LEVEL 6 Strategic Supply Chain Management

LEVEL 6 Strategic Supply Chain Management

Aspects of strategic decisions
• They relate to the ‘scope’ of the organisation: the range of activities it will pursue (what business are we in?), its geographical boundaries, and the kind of human/economic entity it should be • They are likely to influence the direction of the organisation in the long term • They attempt to match the organisation’s activities to its resource capabilities and its dynamic environment • They affect operational decisions (‘set off waves of lesser decisions’) • They will be influenced by the values and expectations of those in power, both within the organisation, and in its environment (as stakeholders). Aspects of strategic decisions

Mintzberg’s perspectives on strategy: the Five Ps
Plan Strategy is the output of a systematic process of planning: setting objectives; analysing environmental threats and opportunities, and the organisation’s strengths and weaknesses; developing and evaluating options; and selecting the most viable option for implementation. Ploy Strategy is developed in the process (or ‘game’) of out-manoeuvering competitors: responding to competitor activity, initiatives, strengths or weaknesses with offensive or defensive moves to gain or maintain advantage. Pattern Strategy is developed from the stream of actions that the organisation adopts consistently over time (whether or not consciously intended). A pattern of action emerges from the retention of approaches that appear to be working, and the discarding of approaches that don’t appear to be working. Position Strategy is a means of identifying an organisation’s position in a given environment (including its competitive market), and of shaping its response to the opportunities and threats presented by external forces. Perspective Strategy reflects the organisation’s ‘ingrained way of perceiving the world’: the corporate ‘personality’ which influences how it defines its purpose and goals, and chooses how to go about things. Table 1.1 Mintzberg’s perspectives on strategy: the Five Ps

Bases for strategy (Ohmae)
• Corporation-based strategy: aiming to maximise the organisation’s strengths, relative to the competition, in the key factors for success in the industry • Customer-based strategy: aiming to understand and satisfy the needs of customers, and to segment and target markets in such a way as to maximise marketing resources and avoid head-on competition • Competitor-based strategy: aiming to exploit sources of differentiation in functions such as purchasing, design/engineering, sales and servicing (eg through greater cost-efficiency, or flexibility). Bases for strategy (Ohmae)

Levels of strategic management
• Corporate strategy is concerned with the scope of the organisation’s activities (what business are we in or should we be in?), and the matching of its capabilities and resources to its environment and stakeholders. • Business strategy (or competitive strategy) is concerned with how each division or strategic business unit (SBU) within the organisation will go about achieving its competitive objectives. • Functional strategy (or operational strategy) is concerned with how the functions of the organisation (purchasing, production, marketing, finance, technology, HR and so on) will support business strategy. Levels of strategic management

The scope of strategic decisions
• Expressing the organisation’s vision of its desired future state (‘strategic intent’) • Determining the scope and boundaries of the organisation’s activities (what does it do – and not do?) • Relating the organisation’s activities to the environment in which it operates • Matching the organisation’s activities to its resources and capabilities • Sourcing, mobilising, allocating and re-allocating resources • Influencing the long-term direction of the organisation (in terms of product/marketing positioning) • Providing a guiding/constraining framework for operational decisions • Reflecting the values and expectations of powerful individuals, coalitions and stakeholders in the organisation • Defining the organisation’s need for, and orientation to, change. The scope of strategic decisions

Exercise Think about your own organsiation or any organisation with which you are familiar. How would you define its range of activities (try not to do this too narrowly)? What kind of entity does it aspire to be (eg does it have defined policies on staff development or care for the environment?). What kind of contributions does it try to make to stakeholders such as its employees, its customers and its suppliers? Exercise

The scope of organisational strategy
Figure 1.1 The scope of organisational strategy

Challenges in strategic decision-making
• Insofar as they attempt to take a long-range view of the future, strategies are subject to a high degree of uncertainty and risk • Strategies (and strategy-making processes) need to be integrated or aligned across functional, structural and political boundaries • Strategies have a ‘soft’ or subjective element • Strategies may become divorced from the real environmental conditions and performance of the organisation: this is sometimes called strategic drift Challenges in strategic decision-making

Advantages of the rational approach to strategy formulation
• It provides a structure and impetus for environmental monitoring, data gathering, problem-solving and decision-making • It encourages a long-term, broad-scope view (as opposed to sub-optimal thinking and resource allocation by individual units with their own short-term targets) • It provides a channel for communicating the corporate vision and intentions to the rest of the organisation and key stakeholders • It sets up a control system, with agreed objectives and success measures with which to evaluate and adjust performance • It provides a sense of shared purpose, direction and security, which may contribute to morale and commitment Advantages of the rational approach to strategy formulation

Criticisms of the rational model (Lindblom)
• It is meaningless to distinguish between objectives and the possible strategies to achieve them. In practice, managers confuse the two. • It is unrealistic to imagine a strategic planner carefully sifting through every possible option to achieve predetermined goals. In practice, the range of options that will even present themselves as possibilities will be limited, and of those many will be filtered out without full evaluation. • At best, formulation of strategy is a process of evaluating a few slight extensions to existing policies. Criticisms of the rational model (Lindblom)

Alternatives to formal strategic planning (Mintzberg)
• Opportunistic (or entrepreneurial) strategies. An organisation may take advantage of changes in the environment or recognise the potential of new skills or technology in an opportunistic manner, or an entrepreneur may have a vision for an opportunity in the market place. • Imposed strategies, where choice is constrained by environmental pressures and imperatives. • Emergent strategies, which are ‘formed’ (rather than being deliberately formulated) through various processes: ‘One idea leads to another until a new pattern forms. Action has driven thinking and a new strategy has emerged.’ Alternatives to formal strategic planning (Mintzberg)

From planned strategy to realised strategy
Figure 1.2 From planned strategy to realised strategy

The adaptive approach to strategy formulation
• Simple priority goals are impossible, because strategies are formed and constrained by the agendas of multiple stakeholder groups. • Strategies evolve through reactive, piecemeal solutions to existing or emerging problems, rather than proactive search for new opportunities. • Organisations make decisions in a series of incremental steps, each differing only slightly from the status quo. The adaptive approach to strategy formulation

Incremental change Figure 1.3 Incremental change
Source: Johnson and Scholes, Exploring Corporate Strategy

Criteria for choosing the approach to strategy
• The complexity and dynamism of the external environment • The history, size and structure of the organisation • The diversity of organisational stakeholders, and the level of their power and interest in the organisation • The culture and management style of the organisation • The abilities of the decision-makers • The availability of information for forecasting and planning Criteria for choosing the approach to strategy

Approaches to strategy formulation
Internal context External environment Rational planning Mature business model Large organisation Fairly static Logical incrementalism Many organisation types Flexible structure Innovative culture Dynamic Emergent strategy Small organisations Entrepreneurial culture Chaotic Table 1.2 Approaches to strategy formulation

Purposes of strategic planning models
• Summarises or records consensus among various contributors to the process • Facilitates strategic thinking by giving an overview of the whole process and its related subsystems, variables, influences, inputs/outputs and so on. • Supports ‘chunking down’ (to greater levels of detail) and ‘chunking up’ (to the overarching problem, objective, system or concept), so that the different levels of decision-making can be aligned. • Enables the process to be reviewed, learned from and modified if necessary. Purposes of strategic planning models

