Logistics & Supply Chain

Module - 5

▰ Managing Cross-Functional Drivers in a Supply Chain

▰ Information Technology (IT) & Sustainability in a Supply Chain

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Stages of a Supply Chain

A typical Supply Chain may involve a variety of stages, including the • Customers
following: • Retailers
• Wholesalers/Distributors
• Manufacturers
• Component/ Raw material
Suppliers

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Managing Cross-Functional Drivers in a Supply Chain

- Explore various factors that influence decisions about whether a Supply Chain activity is
performed “within the Firm or Outsourced”.
- Performance characteristics of Suppliers that affect Total Cost.

Goal is to enable managers to consider all the Trade-offs involved when making sourcing decisions
“to maximize Value” extracted from every stage of a Sourcing Relationship.

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Role of Sourcing in a Supply Chain

“Purchasing, also called Procurement, is the process by which companies acquire raw materials,
components, products, services, or other resources from suppliers to execute their operations”.

- Sourcing is the entire set of business processes required to purchase Goods & Services.
For any supply chain function, the most significant decision is whether to “Outsource the function
or perform it In-house”.

- Outsourcing results in the supply chain function being performed by a third party.
- Outsourcing is one of the most important issues facing a firm, & actions across industries tend
to be varied.

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Benefits from Effective Sourcing Decisions

✓ Better economies of scale can be achieved if orders within a firm are aggregated.
✓ More efficient procurement transactions can significantly reduce the overall cost of purchasing.
This is most important for items for which a large number of low-value transactions occur.
✓ Design collaboration can result in products that are easier to manufacture & distribute, resulting
in lower overall costs. This factor is most important for components that contribute a significant
amount to product cost & value.
✓ Good procurement processes can facilitate coordination with the Supplier & improve forecasting
& planning. Better coordination lowers inventories & improves the matching of supply &
demand.
✓ Appropriate supplier contracts can allow for the sharing of risk, resulting in higher profits for
both the supplier & the buyer.
✓ Firms can achieve a lower purchase price by increasing competition through the use of
Auctions. (Ex: Iron Ore & Coal through E-auction) 6
In-House or Outsource

- “A firm In-House / Offshores a supply chain function if it moves the production facility offshore
(even if it maintains ownership)”.
- “A firm Outsources if the firm hires an outside firm to perform an operation rather than executing
the operation within the firm”.

Address the Outsourcing of supply chain activities by a firm based on the following three questions:
1) Will the 3rd party increase the Supply Chain Surplus (Value) relative to performing the activity
in-house?
2) How much of the increase in Surplus (Value) does the firm get to keep?
3) To what extent do Risks grow upon Outsourcing?
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How do 3rd Parties Increase the Supply Chain
Surplus (Value) ?
3rd Parties increase the supply chain surplus if they either increase value for the customer or decrease
the supply chain cost relative to a firm performing the task in-house.

Various mechanisms that third parties can use to grow the surplus are:-
1) Capacity aggregation.
2) Inventory aggregation.
3) Transportation aggregation by Transportation intermediaries.
4) Transportation aggregation by Storage intermediaries.
5) Warehousing aggregation.
6) Procurement aggregation.
7) Information aggregation.
8) Receivables aggregation.
9) Relationship aggregation.
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10) Lower costs & Higher quality.
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3rd & 4th Party Logistics Providers

“Third-party logistics (3PL) provider performs one or more of the logistics activities relating to the
flow of product, information, & funds that could be performed by the firm itself”.
Traditionally, 3PLs focused on specific functions such as transportation, warehousing, & information
technology within the supply chain.

With the increased globalization of supply chains, customers are looking for players that can manage
virtually all aspects of their supply chain. This has led to the concept of a fourth-party logistics (4PL)
provider.
A 4PL was first defined by Andersen Consulting (now Accenture) as “an integrator that assembles the
resources, capabilities & technology of its own organization & other organizations to design, build &
run comprehensive supply chain solutions.

