Value X 4 Equals Excellence

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Value X 4 Equals Excellence

By Julie S. Roberts

Julie S. Roberts is a writer for Inside Supply Management™. August 2002, Inside Supply Management™, page 38.

When the four individual supply chains that compose an entire supply chain are optimized, excellence results.

For a symphony to produce beautiful music, a variety of instruments are involved — including the easily recognized instruments like the drums or piano and the more subtle instruments such as the cello or oboe. Each instrument can perform a solo and sound nice, but the greatest and most powerful harmony is achieved when all are playing together — each

instrument playing every note as it is written. However, if one instrument or section is playing in the wrong key or is not keeping the same rhythm, the harmony sounds discordant.

These same concepts apply to the supply chain. Every supply chain is actually comprised of four supply chains — physical, financial, informational, and relational. Like the drums or piano, the physical and relational supply chains are easily recognized in most supply

management organizations. The financial and informational supply chains are more like the cello or oboe — not as obvious, perhaps, but equally important for creating a fully optimized supply chain. Also like a symphony, it is important to remember the greater good. For instance, if a method for optimizing the physical supply chain hinders the financial supply chain, it is not an optimal method for the overall supply chain.

The composition of the supply chain may be summed up in the ISM definition of supply management: "The identification, acquisition, access, positioning, and management of resources the organization needs or potentially needs in the attainment of its strategic

objectives." With the supply management professional directing and conducting to achieve the harmony of the composition, he or she is responsible for understanding each supply chain and then optimizing each individually in ways that will enhance the other chains and thus, the entire supply chain.

The Physical Supply Chain

The physical supply chain is defined as the actual movements and flows within and between firms, transportation, service mobilization, delivery, movement, storage, and inventories. Activities such as outsourcing and insourcing, strategic sourcing methods, efficient logistics

Points of Interest

At a glance, here are the main points covered in this article. By reading it, you will learn:

z How four supply chains come together to comprise one entire supply chain

z Strategies for positively impacting each of the four supply chains

z How to improve the entire supply chain by optimizing each aspect

z Information about ISM's November conference, Value X 4: The Essential Supply Management Conference

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and flows, and product design, innovation, and production are some of the components of the physical supply chain.

When it is optimized, the physical supply chain, like the other chains, operates smoothly and efficiently. Outsourcing and insourcing decisions are made considering the total costs — analyzed with input from a variety of supply chain stakeholders (including, but not limited to, internal customers, consumers, and suppliers). These decisions are effectively managed with excellent collaboration and communication between members of the supply chain.

In the optimized physical supply chain, strategic sourcing methods are attuned to the organization's overall objectives, and various methods such as strategic partnering and e-sourcing are selected and employed based on the commodities' impact on the organizational strategy and core competencies.

Logistics and flows become more efficient in the optimized physical supply chain, through the use of collaborative techniques. For instance, trucks making deliveries across the country may pick up supplies on their return trip to the manufacturing plant. This requires coordination with the supplier, the logistics provider (internal or external), as well as internal stakeholders to know how and when transportation will occur.

Product design, innovation, and production are optimized as the lines blur between internal boundaries and even organizations. Supply management professionals may work more closely with engineers on developing products with parts that can be purchased inexpensively.

Innovation is increased as key suppliers are encouraged to pitch ideas to their customers (the buying organizations), and production is optimized by devising ways for shorter cycle times and better quality. In this case, a supply manager may discover that a supplier can complete a production step in less time, at a higher quality, and at a lower cost.

There are many approaches to optimizing the physical supply chain. The paramount issue is becoming more collaborative with the stakeholders and suppliers — actively seeking out new ideas and better ways of conducting activities.

The Financial Supply Chain

While many acknowledge the components of a financial supply chain, such as price containment strategies, capital acquisition methods, cash flows, and settlements, the connectivity may be more difficult to discern. Yet in a simple example, an organization's settlement activities affect the supply chain by impacting the supplier's cash flow, which in turn may affect the buying organization with higher prices, to account for the supplier's cost of capital. This effect can trickle through the supply chain, impacting the final customer's cost. ISM defines the financial supply chain as the flows of cash from firm to firm, incurred

expenses, investments, and costs of processes involved in the creation and eventual delivery of goods and services. A simple way to think of the financial supply chain is to consider the flow of cash accompanying the physical flow of goods or services.

Optimizing the financial supply chain entails examining price containment and reduction strategies, determining the appropriate strategies for the organization and the commodity, and rigorously applying the strategy selected. An example of an aggressive strategy is a supply management professional who looks for ways to reduce the supplier's cost to produce a strategic commodity, which in turn reduces the supply manager's own costs.