Basic premises of the strategic planning school
• Strategies result from a controlled, conscious process of formal planning, divided into distinct steps, each supported by techniques • Responsibility for the process rests with senior management and staff planners • Strategies are made explicit so that they can be implemented through detailed attention to objectives, budgets, programs and operating plans of various kinds. Basic premises of the strategic planning school

The rational strategic management model
Figure 1.4 The rational strategic management model

The Strategy Change Cycle
Figure 1.5 The Strategy Change Cycle

The PCA model of strategic management
• Analysis of strategic position (P) – Defining organisational purpose (what business do we want to be in? what kind of organisation do we want to be?) – Environmental analysis (where are we now?) • Strategic choice (C) – Objectives (where do we want to be?) – Strategies (how are we going to get there?) – Options analysis (are there alternative routes?) • Strategy into action (A) – Implementation (how do we turn plans into reality?) – Monitoring and control (how will we know if we are getting there?) The ACI model of strategic management

Strategic analysis (or strategic position)
According to Johnson and Scholes, ‘strategic analysis is concerned with understanding the strategic position of the organisation in terms of its external environment, internal resources and competencies, and the expectations and influences of stakeholders’. • The external environment poses opportunities (which may be exploited for competitive advantage) and threats (which must be countered for competitive survival). • Internal resources include physical assets, finance, information, human resources and intangible assets such as brand image and corporate reputation. Competencies are the things the organisation is able to do, or good at. • Stakeholders are groups who have an interest or ‘stake’ in an organisation’s activities. Strategic analysis (or strategic position)

Phases in strategic choice
• First we identify the possible bases on which to construct a strategy. For example, we may be guided by specific stakeholder expectations, or we may wish to exploit a specific strategic strength. • Then we generate strategic options, ie we identify the possible courses of action that we could follow to realise our objectives. • Finally, we evaluate the options and select from among them. Phases in strategic choice

Strategy into action • Organising involves developing facilitative organisation structures (authority relationships, communication channels, co-ordinating mechanisms) and external networks (including supply chains). • Enabling involves sourcing and deploying the information, finance, skills and technology required to implement the strategy. • Managing change involves a range of roles, techniques and styles to support and facilitate people through change: communicating vision, confronting resistance, managing change projects and programmes. Strategy implementation

Exercise Try to think of policies which might be favoured by a purchasing department, but unpopular with other departments such as marketing or finance; and others which might be favoured by other departments, but unpopular with purchasing staff. Exercise

Systems theory: two basic types of system
• A closed system is entirely self-contained: its results are wholly determined by the initial configuration of the system, without inputs from the external environment. • An open system is connected to and interacts with its environment. It takes in inputs from its environment (including outputs from other systems), and converts these into outputs (or inputs to other systems). Systems theory: two basic types of system

The organisation as an open system
Figure 2.1 The organisation as an open system

The organisational environment
• The organisation’s immediate operating (or ‘micro’) environment incorporates customers, suppliers and competitors who directly impact on operations. • The general (or ‘macro’) environment incorporates wider factors in the society in which the organisation operates. • The ‘purchasing environment’ may be defined as those elements of the micro and macro environments which affect purchasing operations: presenting both opportunities to improve – through factors such as globalisation and better ICT – and constraints – such as ethics and the legal system. The organisational environment

The position of stakeholders in the environment
Figure 2.10 The position of stakeholders in the environment

Influence of the organisational environment
• It offers threats (such as restrictive legislation, competitor initiatives, technological obsolescence or industrial action by trade unions) and opportunities (such as growth in market demand, technological improvements or increased skills in the labour pool). • It is the source of key organisational resources (labour, supplies, plant and machinery, energy, funds, information, contacts and so on). • It contains interest or pressure groups which may attempt to influence the activities of the organisation (such as the general public, Government bodies and a wide range of action and lobbying groups concerned with environmental, human rights and consumer protection issues). Influence of the organisational environment

Steps in environmental analysis
Figure 2.2 Steps in environmental analysis

Industry analysis • What are the essential economic characteristics of the industry? • What is the level of industrial concentration (what percentage of total capacity is controlled by the five or six largest companies)? • What are the prospects for fundamental changes in the industry’s economic structure? • What is the apparent relationship or correlation between industry sales and economic indicators (eg gross national product)? • What problems are likely to be created by fluctuations in the business cycle? • What are the possible consequences of fluctuations in business activity, fiscal policy, and/or international events for key business decisions and outcomes? Industry analysis

Technological environment
Innovations and developments: • Increase the speed and power of information gathering and processing • Enable 24/7 global customer service, via the internet and telecommunications systems • Enable new products, delivery processes, operations processes, and promotional channels • Shorten product lifecycles, due to the increasing pace of obsolescence and modification • Increase competition and choice, by enabling small competitors to offer differentiated or customised, small-volume products/services to a global market • Create ‘virtual organisations’ which allow firms to source expertise regardless of location • Facilitate de-layering Technological environment

Porter’s five forces model
Figure 2.4 Porter’s five forces model

Barriers to entering a market
• Economies of scale and other cost advantages for established competitors (eg learning curve, access to necessary inputs, or low-cost proprietory designs) • Capital requirements to enter the market • Product differentiation and brand identity • Switching costs and customer loyalty to existing brands, hindering new product trial and adoption by the market • Access to distribution channels (perhaps on a selective or exclusive basis which would hinder competitors) • Government policy and legal restrictions (eg patents and copyrights) Barriers to entering a market

What makes buyers powerful?
• They are limited in number and/or large in size, relative to supplying firms • Their spend is a high proportion of suppliers’ revenue • Products/services are undifferentiated, or there are substitute products, making it easy to switch suppliers • There is potential for ‘backward integration’ (ie buyers can own or control suppliers) What makes buyers powerful?

What makes suppliers powerful?
• They are limited in number and/or large in size, relative to buying firms • There are few substitute products and/or the supplier’s product (and/or service) is highly differentiated • The volume purchased by the buyer/industry is not important to the supplier • The supplier’s product is an important component in the buyer’s business • There is potential for ‘forward integration’ (ie suppliers can own or control buyers). What makes suppliers powerful?

Limitations of Porter’s five forces model
• It focuses on profitability, which may not be the primary or sole objective for all organisations. • It only offers a static ‘snapshot’ of the competitive environment at a particular point in time. • It considers only five forces in the immediate competitive environment. This can create an oversimplified picture. • It is only relevant at the level of strategic business units (SBUs), and not at the level of the whole organisation. • It typifies a ‘positioning’ approach to strategy development, which suggests that the source of an organisation’s competitive advantage is mainly in how it achieves strategic ‘fit’ with its external environment. Limitations of Porter’s five forces model

Environmental variables and their impacts
Example Impacts on… Societal changes Changing customer preferences Population trends Product demand or design Distribution; product demand/design Political/legal changes New legislation New enforcement priorities Product costs Investments, products, demands Economic changes Interest rates Real personal income levels Exchange rates Expansion, debt costs Demand Domestic/overseas demand and profit Competitive changes Adoption of new technologies New competitors Price changes New products Cost position, product quality Prices, market share, margin Market share, contribution margin Demand, advertising expenditure Supplier changes Change in input costs Supply changes Changes in number of suppliers Prices, demand, contribution margin Production processes, investment Costs, availability, risk Market changes New uses of products Product obsolescence New markets Demand, capacity utilisation Prices, demand, capacity utilisation Distribution channels, demand, capacity utilisation Table 2.1 Environmental variables and their impacts