- 3PL targets a function or a set of functions,

- 4PL targets management of the entire process. 10
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Supplier Selection—Auctions & Negotiations…
The selection of suppliers is done using a variety of mechanisms, including offline competitive bids,
reverse auctions, or direct negotiations. No matter what mechanism is used, supplier selection
should be based on the “Total cost of using a supplier” & not just the purchase price.
Commonly used mechanisms for Auctions are as follows:
1) Sealed-bid first-price auctions require each potential supplier to submit a sealed bid for the
contract by a specified time. These bids are then opened & the contract is assigned to the
lowest bidder.
2) English Auctions, the auctioneer starts with a price & suppliers can make bids as long as each
successive bid is lower than the previous bid. The supplier with the last (lowest) bid receives the
contract. The difference in this case is that all suppliers get to see the current lowest bid as the
auction unfolds.
3) Dutch Auctions, the auctioneer starts with a low price & then raises it slowly until one of the
suppliers agrees to the contract at that price.
4) Second-price (Vickrey) Auctions, each potential supplier submits a bid. The contract is assigned
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to the lowest bidder but at the price quoted by the 2nd lowest bidder.
Supplier Selection—Auctions & Negotiations

The key to a successful Negotiation, however, is to make it a “win-win outcome”.

- It is impossible to obtain a win-win outcome if the two parties are negotiating on a single
dimension such as price. In this setting, one party can only “win” at the expense of the other.

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Supplier performance should be compared based on the impact on total cost.
In addition to purchase price, the total cost is influenced by supplier terms, delivery
costs, inventory costs, warehousing costs, quality costs, reputational impact, support 14
costs, other costs such as exchange rates, taxes, & supplier capabilities.
Customer Relationship Management (CRM)

“CRM is a technology for managing all

your company's relationships &
interactions with customers & potential
customers”.

- The goal is simple: Improve business

relationships.
- CRM includes processes that enable
interaction between an Enterprise & its
Customers.

- It helps companies stay connected to

customers, streamline processes, &
improve profitability. 15
Customer Relationship Management (CRM)

Three main types of CRMs:

1) Collaborative CRM systems 2) Operational CRM systems
Focus of Collaborative CRM systems is breaking down Operational CRMs help streamline a company’s
silos. Often the marketing team, sales reps, & processes for customer relationships.
customer support agents are all in different - It provide tools to better visualize & more efficiently
departments that feel disconnected. handle the full customer journey
- It ensure all teams have access to the same up-to-
date customer data,

3) Analytical CRM systems

Analytical CRMs have the primary focus of helping you analyze the customer data you have to gain important
insights. Digital tools & platforms now make it easy to collect large quantities of data.
- It provides features that help to use the data you have to see trends in how customers behave. With that
information, we can better understand what steps lead most successfully to sales, which increase customer
retention, & what the most common customer problems are. 16
Internal Supply Chain Management (ISCM)
“ISCM refers to the chain of activities within a company, specifically, purchasing, production, sales &
distribution”.
- ISCM includes processes focused on the internal operations of an enterprise

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Fig: Internal Supply Chain Management (ISCM) of an Enterprise
Supplier Relationship Management (SRM)
“SRM is the systematic approach to evaluating vendors
that supply goods, materials & services to an
organization, determining each supplier's contribution
to success & developing strategies to improve their
performance”.

- SRM includes processes that enable interaction

between an Enterprise & its Suppliers.

Key Metrics of SRM:

1) Source
2) Measure the Performances
3) Progress Monitoring
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4) Collaborate & Execute
The discipline helps organizations to:
1) Take better advantage of supplier capabilities;
2) Reduce costs;
3) Ensure supply chain continuity;
4) Limit supply chain risks;
5) Increase responsiveness of suppliers;
6) Gain visibility into future prices & hedge against price volatility. 19
Role of Pricing & Revenue Management in a
Supply Chain

Pricing is an important lever to increase supply chain profits by better matching “Supply & Demand”,
especially when there are multiple customer types willing to pay different prices (based on Attributes
such as response time) for an asset.

Revenue Management is the use of pricing to increase the supply chain Surplus & Profit generated
from a limited availability of supply chain Assets.

Supply Chain Assets exist in two forms— “Capacity & Inventory”.

1) Capacity Assets in the supply chain exist for “Production, Transportation, & Storage”.
2) Inventory Assets exist throughout the supply chain & are carried to improve product availability.

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Pricing & Revenue Management in a Supply Chain

Understanding & Acting on the interactions among “Supply, Demand, & Pricing” can bring about
powerful results. The following points are vital in SCM.
1) Evaluate your market carefully.
2) Quantify the benefits of Revenue management.
3) Integrate Supply planning with Revenue management.
4) Implement a Forecasting process.
5) Keep it simple.
6) Involve both Sales & Operations.
7) Understand & Inform the Customer.

