SCM INTEGRATION AND STRATEGIC OFFSHORING: THE GOOD, THE BAD AND THE UGLY

Beth Davis-Sramekbrdavi06@louisville.edu

Department of Marketing

Product Differentiation

Key Business Challenges

SKU Explosion

Compressed Lifecycles

Pricing Pressures

Technology Convergence

Diverse Channels

Demand Volatility

Emerging Markets

Product Service

At the intersections: SCM

Procurement Strategy

LogisticsStrategy

Marketing Strategy

Other Functional Strategies

Operations Management

Strategy

SCM

Corporate

Stra

tegy

4

SUPPLIERNETWORK

INTEGRATEDENTERPRISE DISTRIBUTIVE

NETWORK

Information, Product, Service, and Financial Flows

MATERIALS

Relationship Management

Procurement

Manufacturing

Distribution

END

CONSUMERS

Supply Chain Logistics Management, First Edition. Bowersox, Closs, and Cooper.Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Are you focusing on the development and integration of people and technological resources as well as the coordinated management of materials, information, and financial flows?

Why SCM?

• Five-year performance requirements:

–Year-to-year cost reductions of 5%

–YTY quality improvement of 10-15% (<250 PPM defective)

–A 40-60% reduction in “concept-to-market” time

–Improved customer responsiveness of 30-80%

Robert M. Monzcka

Effective Supply Chain

Integration

Cross-Functional Process Change

Information Systems

Performance Measurement

Alliance Design

People Empowerment

Alignment Mechanisms

Why Supply Chain Management?

Driving Forces

• More Demanding Customers • Greater Competitive Intensity • Shifting Channel Power • Economic Globalization • Tighter Alliance Relationships • Compressed Product Cycles • Continued Merger Activity • Need for Better Information • New Information Technologies • Shifting Competitive Focus; i.e., Companies to Supply Chains

Implementation Challenges

• Lack of Top Management Support • Non-aligned Strategic and Operating Philosophies • Inability or Unwillingness to Share Information • Lack of Trust Among Supply Chain Members • An Unwillingness to Share Risks and Rewards • Inflexible Organizational Systems and Processes • Cross-functional Conflicts and "Turf" Protection • Inconsistent/Inadequate Performance Measures • Resistance to Change • Lack of Training for New Mindsets and Skills

Performance Outcomes

• Unique Products & Services • Faster R&D Cycle Times • Superior Quality • Cost Competitiveness • Shorter Order Cycles • Flexible Customer Response • Enhanced Delivery Performance • Better Asset Management • Increased Cash-to-Cash Velocity • Superior Channel Relationships

Strategic Initiative

Effective Supply Chain

Integration

Cross-Functional Process Change

Information Systems

Performance Measurement

Alliance Design

People Empowerment

Alignment Mechanisms

YouWhat to do?

7

• MARKETING: blamed finance for not approving increased advertising and promotional support and accused production for not making the right products

• SALES: blamed marketing for lack of promotion and trade support, blamed logistics for poor customer service, and blamed production for slow production schedules that hampered their ability to make timely delivery to customers

• LOGISTICS: blamed inaccurate forecasting by the sales groups and engineering for not designing product for distribution, causing poor distribution planning and high cost

• FINANCE: blamed budget overruns by all departments and unreliable forecasting from the marketing group

• PRODUCTION: blamed sales for making unreasonable promises to customers, marketing for inaccurate forecasts, engineering for creating products requiring unnecessary specs, and finance for unrealistic cost objectives.

• ENGINEERING: blamed marketing for not conveying true customer desired value during product development stage

• LEGAL: blamed everybody for putting the company at legal risk for all sorts of liability and contract issues.

Sound familiar?

The Operational Result of the Blame-Game

…need .....product...... … need … product A, B, C... We need: 3 product A, 2 product B, 6 product C….NOW!!!!

Plants Manufacturer D.C.s Distrib Network

•Product focused•Efficiency metrics•Economies of scale

Customer focusedRevenue/market share metricsEconomies of scope

TheGreat Divide

– too much that no one wants or too

little that everyone

wants

So What’s Going On!