Position audit of an organisation
• Its resources and assets (human, financial, information, physical, reputational etc) • Its products, brands and markets • Its operating, administrative, managerial and information systems • Its internal organisation and structure • Its distinctive competencies and capabilities • Its performance and results (using financial and non-financial criteria) Position audit of an organisation

Typical strengths and weaknesses
• Its physical and financial resources: availability of raw materials, asset base, profitability, tax structure etc • The effectiveness of various functions and operations: eg efficiency or quality of production, R & D expertise, purchasing integration • Its product/service portfolio, positioning and market share • Its human resources: management expertise, staff skills, flexibility etc • The efficiency and effectiveness of its systems (eg for quality control, inventory management, communication and so on) • Its structure: adaptability, efficiency, co-ordination • Its distinctive competencies: things it does better than competitors Typical strengths and weaknesses

SWOT analysis Figure 2.5 SWOT analysis

Using the SWOT analysis
• Plan to build on strengths and/or minimise weaknesses – in order to be able to capitalise on the identified opportunities (or create new ones) and to cope better with the identified threats. • Plan to convert threats into opportunities – by developing the strengths (and contingency plans) to counter them (more effectively than competitors), and by being prepared to learn from them. Using the SWOT analysis

Analysing critical success factors
• Identify the CSFs for the specific strategy (eg ‘global market access’). • Identify the core competencies that underpin the CSFs. • Scrutinise the list of CSFs to ensure it is sufficient to give competitive advantage. • Identify performance standards for each CSF. This gives a measure of what we need to achieve in order to outperform competitors. • Assess the extent to which competitors can imitate the core competencies. • Consider likely competitive moves and how these can be counteracted. Analysing critical success factors

Analysing strategic capability
Figure 2.8 Analysing strategic capability

Organisational stakeholders
• Internal stakeholders. The directors, managers and employees who operate within the organisation’s boundaries • Connected stakeholders. These include shareholders, who have a key stake, as owners, in the financial performance of the organisation. They also include financiers, customers, suppliers, distributors etc • External stakeholders. These include Government and regulatory bodies, pressure and interest groups, professional bodies and trade unions and the local community Organisational stakeholders

Mendelow’s power/interest matrix
Figure 2.7 Mendelow’s power/interest matrix

Managing stakeholders
• Stakeholders who have neither interest nor influence (A) are a low-priority group: resources will not be wasted taking their goals into account. • Stakeholders in segment B are important because of their high interest. The recommended strategy is to keep them informed of strategies and outcomes, through stakeholder marketing, communication and education. • Stakeholders in segment C are important because of their high influence. The recommended strategy is to keep these stakeholders satisfied. • Stakeholders in segment D are known as ‘key players’: they have influence and are motivated to use it in their own interests. The recommended strategy is one of early involvement and participation. Managing stakeholders

Influences on organisation structure
• The task or business of the organisation will determine which functional specialisms are required, and how they will relate to one another. • The technology of the task may necessitate certain forms of organisation to maximise its efficiency and the needs of people. • The size of the organisation impacts on its structure. • Geographical dispersion requires a more decentralised structure in order to take local factors into account. • Different cultures and management styles support particular structural configurations. • Environmental factors are highly influential. According to Burns and Stalker, for example, formal, bureaucratic (or ‘mechanistic’) structures are highly stable and efficient for slow-changing environments, but flexible, networked (or ‘organic’) structures are required for survival in fast-changing environments. Influences on organisation structure

Organisational configurations: Mintzberg
• Simple structure: a small, hierarchical organisation based on centralised control by a single leader • Machine structure (or bureaucracy): a hierarchical, formal, impersonal organisation, departmentalised by functional specialism and governed by rules and procedures. • Professional bureaucracy: hierarchical, but recognising the power of professional expertise, this structure tends to be flatter and more participative than machine structures. • Divisional structure: a number of more or less autonomous strategic business units (SBUs), coordinated by centralised strategic and support functions. • Adhocracy: an organic, decentralised structure comprising temporary, flexible project teams and networks. Organisational configurations: Mintzberg

Functional structure Figure 3.1 Functional structure

Methods of organisation
• Functional structure • Geographical structure • Product/brand/customer structure • Divisional structure Methods of organisation

Divisional structure Figure 3.2 Divisional structure

Modern trends towards organisational flexibility
• Flattening of organisational hierarchies, or delayering. • Chunked structures: creating smaller and more flexible units (eg teams) within the overall structure. • Project management: temporary structures, organised to focus on specific output/results, and drawing on cross-functional expertise and resources. • Horizontal structures: allowing work and information to flow freely across functional boundaries, without the ‘vertical’ barriers created by specialisation, departmental job demarcations and formal communication channels. • Core-periphery models of numerical flexibility, such as Handy’s ‘clover-leaf’ structure. • Network structures: loose, dynamic, informal affiliations of autonomous and broadly equal units or organisations, who exchange information and pursue ongoing (typically long-term) relationships for mutual benefit. • Virtual organisation: a special form of the network concept, where companies (or units of a single company) collaborate, co-ordinate their activities and share data. Modern trends towards organisational flexibility

Centralisation and decentralisation
• The extent to which decision-making authority is kept close to the centre (or top) of the firm: ie the level of the hierarchy at which decisions are taken – and the extent of delegation. • The extent to which related tasks and resources are gathered under a single functional authority or location: eg whether there is a separate purchasing function, or whether purchasing is carried out by relevant line departments. Centralisation and decentralisation

Different forms of power
• Overt power is obvious, or transparent – through direct tactics such as physical or economic coercion, autocratic leadership, logical persuasion or the offering of incentives. • Covert power is subtle, hidden or implied – through indirect tactics such as withholding information or excluding someone from a negotiation or network. • Structural power (Cox) is built into the situation, context or relationship – as in the case of legal obligations on organisations, buyers who are dependent on suppliers (or vice versa), or employers who control the rewards of labour. Different forms of power

Sources of power (French and Raven)
• Legitimate power (or ‘position power’): the legal/rational, formally-conferred authority associated with a position or role in an organisation. • Expert power: the power of expertise or knowledge which is both recognised and valued by the group, so that they are willing to be influenced by the expert. • Reward power (or ‘resource power’): recognised control over resources and rewards that are valued by the group, so that they are willing to be influenced in return for rewards. • Referent power (or ‘personal power’): emanating from the attractive and inspiring personality, image or ‘charisma’ of the individual, and the perception by others of his or her ‘leadership quality’. • Coercive power (or ‘physical power’): the power to threaten sanctions, hand out punishments or physically intimidate others if compliance is not obtained. Sources of power (French and Raven)

Sources and indicators of power
Sources of power Indicators of power Within organisations Hierarchy (formal authority) Influence (informal power: eg charismatic leadership) Control of strategic resources (eg finance) Possession of knowledge/skills (eg IT specialists) Control of human environment (eg negotiating skills) Involvement in implementation (eg exercising discretion) Status (eg job grade, reputation) Claim on resources (eg budget size) Representation (eg in powerful positions, committees) Symbols (eg office size, titles) For external stakeholders Control of strategic resources (eg materials, labour) Involvement in implementation (eg distribution outlets, agents) Possession of knowledge/skills (eg subcontractors, partners) Through internal links (eg informal influence) Status (eg inferred by speed with which firm responds) Resource dependence (eg dependence on supplier, size of shareholding/loans, proportion of business tied up with customer) Negotiating arrangements Symbols (eg level of contacts, hospitality) Table 3.1 Sources and indicators of power

