in which supply chains have a role to play are summarised by Saunders as: the recovery and recycling of materials and waste products (reverse logistics); safe disposal of waste products that cannot be recycled; supplier selection policies to support firms that conform to environmental standards with regard to air, water and noise pollution; supplier and product selection policies that reflect concern for conservation and renewal of resources; safe testing of products and materials; and concern for noise, spray, dirt and vibration in the operation of transportation facilities.

4 Why pursue non-commercial goals? CSR is a costly process, and it may be argued that the only real responsibility of business is to make profits for its shareholders. Even so, an organisation may pursue CSR out of ‘enlightened self interest’ (Friedman), because: there are financial and operational penalties for failure to comply with law and regulations; voluntary measures enhance corporate image and branding; above-statutory provisions for employees and suppliers may help attract and retain high-quality service; and increasing consumer awareness of social responsibilities issues create a market demand for CSR! In the same way, ethical sourcing helps to create a climate in which mutually-beneficial long-term trading relationships can be preserved.

CHAPTER 16

Strategic Supply Chain Relationships

1 Globalised model – or contingency approach? The idea of a ‘globalised’ model refers not to geographic globalisation, but to the standardised application of a single ‘one size fits all’ approach to supply chain strategy.

Proponents of the contingency approach, however, argue that prescriptive approaches to supply chain management are based on narrow models, such as the success of the Japanese automotive industry (in the case of lean supply), or elements in the Japanese subcontracting system (in the case of network sourcing). And prescriptions which are effective in those particular operating and/or cultural conditions are not necessarily transferable! The aim of strategic management is to identify strategies which ‘best fit’ the particular conditions in which the organisation finds itself and the particular variables that apply. In essence, ‘it all depends’.

A complex organisation will have a mix of sourcing and supplier relationship management strategies – just as it has a product and marketing mix. Its focus at a strategic level will be optimising the total mix (from a customer value perspective). At the operational level, decisions will seek to leverage each relationship for quality, cost and delivery goals.

One key factor in the type of relationship that will be appropriate, for example, is the purchasing portfolio of the firm. Routine, non-critical items can be procured using market-focused or competitive sourcing. Specialist, strategic or ‘first tier’ items should be procured under closer collaborative or partnership arrangements. Core competencies may require vertical integration, to bring or retain them within the control of the firm.

2 Network sourcing ‘Network sourcing’ (Rich & Hines) is one globalised model of supply chain management. It refers to a pattern of buyer-supplier interaction that has grown up from certain elements in the Japanese-style subcontracting system. It embodies ten key characteristics: supplier tiering; few direct suppliers; high asset specificity; low-valued ratios (maximum ‘buy’ strategy); bilateral product design; supplier innovation; close, long-term, high-trust relations; rigorous supplier grading; supplier co-ordination and supplier development.

3 Competence-based and lean supply approaches The competence-based approach (Chapter 8) is a contingency model, because when it comes to supply chain strategies, ‘it all depends’ on whether or not you have competitive competencies, what they are, and whether they are available from other sources. Core competence is also a key factor in the choice of supply chain relationships, which depend partly on the extent to which a firm must rely on suppliers for its distinctive competencies.

Lean supply (Chapter 14) is essentially a prescriptive model in regard to supply relationships: in order to achieve lean supply, the organisation will need to invest in close, collaborative relationships with a small number of partners. However, the lean supply model can’t be used to prescribe the ‘best’ type of supply relationship for an organisation – because lean supply itself is not necessarily the appropriate strategy for every organisation. We have seen that agile supply prescribes a quite different type of supply chain relationships: virtual, temporary alliances within a loose, easily-reconfigured network.

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4 Adversarial and co-operative strategies Adversarial strategies In the most extreme (and simplified) form of a traditional adversarial relationship, buyer and supplier compete to maximise benefits for their own organisation, at the expense of the other party: this often focuses on price. Multiple suppliers are used to stimulate competition, and contracts are typically short term, to permit opportunistic switching. There is little trust, information sharing or co-operation on problem-solving or improvements.

The intended benefits of such a relationship strategy for a buyer are primarily price reduction (in order to appropriate maximum share of value), compliance (and therefore a level of predictability) and security.

You may have noticed that modern supply chain management is based on a radically different philosophy of buyer-supplier relationships! Some of the identified shortcomings of the traditional adversarial model include: failure to derive the full benefits of the other party’s expertise; wasted effort on negotiation and supply chain management; poor supplier motivation; and little potential for improved quality or costs from integration.

Co-operative strategies In a collaborative relationship, the buyer seeks to develop long-term relationships with a smaller number of preferred suppliers. The strategic view is that both organisations share common interests, and both can benefit from seeking ways of adding value in the supply chain. Relationship management is therefore based on trust, mutual obligation – rather than compliance with contract terms – and co-evolution. The supplier participates proactively with the buyer in looking for improvements and innovations, the benefits of which will be shared. Information will be shared more or less freely (in areas of shared activity) in both directions, to support joint problem-solving and development.

We looked at some of the benefits and drawbacks of co-operative strategies (in the context of SCM) in Chapter 10. It is important to note again that a collaborative approach is not necessarily the ‘best’ approach in all circumstances. It is also worth noting that a relationship need not be either adversarial or cooperative, but can be a mix of both. ‘Adversarial-collaborative’ relationships may be developed, where collaboration is used to create value, while competition is used to claim a larger share of value gains.

5 Partnership sourcing Partnership sourcing is the most advanced form of co-operative strategy. It involves a long-term relationship in which buyer and supplier work together to achieve mutual benefits, sharing the risks and rewards. Each party is committed to continuous improvement, and elimination of waste in the supply chain. Such relationships are characterised by a high level of trust, knowledge sharing and openness. There is likely to be early supplier involvement in design, and a high degree of systems integration (eg EDI).

Partnership sourcing may be beneficial where the customer has high spend with a supplier, or faces high supply risk; where the product calls for advanced technical or market knowledge by the supplier; or in a restricted supply market, where there are few competent suppliers.

Successful partnership requires top management support, a relationship of trust (extending to cost transparency), cultural compatibility, relevant complementary competencies and mutual acceptance of the concept of win-win within the supply chain. There must be meaningful performance measures to assess supply chain performance. Cross-functional teams should be used to enhance co-ordination and continuous improvement.