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Summary Supply Chain Management
Supply Chain Management (Hogeschool van Amsterdam)
Scannen om te openen op Studeersnel
Studeersnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit
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Supply Chain Management
Chapter 1, Introduction to supply chain management.
“Managing the flow of information, materials and services from raw material suppliers
through factories and warehouses to the end customer”- Supply Chain
Everything we consume from food we eat and clothes we wear, to cars we drive, is
configured from components that have travelled from different corners of the world.
1.1 What starts a Supply Chain?
Flows:
1. Flow of materials
2. Flow of information
3. Flow of funds
Forces:
1. Product supply (Commodities, such as, tea, coffee, rice, milk, and most other basic
consumer products that you find in supermarkets)
2. Customer demand (These products are typically characterized by a high degree of
customization or product innovation).
 The customer order starts the supply, manufacturing and transport activities of
you desired product.
1.2 A functional View of Supply Chain Management
 Plan process:
Balance demand and supply.
 Sources process: The process of buying goods or services to meet planned or actual
demand.  Selecting suppliers, establishing policies and assessing performance.
 Make process:
Set up manufacturing
 Deliver process: Order management, logistics  all supply chain processes are
included that provide finished
 Return process: Post-delivery customer support or the return of product.
Takes place in every stage of the supply chain
Supply chains react to changes in their environment
- Customer demand
- Product supply
- Exchange rates
- Temperature
In its simplest format, a supply chain consists of three nodes.
1. The company (the producer of tea bags)
2. The supplier (local companies that produce raw and packaging materials)
3. The customer of the company (local supermarkets)
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Chapter 2, Guide to Plan in Supply Chain Management
2.1 Inventory and Supply Chains
Inventory: quantity of goods that is available on hand or in stock (raw material, work in
progress, finished goods).
Why hold inventory?
 Protect against uncertainty (Uncertainty can be caused by variations in demand or by
restrictions in supply)
 Cost reduction (When stock is held close to the customer  IKEA)
 Protect against quality defects (Quickly replacement if there is stock available)
 Stabilize manufacturing (For seasonal products where manufacturing technology is
costly  Ice cream, it is produced throughout the year to keep up with the high
demand in the summer)
 Anticipate stock (Demand driven instead of supply driven)
 Balancing supply and demand (ideally suppliers deliver exactly when we need it and
in full)
2.1.1 Different Types of Inventory
 Cycle stock (or replenishment stock), necessary to meet normal daily demand.
 Safety stock, stock that buffers against forecast error and thre supplier’s unreliability
(Back-up).
 In transit stock, stock being transported.
 Seasonal stock, to meet seasonal increased sales volume (Ice cream and Sinterklaas)
 Promotional stock, to feed marketing campaigns and advertising
 Speculative stock, against price increases or limited availability
 Dead or obsolete stock, no longer usable or saleable
Cycle stock and safety stock are those types that are most looked after in inventory
management.
Two important cycle stock concepts:
1. Average cycle stockholding: the average cycle stock held during a particular
timeframe
 Typical quantity or the orders / 2
2. Average cycle stock investment
 Average cycle stockholding x product cost
 Assumption: Demand is stable
Safety stock
Safety stock is different from cycle stock as it does not cover the regular rate of sales but
protects against uncertainty.
- Unplanned production and delivery delays
- Unplanned demand
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Safety stock = A + B
A= Safety stock supply
 Average demand x supplier uncertainty(SU)
B= Safety stock demand
 Standard deviation of demand x service level factor x
LT= Lead-time
SU= Supplier uncertainty
LT + SU
Reducing inventory
By compressing supplier lead-times, reducing it from 4 days to one day, less safety stock is needed to
safeguard supply. The same applies for the reduction of supplier uncertainty. As suppliers become
more reliable (ideally reducing their lead-time variability to zero), a considerably lower safety stock
can be held.
By reducing forecast error, demand uncertainty can be reduced and thus less safety stock will be
needed. Lastly, the reduction of service levels will positively improve your safety stock position.
2.2 Demand and Supply Planning
2.2.1 Describing Demand
 Level of demand (high or low)
 Frequency of demand over a certain period of time (fast or slow)
 Patterns of demand (stable, trend or seasonal)
 Product life cycle positioning: there are 5 phases in a product life cycle. In each of
these phases, demand can take a different form and therefore could have an effect
on planning and inventory management.

1. Launch: often requires building up stock prior to the launch date. At this moment of
time demand is most uncertain.
2. The emerging phase: describes the demand building on the launch of the product.
3. Establishing: phase of the product life cycle, demand increases and decreases are rill
likely to occur but they will be sudden and heavy in magnitude.
4. Decline: now the angle of decline of demand needs close monitoring in order to
ensure that inventory levels are sufficient in order to meet ongoing demand.
5. Withdrawals: demand is likely to approach zero and the product needs a good phase
out strategy in inventory control to minimize the risk of obsolescence
(disappearance).
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
Product classification: product segmentation, rather than spending the same amount
of time for planning and managing every single stock keeping unit (SKU), it is wise to
segment the product portfolio into various categories depending on their percentage
turnover.
2.2.2 Forecasting Methods
There are two distinct classes of forecast methods:
1. Qualitative forecast (the simple process of guessing future demand, making hunches
based on intuition and using your experience)
2. Quantitative or statistical forecasting (compromises statistical models that can have
a casual nature or that can be based on time series of historical data.)
Time series method of statistical forecasting method based on assumption that historical
patterns of demand are a good indicator for future demand. This assumption is also called
the assumption of continuity.
Forecast accuracy in the supply chain is typically measured using the Mean Absolute Percent
Error (MAPE). Forecast error can be defined as the absolute deviation of the actual realized
demand quantity from the forecasted quantity.
(Actual – Forecast)
Error (%)= ------------------------Actual
This formula takes absolute values of the error because the magnitude of the error is more
important than the direction of the error. Decreasing forecast errors will mean increasing
forecast accuracy since forecast accuracy is the converse of error. Forecast Accuracy (FA) can
be defined as:
FA (%)= (1-Error (%))
Order cycle management (supply)
 Continuous review (reorder fixed qty below the reorder point)
 Periodic review (reorder up to the max qty after each review point, fixed order cycle)
Supply Planning: The Economic Order Quantity (EOQ)
As an inventory manager you have to ask yourself: How much should I order at a time? The
trade-off lies in the cost of holding inventory and the cost of ordering it.
 If you decide to buy a large amount at once, the unit price may be low but you may have
a lot more capital tied up in stock and it may required a large store space.
√ 2CR
Economic Order Quantity: EOQ=
PF
C: Ordering cost per order
R: Annual demand in units
P: Purchase cost of one unit
F: Annual inventory carrying cost as a faction of unit cost
PF: Holding cost per unit per year
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Sales and Operations Planning (S&OP)
The S&OP Process
The S&OP process is a multi-step process centered on a series of meetings that enable the
company to respond effectively to demand and supply variability. The outcome of the S&OP
process is a reconciled plan that maximizes financial and strategic opportunities and overall
business profitability.
The process aims to take place on a monthly basis and typically looks at a mid to long-term
planning horizon of four weeks to two years on a rolling forward basis.
Guiding principles for successful S&OP implementation
1. Stakeholder commitment: It is important that stakeholders across the business are
engaged and educated to understand the whole process.
2. One set of number: All the different numbers of sales, marketing etc. in one set of
numbers.
3. Accountability and decision making: As the size of the organization increases so
does the complexity of decision making. It is crucial to define in detail during the
design phase what will be the participants role and responsibility in each meeting.
4. Alignment of business objectives: Effective S&OP solutions have to align to KPIs that
drive the best result for a company as a whole.
5. Appropriate time horizon: When things go wrong, the temptation is to micromanage the crisis rather than to plan for the future. Moving the conversation into
the future will help managers to reach best for business solutions, and therefore do
less firefighting on a daily basis.
6. Understanding the benefits of S&OP: A sound S&OP process recognizes
imperfections on a regular basis and re-optimize plans across the supply chain. Also
customers should benefit from better customer service and more efficient response.
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Customer Service Improvements trough S&OP
S&OP aims at improving your business, but how does S&OP make a difference in terms of
customer service?
1. From S&OP principles = Improved forecast
2. From improved forecast = Improved reconciliation of demand and supply
3. From improved reconciliation of demand and supply = Improved customer service
4.
