Appendix 2
Strategic sourcing techniques based on competition
Stimulating competition is an important aspect of rationalisation through strategic sourcing, although it falls outside supply chain management in so far as it does not affect the ability to balance demand with supply or reduce the bullwhip effect throughout the supply chain.
For leverage categories, the most effective strategy is generally based on approaches that act to keep suppliers’ margins in check. These approaches include, for example, requests for information (RFI), quotes (RFQ) and proposals (RFP), collectively called RFX for short, global sourcing, auctions and payment terms.
Buyers have recently made a significant move from managing supplier price to managing supplier cost. Led by Wal-Mart, buyers know that knowledge of the actual cost is power. When buyers speak knowledgeably and accurately about cost structures in the supply market, sellers are more inclined to share information that proves (or disproves) the buyers’ understanding.
In recent years, low-cost country sourcing has proved to be the most effective supplier competition strategy. Studies reveal that global sourcing has saved companies 13% of acquisition cost on their largest-spend categories, compared with an average of 7% for most supply chain initiatives. Both goods manufacturers and service providers do it under different names, for example outsourcing or offshoring, and even small and mid-sized firms are doing it. The arrival of value-priced competitors such as Zara (Spain) and Matalan (UK) has shifted the price expectations of consumers. Tesco buys over 60% of its clothing and 40% of its non-food products through its Hong-Kong based global sourcing centre.1 Even high-end retailers such as London-based Marks and Spencer have turned to low-cost country sourcing. When it started to make the transition in 1998, textile labour cost $9.50 per hour in the UK, while it cost less than 50 cents per hour in China, Pakistan and Indonesia. Like many retailers, Marks and Spencer began by asking its suppliers to offshore their sourcing and eventually it established some of its own supply relationships overseas. To deal with the challenge of the long import lead times for fashion-oriented clothes, it ordered half of its merchandise well before the season, 40% of it nearer to the season in which it is sold and 10% of it during the season “in response to emerging fashion trends”.2
Offshoring is a common form of low-cost country sourcing. China became prominent for its low-cost offshore manufacturing capabilities. India also became a hotspot for business process outsourcing (BPO), and other countries are getting in on the BPO game. For example, Gloria Macapagal Arroyo, president of the Philippines, cites BPO as one of the country’s growth strategies. Outsourcing and offshoring have been so widespread that international transportation and logistics companies, especially air express carriers such as DHL and UPS, are expanding rapidly on international routes that connect Asia and the West, which is catalysing the spread of SCM concepts in Asia. Even small, privately held firms can participate in the offshoring opportunity. Take, for example, MacGregor, a US financial services software developer that was recently acquired by Investment Technology Group. It operated a development centre in Spain, which was part of the reason it was attractive to Investment Technology Group.
Other ways to engage suppliers in competition include competitive bidding, reverse auctions (which start at high prices and go down), competitive events and structured negotiation.
The traditional mechanism for competitive bidding has been RFX. Charles River Laboratories, a $1.4 billion US clinical research company, uses RFX to source much of its material and service requirements, including lab supplies, animal transportation, and IT hardware and software. The RFX programme was part of a plan to centralise some parts of procurement after years of decentralised purchasing. Procurement decision-making had been fragmented across 40 locations in the United States, Canada, Scotland and Japan as a result of rapid growth through acquisitions.
GlaxoSmithKline, a UK pharmaceutical company, has used reverse auctions extensively for purchasing materials and services. Purchasing magazine reports:3
In 2003, the company completed 939 e-sourcing events including 534 e-auctions, pushing more than $3.8 billion through the tools, almost one-third of its total spend. After assuming responsibility for procurement, [chief procurement officer Gregg Brandyberry] was saving an average of 8% before moving suppliers to an online bidding system, when it almost doubled to 15% for sealed bids and sometimes as much as 28% for reverse auctions.
The internet and low-cost computing have spawned many creative variations on auctions. For example, combinatorial auctions allow bidders to choose parts of the whole or the whole bundle in order to increase the chance of a higher bid value. Also, buyers can significantly affect results by controlling the sequence in which the bidders bid and the information is known or hidden from bidders. Today, buyers have polarised opinions on auctions. Some feel that they are the best way to send a hard message to suppliers and get tangible results quickly, while others feel that suppliers are less co-operative when under the auction model than under more relationship-focused supplier management models.4
Appendix 3
List of abbreviations
3PL
third party logistics provider
ABC
inventory counting method that stratifies types of inventory into categories according to the frequency of its rotation, or turns; alternative meaning: activity-based costing
AGV
automated guided vehicle
APS
advanced planning and scheduling
APICS
Association for Operations Management. The abbreviation comes from its former name, the American Production and Inventory Control Society
ASRS
automated storage and retrieval system
ATO
assemble to order
ATP
available to promise
BOM
bill of material
BPO
business process outsourcing
BPR
business process re-engineering
CAD/CAM
computer aided design, computer aided manufacturing
CEO
chief executive officer
CFO
chief financial officer
CLO
chief logistics officer
CMO
chief marketing officer
COO
chief operations officer
CMMS
computerised maintenance management system
COGS
cost of goods sold
CORE
clear, objective, relevant and effective
CPG
consumer packaged goods
CPO
chief procurement officer
CRM
customer relationship management
CSCMP
The Council of Supply Chain Management Professionals
CSI
Container Security Initiative
CT/PAT
CTO
configure to order
DC
distribution centre
DIAD
delivery information acquisition device
DMAIC
define, measure, analyse, improve and control
DRP
distribution resource planning
EBIT
earnings before interest and tax
EBITDA
earnings before interest, tax, depreciation and amortisation
ECM
electronic contract manufacturer
ECR
efficient consumer response
ECO
engineering change order
EDI