Cultural school of strategic management
• Strategy formation is a process of social interaction, based on the beliefs and understandings shared by members of an organisation (though not necessarily clearly articulated) • Culture and ideology tend to resist strategic change – and radical changes in strategy therefore have to be based on a fundamental change in culture and values • Positive, dominant, widely-shared values (such as service, quality and innovation) can be a powerful source of corporate direction and competitive advantage. Cultural school of strategic management

The cultural web • The paradigm may include assumptions about customer satisfaction, quality, risk, innovation or employee relations; the importance of values such as integrity (and how that is defined), empowerment or teamhood; and how the organisation sees itself in general. • Stories form the ‘mythology’ of the organisation. • Routines include formal procedures; ‘short-cuts’ developed in practice; informal norms. • Control systems refer to ways in which control is exercised: performance monitoring, supervision, rewards and sanctions and so on. • Organisational structure: centralised or decentralised; formal or informal; encouraging collaboration or competition. • Power structures refer to how power is distributed. • Symbols include formal logos and trade marks, as well as things which take on symbolic value. The cultural web

The cultural web Figure 3.3 The cultural web

Levering cultural change
• Consistent expression and modelling of the new values by management (from the top down), leaders and influencers (who may need to be co-opted to the initiative by those in authority) • Changing underlying values and beliefs, through communication, education and involvement; spreading new values and beliefs and encouraging employees to ‘own’ them (through incentives, co-opting people to teach others and so on) • Use of human resource management mechanisms to reinforce the changes: including new values and behaviours in recruitment and selection profiles, appraisal and reward criteria; training and development planning; and so on. Levering cultural change

Harrison’s four cultural types
Culture Key features Advantages/disadvantages Power culture Power centred in a key figure, owner or founder Control through direct personal communication Little formalisation, rules or procedures Suits small, entrepreneurial organisations of like-minded people Enables the organisation to adapt quickly in response to change Role culture Classical, rational organisation (bureaucracy) Formalised, impersonal: authority based on position, function; conformity to rules and procedures Efficient for large organisations in stable environments Inability to change/innovate, due to rigidity Task culture Management directed at outputs/results Team-based organisation: horizontally structured, flexible Valuing expertise, communication, collaboration Fosters results/customer focus Involves/empowers staff Can be expensive (securing expertise, consensus decision-making) Person culture Serves the interests of individuals: eg barristers working through chambers Management function administrative and supportive, rather than directive (eg bursars or registrars) Supports individual talent and interests Rare in practice Table 3.2 Harrison’s four cultural types

Dimensions of difference between national cultures (Hofstede)
• Power-distance: the extent to which unequal distribution of power is accepted and involvement/participation expected • Uncertainty-avoidance: the extent to which security, order and control are preferred to ambiguity, uncertainty and change • Individualism: the extent to which people prefer to live and work in individualistic (‘I’) or collectivist (‘we’) ways • Masculinity: the extent to which gender roles are distinct, and whether masculine values (assertiveness, competition) or feminine values (consensus, relationship) prevail • Long-term orientation: the extent to which we emphasise long-term values such as thrift and perseverance rather than short-term values such as fulfilling social obligations and protecting ‘face’ Dimensions of difference between national cultures (Hofstede)

Ethical issues at three levels
• At the macro level, there are the issues of the role of business and capitalism in society. • At the corporate level, there are the issues which face an individual organisation as it formulates strategies and policies about how it interacts with its various stakeholders. • At the individual level, there are the issues which face individuals as they act and interact within the organisation and supply chain. Ethical issues at three levels

Ethical duties of leaders
• Their duty to comply with national and international law – including the need to avoid corporate liability (among other negative outcomes) for wrongdoing • Their duty to comply with professional and corporate ethical guidelines and codes of practice • Their responsibility for fulfilling corporate objectives (including ethical objectives) and maintaining constructive ongoing trading (and employment) relationships • Their responsibility for developing staff and managing discipline in the organisation. Ethical duties of leaders

Porter’s generic strategies for competitive advantage
• Cost leadership: seeking to become the lowest cost producer in the industry as a whole • Differentiation: seeking to exploit a product or service believed to be unique in the industry as a whole • Focus: targeting activities to a selected segment of the market, either by providing goods or services at a lower cost to that segment or by providing a differentiated product or service for the needs of that segment. Porter’s generic strategies for competitive advantage

Porter’s generic strategies
Competitive advantage Competitive scope Lower cost Differentiation Broad (industry wide) Cost leadership Narrow (market segment) Cost focus Differentiation focus Figure 4.1 Porter’s generic strategies

The Ansoff matrix Figure 4.1 The Ansoff matrix

The Ansoff matrix, adapted
Figure 4.2 The Ansoff matrix, adapted

Protect/build strategies
• Withdrawal may be desirable if the organisation has been unable to develop sufficient resources/competencies to compete successfully; or if its priorities have changed (eg if short-term objectives for the market have been satisfied); or if divestment is required to fund investment elsewhere. • Consolidation is a strategy of protecting and perhaps strengthening the organisation’s position in its existing markets. • Market penetration is a growth strategy, based on gaining greater market share in an existing market, with an existing product. This may be done to secure dominance of a growth market, or to drive out competitors from a mature market. Protect/build strategies

Mergers and acquisitions: advantages
• Taking advantage of economies of scale (arising from pooled activities and bargaining power) and scope (arising from organisational synergy) • Giving immediate access to (and legitimate ownership control over) resources such as brand names, products, IT systems and customer bases, new products, national markets and expertise (eg in the case of a diversified or cross-border merger or acquisition) • Giving a high degree of control, compared to other inter-organisational alliances and partnership Mergers and acquisitions: advantages

Alliances and partnerships
• Joint venture: a formal arrangement whereby two independent companies establish a new company which they jointly own and manage. Their other businesses remain separate from this new, shared venture. • Strategic alliance: a formally structured relationship, in which two companies legally contract to cooperate in limited, specified ways to achieve specific commercial objectives that are of benefit to both parties. • Subcontracting, outsourcing, franchising and licensing agreements: arrangements by which one organisation delegates some of its own activities, under contract, to external companies. • Networks: looser, dynamic, more informal affiliations of autonomous and broadly equal organisations, who exchange information and pursue ongoing (typically long-term) relationships for mutual benefit. Alliances and partnerships

Exercise Begin to collect specific examples of joint ventures, strategic alliances and other inter-organisational forms, as you read about them in professional journals and the business press. You will then be able to offer named examples, if asked to do so in the exam, which aren’t the same as everybody else’s! As a further useful exercise, try to analyse the ways in which your own organisation collaborates with other organisations. Which category of inter-organisational relationship applies in each case? Exercise

Criteria for evaluating strategies
• Suitability. Does the strategy fit the situation identified in the strategic appraisal? Does it solve the problem? • Feasibility. Can the strategy be implemented? Will it work in practice? • Acceptability. Will the strategy be acceptable to key stakeholders? Criteria for evaluating strategies

Is the strategy suitable?
• Does it capitalise on the organisation’s identified strengths and exploit its core competencies (for competitive advantage)? • Does it overcome identified weaknesses? • Does it deflect or neutralise identified threats? • Does it exploit identified opportunities? • Does it align with the organisation’s mission, objectives and cultural values? Is the strategy suitable?