Why S&OP Implementations fail:
1. People
2. Process
3. Strategy
4. Performance
Different planning horizons:
All steps in the supply chain planning process are linked and interact in the different planning
horizons.
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Chapter 3, Guide to Source in Supply Chain Management
3.1 Introduction to Sourcing
Sourcing: The interface between suppliers and the buying company. (B2B)
Two main activities:
- Selecting new suppliers
- Manage the supplier over a period of time
Sourcing in product companies generally involves dividing products or services into two
distinct groups: direct (glass, label, sugar etc.) and indirect (factory security, consultants,
electricity, stationary) items.
3.1.1 The purchasing process
Pre-order process
Need  Specification  Sourcing  Tendering  Negotiation  Selection  Contracts
With the contract in place between the clothing company and the supplier, this leads us to
the post-order process
Post-order process
Placing and handling orders  Progressing and delivery  Payment and review 
Performance indicators.
The purchasing process of pre-order and post-order steps will continue on an operational
basis daily. To achieve benefits from the pre and post- order process, there are tactical
sourcing activities.
- Market research (what is happening in the market?)
- Commodity analysis (commodity items represent high percentage of the company
sourcing budget)
- Forecasting requirements (improving supplier efficiency)
- Supplier performance analysis and benchmarking (to make sure the buying
organization is receiving the best output from its purchases)
- Price and cost analysis
3.2 Strategic Sourcing Initiatives
Category Sourcing or Category Management
Category Sourcing (CS) or Category Management (CM) are concepts where the products an
organization requires are broken down into categories (related products).
1. Profile the category group (establish how many suppliers there are and what power
they have)
2. Select the sourcing strategy
3. Generate the supplier portfolio
4. Follow the purchasing process
5. Negotiation
The different category groups
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Routine items:
Bottleneck items:
Leverage items:
Critical items:
Supplier Relationship Management
Supplier Relationship Management (SRM) is the process that looks at proactively managing
the link between buyer and supplier.
 Breaking down functional barriers and functional mindsets
 Promoting innovation and joint thinking for “doing things better”
 Improving supply chain visibility for buyer and supplier
 Sharing assets across supply chain, removing duplications
 Enhancing forward looking visibility giving more reliability to all parties
3.3 Sourcing Management Tools
There are two tools that are used very commonly in sourcing: negotiation and cost
management.
Negotiation
Without disagreement between two parties there is no need for negotiating.
1. Establish if negotiation is required
2. Plan the negotiation
3. Execute the negotiation
4. Deliver the agreement
Cost management
What a supplier’s product or service should cost.
- Fixed costs (remain constant with different levels of volume and could be factory site
rental or insurance)
- Variable costs
- Semi-variable costs
In terms of managing three costs strategically, there are some sourcing tools that are
commonly used:
 Commodity purchasing: Can constitute a large proportion of an organizations spend.
 Value engineering and analysis: Working with suppliers to initiate any new product
development processes more effectively, as well as to consider design and
specification improvements.
 Non-value added improvement: Working with suppliers to remove waste.
Eliminating production down times, excess inventory and long order cycle times.
 Total cost of ownership: Considers selecting the lowest cost of supply, not the lowest
price.
 Price analysis
Chapter 4, Guide to Make in Supply Chain Management
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Make is also known as the manufacturing, assembling, processing or production function,
and can be defined as the physical act of making the product. This includes the people who
work in manufacturing (man), the business process to run manufacturing (method), the
technology employed (machine) and the material consumed (material).
From Craft to Mass Manufacturing
Advantages craft manufacturing: the item is unique and of extremely high quality.
However, the replacement of parts is difficult and time consuming since these parts have to
fit the same level of quality as the rest of the parts of that product.
Today most common goods and consumer products are manufactured with the help of
machinery and mass manufacturing.
Five types of manufacturing process
Businesses have a range of choices to make between different methods of manufacturing
depending on the nature of the product and the target market. There are five classic types of
manufacturing process:
1. Project: a one-off manufacturing process that meets very specific customer
requirements and that is too large to be moved once completed (Bird’s nest Olympic
Stadium in Beijing).
2. Job Shop: also a one-off manufacturing process where the end product meets the
unique order requirements of a customer. Job shop manufacturing is different from
the project type as assembly usually takes place offsite. Once completed, the product
is delivered to the customer (luxurious yacht).
3. Batch (also known as flow manufacturing): Similar items are provided on a repeat
basis usually in larger volumes. The process is divided into a chain of activities that
take place after each other.
4. Line: products are passed through the same sequence of operations from the
beginning to the end. Line manufacturing can be made to order (cars in an assembly
line at BMW) or can be made to stock (fridges or washing machines at siemens).
There are two common forms of cell arrangements used in the make process of line
manufactured products: the U-line and the rabbit chase cell.
5. Continuous Flow: This type of manufacturing applies to certain products that run
continuously through various refining, cooling and separating steps in the
manufacturing process. In continuous flow manufacturing, the choice of process is
based on the liquid or gas-like product nature and high volumes, which justifies the
very high investment involved.  Shell and providers of water and gas.
Other set-up considerations
Product companies can implement a combination of these five types of manufacturing
processes. Each choice of process will bring certain implications for the business in terms of
response to its markets, manufacturing capabilities and level of investment required.
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4.2
Manufacturing planning and control
Once the manufacturing set-up is clear, we need to establish methods or systems in order to
plan and control the transition from input, into output.
The manufacturing planning and control process:
Master Production Scheduling (MPS)
MPS is the first step in the implementation of the overall manufacturing programme of a
factory. It has two main objectives. The first objective looks at the short-term materials
requirements planning. The second objective is about the long-term estimate of demands
on company resources.
The MPS can be considered the output plan for the factory and it is constructed by
combining actual demand forecasts and customer orders.
Material Requirements Planning (MRP)
 Aim of MRP is to ensure that items are available for manufacturing just when they are
needed.
MRP has two main inputs:
1. Bill of materials (BOM): the “recipe” for a product. States what components are
required.
2. Inventory file: important because the total requirements will be netted against the
inventory on hand.
The MRP system allows the planner to have a clear plan of order quantity and timing for
each component or raw material. These orders should then arrive at the right time to be
available for assembly and later for dispatch.
There are two additional key planning concepts within manufacturing: Capacity
Requirements Planning (CRP) and Distribution Requirements Planning (DRP).
CRP is the process of determining the impact on key resources required to support the
proposed manufacturing plan. When carried out at a high and aggregate level it is called
Rough Cut Capacity Planning (RCCP).  Man and machines.
DRP system focuses on the planned delivery of finished products to customers and is in a
way very similar to MRP.
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4.3
JIT Manufacturing Strategies
The concept of Just-In-Time (JIT) offers an approach that organizes all activities in the make
process so that they happen exactly at the time that they are needed.
Another concept of the JIT strategy is the demand-pull concept. The demand-pull strategy
refers to the manner in which materials are “pulled” through the manufacturing process in
the supply chain. The items necessary at one workstation are pulled from the preceding
workstation only once required.
Demand-pull concept in JIT: the use of demand for a given product signals when
manufacturing should occur.
Elements of JIT Manufacturing
The JIT philosophy is holistic in its approach. It included elements such as the human
resources as well as manufacturing, purchasing, planning and organizing functions of a
business. There are three elements:
- People: a JIT manufacturing system cannot be implemented successfully without the
support and agreement from all the people involved.  total people involvement.
- Plant: the plant layout is arranged for maximum worker flexibility. The layout is
arranged according to product rather than process.
- System: the system refers to the technology and processes used to link, plan and coordinate the activities used in manufacturing.
Limitations of JIT
1. Cultural differences: JIT could be less successful in different cultural surroundings
where resistance to change in attitude and worker philosophy exists.
2. Loss of safety stock: the elimination of safety stock to offset inaccurate demand
forecasts can cause out of stock problems.
3. Decreased individual autonomy: under JIT, employees must stick to strict methods
of manufacturing in order to maintain the system. This in turn reduces the
“entrepreneurial spirit” and individual autonomy of workers, which can become a
major challenge for a JIT implementation.
4. Industry-specific success: it is suggested that craft-oriented businesses with a focus
on assembly of products have performed better in JIT programmes, than
organizations producing commodity type products.
 To conclude: when looking at JIT programmes, it is important to acknowledge that
certain limitations exist that could trade off the widely reported advantages of JIT in terms
of increased quality, productivity and efficiency.