electronic data interchange
EDLP
every day low price
EFT
electronic funds transfer
ERP
enterprise resource planning
&nb
sp; EOQ
economic order quantity
ETO
engineer to order
EVA
economic value added
FMCG
fast-moving consumer goods
GPO
group purchasing organisation
GPS
global positioning system
ISCEA
International Supply Chain Education Alliance
JIT
just-in-time
KPI
key performance indicator
KRA
key results area
LP
linear programme
MECE
mutually exclusive and collectively exhaustive
MRO
maintenance, repair and operating
MRP
materials requirements planning
MTO
make to order
MTP
make to plan
MTS
make to stock
NPD
new product development
NPI
new product introduction
OCR
optical character recognition
OEM
original equipment manufacturer
OM
operations management
OR
operations research
PDA
personal digital assistant
PDCA
plan-do-check-act
PLM
product life-cycle management
PO
purchase order
PPP
public-private partnership
QEC
quick engine change
RFID
radio frequency identification
RFx
requests for information, quote and proposal (RFI/RFQ/RFP, collectively called RFx for short)
RMA
returned merchandise authorisation
ROA
return on assets
ROCE
return on capital employed
RONA
return on net assets
S&OP
sales and operations planning
SaaS
software as a service
SCM
supply chain management
SCOR
supply chain operations reference (model)
SFA
salesforce automation
SKU
stock-keeping unit
SMED
single minute exchange of die
SRM
supplier relationship management
TCO
total cost of ownership
TMS
transportation management system
TPM
total productive maintenance
TPS
Toyota production system
TQM
total quality management
VAR
value-added reseller
VMI
vendor-managed inventory
VOIP
voice over internet protocol
VPN
virtual private network
WMS
warehouse management system
XML
extensible markup language
Appendix 4
Glossary
All definitions in this glossary are deliberately reduced to the essence of their pertinence to end-to-end SCM. For more detailed definitions, the reader may wish to consult the APICS Dictionary, the CSCMP Glossary and sources cited in the notes.
Assemble to order
Production system in which material is prepared so it can be assembled quickly upon customer request.
Barcode symbology
Logical systems of data storage in barcodes (strips of vertical lines of varying widths designed to be read by optical scanners) that define the amount and type of data that can be stored and how they are transmitted between the barcode and the reader. The UPC code, which is used at most retail checkout counters, is the most popular barcode symbology.
Bottleneck
Point of limited capacity where the flow slows down because of constriction.
Break-bulk
Irregularly-shaped and often oversized cargo that needs to be transported and handled by hand or by specialised equipment. Alternative definition (from the APICS dictionary): division of truckloads of homogeneous items into smaller or more appropriate quantities for use.
Channel design
Architecture of a set of supply chain relationships that defines which actors will trade with which other ones and sets high-level parameters such as which partner will hold inventory and how much, which will face the customer and which will share information with which others.
Close-out
Sale, discount or clearance.
Collaborative inventory management
Co-operation between a buyer and a supplier, usually in the form of shared forecast information and a single unified and reconciled plan, to improve stock availability and reduce its cost.
Concurrent design
Method of product development whereby new product conception is a collaborative and simultaneous process between many functions, such as product development, manufacturing and field service, with the goal of cost effectiveness and customer-perceived value once the product is produced and distributed in large volumes.
Configure to order
Assemble to order.
Consignment
Inventory replenishment mode in which the buyer pays only when he sells the product to his customer, and he may return unsold inventory to the supplier. Alternatively (CSCMP Glossary): a shipment that is handled by a common carrier.
Constraints management
Identifying, reducing or eliminating bottlenecks in an operation; according to the theory of constraints, a five-step process for identifying and eliminating bottlenecks that was developed by Eliyahu Goldratt.
Cross-docking
The process of taking cargo from an incoming vehicle to an outgoing vehicle without storing it in inventory at a warehouse. Cross-docking reduces inventory investment and storage space requirements.
Cross-selling
Offering a customer or prospective customer products or services from parts of the company’s offering other than what the customer is currently purchasing or interested in purchasing.
Cycle time compression
Re-engineering of processes to reduce the time, and hence the cost, needed for a product to move through part or all of a supply chain.
DC bypass
Circumventing the distribution centre by routing freight directly to its destination. This requires co-ordination with suppliers and customers to ensure the proper inventory levels and frequency of delivery to achieve the target service level and avoid stock-outs.
Demand chain management
Supply chain management that emphasises the primacy of customer requirements as manifested through the strategy techniques of synchronisation and customisation.
Design for assembly/modularisation
Engineering a system of components so that they can be easily and quickly assembled as a final product or service when a customer needs it.
Design for maintainability
Engineering a product or service so it can be easily and inexpensively repaired and updated.
Design for manufacturability
Approach to conceiving products that considers the complexity and cost of large-scale production.
Design for operability
Engineering a product or service so it can be easily and inexpensively used.
Design for prototypeability
Approach to conceiving a product that allows it to be easily and rapidly translated into a working model.
Design for supply chain
Approach to conceiving and developing products that considers total supply chain costs.
Disintermediation
Bre
aking down of an established reseller relationship in a supply chain in favour of a direct relationship between two parties.
Drum-buffer-rope
Lean manufacturing concept in which the drum represents the heartbeat, or takt time, of the operation (which is also the pace of the binding constraint); the buffer represents work-in-process inventory in the production operation; and the rope represents the pull of demand limited by the pace of material release.
Early customer involvement
Soliciting input from customers in the product development stage to increase customer satisfaction and implement cost-saving ideas before suboptimal supply chain processes, systems or infrastructure are developed.
Early prototyping
Creation of working models of a product at the initial stages of product development to identify problems while the design is still fluid enough that it can be modified at low cost.