TOWS matrix Strengths (S) Weaknesses (W) Opportunities (O)
S/O strategies Options that use strengths to exploit opportunities W/O strategies Options that overcome weaknesses to exploit opportunities Threats (T) S/T strategies Options that use strengths to avoid threats W/T strategies Options that minimise weaknesses to avoid threats Figure 4.3 TOWS matrix

Is the strategy feasible?
• Practical: do we have the resources (financial, physical, human, informational) to do this? Will we be able to attain and sustain the required level of performance? • Economic: are the financial resources available? Will there be a satisfactory return on investment, at an acceptable level of risk? • Social: will stakeholders accept and support the strategy – or resist it? • Technical: can the strategy be implemented using available or accessible technology (equipment, systems and processes)? Is the strategy feasible?

Is the strategy acceptable?
• Will the strategy be sufficiently profitable to meet shareholder expectations? • Will managers and employees favour the decision? (Can its outcomes be dovetailed with their interests?) • What will be the impact on customer satisfaction, loyalty and demand? • What will be the impact on long-term supply chain relationships? • What will be the ‘external’ costs and impacts on the wider community (eg the environment or employment)? Is the strategy acceptable?

Processes of strategy selection
• The planned approach is a rational, scientific method, using formal tools of analysis, and attempting to decide whether the options considered are likely to achieve the specified objectives • Enforced choice refers to situations where adoption of a particular strategy is imposed by forces outside the organisation. Such forces may overwhelm normal planning routines, particularly if they arise from major changes in the external environment (eg technological breakthroughs or legislative changes). • The learning approach means that different areas of the organisation adopt incremental changes based on their own experiences and adaptations. Unless carefully managed, this can lead to strategic drift. • The command approach means that particular strategies are imposed by top management after little or no discussion with lower levels. Processes of strategy selection

A framework for evaluation and selection of strategies
Figure 4.3 A framework for evaluation and selection of strategies Adapted from Johnson and Scholes

Reviewing the strategic management process
• Was the strategic management approach (rational, logical incremental, emergent, imposed) suitable? • How effectively and efficiently was the chosen approach carried out? • How effectively were stakeholder relationships managed through the process? • How effectively and efficiently was the chosen strategy implemented, or put into action? • Is the implemented strategy effective: is it in fact accomplishing the strategic intent and objectives for which it was chosen? Reviewing the strategic management process

Two views of strategy • A positioning-based approach to strategy suggests that the source of an organisation’s competitive advantage is mainly in how it achieves strategic ‘fit’ with its external environment, exploiting opportunities and minimising threats. • The resource-based approach suggests that the source of an organisation’s competitive advantage lies mainly in how it exploits its distinctive (unique and hard to imitate) internal resources and competencies, setting strategic objectives based on what they enable it to do. Two views of strategy

Arguments against competitive advantage based on positioning
• The speed and unpredictability of change in the business environment undermines the assumptions behind positioning. • Positioning is based on generic sources of advantage (such as differentiation and cost reduction) which can eventually be duplicated by competitors. • Organisations are not infinitely flexible: they cannot be repeatedly changed for repositioning without damage to the internal structures, culture and processes upon which lasting competitive advantage depends. Arguments against competitive advantage based on positioning

Fit or stretch Aspect of strategy Environment-led ‘fit’
Resource-led ‘stretch’ Underlying basis of strategy Strategic fit between market opportunities and resources Leverage of resources to improve value for money Building blocks of strategy Products and markets Business processes Competitive advantage through … ‘Correct’ positioning Differentiation directed by market need Differentiation based on competencies suited to or creating market need How small players survive Find and defend a niche Change the ‘rules of the game’ Risk reduction through … Portfolio of products/ businesses Portfolio of competencies Corporate centre invests in … Strategies of divisions or subsidiaries Core competencies (across organisational boundaries) Table 5.1 Fit or stretch

Features of advantage-creating resources
• Valuable: capable of creating customer (and shareholder) value, by allowing the firm to implement strategies that will enable it to meet customers’ needs more efficiently and effectively. • Rare and in high demand (eg retail locations, natural resource deposits or scarce skills) • Inimitable or difficult for competitors to imitate (eg protected by patents, trademarks or operating licences, or intangible resources such as relationships, goodwill, skills and knowledge, and brand identity) • Difficult to substitute Features of advantage-creating resources

Sources of distinctive, value-adding capabilities
• The organisation’s structure and its internal, external and network relationships (or ‘competitive architecture’) • Reputation: the esteem in which the organisation is held by the market (creating brand loyalty) and internal/connected stakeholders (creating commitment and co-operation) • Creativity and the ability to innovate (develop new offerings and solutions) • Ownership of strategic assets (materials, distribution channels, intellectual property rights, operating licences and so on) which create barriers to entry. Sources of distinctive, value-adding capabilities

Turning strategies into implementation plans
• Identification of general strategic objectives: specification of the general results expected from the strategy initiatives • Formulation of specific plans • Resource allocation and budgeting – indicating how the plans are to be paid for • Monitoring and control procedures Turning strategies into implementation plans

The basic strategy implementation process
Figure 5.1 The basic strategy implementation process

Aspects of strategy implementation
• Selecting a strategy that exploits the organisation’s principal resources and capabilities • Ensuring that the organisation’s resources are fully employed, which in turn will ensure that its profit potential is fully exploited • Building the organisation’s resource base. Aspects of strategy implementation

Effective use of human resources
• Sourcing decisions (ie recruitment and selection, outsourcing) • Resource development (ie appraisal and learning/training/improvement planning) • Resource utilisation (ie goal-setting and organising for productivity, flexible deployment, securing motivation and commitment) • Resource disposal (ie managing employee exit, dismissals and redundancies) Effective use of human resources

Financial ratios to evaluate performance
• Profitability ratios: the extent to which the firm is trading profitably. These ratios include: profit percentages; cost-to-sales ratios; return on capital employed (ROCE). • Investment ratios: the attractiveness of the firm to potential investors. These ratios include: dividend per share, earnings per share (EPS), or price/earnings ratio (P/E). • Liquidity ratios: the extent to which the firm has the liquid assets to meet its short-term and long-term liabilities. These ratios include: working capital ratios or gearing ratio (broadly, the proportion of debt to equity). • Efficiency ratios: the efficiency with which the firm is managing its assets (eg asset turnover). Financial ratios to evaluate performance

Information as a source of strategic capability
• Create product/service features valued by customers (eg through lowering prices, improving sales information, streamlining purchase processes, enabling the customisation of products, and improving after-sales service) • Differentiate its offerings and outperform competitors, particularly in the area of service (eg by gathering customer data and feedback, personalising contacts, targeting promotional offers, improving information quality) Information as a source of strategic capability

Information and value chain relationship
• Replacing paper-based processes with electronic processes. You should be familiar with examples from e-procurement – but think also about e-relationships (eg through ), e-commerce and e-marketing. • Extending the functions that the business can offer: eg e-auctions, electronic payment/logistics/information services, virtual communities and so on. (Think about a business like Amazon.com: it can hardly be imagined outside an ICT context.) Information and value chain relationship

Information and organisational structure/processes
• Supports new patterns of work organisation such as tele-working and networking • Changes the nature, structure and management of work groups (eg through virtual teamworking) • Enables simultaneous centralisation (managerial control and co-ordination) and decentralisation (empowerment of dispersed, networked units): even ‘virtual organisation’ • Replaces many of the decision-making, information-processing and supervisory functions of the middle line, facilitating delayering. Information and organisational structure/processes