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Information Technology (IT) & Sustainability

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Role of IT in Supply Chain

Information is crucial to making good supply chain decisions at all three levels of decision making
(Strategy, Planning, & Operations) & in each of the other Supply Chain Drivers (Facilities, Inventory,
Transportation, Sourcing, & Pricing).
IT enables not only the gathering of these data to create supply chain visibility, but also the Analysis
of these data so that the Supply Chain Decisions made will maximize profitability.

Ex: Amazon, Flipkart, JSW, TATA, Mahindra, Adani & Netflix.

To support effective supply chain decisions, Information must have the following characteristics:
✓ Information must be Accurate.
✓ Information must be Accessible in a timely manner.
✓ Information must be of the Right kind.
✓ Information must be Shared. 23
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Goal of Supply Chain IT

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Future of IT in Supply Chain

The following three important trends will impact IT in the Supply chain:
1) The growth in “Software as a Service (SaaS)”
2) Increased availability of “Real-time Data”
3) Increased use of “Mobile Technology”

- SaaS is defined as software that is owned, delivered, & managed remotely.

Salesforce.com is one of the best-known pure SaaS supply chain software providers (in CRM).

- The opportunity is to design systems that enable rapid insight based on Real-time data.

- The increased use of Mobile technology coupled with real-time information offers some supply
chains an opportunity to better match demand to supply using differential pricing.
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Supply Chain IT in Practice

Managers need to keep in mind several general ideas when they are making a decision
regarding supply chain IT.

▪ Select an IT system that addresses the company’s key success factors.

▪ Take incremental steps & measure Value.
▪ Align the level of sophistication with the need for sophistication.
▪ Use IT systems to support decision making, not to make decisions.
▪ Think about the future.

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Role of Sustainability in a Supply Chain
Sustainability has become a key priority in the design & operation of supply chains in the 21st
century. A focus on sustainability allows a supply chain to better serve more environmentally
conscious customers while often improving supply chain performance.
The Brundtland Commission of the United Nations defined Sustainable development as
“development that meets the needs of the present without compromising the ability of future
generations to meet their own needs.”
The 2005 World Summit of the United Nations
introduced a framework identifying the “three pillars”
of sustainable development. All three pillars must be
reconciled for sustainability to occur.

Three Pillars of Sustainable Development

1) Economic,
2) Environmental,
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3) Social sustainability
Role of Sustainability in a Supply Chain

The factors driving an increased focus on Sustainability can be divided into three distinct categories:
1) Reducing risk & improving the Financial performance of the Supply Chain
2) Attracting customers who value Sustainability
3) Making the world more Sustainable

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Goal of Sustainability in a Supply Chain

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Key Metrics for Sustainability

From an Environmental perspective, all firms should measure & report on these four categories:
1) Energy Consumption
2) Water Consumption
3) Greenhouse Gas Emissions
4) Waste Generation

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Sustainability & Supply Chain Drivers….
1) Facilities
Facilities tend to be significant consumers of energy, water, & emitters of waste & greenhouse gases
& thus offer significant opportunities for profitable improvement. Once a firm measures the direct
impact of each facility in terms of energy, water, emissions, & waste, it should separate the
improvement opportunities into those that generate positive cash flows & those that do not.

2) Inventory
Most supply chains focus on raw materials, work-in-process, & finished goods inventory, but few
focus on the inventory sitting in a typical landfill. While the inventory in the landfill may not show up
in a firm’s balance sheet, it does show up as one of the most damaging aspects from a sustainability
perspective.
3) Transportation
Transportation is another driver wherein firms are likely to find several positive cash flow
opportunities. Any supply chain design innovation that lowers transportation costs also tends to
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reduce emissions & waste generated from transportation.
Sustainability & Supply Chain Drivers….

4) Sourcing
For most firms, the majority of energy, water use, waste & emissions occurs in the extended supply
chain outside their own enterprise. Thus, to truly have an impact on sustainability, powerful players
must look at the extended supply chain & work with their suppliers to improve performance.

5) Information
Good information continues to be one of the biggest challenges to improved supply chain
sustainability. The absence of standards for measurement & reporting has led to claims of
improvement that are often not verifiable.

6) Pricing
One of the biggest challenges to improved sustainability of a supply chain is changing the customer’s
willingness to pay for a product that is produced & distributed by a supply chain in a more
sustainable manner but ends up costing more. 33