building high performance relationships with suppliers
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BUILDING HIGH PERFORMANCE RELATIONSHIPS WITH SUPPLIERS Douglas M. Lambert, Ph.D. Raymond E. Mason Chair in Transportation and Logistics Fisher College of Business The Ohio State University Supply Chain Management …is the integration of key business processes from end user through original suppliers, that provides products, services, and information that add value for customers and other stakeholders. [The International Center for Competitive Excellence, 1994] [The Global Supply Chain Forum, 1998] SUPPLY CHAIN MANAGEMENT Integrating and Managing Business Processes Across the Supply Chain Information Flow Tier 2 Supplier Manufacturer Tier 1 Supplier Logistics Purchasing Production Customer Marketing & Sales PRODUCT FLOW Consumer/ End-user Finance Supply Chain Management Processes R&D CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT MANUFACTURING FLOW MANAGEMENT SUPPLIER RELATIONSHIP MANAGEMENT PRODUCT DEVELOPMENT AND COMMERCIALIZATION RETURNS MANAGEMENT Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2 (1998), p. 2. Types of Inter-company Business Process Links Tier 1 Customers Tier 1 Suppliers Tier 2 Customers 1 1 2 2 n Tier 3 to Consumers/ End-users n 1 1 1 2 n 2 1 3 2 3 1 3 n 1 n n n 1 n Managed Process Links Monitored Process Links Not-Managed Process Links Non-Member Process Links n 1 2 1 n Consumers/End-users Tier 2 Suppliers Tier 3 to n customers Tier 3 to n suppliers Initial Suppliers Tier 3 to Initial suppliers n Focal Company Members of the Focal Company’s Supply Chain Non-members of the Focal Company’s Supply Chain Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 7. FUNCTIONAL INVOLVEMENT IN THE SUPPLY CHAIN MANAGEMENT PROCESSES Business Functions SUPPLIERS Customer Service Management Demand Management Order Fulfillment Manufacturing Flow Management Supplier Relationship Management Marketing Sales Logistics Production Purchasing Marketing Plan Technological Logistics Manufacturing Sourcing Account & Resources Management Capabilities Capabilities Capabilities Capabilities Prioritization of Customer Knowledge of Customer Operations Competitors’ Initiatives Competing Programs in Customer Space Role of Logistics Service in Marketing Mix Knowledge of Customer Requirements Differentiation Opportunities from Manufacturing Capabilities Capabilities Required for Competitive Positioning Technical Service Process Requirements Environmental Requirements Knowledge of Design for Customer Manufacturability Requirements Product Design Finance Customer Profitability Alignment of Logistics Activities Coordinated Execution Priority Assessment Cost-toServe Forecasting Manufacturing Capabilities Sourcing Capabilities Tradeoff Analysis Network Design Material Made-to-Order Constraints Prioritization Production Planning Criteria Material Inbound Sales Growth Opportunities Specifications Material Flow Product Development Product/Service Customer and Commercialization Gaps in Market Opportunities Returns Management Research & Developmen t Integrated Planning Logistics Process Requirements Specifications Distribution Cost Integrated Manufacturing Supply Cost Supplier Capabilities Material Specifications Knowledge of Reverse Product RemanuMaterial Customer Marketing Logistics Design facturing Specification Knowledge Programs Information Architecture, Data BaseCapabilities Strategy, Information Visibility Total Delivered Cost CUSTOMERS Business RequirementsProcesses Definition Customer Relationship Management R & D Cost Revenue & Costs Information Architecture, Data Base Strategy, Information Visibility Note: Process sponsorship and ownership must be established to drive the attainment of the supply chain vision and eliminate the functional barriers that artificially separate the process flows. Source: Adapted from Douglas M. Lambert, Larry C. Guinipero and Gary J. Ridenhower, “Supply