Strategic issues raised by technology
• Its impact on competitive forces in an industry and whether an organisation wishes to be a technology/innovation leader or competitive imitator • Its potential to create core competencies: eg if innovations are patented; technologies are linked together in creative ways (such as computer-assisted design and manufacturing); or the organisation develops dynamic R & D and innovation capabilities • Whether technology is developed in-house; acquired by alliance; or acquired by takeover, merger or purchasing of rights/licences. • How work will be organised around the technology. Technological change always has implications for organisation structure and processes. Strategic issues raised by technology

The budgetary planning process
Figure 5.2 The budgetary planning process

The role of purchasing research
• Demand analysis. Standard ABC (Pareto) procedures should be operated to ensure that particular attention is paid to high-value materials. The objective is to estimate likely usage in the period ahead. • Vendor analysis. Buyers must evaluate the performance of current suppliers, as well as giving consideration to potential suppliers not currently being used. • Market analysis. Buyers must appraise general supply conditions in the market. What is the likely availability of each material, and are any shortages possible or probable? What is the prevailing price of each material, and what fluctuations (if any) are likely? The role of purchasing research

Outcomes from strategic materials planning
• Long-term agreements with one or more suppliers to provide specified materials for specified future periods • A decision to phase out a material where long-term supply is regarded as doubtful. In this case value analysis should be used to identify a suitable alternative material • A decision to cease buying the material and instead to make it in-house Outcomes from strategic materials planning

Types of control processes
• Input-focused (aiming to control the resources input to, or consumed in, a given strategy) or output-focused (aiming to control the results and outcomes of a given strategy) • Direct (using close supervision, monitoring and behaviour-shaping mechanisms) or indirect (using ecological controls to create conditions within which desired behaviours/results can be achieved) Types of control processes

Types of control processes
Input-focused Output-focused Direct Direct supervision Planning systems Performance targets Indirect Social/cultural control Self-control Internal market mechanisms Figure 5.3 Types of control processes

Control processes • Direct supervision
• Planning systems (eg budgetary control, standardisation of work processes etc) • Performance targets focus on outputs such as revenue, profit, quality standards and other key performance indicators (KPIs). • Social and cultural control involves the way in which norms and expectations of behaviour become standardised in a group or organisation, and the way in which processes of socialisation and social influence encourage individuals to conform to those norms and expectations. • Self control depends on personal motivation to influence the quality of employee input and conduct without direct intervention. • Internal market mechanisms involve a formalised system of ‘contracting’ for resources between units in an organisation as internal suppliers/customers. Control processes

Exercise If an organisation is following a cost leadership strategy, what will their performance measurement focus on? You should be able to see that cost leaders will tend to focus on measuring their resource utilisation and controlling costs along the value chain. Exercise

Examples of performance criteria
Area to be measured Types of performance criteria Financial performance Profitability and liquidity analysis Budget variance analysis Capital structure Market ratios Level of bad debts Competitiveness Sales growth by product or service Measures of customer base Relative market share and position Resource utilisation Efficiency measurements of resources planned against consumed Measurements of resources available against those used Productivity measurements Quality of service Quality measures in every unit Evaluate suppliers on the basis of quality Number of customer complaints received Number of new accounts lost or gained Table 5.1 Examples of performance criteria

Examples of performance criteria (continued)
Area to be measured Types of performance criteria Customer satisfaction Speed of response to customer needs Informal listening by calling a certain number of customers each week Number of customer visits to the factory or workplace Number of factory and non-factory manager visits to customers Quality of working life Days absence Labour turnover Overtime Measures of job satisfaction Innovation Proportion of new products and services to old ones New product or service sales levels Table 5.1 Examples of performance criteria (continued)

The balanced scorecard
Figure 5.3 The balanced scorecard

Drawbacks to the balanced scorecard
• Developing and implementing the scorecard is a complex, time-consuming and expensive exercise. • Implementing the scorecard will often imply radical, transformational change of management and organisational culture – for which resources, readiness and consensus/support may not be available. • Care must be taken in cascading the business scorecard to individual functions (including procurement), in order to ensure that scorecards only contain performance measures that can be directly influenced by the function. • Commitment from the top down must be genuine and consistent, to avoid ‘mixed messages’. • All these factors create a temptation, once metrics have been developed, to see them as a static, long-term checklist – but this will only create rigidity, which is dysfunctional in dynamic environments. Drawbacks to the balanced scorecard

Three elements of strategic intent (Hamel and Prahalad)
• A sense of direction: a unifying and personalising view of the future; a point of view about the long-term market or competitive position that a firm hopes to build over the coming decade • A sense of discovery: a differentiating, or competitively unique, point of view about the future; the promise of exploring new competitive territory • A sense of destiny: an emotionally-laden goal which employees perceive as inherently valuable. Three elements of strategic intent (Hamel and Prahalad)

A hierarchy of objectives
Figure 6.1 A hierarchy of objectives

Contents of a mission statement
• The organisation’s raison d’être (corporate purpose) • The business domain in which the organisation will operate (corporate scope) • The stakeholder groups the organisation will serve. Contents of a mission statement

SMARTER objectives Specific Stated in clear, detailed terms: precisely what the desired outcomes or deliverables are Measurable Susceptible to monitoring, review and measurement (ideally in quantitative or numerical terms) so that you know when or how far progress/success has been attained Attainable Target outcomes and standards, and the contexts and timetables within which they must be attained, must be realistically achievable, using the capacities, capabilities, readiness and resources available Relevant The objectives must be relevant to the strategic objectives of the unit and the business as a whole: they must lead somewhere meaningful Time-bounded Target timescales and deadlines for completion (or review) must be included in the objective: it is not open ended Evaluated The objective must have been assessed as worth pursuing, given the investment in time or effort it will require: this may involve some form of cost-benefit analysis Responsible The objective must take into account potential impacts on key stakeholders, in the light of the unit’s (and organisation’s) ethical responsibilities towards them. Table 6.1 SMARTER objectives

Levels of strategy • Corporate strategies apply to the whole organisation. They focus on the broad, general direction of the organisation, and how value will be added, over the long term (say, 3–5 years). • Tactical or business level strategies apply to particular divisions, functions or strategic business units. They focus on the tasks and objectives required to pursue the chosen corporate strategies and compete successfully in particular markets, over the medium term (say, 1–2 years). • Operational strategies and plans apply to functions and departments. They focus on the specific detail of tasks, targets, resources and actions needed to deliver the corporate and business level strategies, over the short term (up to a year, say). Levels of strategy

Advantages of mapping unit plans
• ‘Apart from giving a cohesive view, it helps prevent duplication of effort and resources, encourages everyone to help each other, and gives each team a view and feeling of corporate impact – tying everyone’s role to the bigger picture. This is hugely motivating for people and teams at every level.’ • ‘Organisations that have mastered this approach achieve stunning improvements in driving their business forward. In addition to improved planning and understanding by all involved in the vision and journey, such contentious issues as ownership, prioritisation and delivery can be more fully explored and explained.’ • ‘Adopting this method also leads to improved measurement of your value. It will only be possible to list each and every activity as it is matched to a business justification, rather than being done for its own sake.’ Advantages of mapping unit plans