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Other means of optimizing the financial supply chain, on an internal scale, include working with accounts payable to expedite payment more quickly to increase the cash flow speed and efficiency throughout the supply chain. Optimization of the financial supply chain may also be as simple as collaborating with end users to determine if substitute products or services may be used to reduce costs — or as elaborate as working with third-party financiers to find alternative means for funding purchases.

An optimized financial supply chain is one in which the cash flow moves smoothly throughout the supply chain. There are no gaps or boundaries. The financial processes are seamless and the cost reduction strategies are continually refined and practiced — all positively impacting the other three chains within the overall supply chain.

The Informational Supply Chain

The informational supply chain is the processes and electronic systems, data movement triggers, access to key information, capture and use of data, enabling processes, and market intelligence that drive the flow of products and services throughout the supply chain. It is another subtle supply chain — the connectivity of information activities in the supply chain may not be immediately apparent, but value can come from improving and optimizing those connections.

Information not only is valuable to the organization, it also drives the supply chain by enabling better decisionmaking, greater efficiency with less time wasted trying to find information, and more effective use of resources from better planning. Examples of components of the informational supply chain include inventory forecasting, information management advances, technology and e-business tools, and customer information.

The more information available for making a decision, the better the outcome, right? Maybe. It depends on if the information is usable to the stakeholder. Data is different than

information. For information to be useful to any member of the supply chain, meaning must be attached to it. For instance, inventory data may just be numbers. If a supply manager attaches meaning to the numeric data, then the data becomes information, and inventory forecasting can be accomplished.

In the informational supply chain, technology and human knowledge must work together. Technology is used for retaining data and making it easier to retrieve, but humans attach meaning.

Technology can capture how many units are sold or how often a consultant visits an

organization, but this may not represent the type of information needed to make an informed supply decision. Information such as customer comments or specific conversations that a consultant had with an employee is what would be useful for making supply decisions. Have customers made suggestions about products that could be improved — by using a new

supplier or a new part altogether? Is the question regarding an update to the ERP system that the consultant answered for one supply manager something that others would benefit from? Without the human element of attaching meaning and choosing what to input into a database or intranet system, the truly valuable information might be lost.

An optimized informational supply chain will provide the right information, to the right person, at the right time. Technology and people must work together to provide this value to the supply chain. Connecting the informational supply chain, and making the appropriate

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information accessible to supply chain members, ensures that the right people have access to the needed information.

The Relational Supply Chain

The relational supply chain, as defined by ISM, is the appropriate linkage between a supplier, the organization, and its customers for maximum benefit. This also includes internal supply relationships throughout the organization. Components of this supply chain include supplier-buyer relationships, unique supplier-buyer-supplier linkages, customer and supplier relationship management, supplier rationalization, and ethics.

The relational supply chain is clearly recognized in the entire supply chain — and is within each of the individual supply chains. For a physical supply chain to work optimally, a

collaborative relationship between the suppliers and the buying organization must exist. For the financial supply chain to operate effectively, a trusting relationship must exist between suppliers, the buying organization, and the end customer to obtain the necessary visibility for insight about true costs. Even the informational supply chain requires relationships. For customers to provide information that affects supply management decisions, they must believe that their information will go beyond the organization's sales representative. For sharing information, relationships must exist to even know what information is available. Thus, the relational supply chain plays an important role in the entire supply chain.

Unique buyer-supplier linkages may be a good solution if a traditional relationship isn't meeting an organization's needs. Could a supplier do more for the buying organization by assuming a partnering role? Or, for example, could the buying organization purchase

materials from a second-tier supplier to be manufactured by a first-tier supplier and then sold to the buying organization at a lower cost? Is there a unique manufacturing process that the supply manager's organization can perform? For instance, can the buying organization purchase materials from a supplier, manufacture a part or component, and then resell it to the supplier? Although unique, the relationship is key to making ideas for greater

effectiveness work.

The relational supply chain also includes supplier rationalization as a component. Which relationships provide value to the buying organization? Which are worth keeping and nurturing? Deciding which relationships to maintain, which to nurture into a partnership or more collaborative relationship, and which to end is part of optimizing the relational supply chain. Holding onto non-valuable relationships may limit organizations from finding better supplier relationship opportunities.

Value X 4

While it is useful to understand and optimize each supply chain, the impact on the other supply chains and the entire supply chain must be considered. Optimizing all of the supply chain components to positively affect each other is what brings about value X 4 and supply chain excellence.

Supply managers can optimize the four supply chain components by first streamlining and delegating the tasks that can be accomplished electronically or by someone else. The fewer tactical tasks that a supply manager must devote time to, the more he or she can do to provide more value to the organization.