Chain Management: A Key to Achieving Business Excellence in the 21st Century”, unpublished manuscript as reported in Keely L. Croxton, Sebastián J. García-Dastugue and Douglas M. Lambert, “The Supply Chain Management Processes”, The International Journal of Logistics Management, Vol. 12, No.2 (2001), p. 31. SUPPLY CHAIN MANAGEMENT Integrating and Managing Business Processes Across the Supply Chain Information Flow Tier 2 Supplier Manufacturer Tier 1 Supplier Logistics Purchasing Production Customer Marketing & Sales PRODUCT FLOW Consumer/ End-user Finance Supply Chain Management Processes R&D CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT MANUFACTURING FLOW MANAGEMENT SUPPLIER RELATIONSHIP MANAGEMENT PRODUCT DEVELOPMENT AND COMMERCIALIZATION RETURNS MANAGEMENT Source: Adapted from Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol. 9, No. 2 (1998), p. 2. Customer Relationship Management (CRM) & Supplier Relationship Management (SRM): The Critical Supply Chain Management Linkages CRM Supplier D CRM Manufacturer C SRM P&L for C as customer Total Cost Report for D as supplier ∆ Revenue - ∆ Cost ∆ Profit ∆ Cost = ∆ Profit SRM P&L for B as customer ∆ Revenue - ∆ Cost ∆ Profit CRM Wholesaler/ Distributor B P&L for C as supplier ∆ Revenue - ∆ Cost ∆ Profit Retailer/ End User A SRM P&L for A as customer ∆ Revenue - ∆ Cost ∆ Profit P&L for B as supplier ∆ Revenue - ∆ Cost ∆ Profit Supply Chain Performance = Increase in Profit for A, B, C, and D Source: Adapted from: Douglas M. Lambert and Terrance L. Pohlen, “ Supply Chain Metrics”, The International Journal of Logistics Management, Vol. 12, No. 1 (2001), p. 14. Required Behaviors Relationships with major suppliers are corporately managed as partnerships while purchase order transactions become simplified and integrated with the supply process. Supplier Relationship Management Process Supplier Relationship Management Process Product/service agreements are developed and managed with key suppliers and segments of non-key suppliers. Teams work with suppliers to maintain costs and improve service. Goal is to improve the profitability of both the focus firm and the suppliers. Purchase order transactions are integrated with the supply process to improve productivity and all areas of supplier performance. Supplier Relationship Management Teams From MIS MIS R&D R&D MKTG Buyer Seller MKTG LOG LOG ACCT ACCT To Purchasing MIS R&D MKTG Sales MIS R&D MKTG LOG LOG ACCT ACCT Supplier Relationship Management Strategic Sub-Processes Review Corporate, Marketing, Manufacturing and Sourcing Strategies Process Interfaces Operational Sub-Processes Customer Relationship Management Differentiate Suppliers Customer Service Management Prepare the Supplier/Segment Management Team Identify Criteria for Categorizing Suppliers Provide Guidelines for the Degree of Customization in the Product/Service Agreement Demand Management Internally Review the Supplier/ Supplier Segment Order Fulfillment Identify Opportunities with the Suppliers Manufacturing Flow Management Develop the Product/Service Agreement and Communication Plan Product Development & Commercialization Implement the Product/Service Agreement Returns Management Measure Performance and Generate Supplier Cost/Profitability Reports Develop Framework of Metrics Develop Guidelines for Sharing Process Improvement Benefits with Suppliers Source: Keely L. Croxton, Sebastián J. García-Dastugue, Douglas M. Lambert, and Dale S. Rogers, “The Supply Chain Management Processes,” The International Journal of Logistics Management, Vol. 12, No. 2, (2001), p. 15. The Strategic Supplier Relationship Management Process Process Interfaces Customer Relationship Management Strategic Sub-Processes Review Corporate, Marketing, Manufacturing and Sourcing Strategies Customer Service Management Identify Criteria for Categorizing Suppliers Demand Management Order Fulfillment Manufacturing Flow Management