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4.4
Lean Manufacturing
Lean thinking and lean supply chain strategies are all about using the right level of man,
machine and material to product what is required. Lean literally means “with no fat”, thus
focusing on the essential requirements for the manufacturing process. As a consequence,
waste should be reduced as much as possible and methods and machines need to be
optimized.
TQM and Continuous Improvement
Total Quality management (TQM): a management approach for an organization, centered
on quality, based on the participation of all its members and aiming at long-term success
through customer satisfaction, and benefits to all members of the organization and to
society.
Improving Performance through Waste Reduction
Waste in the manufacturing process can be a lot of things: unused materials, defective
finished goods, obsolete packaging, lost manufacturing time, uninformed operators and over
represented managers.
Waste is thus another term for inefficiencies or losses that can occur in the manufacturing
process and in other parts of the supply chain and that need to be reduced as much as
possible in order to improve performance.
Wastes in manufacturing environments:
1. Over manufacturing: production ahead of demand
2. Waiting: waiting for the next manufacturing step
3. Defects: the effort involved in inspecting for and fixing defects
4. Inventory: all components, work in progress, finished products not being processed
5. Motion: people or equipment moving or walking more than is required
6. Transport: moving products that are not actually required
7. Inappropriate processing: due to poor tool or product design
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Tools to Improve Make Performance
Lost Tree Analysis
Is a process or tool to help you identify your priorities when aiming for quality
improvements. To identify where the issues are, allows the used to focus on specific areas.
Five Why Analysis
This method of exploring causes of problems by asking “why?” five times is called “Failurecause analysis” or “5-why analysis”. Information is taken from the fishbone analysis and the
issue summarized into a succinct statement.
Fishbone Diagram
Is an effective problem-solving tool to be used by groups of people involved in finding the
possible causes of problems. Cause can be split into four categories: MAN, METHOD,
MATERIALS, AND MACHINE. Each of these categories is then examined in more detail.
Chapter 5, Guide to Deliver in Supply Chain Management
Introduction to Deliver
Also described as distribution management: it is an integrated part of the end-to-end supply
chain. Companies constantly try to optimize their distribution network, for example by
reducing the number of warehouses. However, consolidation warehouses increases the
distance between the supplier and customer while decreasing responsiveness.
 This creates a key trade-off in the deliver set-up: balancing cost and service aspects.
The deliver function is influenced by a number of factors:
 Global economy: challenge for the deliver function is to find solutions that follow the
needs of global economy, shifting from national  multi-country sourcing strategies.
 Political decisions: new roads, airports, rail links and seaports are often undertaken
by national governments.
 Advanced technology: mobile telecommunications and satellites are few
technologies that have already revolutionized transportation and warehousing.
 Environmental requirements: number of environmental friendly innovations in the
transport industry.
Network trade-offs
As the number of warehouses increases, the associated deliver cost also increases because
of three cost components:
1. Facility cost: the company have to pay the warehouse running cost: electricity,
insurance and labor.  for each of the facilities.
2. Inventory costs: increases with every warehouse carrying additional amounts of
safety stock.
3. Primary transport costs: add warehouse  primary transport decreases. Keep
adding distribution facilities  the delivery quantity per warehouse becomes smaller
and smaller until trucks travel half empty  the cost curve goes up (increases).
Network distribution cost components:
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Facility Location decisions
In order to work out the optimum number of facilities, companies use one of a number of
the major network modelling programmes. These complex software optimization tools work
with the Centre of Gravity (COG) principles.
COG method: locates facilities by using a weighting of customer demand data on a grid map.
Mathematically, this method gives you the optimum location of your warehouse or
distribution center.
However, other non-mathematical factors need to be considered first:
 Cost of commercial property in that location
 Availability of skilled labor
 Time to build or occupy the site
 Accessibility of government grant or subsidy
 Proximity of road, rail, water and air networks
 Customer service implications
 Environmental considerations
Deliver Components
There are three main components of deliver within supply chain management:
Transport management: moving products in trucks, ships, planes, pipes and trains.
Variables in transport management are: speed, reliability, security, quality, environment
and cost.
Transport management can add value to global supply chain operations by offering different
transport choices that perform differently on the six transport management variables.
There are five different transport modes available for companies to choose from: air, road,
rail, water and pipeline.
AIR: there are three main options for transporting good by air
- Cargo operators: bulk of global airfreight takes place using this transport. Specialized
in cargo.
- Courier operators: carry goods in parcel format. TNT express, UPS, FEDERAL
EXPRESS. Own aircrafts.
- Niche operators: neither offered by cargo nor courier operators. Run often by
military-related agencies. Such as heavy equipment, tanks.
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ROAD: offers door-to-door transport flexibility.
- Primary transport: large and generally used in upstream supply chains. Takes raw
materials or finished products from airports, rail terminals, and warehouses to a
distribution center.
- Secondary transport: picks up customer orders from the distribution center and
deliver them to the customer.  smaller trucks, cans or motorcycles.
RAIL: rail transport is that transport routes are limited to fixed-track and terminal facilities, it
can provide “piqqyback” services, such as:
- Trailer on Flat Car (TOFC): driver drops loaded trailer to the rail dock  placed on a
flat rail car  transported to destination.
- Container on Flat Car (COFC): the same as above, involves a container that comes
from a sea terminal or road depot.
WATER: water transport encompasses the following main activities
- Tankers: carrying products like oil and liquid natural gas (LNG)
- Container vessels: carrying standard and refrigerated containers
- Inland waterways: boats and barges using canal and river networks
PIPELINE:
- Hundreds of thousands of kilometers of pipelines carry oil and gas “invisibly” every
day for our world’s energy consumption.
- Only products with certain specifications: liquid, gas or powder can be pushed under
pressure and in large volumes through pipelines.
- The initial infrastructure investments in pipelines is very high and can have important
social and political consequences.
Intermodal Operations: describes the transport of goods using two or more different
transport modes. When these goods cross international boundaries on their journey to
customers, six factors become important. 
Warehouse management: keeping and moving stock within depots, warehouses and
distribution centers.
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To add to this list, there are different formats of warehouses such as:
 Contract: is managed by a third party
 Refrigerated: provides temperature-controlled storage
 Bonded: is under custody of a government body: the products stored are usually tax
duty unpaid.
 Cross-docking: carry no safety stock but hold bulk stock of orders that enter and
leave the warehouse within a short time period.
Warehouse planning
When planning warehouse operations it is important to be aware of the expected
development of products, volumes, suppliers and customers.
Warehousing normally represents one third of the total distribution cost of a business with
labor and space; warehouse operations cost amounting to about 90% of the costs and 10%
for equipment.
The productivity and procedures managed within these warehouses then dictate the costs,
service, quality and time outputs that provide value for customers.
In warehouse planning it is important to the optimum combination of
1. Maximizing storage space in cubic meters
2. Minimize handling operation
 To achieve this, it is helpful to use a warehouse planning process.
Warehouse Planning Process
The warehouse planning process is a management tool that can be used to plan the
construction of new warehouses or to optimize the running of existing warehouses.
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Assess the inventory: this will provide a profile of the inward and outward movements.
Warehouse layout: can be planned and sketched
The calculated cost: are reviewed and compared with the total budget available.
Warehouse Layout
There are four main activities within the warehouse layout:
1. Receipt
2. Storage
3. Picking
4. Dispatch
Order management: capturing the customer order all the way through to bringing back
a proof of delivery in order to raise a customer invoice
Chapter 6, Introduction to return
Return describes the process of returning logistics for goods, packaging material and
transport equipment. This encompasses customers, retailers, manufacturers and suppliers.
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The term Reverse Logistics (RL) is often used in conjunction with returns management in
supply chain literature.
A more holistic and modern definition would also include processes and activities to avoid
return, to reduce materials in the forward supply chain (so that fewer materials flow black)
and to ensure the possible reuse and recycling of materials.
The European Working Group for Reverse Logistics definition: the process of planning,
implementing and controlling backward flows of raw materials, work-in-progress, finished
goods and information, from the point of consumption to the point of recovery of proper
disposal.
Why






do products Return?