Communicating the vision
• Vision can be expressed overtly and specifically in mission statements and value statements; annual reports and shareholder meetings; and other stakeholder communications (customer charters, website ‘About Us’ statements, conference speeches, employee handbooks and so on). • It can be expressed through (or implied by) the organisation’s mottos, slogans and stories about itself; and its corporate image, identity and branding. • Commitment to the vision, and the behaviours it implies, must be modelled by management from the top down. Where possible, key influencers/leaders in the organisation (not necessarily in managerial positions) can be co-opted to this process, as part of what Johnson and Scholes call the guiding coalition. Communicating the vision

Communication channels and media
Employee communication Employee handbooks/manuals Intranet Notice boards Memos, s, letters etc Meetings and presentations Consultation with employee representatives The strategic plan, policies and procedures Stakeholder communication Media/press releases and briefings Corporate brochure, annual report Shareholder meetings Advertising, promotion and PR activity Website content Letters to shareholders Table 6.2 Communication channels and media

Protecting the confidentiality and integrity of information
• Who has the authority to issue certain types of information, or to act as a contact point with particular audience groups? • What checking and authorisation is required before release of particular types of information? • Who will act as a point of contact for queries on information released? • What legal disclaimers may be required to protect the organisation from liability for any consequences arising from unauthorised communications? (You often see such disclaimers at the end of corporate messages, for example.) Protecting the confidentiality and integrity of information

Management by objectives
• Develop a coherent strategic plan, with clear organisational goals and objectives. • Collaboratively define each individual’s major areas of responsibility and the purpose of their role within the corporate plan. • Jointly define and agree the key tasks which are directly related to the achievement of the objectives, and in which any performance shortfall would negatively impact on success. • Jointly define and agree, for each key task, key results and methods of monitoring and measuring performance in these areas. • Agree individual (or unit) performance improvement plans for a defined planning period: selecting specific improvement objectives for each key task and formulating action plans to achieve those objectives. Performance can then be monitored, reviewed and controlled as part of a cycle of planning and control. Management by objectives

Components of a reward system
• Direct or base pay, in the form of salaries and wages, which constitute a standard rate for the job, paid at standard intervals and therefore often reflecting time spent on the job (rather than particular outputs) • Performance or variable pay: a method or component of payment directly linked to work-related behaviour, such as performance or attainments: merit pay, payment by results (linked to quantity of output) or performance-related pay (linked to defined performance criteria) or organisation performance pay (such as profit-sharing or value-added schemes). • Indirect pay or ‘benefits’: non-cash items or services, both statutory entitlements (such as sick pay or parental leave) and ‘fringe’ benefits such as company cars, medical insurance, allowances, canteen facilities and so on. Components of a reward system

The 7S framework Figure 6.2 The7S framework

The McKinsey 7S framework
• Strategy is a chosen course of action leading to the allocation of the firm’s resources over time in order to reach defined goals • Structure refers to the formal organisation structure • Systems refer to procedures, tools and processes that standardise work and information flow in the organisation (including IT systems, but also business processes, policies and rules and so on) • Staff are the human resources of the organisation: their abilities and motivation, team dynamics, flexibility, turnover rates and so on • Style refers to corporate image, organisation culture and management style: patterns and norms of behaviour • Skills refer to the distinctive capabilities of key personnel or of the organisation as a whole (eg in knowledge transfer, innovation and so on) • Shared values (like the ‘paradigm’ in the cultural web) are the underlying guiding beliefs and assumptions that shape the way the organisation sees itself and its purpose. The McKinsey 7S framework

Benefits of incremental change
• Building on existing skills, routines and beliefs in the organisation: change is likely to be more efficient, less traumatic and more likely to win acceptance. • Allowing flexible response to environmental changes and feedback, allowing constant re-alignment of strategy. Resources are not wasted on long-range plans which are undermined by uncertainty. (Near goal-posts are less likely to move.) • Allowing a continuous sense of progress, even through uncertainty and difficulty. Small changes may be easy to achieve – and may trigger bigger changes (or help them to emerge): ‘Big strategies can grow from little ideas’ (Mintzberg). • Empowering employees. ‘Because big strategies can grow from little ideas… almost anyone in an organisation can prove to be a strategist’ (Mintzberg). Benefits of incremental change Benefits of incremental change

The risk of strategic drift
Figure 7.1 The risk of strategic drift Adapted from: Johnson and Scholes, Exploring Corporate Strategy

Managed and imposed change
• Managed: proactively formulated, planned, implemented and controlled by strategists or change agents, in pursuit of strategic objectives • Imposed: choice is constrained by environmental pressures and imperatives, to which the organisation must simply respond. Managed and imposed change

Contextual features which may influence strategic change programmes
Figure 7.2 Contextual features which may influence strategic change programmes

Forcefield analysis (Kurt Lewin)
• Driving forces (for change) encourage people to give up old ways of doing things and to try new behaviours. Examples include: the frustration or unpleasantness caused by customer complaints or inefficient processes; new technology becoming available; or influence/support from a powerful individual or group. • Restraining forces (against change) support the status quo. Examples include: shortage of resources; opposition from influencers or cultural values; already-installed technology and established systems; managerial preoccupation with day-to-day matters and so on. Forcefield analysis (Kurt Lewin)

Force field analysis Figure 7.4 Force field analysis

Conditions favourable to change
• Financial viability and stability (although change may also be more readily complied with if it is perceived to be a necessity for survival.) • Adaptable (task- or output-focused, flexible, horizontal, information-sharing) organisation structures • Vision, leadership and support from senior management • Supporting HR systems and procedures: selection, training, appraisal and reward systems which reinforce flexibility and willingness to change as a cultural value • Supportive culture and attitudes: trust between management and staff; receptivity to new ideas, learning and information-sharing; tolerance of mistakes and shortfalls in the process of learning; and flexibility. These attributes are broadly characteristic of a learning organisation. Conditions favourable to change

Drivers of change • Internal triggers: factors that cause organisational disequilibrium. In order for equilibrium to be re-established, some element of the system will have to change. • External forces for change are factors in the the organisation’s competitive (‘micro’) and wider (‘macro’) environments. These may include: economic opportunities and threats; changes in the characteristics of the market and labour pool; increasing scarcity of natural resources and ecological concerns; technological developments; the opening of international or global markets; and amendments to the law and regulation of business activities. Drivers of change

Barriers to organisational change
• Organisational focus. Organisations which focus on internal processes, efficiency and stability are hampered in their ability to see, justify and inspire change. • Organisational structure. Bureaucracy illustrates the rigidity that results where specialised departments are seen as ‘silos’ disconnected from each other, where the structure is formalised and hierarchical, and where behaviour is dictated by conformity to rules and procedures. • Attitudes to security and risk. Organisations developed in relatively stable environments may not be accustomed to chaotic change. • Resources. Change requires investment of finance, managerial time and the opportunity costs of people/systems underperforming (or undergoing ‘teething troubles’) during the process. Barriers to organisational change

Potential pitfalls of change programmes
Ritualisation of change Continual incremental change programmes come to be seen as empty rituals, rather than meaningful changes Hijacked processes Leaders or units hijack change efforts in order to serve their own agendas (eg downsizing, power enhancement) Erosion The programmes is overtaken by other events and priorities emerging in the organisation: momentum is lost or diverted Reinvention The attempted change is reinterpreted through the lens of the old culture, which simply reinforces the status quo (the organisation convinces itself it’s ‘already doing that’) Ivory tower change Change driven by senior or external agents is perceived to be out of touch with the realities of the market, losing credibility Inattention to symbols Change agents fail to link the ‘big messages’ about change to organisational values and symbols. Change may be seen as irrelevant – or the wrong message (eg blame) may be given. Uncontrolled/unco-ordinated effort New practices are inconsistent with the thrust of change as understood by people in the organisation, creating lack of coherence Behavioural compliance People comply with changes, without commitment: the programme may look successful, but the changes may not be effective or lasting Table 7.1 Potential pitfalls of change programmes