Activities Identify product & service components that are key to the organization’s success now and in the future Profitability / Growth / Stability Technology Capacity Innovation Quality Volume purchased Criticality / service level required Sophistication / Compatibility Provide Guidelines for the Degree of Customization in the Product/Service Agreement Consider quality/cost implications of various differentiation alternatives Select boundaries for degree of differentiation Develop Framework of Metrics Outline metrics of interest Relate metrics to the supplier’s impact on profitability and the profitability for the supplier Develop Guidelines for Sharing Process Improvement Benefits with Suppliers Outline options for sharing the benefits of process improvement Product Development & Commercialization Returns Management The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission Categorizing Packaging Suppliers at Masterfoods USA - - Not a current supplier - Reasons for interest: • Size • Technology • Innovation • Diversity Potential Under development Intensive care Temporary Not in stable stage Either a niche/core supplier that the company can grow - Core Open relationship Long term relationship Large % of spend Focus on our business Unique offering Assessment Niche The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission Bottlenecks Strategic Cooking Oil Chicken Beef Promotional Sauces Non-Critical Leverage Straws Cups Napkins Low Complexity for Wendy’s High Comparing Suppliers on Complexity and Volume Low Volume of Spend Source: Judy Hollis, Vice President, Wendy’s International High How Supplier Relationship Affects Economic Value Added (EVA®) Supplier Relationship Management’s Impact Sales Improve product quality Improved order fill rates – Improve manufacturing processes Gross Margin Cost of Goods Sold Profit from Operations Reduce cost of direct material – Improve plant productivity Increase productivity Total Expenses Reduce freight and indirect labor/warehousing costs Net Profit – Taxes Optimize physical network/facilities Economic Value Added Reduce order management costs Reduce information systems costs = Reduce human resources costs/improve effectiveness Reduce general overhead/management/administrative costs Inventory Current Assets Reduce purchased goods inventories – Reduce work in process inventories Reduce finished goods inventories Capital Charge + Other Current Assets + Fixed Assets Total Assets Cost of Capital × % Improve asset utilization and rationalization (warehousing & plant) Improve investment planning and deployment Source: Adapted from Douglas M. Lambert, and Terrance L. Pohlen, “Supply Chain Metrics,” The International Journal of Logistics Management, Vol. 12, No. 1 (2001), p. 11. Assigning Costs to Segments Variable Is cost dependent on unit volume? YES Charge Applicable Segment YES Charge Applicable Segment NO Non-Variable Is resource dedicated to a specific product line? NO Indirect Place in contribution pool SUPPLIER PROFITABILITY ANALYSIS: A CONTRIBUTION APPROACH WITH CHARGE FOR ASSETS EMPLOYED SUPPLIER A SUPPLIER B SUPPLIER C SALES COST OF GOODS SOLD GROSS MARGIN PLUS: DISCOUNTS AND ALLOWANCES MARKET DEVELOPMENT FUNDS SLOTTING ALLOWANCES CO-OP ADVERTISING NET MARGIN VARIABLE MARKETING & LOGISTICS COSTS: TRANSPORTATION RECEIVING ORDER ROCESSING Other Costs (will depend on situation) CONTRIBUTION MARGIN ASSIGNABLE NONVARIBLE COSTS: SALARIES ADVERTISING INVENTORY CARRYING COSTS LESS: CHARGE FOR ACCOUNTS PAYABLE Other Costs (will depend on situation) SEGMENT CONTROLLABLE MARGIN The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission SUPPLIER D The Three Components of Total Costs • Acquisition Costs Purchasing price Quality costs Financing costs Planning costs Taxes • Ownership Costs • Downtime costs Cycle time costs Non-value-added costs Risk costs Conversion costs Supply chain/Supply network costs Post-Ownership Costs Environmental costs