Customer is not satisfied
Installation or usage problem
Warranty claim  for repair
Faulty order processing  late delivery, incomplete shipment, wrong quantities
Retail overstock
Manufacture recall program
Drivers of Reverse Logistics
There are three main drivers that have led reverse logistics to become part of many senior
managers ‘strategic agendas’:
 Legislation: in many countries, governments have introduced regulations on how to
handle products in the supply chain in order to protect the environment.
 Economics: reverse logistics programmes may bring two types of economic benefits:
1. Direct gains: can mean significant financial benefits in terms of cost, revenues
and Return On Capital Employed (ROCE) for the manufacturer. The recovery of
materials is often cheaper than building or buying new material.
2. Indirect gains: often relate to marketing, competition and strategic actions.
Taking back products can be used as an image building operation. Customers
might reward green supply chain practices with greater customer loyalty leading
again to increased revenues.
 Corporate citizenship: companies use the term corporate citizenship to express that
they respect society out of good principles. In the context of reverse logistics,
corporate citizenship describes a set of values or principles that drives a company to
start engaging in reverse and green logistics.
Key players in reverse logistics
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6.2
The return process
The return process starts with the injection of a used product from the point of
consumption, back into the supply chain. Recovery options:
 Resale: immediate selling of returned products such as catalogue returns or
customer lease to secondary markets.
 Repair: bringing damaged components back to a functional condition.
 Reuse: using good components from retired assemblies (mostly spare parts) for
refurbish or remanufacture of products.
 Remanufacture/refurbish: restoring a product to a like-new condition by reusing,
reconditioning and replacing parts.
 Recycle: taking component materials and processing them into useful material.
 Scrap: disposal of products if no alternative course of action is available.
Five stages of the Product Return Process:
1. Receive: products are received at a central location. Return acknowledgement is
printed and sent to the customer.
2. Sort and stage: has to be sorted for future staging in the return process. 3 days or
less or standard 1-2 days.
3. Process: the items are sorted according to their vendor number. Having the
appropriate information on the return label of the product allows for items from the
same customer to be processed at the same time. At this point, customer credits for
the returned items can be given at the paperwork that accompanied the return is
separated from the item and sent to the administration area.
4. Analyze: employees working at the 4th stage of the process, must be the most highly
trained in reverse logistics as they have to decide for the most appropriate recovery
option.
5. Support: when the disposition of the product has been chosen, the item will be
distributed according the where is should go. For some of the recovery options, the
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product will go to a repair center close to the distribution center. For other recovery
options, the returned product will go back to the manufacturer.
Different Return Business Models
There are three main ways to run reverse logistic (RL) supply chains.
The term closed-loop describes the process where used materials or products are returned
and processed by the manufacturer and thus the same party that is responsible for the
forward logistics.
Closed-Loop Supply Chain (CLSC): the manufacturer organizes the full five-stage of RL.
Product Recovery Issues:
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6.3
Strategic Outlook in Returns
It is expected that product return rates will grow because of legislation, economic and
corporate citizenship drivers. The increasing use of home delivery through the internet sales
channel has a very high return rate.
Improving returns:
- design for disassembly
- recycle more material
- increased product life cycles
Golden Rules:
- returns must be treated as perishables
- values chain partnerships are crucial
- return can provide valuable customer feedback
Chapter 7, Guide to Strategy in Supply Chain Management
What is Corporate Strategy?
Corporate Strategy: the direction and scope of an organization 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.
Mission: describes the purpose of an organization.
Goal: the aim or purpose. The goal needs to be substantiated by the objective. Example:” to
grow business revenue”.
Objective: needs to be really clear, measurable and needs a verb included so people have to
do something.  has to be realistic.
Strategies: the broad types of actions that will be needed to achieve the objectives.
Actions: the specific activities by team or individual that lead to the rewards.
Rewards: the payoff for satisfying the objectives.
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What is Competitive Strategy?
Implementing an effective competitive strategy can be the key to business success.
Organizations make decisions about their competitive strategy and once made they need to
consider how their internal structure will deliver them.
Different companies will seek to achieve a competitive advantage in the market place in one
of the three generic strategic options.
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Operational excellence: delivering high quality products quickly, error free and for a
reasonable price.
 Customer intimacy: delivering what customers want with high service and superior
value.
 Product leadership: delivering products and services that push performance
boundaries and delight customers.
 It may be possible to utilise two of these options and very rarely all three.
7.2
Achieving Strategic Alignment in Supply Chain Companies
There is a link between an organizations competitive and functional strategy.
To execute the competitive strategy, the different functions within an organization must
develop and operate supporting plans and strategies.
 The product development strategy: identifies the portfolio of products that a
company will develop and the functionality that they will have. It will also specify
whether these products will be internally or externally manufactured.
 The sales and marketing strategy: segments the market and identifies the product
structure and how it will be positioned, priced and promoted.
 The supply chain strategy: specifies how materials will be sourced, where and how
the production activity will be performed, where and how deliver and return will be
operated and how the customers will be supported after delivery.
All the functional strategies need each other and in turn, support each other in their journey
to success.
7.3
Concepts to Support Supply Chain Strategy Development
There are four methods available for strategic decision-making within the supply chain.
1. To segment our supply chains using the four drivers of supply chain performance
 Inventory, information, facilities and transport.
2. Examines the decoupling point position or strategic inventory, where supply and
demand meet in the supply chain.
3. Explores the concept of lean and agile strategies.
4. Postponement
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7.3.1. Four drivers of Supply Chain Performance (Strategy 1)
 Inventory: what cycle of safety stock should be held, where and in what quantities.
 Information: decisions on systems requirements (example: how should we run our
MRP system.)
 Facilities: include both manufacturing and warehouse strategies and would consider
the strategic location or capacity requirements.
 Transportation: include mode and network decisions.
7.3.2 Five Inventory Strategies (Strategy 2)
A different perspective for supply chain strategy can be gained by considering the supply
chain as a combination of processes. The supply process is the upstream activity, whilst the
demand process is the downstream activity. The buffer between the two is normally the
major inventory point.
The demand process is driven by customers’ orders and this “pulls” the product through the
supply chain. The supply process is driven by a forecast with the intention of providing the
“push” for the product to the stock point in anticipation of future demand. This major
inventory point is the “decoupling point” , since it “decouples” the order and forecast driven
activity. There are five inventory strategies that are used depending on the market
requirements and product characteristics.
1. Make and deliver to stock: occurs when the customer places their order and it
penetrates into the supply chain to the point where stock is held. The stock is
removed and sent to the customer to satisfy the order.
2. Make to stock: central holding of stock. Customer deliveries are executed form this
central stock holding point.
3. Assemble to order
4. Make to order
5. Purchase and make to order: the supplier holds no stock. When the customers’ order
is received the product is designed, the raw materials ordered, production and
assembly planned to enable the product to be shipped.
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7.3.3. Lean and Agile (Strategy 3)
A lean supply chain is trying to supply demand at lowest cost.
 products are more easily forecasted and purchased in high volume over long periods of
time.
An agile supply chain is trying to respond quickly to demand.
 each product launched has either very high or very low sales over a short product
lifecycle.
7.4.3 Postponement
 Delayed configuration based on the principle of common platforms where the final
assembly or customization does not take place until the final market destination and/or
customer requirements is known.
 Delay the point where assembly or customization happens. Closer to the customer.
Benefits: Cost reduction & customer service increased.
 reduces the risk of obsolescence.
Chapter 9, Guide to Finance in Supply Chain Management
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9.1 Introduction to Supply Chain Finance
Supply chain companies are usually in business to generate cash and give a return to their
investors. Making a profit is important: Costs – Sales for the year.
The business process:
There are three areas critical to supply chain finance: gearing, returns and hurdle rates.
1. Gearing
Identifies how much capital investment in the company is funded by internal or external
funds. It is the measure of financial leverage, demonstrating the degree to which a firm’s
activities are funded by owner’s funds (shareholders) versus creditor’s funds (banks).
Capital that is lent by banks is referred to as debt. Capital that is invested by the
shareholders is equity.
Gearing: Debt as a percentage of total funds (debt + equity)
2. Returns
To start a business, the bank will inject some investment (50%), the remaining capital will
have to be obtained from investors (shareholders). The bank would expect a 5% return in
interest and shareholders 10%. If company goes bankrupt  the banks own the assets and
the shareholders lose everything.
3. Hurdle Rates
The return rates have two main components: (1) the cost of debt capital & (2) the cost of
equity capital. This is referred to as the Cost Of Capital (COC).