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techniques from ISM's conference, Value X 4: The Essential Supply Management

Conference. This conference will be held in November in Scottsdale, Arizona. See below for more details.

Sessions will discuss the various components of the supply chain. For the physical supply chain, supply managers might choose "Supply Chain Optimization: Cost-Effective Inventory Management, A Value Opportunity," which discusses optimal sourcing locations considering the geography of the supply chain as well as issues about transportation and distribution. For discussion about the financial supply chain, supply managers could opt for "Driving More Value at Lower Cost." This session presents the inside story on how one organization was able to lower procurement costs while increasing value to its customers. Discussion about the informational supply chain will be an important focus in the session entitled, "Earning the Right to Lead by Adding Value: Exploit the Power of Spend Data." Ideas for improving the relational supply chain through effective negotiations will be presented in "Strategic Negotiation: A Rational Process for Adding Value." Putting the supply chain strategies into practice will be covered throughout the conference, but two sessions you won't want to miss include "The Competitive Supply Chain: The Value of Integrating Your Physical, Financial, Informational, and Relational Systems," and "The Near Future: How Far Can You Leverage Supply?"

Value X 4 is the objective for optimizing the physical, financial, informational, and relational supply chains to bring about supply chain excellence and harmony. While many of the activities comprising these chains currently exist, identifying them and understanding their connectivity within the chain and their impact on the entire supply chain can result in added value.

Four Supply Chains, Four Cover Stories

The cover stories of the May, June, July, and August issues of Inside Supply Management™ have discussed in detail each of the four supply chains comprising the entire supply chain. To review these articles, go to the ISM Web site at www.ism.ws and select Inside Supply Management™ and Other Publications from the menu on the left.

z Physical supply chain: "Collaborative Logistics: Building a United Network," May 2002, p. 42

z Financial supply chain: "The Supply Chain of Dollars and Cents," June 2002, p. 38 z Informational supply chain: "Knowledge Management — The Supply Chain Nerve

Center," July 2002, p. 38

z Relational supply chain: "Facing SRM and CRM," August 2002, p. 30

Value X 4: The Essential Supply Management Conference

Value X 4: The Essential Supply Management Conference represents the ultimate learning experience for supply chain optimization. It's an opportunity to capture leading practices of the four cornerstones of today's supply networks: physical, financial,

informational, and relational. It all takes place November 11-13, 2002, in Scottsdale, Arizona, at Marriott's Camelback Inn Resort, Golf Club and Spa. Within the four value keystones, this specialty conference will address:

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z Competitive advantage z Impacting revenue

z Discovering best practices z Supply chain optimization z Unraveling the data web

z The supply management continuum

z Leveraging your spend

Best practices and success stories cover a variety of industries including manufacturing, educational providers, retail, financial management, technology, and non-manufacturing services. Workshop speakers represent decades of experience and dedication to a successful supply management framework.

Keynote addresses, presented each morning of the conference, offer exciting opportunities to learn from industry leaders sharing their thoughts and visions about supply management. Here are some of the highlights to anticipate:

Monday: Joseph L. Cavinato, Ph.D., C.P.M., senior vice president and ISM distinguished professor of supply management for ISM, will address the focus of the conference — "The Four Cornerstones of Value-Producing Supply Networks." He will introduce the four key supply chains and detail how supply management can take a strong leadership role across the entire supply network for cost, price, systems, innovation, and even revenue results. This keynote address will serve as a road map for the rest of the conference sessions.

Tuesday: Kent Brittan, vice president, supply management for United Technologies Corporation (UTC), will present, "The Competitive Supply Chain: The Value of Integrating Your Physical, Financial, Informational, and Relational Systems." In this keynote address, learn how UTC has been making supply management a strategic competitive advantage across its five major businesses. Brittan will discuss how the development of a strategy and common processes and language across the corporation has allowed the organization to leverage its flow of information, financial processes, physical supply chain movement, and relationship alignment.

Wednesday: The last keynote address, given by Cavinato, entitled, "The Near Future: How Far Can You Leverage Supply?" presents the exponential pace of change in the supply

management field. This keynote address will explore many of the key issues and perspectives of the conference sessions and present insights as to the directions to pursue for your future. Don't miss this keynote address that will teach you how to apply your newfound knowledge to your organization and to your career.

Learn how to optimize your entire supply chain one component at a time by attending the Value X 4 Conference. Check out the ISM Web site at

www.ism.ws/Conferences/ValueX4.cfm for more information.

To contact the author or sources mentioned in this article, please send an e-mail to

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