Product liability costs Warranty costs Customer dissatisfaction costs Sysco Sales and Earnings History FY03 Sales +11.9%; Net Earnings +14.5% Net Earn. Sales Sales Net Earnings (Billions) 30 (Millions) 900 800 25 5 Yr. CAGR: Sales = 11.3% Net Earnings 19.1% 700 20 10 Yr. CAGR: Sales = 10.1% Net Earnings 14.5% 600 20 Yr. CAGR: Sales = 14.6% Net Earnings 16.0% 500 30 Yr. CAGR: Sales = 16.6% Net Earnings 18.1% 400 15 10 300 200 5 * All net earnings data is before accounting changes. Source: Neil Theiss, Senior Director, Supply Chain Management, Sysco Corporation. FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95 FY94 FY93 FY92 FY91 FY90 FY89 FY88 FY87 FY86 FY85 FY84 FY83 FY82 FY81 FY80 FY79 FY78 FY77 FY76 FY75 FY74 FY73 FY72 FY71 FY70 0 100 0 COMBINED CUSTOMER-SUPPLIER PROFITABILITY ANALYSIS: A CONTRIBUTION APPROACH WITH CHARGE FOR ASSETS EMPLOYED Supplier CUSTOMER A NET SALES COST OF GOODS SOLD (VARIABLE MFG. COST) MANUFACTURING CONTRIBUTION VARIABLE MARKETING & LOGISTICS COSTS: SALES COMMISSIONS TRANSPORTATION WAREHOUSING (HANDLING IN AND OUT) SPECIAL PACKAGING ORDER PROCESSING CHARGE FOR INVESTMENT IN ACCTS. REC. CONTRIBUTION MARGIN ASSIGNABLE NONVARIABLE COSTS: SALARIES SEGMENT RELATED ADVERTISING SLOTTING ALLOWANCES INVENTORY CARRYING COSTS SEGMENT CONTROLLABLE MARGIN CHARGE FOR DEDICATED ASSETS USED NET SEGMENT MARGIN Customer SALES COST OF GOODS SOLD GROSS MARGIN PLUS: DISCOUNTS AND ALLOWANCES MARKET DEVELOPMENT FUNDS SLOTTING ALLOWANCES CO-OP ADVERTISING NET MARGIN VARIABLE MARKETING & LOGISTICS COSTS: TRANSPORTATION RECEIVING ORDER ROCESSING CONTRIBUTION MARGIN ASSIGNABLE NONVARIABLE COSTS: SALARIES ADVERTISING INVENTORY CARRYING COSTS LESS: CHARGE FOR ACCOUNTS PAYABLE SEGMENT CONTROLLABLE MARGIN CHARGE FOR DEDICATED ASSETS USED NET SEGMENT MARGIN The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission SUPPLIER A “ I ask my executives to run the business as if it is the only asset their family has, they can’t sell it, and they are going to own it for 100 years.” Warren Buffett Berkshire Hathaway The Operational Supplier Relationship Management Process Process Interfaces Customer Relationship Management Operational Sub-Processes Differentiate Suppliers Activities Perform supplier profitability analysis or total cost analysis Assess potential growth, strategic value and drivers Customer Service Management Prepare the Supplier/Segment Management Team Identify Account/Commodity Manager Select team members Demand Management Internally Review the Supplier/ Supplier Segment Product purchased Sales growth Criticality of supplier Order Fulfillment Identify Opportunities with the Suppliers Manufacturing Flow Management Develop the Product/Service Agreement and Communication Plan Product Development & Commercialization Returns Management Implement the Product/Service Agreement Measure Performance and Generate Supplier Cost/Profitability Reports Sales opportunities Cost reduction opportunities Service improvement opportunities Outline and draft the PSA Gain commitment of the company’s functions Gain supplier acceptance of PSA Agree on a communications and continuous improvement plan Develop and follow implementation plan Meet regularly with key customers Measure by supplier and for the supplier Revenue Costs Profitability Other: service, quality Report performance The Global Supply Chain Forum, The Ohio State University – Do not reproduce, cite or quote without written permission SUPPLY CHAIN MANAGEMENT: Elements and Key Decisions Supply Chain Management Processes Supply Chain Management Components 3) What level of integration and management should be applied for each process link? 2) What processes should be linked with each of these key supply chain members? Supply Chain Network Structure 1) Who are the key supply chain members with whom to link processes? Source: Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998, p. 4. THANK YOU DO YOU HAVE ANY QUESTIONS??