If debt requires a 5% and equity a 15% return the then the Weighted Average Cost of Capital
(WACC) is 10%.  This 10% WACC is known as the “hurdle rate”.
Hurdle rate: the required return for a project.
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9.2 How Companies Cascade Financial Information
Companies cascade financial information using three financial statements: (1) Profit and loss
account, (2) balance sheet & (3) cash flow statement.
9.2.1 Profit and Loss
The Profit and Loss (P&L) account is something referred to as the income statement, and it
essentially captures how much money goes into and out of the company. It usually consists
of four parts.
Supply chain activities can impact the P&L very significantly by influencing both revenue and
cost.
 Quality: not delivered the required quality, sales decreases.
 Service: inefficient forecast  short delivery to a customer  service level is
affected.
 Cost: if two products are very similar, but one is more expensive than the other to
product because its supply chain is less efficient, sales revenue is likely to be less.
Higher profit margins will be achieved through reduced supply chain costs.
 Time: the time it takes to get the product to the market place.  customer ordering
a product or new product launch.
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9.2.2 Balance Sheet
The financial statement of a business that lists the assets, debts, and owner’s investment as
of a specific date, very much like a “snap-shot” in time.
 Summarizes how the company has been financed.
Fixed assets:
 Buildings: factories & warehouses.
 Plant and machinery: trucks & heavy machinery used in manufacturing.
An interesting decision point is whether to own or to lease facilities.
 once buildings are leased they disappear form the balance sheet and become costs that
appear on the P&L account.
Current assets:
 Stock: inventory in the format of raw material, work in progress or finished goods.
 Debtors: customers that still have not paid for their purchases. (Acc. Receivable)
 Cash
9.2.3 Cash Flow (Liquidity)
Shows the cash in and the cash out for the business, in a given year.
Ways to improve cash flow:
1. If customers pay sooner and suppliers are paid later, both of these strategies
improve cash flow.
2. Reducing inventory is also a way the supply chain can improve cash flow in a
business. This is a key issue for companies who hold stock. Reducing inventory gives
businesses cash without needing to raise extra capital.
3. Companies can also use their supply chain to improve cash flow by switching
manufacturing to countries with a weak exchange rate.
4. Lease instead of buy
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9.3 How to Add Value and Improve Corporate Financial Performance
Organizations communicate financial information internally and externally, using the Return
On Capital Employed (ROCE) formula.
ROCE, which is referred to as a percentage, can be calculated by taking the profit from the
P&L and dividing it by the capital employed in the business from the balance sheet. The
larger the ROCE % figure becomes, the higher a return the investor will receive.
Improving your ROCE will mean that investors are more interested in investing in your
company.
= Operating profit / capital employed
= Operating profit / (shareholders’ equity + debt liabilities)
= Operating profit / (total assets – current liabilities)
9.4 Six supply chain Performance Levers
When these six supply chain performance are piled, they improve supply chain financial
performance. It can be used as a checklist when auditing supply chain.
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Demand: the customer’s transfers demand onto the next stage up in the chain. This
demand can be in the form of a forecast or order, and this is where the supply chain
starts.
Supply: the on time in full delivery performance of product supply is imperative in
the overall effectiveness of the chain. Without supply we cannot satisfy demand.
Lead times: the lead time is the time between placing and receiving and order. The
lead time and responsiveness is a key measure of success within the chain. By
reducing lead-times inventory is lowered.
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Information: important to advise the delivery time and to ensure the correct product
is shipped to the correct place. Improve information flows reduces raw material
waste, wasted labor, and overheads.
Physical quality: products should arrive in good shape without any defects or
damage. Better quality impacts materials, labor, overheads, stock and potentially
debtors and creditors.
Throughput efficiency: refers to the amount of working capital in the chain and the
efficiency of the network. Product is pulled through the supply chain with less waste
and less waiting time.
Chapter 11, Guide to Outsourcing in Supply Chain Management
Outsourcing: the process of moving aspects of your own company to another supplier.
Outsourcing is normally considered when your company doesn’t have the capability to
perform the specific task, or when your company believes that another organization can
perform the task better.
Growth Drivers in Outsourcing
 Globalization
 Increasing complexity
 Emerging markets
The most common reasons for a supply chain to engage in outsourcing are to:
 Increase operating flexibility
 Reduce fixed assets
 To increase efficiency
Outsourcing concerns
Outsourcing secondary transport to another company means losing the direct interface with
the customer.  less customer contact and therefore lose control over the relationship.
Also, 3PLs have great knowledge about their own business, but it needs time for them to get
to know your business.
Finally, losing control in your business processes as well as any aspect that differentiates
your business from your competitors.
11.2 The Tendering Process of Outsourcing
The Tendering process is a clearly defined process for contractor selection including all key
steps from scoping of outsourcing requirements, trough to the final negotiation and contract
agreement. There are 9 steps in the tendering process.
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Step 1: Review Scope of the Outsourcing and Requirements
An internal assessment of the need for outsourcing. It is important to reflect which
processes within your company could be potential outsourcing candidates and whether
outsourcing is the right step to be taken for these processes.
As there are various types of operations to be outsourced, you also need to decide which
mode of operations you want to go for: dedicated or shared resources.
Dedicated resources: a 3PL provides a complete logistics or distribution operation to one of
its clients exclusively.
Shared resources: logistics services that a 3PL may offer to multiple clients in the same
operation. For example, various customers might use a distribution center if similarity of
product characteristics allows.
Step 2: Identify Potential Service Providers
The next step in the tendering process is to draw up a long list of potential service providers
Some useful questions that might help in the identification process.
You could check whether the 3PL has invested in:
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Digital and IT equipment, including online links and tracking equipment?
Human resources, staff training?
Resources and facilities to meet specific requirements?
Sustainability improvement processes?
Infrastructure, including network coverage, fleet and depots?
Furthermore, there are other items that will affect the outsourcing decision.
The provider’s ability to provide:
 A complete logistics package
 Quality of service
 Reliability in performance
 Access to top management
 Strong partnerships
 Implementation record
Step 3: Produce Request for Information and Shortlist (RFI)
We have just identified our long list, now it’s time to contact each potential service provider
and ask for specific information. You can do this by sending a Request For Information (RFI)
document to all potential providers on your list.
The RFI is a concise document covering different key areas of information:
1. Introduction and confidentiality clause
2. Description of your company
3. Description of the opportunity
- what does your company wish to outsource?
- does your company have any preference for dedicated or shared resources?
4. The selection process (timescale and key selection criteria)
5. Response
Once you have received back response to your RFI, you can evaluate those based on your
key selection criteria that you will previously have defined. As a result of this process step,
you should be left with five to ten contractors for tender.
Step 4: Prepare and Issue the Request for Quotation (RFQ)
A Request For Quotation (RFQ) is an extensive yet important document. Its purpose is to
collect detailed data and information from the short-listed companies in a standard format.
The collection of further data in a standardized format is crucial to ensure consistency and
comparability of information to facilitate your selection process.
Typically, and RFQ will include the following sections:
 Business description and background
 Data provided with the RFI
 Physical distribution network
 Information systems
 Distribution service levels and performance monitoring
 Risk assessment
 Industrial and business relations
 Charging structure
 Terms and conditions for payment
 The selection procedure and response format including deadlines
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Step 5: Assess the Tenders
You need some time for assessment, reflection and discussion. This can best be done in
cross-functional teams. For distribution outsourcing the people involved in these teams are
likely to be Logistics, Procurement, Finance and Human Resources.
Step 6: Select Contractor and Assess Risk
At this stage, you could make a risk assessment to identify any factors that might be an issue
for the contract implementation or the outsourced operations. Examples for areas of risk
are:
 Operational/service risk: sudden demand changes, new product introduction,
information system failure
 Business risk: 3PL’s insolvency, tax problems
 External risk: fire or flooding
Step 7: Determine Contract
The final contract has to be formulated and agreed at this step. Key areas:
 Object related factors: warehouses, equipment, personnel
 Cost related factors: operational and management costs
 Service related factors: service level agreement
Step 8: Implement Contract
Step 9: Manage Ongoing Relationship
11.3 Improved Service Through Better 3PL Management
Disputes: Why Outsourcing Relationships Fail
The reasons behind a failing outsourcing relationship are varied and the responsibility ay be
attributed to the 3PL, the outsourcing company or both.
