Managing Customer Satisfaction Week 4 Managing Supply Relationships

Unit objectives Identify the main types of supply relationships Define supply chains, explore service applications & discuss main issues in supply chain management (SCM) Identify the use and management of intermediaries Identify the main types of supply partnerships and how they can be managed effectively Evaluate the role of service level agreements

Introduction Purpose: describe the Management of the relationships involved in delivering service to the end customer SCM grew out of manufacturers’ need to synchronize all the elements in the SC: Increase product availability Respond quickly to changes in consumer demand Maintain or reduce inventory levels

A simple supply chain

Types of supply relationships Service supply chains or networks Management through intermediaries Management through supply partnerships

Service supply chains Service provider’s concerns: cost & quality Service providers have several supply chains, e.g., supermarket: Cleaning service Legal services and auditing Food items through wholesalers, distributors, producer (direct) Supplier and customer levels are called “tiers”: first-tier (direct contact with service provider), second-tier, etc.

Multi tiered supply chain

Management through intermediaries ‘Middlemen’ or distributers, agents, dealers who manage part of the SC E.g., car manufacturers have dealers Disintermediation—reducing the number of intermediaries The Internet and disintermediation Outsourcing—increasing the number of intermediaries

Holiday supply chains and disintermediation

Managing service supply chains A supply chain is a network that joins together internal and external suppliers with internal and external customers Supply chain management (SCM) is concerned with managing the network and flow of information, materials, services, & customers through the network

Managing service supply chains Information is essential to anticipate and meet demand In practice, information is not always shared (supplier power, producer power) Reasons why there is always inventory in the SC Processes require work in progress (cannot produce one item at a time) Inventory must be available to meet demand with 100% accuracy (processes are inflexible & unreliable) SCM is targeted at reducing inventory Figure 5.2, pg. 144

The value of SCM The value of SCM Provides the benefits of vertical integration Eliminates long-term overhead & inflexibility of managing all the activities of SCM within one organization

SCM approaches The basis of SCM lies in the development of strong buyer-supplier partnerships Helper (1991), ten year study of US auto industry: weak suppliers powerful buyers Increasing use of JIT manufacturing process

Information exchange in supply partnerships Categories (4) Voice—partnership, collaboration, long-term, joint R&D Exit—traditional (adversarial), competitive pricing, short term, buyer still searching for lowest price Unlikely—unlikely that a long-term relationship is possible, buyer may not want to become dependent on one supplier Stagnant—sense of commitment but relationship has not developed Figure 5.4, pg. 148

Key elements of SCM Management of the SC in its entirety using measures to assess performance Buyer/supplier partnerships to share benefits Reduction of the number of suppliers Increased exchange of information Possibility of redirecting activities to the most effective position in the SC

Benefits of SCM Reduction in the total cost of inventory Reduced administration overheads involved in managing multiple relationships Collaboration in scheduling & process improvement Faster response to changes in market demand

Purchasing function Procurement/purchasing responsible for managing the SC Identify internal customer’s needs Translate needs into specifications Manage the delivery of goods & services Assess customer satisfaction Communication with suppliers Sourcing through invoicing ‘Cinderella’ operation PWC study: 10% reduction of costs = 50% increase in profit margin

E-procurement Disintermediation—desktop procurement Benefits: Customer satisfaction (more work but greater control) Process compliance (more reliable since easier for individuals to use—transparency) Cost reduction (reduced ‘just in case’ purchasing)

Lean manufacturing Toyota production system to eliminate waste (muda): anything that creates no value for the customer (Toyoda & Ohno) Value must be defined by the customer Remove non-value producing activities from the value stream Create flow – pipeline vs. batched work Pull vs. push – demand driven McD replenishes burgers as customers buys them Strive for perfection – developing a culture of continuous improvement

Applying lean thinking to service operations Ohno’s 7 sources of muda Over-production ahead of demand Waiting for the next process step Unnecessary transport of materials Over-processing or parts due to poor process design or technology Excessive inventories Unnecessary movement of employees Defective production

Barriers to SCM improvement Lack of systems capability—inability to pass information about demand along the SC Complacency (Toyota?) Information used for conflicting purposes—sales forecasts Mistrust Power games—fear of being overwhelmed by a more powerful partner

Managing through intermediaries Why use intermediaries? Closeness to customer Local knowledge Focused expertise (Microsoft, 5.3, pg. 155) Poor service margins Insufficient capacity (subcontracting)

Forms of service: Military model The Commandos—highly trained, self-directed, complex projects (software) The Regulars—less comprehensively skilled Part-timers—provided by the customers Mercenaries—not part of the parent organization, may not share its culture Enemies—not on the same side, parent company may have decided not to provide service

The military model

Motivating mercenaries Financial incentives Punishments Providing expertise Training—McDonald’s Hamburger University IS & IT support

Alliances Types Focused or complex—level of involvement Joint venture—forming a new company Partnership—forming a strategic alliance

Service level agreements SLAs are contracts between the service supplier and purchaser (B2B) considered to be an integral part of the developing relationship between the two Activities: Setting a service specification Dealing with routine issues Development of the relationship—on-going review and revision SLAs are tailor made

Strategic alliance success factors