Diversity of Choice

Operations Marketing

Unit Price

The Dis-Integrated Organization

Information, Product, Service and Financial Flows

MATERIALS

END

CUSTOMERS

* Hidden supply chain costs* High inventory levels to hedge uncertainty* High volume, infrequent deliveries

* Multiple faces presented to customer* Functional org structure* Mixed-product shipments from

stock

INTERNAL ENTERPRISE

Procurementand

ManufacturingIntegration

Distributionand

MarketingIntegration

The Great Divide

Why? Misaligned incentives

12

Elements for successful outcomes

• Top-performing supply chains possess three very different qualities:– alignment– agility – adaptability

• Only those companies that build agile, adaptable, and aligned supply chains get ahead of the competition

13

Incentives → behavior → outcomes• Blending outcomes complicates measurement• Intra-firm

– Incentives should encourage employees to behave in ways that benefit the overall firm, not just their own functions.

– Beware of conflicting incentives!– Employee buy-in

• Inter-firm– Start with the alignment of information, so that all the companies in a supply

chain have equal access to forecasts, sales data, and plans.– Do we incentivize the ‘urge to surge?’ (short-term thinking)– Reward-sharing incentivizes ‘helpful’ behavior

Alignment

Sales and OperationsPlanning

Collaborative Planning

Learning About Customers(Determining Customer Value)

Giving Customers What They Want (Delivering Customer Value)

Telling Customers About What You Can Give Them

(Communicating Customer Value)

Demand (Sales and Marketing

Demand Forecast

Demand Plans

Developing a Supply Line to Fit Market Strategy

Supply (Logistics, Procurement, Operations)

Understanding Relationships between

Supply Chain Members

Managing Supply Chain Components

Capacity Forecast

Operations Plans

Demand and Supply Integration (DSI)

Demand/SupplyIntegration

SUPPLY DEMANDDemandForecast

Capacity Forecast

DemandPlan

Operations Plan

Knowledge Generation Knowledge

GenerationKnowledge Dissemination

Knowledge Dissemination

Knowledge Application

Knowledge Application

Shared Interpretation

Supply Management Domain

Demand Management Domain

The dynamic integration of enterprises and their customers and suppliers to determine, create, fulfill, and communicate customer value in the global environment.

BEST IN CLASS COMPANIES. . .

• . . . are relentlessly customer centric.

• . . . recognize inter-firm collaboration as critical.

• . . . focus on processes rather than functions.

• . . . view open communication as a must.

• . . . factor people into every decision.

• . . . invest in information technology as an enabler.

• . . . are obsessed with performance measurement.

Low Cost Production

Supply Chain’s Reaction

High Inventory

Outsourcing - Multiple Partners

Why Offshore?

Why NOT do it?Lewin and Peeters, HBR

The Hidden Costs of Offshoring

Source AMR

Location choices: activity types

• Scarce natural resources• Customers and markets• “Mobile” activities

– Gravitate to location with lowest total cost– Coordinate at a distance– Stable macroeconomic policies

Porter and Rivkin, HBR 2012

How managers choose locations

• Rules of thumb– Generally not large-scale movements– Limited data– Inconsistent accounting systems– Limited performance reviews– “We’re here already”– Perception– Today many companies seem to believe that most

activities can be carried out more economically outside the U.S.

What to (or not) Offshore?

• Core processes/activities: must be controlled• Critical processes/activities: might be

purchased from best-in-class vendors• Commodity processes/activities: easily

outsourced

The Industrial Commons…

• Is the world flat?• Where did the “original design manufacturer” come

from?.. • Industrial commons: refers to a foundation of

knowledge and capabilities (technical, design and operational) that is shared within an industry sector, such as R&D know-how, advanced process development and engineering skills, and manufacturing competencies related to a specific technology.

HBR, Pisano and Shih, 2009

HBR, Pisano and Shih, 2009

Source: HBR 2012

Business: Making the Environment More Competitive

• Capitalize on changes in business conditions that favor the US

• Near-shore instead of offshore• Avoid the subsidy trap• Improve the quality of location decision

making• Upgrade US communities

Questions?Comments?