Reasons why the 3PL might be responsible:
 Too little involvement and pushing back during negotiation, design and
implementation phase.
 Over-promising on capabilities of 3PL
 Unclear about customer requirements
 No continuous improvement
 Poor service levels and performance
 Not behaving as part of the customer’s supply chain
Reasons why the outsourcing company might be responsible:
 Inaccurate volume information from customer (too low or too high)
 Inappropriate resource to manage 3PL
 Unclear or unrealistic expectation on outcome
 Poor outsourcing contract implementation on customer side
 Cost reduction focus too strong
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No clear service level agreement in place
3PL regarded just as another supplier
Reasons why both might be responsible:
 Unclear contract
 No clear goal setting and performance measurement
 Poor implementation
 Poor communication
11.3.2 Manage Expectations
In order to ensure success in outsourced relationships, we need to actively manage the
relationship from start to finish.
Therefore, it’s important that expectations are shared and that both parties work towards
the same goals.
11.3.3 Managing the Relationship
The two key areas for management are performance monitoring and operational control.
Performance Monitoring
There are usually two fundamental criteria in 3PL performance monitoring: checking agreed
service levels and monitoring that service are delivered at acceptable cost.
Therefore, you need to monitor the operations and their performance.
Performance can be monitored through financial measures or customer service measures.
In order to monitor performance, you have to set targets for your customer service level,
delivery time and order-picking accuracy performance indicators.
Operational Control
Performance measures and monitors now need to be translated into a rolling operational
plan. In an operational plan, costs are divided by period (week or month), by functional
element (for example, fuel or insurance), by logistics component (transport or warehousing)
and by activity (customer or product group).
Once you have implemented the operational plan, and have monitored the measures for the
number of periods, you may find deviations between actual and targeted performance
measures. Major causes of deviation are:
1. Changes in the level of activity (less work available on equipment)
2. Changes in efficiency or performance (more downtimes on trucks or machines than
planned)
3. Changes in price (cost of fuel has increased)
ISCM- Export Management Summary
Chapter 5: Entry Strategies
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When a company decides to enter a foreign market, it must decide the best way to approach
the new target market. The success in a foreign market is very dependent on the entry
strategy (distribution policy).
There are three forms of entry strategies:
 Direct exports: company exports directly, without any intermediaries.
 Indirect exports: company exports with the help of an intermediary.
 Cooperative export: company exports in cooperation with another company.
When entering a foreign market and after choosing the appropriate entry strategy, the
company is usually led by three principles:
 Naïve principle: company uses the exact same entry strategy for all markets
worldwide.
 Pragmatic principle: company uses a workable strategy for each foreign market.
 Strategic principle: company compares various entry strategies, final choice is made
on the basis that the sales channel should match with the company’s objectives.
The ways in which a company approaches a foreign market can be divided into two basis
approaches: sales approach and entry strategy approach.
Sales Approach
Target Markets
Short term
No organized selection
Main Objective
Direct sales
Entry Strategy
No organized choice
Distribution channels
No attempt to control
distribution channels
Entry
Strategy
Approach
Long term
Selection based on analysis
market potential
Building up a permanent
market position
Weighing
of
various
distribution channels
Attempts to cooperate with
various links in the chain
Distribution channel is described as a system of marketing organization, which links the
producer with the end user abroad. Sometimes it is a relatively simply channel (direct
export), but often products travel a complex road full of intermediaries. Size and growth of
the possibilities in the foreign market are largely responsible in the decision making process.
The willingness of a company to tie itself to the foreign market depends on the attractiveness
of the location, the company’s capacity and the risks. Choosing and entry strategy is
influenced by the following factors:
 Internal factors: size of the company, type of company, company experience, and
type of product.
 External factors: socio-cultural aspects, market size growth, foreign market situation,
and marketing objective.
Most SMEs work in foreign markets through indirect export. The most common methods
employed in indirect export are:
 Agent: most companies work with agents (and agents are allowed to work with
multiple companies at the same time). Agents are independent intermediaries,
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familiar with the products, sector and sales of it. Limited risk.
Risk: companies have limited influence on the way the agent works.
Importing reseller/wholesale dealer: importing re-sellers buy goods at own risk and
passes them on to a wholesaler. The company has little to no influence on the export.
Trading house/wholesale dealer: fully independent intermediaries that buy at their
own risk and on their own accounts. Trading houses generate turnover in difficult to
access markets. Turnover is more or less stable and can be used for the production
process in the home market. They have the necessary expertise in foreign markets to
anticipate developments.
Piggy backing: cooperation of two companies in the home market in which one
(rider) uses the distribution and sales channels of the other (carrier). Rider’s products
are often complementary to the carrier’s and do not compete.
Joint selling: two companies work together in the same form as piggy backing,
however, joint selling is on an international level. One company markets and sells
products for another company in a foreign market and vice versa.
Advantages: drop in product prices, independence for both partners, lower product
cost (economies of scale), and easy access to foreign market.
Disadvantage: no influence on how the foreign market is worked.
Export combination: form of cooperation between a limited number of companies
which together form a central body that delegates one or more export functions. This
is usually done by market research to create export opportunities, establishing
contracts with agents/distributors and executing a marketing strategy. Cooperation
through such export combination can be based on joining product ranges, common
interests in export areas, supply to same customers and financial reason.
International Joint Venture: strategic alliance between two or more companies from
more than one country that remain independent. Companies can complement each
other in technology or management (which creates new opportunities), enter new
markets faster, reduce their production costs, speed up product introduction and
avoid legal trade barriers. Sometimes, governments require foreign companies to
cooperate with a national one, which creates joint venture as well.
In addition to exporting, companies can choose to product abroad. This includes the
following advantages: lower production costs, changing the production process without
changing the home country’s production, faster delivery and avoiding import/trade
restrictions.
 Licensing: international collaboration with a company situated abroad. Licensors give
licensees the right to make use of their industrial property (patents, knowledge,
technical advice, marketing support, and trademarks/brand names).
Advantages: market synergy, fast market access, no capital tied up in production.
Disadvantage: margin loss and potential competition from licensee.
 Franchising: fastest growing entry strategy; contract of collaboration whereby the
foreign producer/distributor/franchisee is allowed to make use of the marketing
strategy of the franchisor. It allows the franchisee to use the products, brand name,
logo and sales methods.
Hard franchising: the decisions are taken centrally with very limited independence of
the franchisee.
Soft franchising: franchisees are independent and free to decide the product ranges.
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Contract Manufacturing: international company has its products manufactured by an
independent local producer. The producer’s responsibility is limited to
producing/manufacturing. By doing so, the international company does not have to
invest in production facilities.
Assembly: international company arranges the final phase of production to take
place in the country of export. This is lucrative because the domestic market is
protected and because of the low labour costs in the export countries. In
Management Contracting the foreign investor provides the necessary know-how in
the form of management, while locals take care of production. In Joint Ownership the
exporter provides parts of the capital for production, often done after governmental
demands. In Local Production, export companies build complete factories abroad.
E-commerce is all business activities, which are carried out electronically in order to improve
efficiency and effectiveness of market and business processes. It is a quite new distribution
channel, which can shift the power from producers and intermediaries to end consumers. ECommerce makes it possible for manufacturers and customers to have direct contact and
therefor shift from indirect to direct export. E-Commerce is only adding value if
implemented correctly throughout the all divisions within a firm.
Factors that influence the e-commerce popularity as sales platforms are:
 Desire for convenience: Internet gives users ability to collect information and buy
services/goods directly.
 Incorporation of the net in the buying process: pre-buying and post-sale behaviour
increased a lot.
 High degree of customer loyalty: customers make many repeat purchases.
 Change in business practice: many businesses will use the Internet as a new
distribution channel.
Export marketing e-commerce is usually used as a complement to existing entry methods. It
has the following advantages: lower sales and transaction costs (saves money), provides
access to larger markets, leads to distribution efficiency (fewer channels/less dependence),
offers improved customer service and reduces delivery times.
However, e-commerce has several drawbacks as well: no physical examination of product is
possible, exchange of knowledge is limited due to lack of face-to-face contact, navigating
through sites is time-consuming, small orders have extra logistical costs, can not access
cheap non-transactional functions provided by intermediaries, difficult to attract new
customers due to absence of physical facilities.
Traditional distribution channels are linear, while the Internet is introducing distribution
channels that are transformed into value webs. Such wired marketplaces allow companies to
become information companies: most important intermediate link in the chain of
international business. The choice of a right distribution channel determines the success in
the foreign market.
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Because local and global competitors might have agreements with distributors, as a new
company entering the market it might be hard to find a suitable distribution channel. In
order to outdo this competition, companies have to find completely new distribution
channels and use them as a competitive advantage. Low risk channels are trading companies
and piggyback riding. Medium risk channels would be distributors, dealers, franchising
formulas, licensing and agents. High-risk channels would include having own sales offices
abroad.
Merger is combination of two or more companies, usually part of a company’s growth
strategy. Usually for an exchange of experience between the various companies (economics
of skills), possibilities to react quickly to strong growth in markets, to become an economy of
scale and acquire profit in short term, to spread risks and to avoid problems caused by entry
strategies.
Strategic Alliances are mutually accepted collaborations between two companies in
commerce whereby core competences are combined with the purpose of achieving global
advantage and better/easier market access. The advantages of strategic alliances are:
sharing large investments/costs, access to new technologies/management knowledge, quick
ROI, spread of risks, economies of scale (reducing producing costs), strengthening of
competitive position. The core objectives for successful collaboration are: strategic benefits
(clear advantages for both), interdependence (working together to minimise risk),
commitment and coordination (no bureaucracy!). Most common forms of strategic alliances
are:
 Licence: method for penetrating foreign markets, derives income from
patents/trademarks, overcomes obstacles in exporting, enables to expand capacity.
 Contracting: contract manufacturing/global sourcing is manufacturing products
abroad to minimise investment, control marketing and sales, avoid currency risks and
import tariffs, “locally made”.
 Joint venture: most far-reaching collaboration between companies, sometimes only
one possible due to governmental regulations, allows to operate in foreign markets
with minimal capital, local company’s knowledge helps overcome barriers and
identify risks quicker.
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Chapter 6: Financial Policies
When dealing with export, you are forced to deal with financial transactions. Because of the
increasing complexity of such transactions, companies have formulated internal guidelines.
Careful allocation of tasks and assigning of responsibilities should minimize the chance of
financial blunders. A company’s financial analysis should be based on the assessment of its
balance sheet and its results as shown in the profit-and-lost account. It provides insight into
the financial situation of a company to decide whether it is able to internationalize.
An exporting company will be confronted with a number of characteristic differences in
assessing and controlling the capital invested. These differences can relate to:
 Liquidity management: management of liquid assets and cash flows within a
company. Internationally operating companies face problem that the cash flows
consist out of different currencies. Cash management is therefore used to address
financial and investment issues that resulted from flows of money, liquidities and
currency risks. Within international companies the flows of money can be divided in
flows of money to and from third parties and flows of money within the
company/intra-company flows.
 Active cash management policy: conducting active cash management policy can be
very beneficial for a company. A significant advantage in interest is achieved when
the company combines several accounts in one currency (interest combination)
within one bank.
 Debtors: exporters should cover themselves against currency risks by invoicing in
their home country currency (euro) or by closing forward contracts that prevent
changes in price due to currency risks.
 Creditors: exporters should cover themselves against currency risks by demanding
invoicing in his country’s currency or by closing contracts.
 Stock in hand: currency risks on economic stock in hand (stock on which a price risk
is accepted) can be avoided by closing forward contracts.
When agreeing on a currency (clearing currency) it is important for both the exporter as well
as the importer to have a currency that can be bought and sold at any time and any place.
From the moment such an agreement/contract is concluded, the payments that are not
received in the home country’s currency will face a currency risk (currency exposure). Even
though it is very difficult to forecast an exchange rate fluctuation, a currency manager can
limit the currency risk by:
 Leading: hurrying receipts in case of appreciation of foreign currency.
 Lagging: delaying payment in case of depreciation of foreign currency.
Currency risk can be avoided by currency hedging: taking a position (hedge) in one market in
an attempt to balance exposure to price changes or fluctuations in some opposite position
with the goal of minimizing one’s exposure to unwanted risk. The safest way to avoid a risk is
to conclude a forward currency contract: an agreement in which both parties agree to
exchange two currencies at a given exchange rate at some point in the future (30/60/90
days). However, forward contract have the disadvantage that the currency rate at the day of
buying is lower than the rate both parties agreed upon.
Currency transactions are done on the spot market, where foreign currencies are bought
and sold for immediate delivery or payment.
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A recent method of hedging against currency risks is the currency option. The right to buy
currencies at a fixed price, exercise price (EP), is called a call option. The right to sell
currencies at a fixed price (EP) is a put option. In order to obtain these rights, the option
premium price has to be paid.
It is possible to get insurance for currency risks by Atradius. However, the main two
conditions to get the insurance are that it only covers currency risks for transactions in
capital goods and that the duration of the insurance is over two years. The insurance covers
the difference between the exchange rate on the day of contract signing and the exchange
rate on the day of receiving payments in foreign currency. Atradius will pay out difference.
However, if the exchange rate goes up, the exporter has to pay the difference to the
insurance.
Exchange rate clause is frequently included in export contracts and it specifies the exchange
rate at which the value of the contract has been calculated. It also indicates in what way the
difference regarding the rate will be settled. In this case it is always clear that there is a
currency risk with signing the contract.
In international companies it is common that foreign customers have a longer credit period
than domestic customers. The foreign payments are slower than domestic ones. To calculate
the average credit term for customers: Average debtor’s balance / Year’s turnover on
account x 360 days
For companies it is important to keep this average credit terms as short as possible and it
allows them to assess whether they want to do business with a customer or not.
There are two ways to protect the exporter against customer insolvency through risk
management products:

Factoring is a term for a number of supportive financial and administrative services,
which can be supplied to a company. It is a tool for financing, enabling a company to
convert part of its debts into liquid assets. Factoring is a continuous agreement
whereby factor commits himself to take over all debts at the moment the come into
existence, irrespective of factor’s approval of these claims. The factor takes care of
the management of these debts: taking over debt control administration, monitoring
that debtors meet financial obligations in time, providing an advance on the financial
transferred debt, usually up to 90%, factor takes over the insolvency risk assumption
by bearing the risk of non-payment. However, factoring is not free. The costs of
factoring include the factor’s commission (varying from 0.2% to 3%) and interest on
financing advances.

The Export Credit Insurance is an insurance policy offered by private insurance
companies and governmental export credit agencies to export companies in order to
protect their accounts receivable from loss due to credit risks such as protracted
default, insolvency, bankruptcy etc. It can also be seen as a tool for trade promotion
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and development cooperation. Export credit insurance covers short-term (<12
months) and medium-term (>12 months) credits. Short-term insurance is often made
to measure and includes turnover policy and single transaction policy. Medium-term
insurance (single transaction policy) is not made to measure not because it involves
financing for a longer period of time.
Maximum security with international payments can only be achieved through export credit
insurance. There are four ways of settling international payments:
 Advance payment: prepayment of all or a part of the debt prior to its due date offers
the greatest security of all payments. Some customers (expected to be insolvent)
should only be served after prepayment. When agreeing to partly prepayments, the
manufacturers should bear in mind that the manufacturing costs will exceed the
prepayment at some point and therefore stages of payment should be discussed.
 Payment in open account: payments take place without relevant delivery documents
being passed to the bank. Documents are sent directly to the buyer, who orders the
bank to pay. The advantage for the buyer is that it will take some time to take the
money from the account; however, the exporter faces a risk there. This payment
method rests on mutual trust and is often chosen by parties that know each other
well. In some countries it is customary to pay with cheques, but usually the payment
in open accounts are done through electronic transfer.
 Payment against documents: an agreement between buyer and seller whereby the
payment is made after the buyer is offered the documents needed to own the goods,
which cover the delivery, with assistance of a bank. This method includes two types:).
documents against payment (importer receives documents when he fulfils payment)
and documents against acceptance (importer receives the documents from offering
bank after acceptance of bill of exchange
 Credit against documents: letter of credit provides the exporter with greatest
certainty that payment will follow when he meets his contractual obligations. This
document is delivered by the importer’s bank that acts as a guarantee if the importer
does not fulfil his obligations, the bank will pay. At the request of the importer, the
credit-opening bank opens the credit in favour of the exporter. Letter of credits are
usually opened in an irrevocable from: the credit-opening bank has an obligation to
the seller. Unconfirmed letters of credit are forwarded by de advising bank to the
exporter to confirm its authenticity, but to not make payments or accept
responsibility of payments. A confirmed letter of credit is provided by de advising
bank and confirms that payment will be made upon presentation of documents.
Financial Documents
Trading documents
Financial Documents
Invoice
Cheque
Insurance policy
Bill of exchange
Shipping documents
Promissory note
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Chapter 7: Exports, Logistics and Customs
Logistics is the process of organizing, planning, managing and processing flow of goods from
buying through production, storage and distribution up to delivery to end user, in such a way
that market requirements are met at minimal cost and use of capital. The main goal of
logistics is to make the desired goods available in the right quantity at the right moment in
the right place at the lowest cost possible. Logistics is generally considered as an integrated
process whose aim is to achieve optimum efficiency for the entire chain of the flow of goods.
Logistics are taken care of by export managers (small companies) and export coordinators
(big companies). The process logistical process is split up in three parts:
 Logistics of buying/Purchase logistics: from supplier to production.
 Logistics of production: materials management: spare parts, quality control and
inventory management.
 Physical distribution: from production to end-user.
Correct usage of logistics management can influence operating results by contributing to a
positive turnover and determining to a large extent what the cost of delivered product will
be.
Physical distribution is all activities concerned packaging, transporting, storing, gathering,
re-packaging and reconditioning goods from the end production process up to delivering to
the end-customer. The essential task of physical distribution is to achieve timely arrival of
the correct goods according to the agreement. Even though the costs are high, it is essential
to every supply chain to have an efficient physical distribution network. Effective
management of PD will result in a higher level of customer service and decrease the level of
total costs. Trade-of occurs when cost increase somewhere in the logistical system results in
a cost decrease elsewhere, in such a way that the total cost of the system decreases. At the
strategic level, it is important to implement the PD and consider it as a system, an entity of
relationships that are closely linked. Sub-systems such as transport and packaging should be
synchronised in order to optimize the PD network. When sub-optimization occurs one subsystem is being optimized, while overlooking the negative effect on the results of the entire
chain.
Export logistics are complicated by several factors: differences in physical situation at the
departure/arrival, different cultures, different languages, difference in quality perceptions.
Because export logistics face a lot more complications than domestic logistics, it is important
that the company pays attention to the right strategic choices and implements them at
tactical and operational levels. The implementation of logistics strategy is made part of an
export policy plan.
To survive in international business, it is important to anticipate developments as early as
possible. There are several trends in international logistics:
 Changing global politics: rise of international trading blocks.
 Globalization: new markets will become available worldwide and lead to increased
competition, production will be redistributed, and global sourcing and outsourcing
will become more common. Goods will move across greater distances.
 Environmental issues: growing environmental awareness is a stimulator for new
transport techniques.
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
Technological developments: led by ICT sector, will have an effect on products to be
transported as well as the transport techniques and delivery time.
 E-Commerce: increase of online purchases will increase the placement of worldwide
orders.
Factors influencing logistics are: the higher the cost of the goods, the higher the additional
surcharges (costs for the order to arrive at the selling price in a foreign market). Therefore
exporters prefer to produce goods close to their markets, because that reduces the cost of
production as well as the surcharges. The role of internal logistics changes with the type of
company, type of product (value, weight, volume) and level of customer satisfaction
required. Logistical choices are being made in three decision areas:
 The level of the company contribution to logistical process: outsourcing to extensive
involvement.
 The level of customer service that is to be provided: balance between service level
and costs.
 The logistical policy: standard or differentiated policy to cover various markets.
International transactions nearly always involve customs (only transactions within the EU are
excluded). Customs act as a collector of taxes, but also as a protector against diseases,
national security watchdog etc. When working in the export industry, companies should
always take governmental regulations into account because they affect the logistical process
and custom policy. To achieve a proper implementation of custom policy, an analysis must be
made
of
the
legislations
a
company
may
be
confronted
with.
Customs legislation = value to customs x tarif.
The company’s custom policy should monitor the optimization of the system of formalities:
formal requirements of customs, especially documents, which must be completed.
Electronic Data Change (EDI) is a useful tool to make the customs administration run
smoothly and parallel to the logistical administration. Companies should always try to
reduce the customs duty. Customs values are established on the basis of transaction value,
transaction value of identical goods, and transaction value of similar good, reverse
calculation method. Tariffs are often determined according the Harmonized System:
international list of goods compiled by World Customs Organization (WCO) adjusted to the
needs of international trade.
Systematic thinking and adopting an integrated approach should not only be implemented
on strategic level, but also at tactical level. The decisions made at the strategic level guide
the manner in which the tactical and operational levels are implemented. The first decision
to be made at strategic level is the extent to which the company is taken care of physical
distribution themselves. Tactically it will be decided with which external parties the company
will be cooperating, the most important intermediaries are:
 Shipping Agent: assigned by exporter to arrange the transport of goods or groupage
(reserved standard quantities of cargo space).
 Ship Broker: representative of the ship owner who makes arrangements with
shippers.
 Integrator: offers a complete package of services for integrated logistical processes.
 Surveyor: provides pre-shipment inspection, particularly for shipments to
development countries.
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Incoterms are general conditions applied to many companies/secotrs, affecting terms of
delivery. Decisions based on incoterms are revising to what extent the exporter is influencing
the delivery process and the risk it is prepared to take. Incoterms are an attempt to
optimize three aspects of international trade:
1. Sharing of costs: specifying the critical point (where does responsibility stop/begin)
at which the seller bears the cost and the buyer starts bearing them. Who pays for
what?
2. Distribution of risk: specifying the CP at which the seller is responsible for risks and
the buyer takes the responsibility. Who carries risk up to which point?
3. Division of tracks: specifying who does what.
However, the incoterms do not arrange the transfer of ownership, do not rule the
relationship between buyer, seller and carrier and do not offer a solution for situations in
which the buyer refuses to accept the goods for whatever reason. At this moment there are
officially 13 different incoterms, with a distinction in maritime (M) application/sea transport
and non-maritime (NM) application/all other types of transport.

Ex Works (EXW) – NM: buyer responsible for packaging, collecting goods, no
insurance.
CP for risk and costs is the moment that goods are made available at agreed place
and agreed time.
 Free Carrier (FCA) – NM: buyer/seller transport, no insurance, seller exports.
CP at the moment the goods are made available to shipper/exporter.
 Free On Board (FOB) – M: seller takes care of and pays transport up until the goods
are loaded on ship, seller exports, buyer arranges transport from port, no insurance.
CP at the moment the goods are moved on board at port of departure.
 Cost and Freight (CFR) – M: seller takes care of and pays transport up until the goods
are loaded on ship, seller exports, seller arranges and pays transport to port or
arrival,
no
insurance.
CP for risk is when the goods are moved on board at port of departure.
CP for costs is when goods are moved off board at port of arrival.
 Cost, Insurance and Freight (CIF) – M: seller takes care of and pays transport up until
the goods are loaded on ship, seller exports, seller arranges and pays transport to
port
of
arrival,
INSURANCE.
CP for risk is when goods are moved on board at port of departure, CP for cost is
when goods are moved off board at port of arrival.
 Carriage Paid To (CPT) – NM: seller delivers the goods to first carrier and pays for
transport to agreed destination, including charges for unloading, seller exports, no
insurance.
CP for risk is when the goods are delivered to first carrier. CP for cost is when goods
arrive at agreed destination.
 Delivered Duty Unpaid (DDU) – NM: seller arranges and pays for transport to
place/destination mentioned, including charges for unloading, seller exports and
takes care of transit formalities, buyer imports, no insurance. CP for risk and cost is
when the seller makes goods available at agreed destination.
Incoterms should be discussed in early stages of negotiation, because they affect the costing
of the offer. The choice of incoterms is mainly based on the level of customer service the
seller wishes to provide.
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Communication technology such as e-commerce and EDI are increasingly important when it
comes to exchange of information, tracking of goods and the use of mobile phones. The
Electronic Data Interchange (EDI) is a automated exchange of structured and standardized
messages between computer systems of various companies. The application of EDI’s is built
on linking computer systems and standardizing the information to be exchanged.
Customer service is the providing service to customers during and after a purchase. A series
of activities are designed to enhance the level of customer satisfaction – feeling that the
product/service met customer expectations. Always ask if the expenses for providing
customer service are compensated with the amount of customer satisfaction they generate.
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