Why major change programmes fail (Kotter)
• Allowing too much complexity (not breaking change down into manageable chunks) • Failing to build a coalition of stakeholder support • Lack of a clear vision for the purpose and direction of change • Failing to communicate the vision clearly • Allowing resistance and barriers to gather • Lack of short-term wins in the change plan (to create momentum and confidence) • Stopping short (failing to consolidate changes or push for ongoing improvement) • Failing to embed changes in the corporate culture Why major change programmes fail (Kotter)

The planned change (unfreeze-movement-refreeze) model
Figure 7.4 The planned change (unfreeze-movement-refreeze) model

Model for transformational change (Kotter)
Step 1 Establish a sense of urgency and prioritise change objectives based on market and organisational imperatives Step 2 Form a guiding coalition of influential stakeholders Step 3 Create a compelling vision for change Step 4 Communicate the vision as widely and clearly as possible Step 5 Empower people to act on the vision by removing cultural, technological and structural obstacles Step 6 Plan to create short-term wins (visible performance improvements, recognition/reward for participants) which foster momentum and buy-in Step 7 Consolidate improvements to produce further change, keeping momentum going (eg next-step changes, developing staff, setting improvement goals) Step 8 Institutionalise new approaches: embed them in culture, procedures and HR systems. Model for transformational change (Kotter)

Change management styles
• Education and communication: based on promoting and justifying the compelling reasons for the change and the benefits (to the stakeholders themselves, where possible) expected to accrue from the change. • Collaboration. Stakeholders are considered more likely to support changes if they are encouraged to ‘own’ them through having participated in the decision-making and implementation process. • Intervention. A change agent drives, co-ordinates and controls the overall change process, while delegating elements of the process to project or task force teams (eg ideas generation, research or identification of critical success factors). • Direction. The change agent or senior leader uses personal managerial authority to establish a clear strategy and map of how change will occur: in other words, top-down change management. • Coercion. The change agent or senior leader imposes the change, more or less as a fait accompli, and threatens some form of penalty or sanction for failure to comply. Change management styles

The role of symbolic and political processes
• Routines (‘the ways we do things around here’). Well-established routines or habits can be blockages, because they often persist in the face of strategy change. Changing behaviour/routines may bring about a shift in thinking/values more effectively than trying to change thinking/values. • Symbols (objects, events, acts or people which have special meaning within a culture). The manipulation of symbols is an important lever, because altering symbols can help reshape beliefs and expectations, aiding in the ‘unfreezing’ of behaviour. • Political processes (or power structures). Change agents may need to utilise political mechanisms to build a power base, overcome resistance, and motivate or coerce others into compliance. The role of symbolic and political processes

Two styles of leadership (Burns)
• Transactional leaders (sometimes also called ‘instrumental’ leaders) see the relationship with their followers in terms of exchange: they give followers the rewards they want in return for service, loyalty and compliance. • Transformational leaders (also called ‘charismatic’ or ‘visionary’ leaders) see their role as stimulating interest, and inspiring higher achievement and commitment to organisational goals. Two styles of leadership (Burns)

What leaders focus on • Their strategic role (the strategy approach).
• Developing people (the human assets approach) who can add value, take responsibility for managing the corporate strategy ‘locally’, and interface with the market and other stakeholders. • Developing ‘core competencies’ in the organisation (the expertise approach). • Controlling organisational performance, ensuring efficiency of processes and predictability of outputs (the control approach). • Their role as change champions or drivers (the change approach), taking personal responsibility for initiating and championing continual cultural and strategic change: the role of other managers is to act as supportive change agents. What leaders focus on

Advantages of external change agents
• They are more likely to be objective and dispassionate, without the ‘cultural baggage’ or personal/factional interests that might bias insiders. • They may better represent the interests of other stakeholders in the change process and outcomes. (Customers, suppliers and others may themselves act as external change agents, in the sense that they may have influence in the process.) • They are better able to ask questions and perform analyses which challenge the status quo and its constraints, and broaden the range of options. • They may have technical expertise in carrying out research and change interventions which in-house managers lack. • They are dedicated to the change programme, where internal managers’ focus is likely to be dissipated by their workload and other competing priorities. • They represent a significant, focused investment in change, and may help to signal to stakeholders that the organisation is taking the change process seriously. Advantages of external change agents

Corporate, business and functional strategy
• Corporate strategy is concerned with what business or businesses the organisation is involved in or should be involved in, and the extent to which these businesses should be integrated with each other. • Business strategy determines how each SBU of an organisation (say, a division or subsidiary) should attempt to achieve its objectives, in the context of the overal corporate strategy. • Functional strategy determines how individual functions, such as purchasing, can best support the corporate and business strategies. Corporate, business and functional strategy

Links between corporate and purchasing objectives
Corporate objectives Purchasing objectives Maintain/increase market share Provide supplies to match customer needs; assure quality; reduce delivery lead time; reduce cost Improve profits, cash flow, and return on capital Reduce stocks; improve reliability; more frequent deliveries Shorten time to market Early supplier involvement; simultaneous engineering Eliminate non-core activities Develop effective make-or-buy policy; integrate purchasing and capacity planning Introduce continuous improvement Reduce supplier base; partnership and co-makership approaches; reduce product complexity; increase accuracy and reliability Become world class supplier Work with suppliers to establish world class standards; improve flexibility of response to market conditions; liaison with technological sources Table 8.1 Links between corporate and purchasing objectives

Strategic themes for purchasing and supply
• The need to respond to changing environmental conditions, such as globalisation, increasing competition and shortening product lifecycles, public sector restructuring and efficiency targets, ‘green’ concerns and technology developments • Movement towards a proactive role which emphasises the strategic importance of purchasing/supply performance for organisations as a whole. • Strategies for supplier relationships. • Sourcing strategies, ‘designed to achieve control of performance with regard to basic requirements of quality, delivery, cost and service’. • Organisation of the supply function. • Application of information and communications technology (ICT) to purchasing and supply management activities. Strategic themes for purchasing and supply

Integrating processes
• A formal long-term procurement plan may be developed as part of the corporate planning process (or as a component of a business strategy) • Purchasing managers may be involved in the corporate planning process • The main board of directors may act as an integrating mechanism, providing guidance on corporate strategy and direction • Interpersonal relations between purchasing managers and a supportive chief executive may informally facilitate integration, as information is exchanged about objectives and environmental threats and opportunities. Integrating processes

Other integrating factors in the organisational context
• Recent decades have seen the integration of materials-handling functions across an increasingly wide span of the value chain. • The cost savings available from consolidating or aggregating the purchasing requirements of SBUs through a centralised procurement function places purchasing strategy a step closer to overall corporate strategy. • Strategic purchasing requirements are the basis of procurement strategies, using tools such as the Kraljic matrix. • Purchasing and supply management has increasingly embraced areas of strategic concern at the corporate level. Other integrating factors in the organisational context

Definitions of supply chain management
• ‘The integration and management of supply chain organisations and activities through co-operative organisational relationships, effective business processes, and high levels of information sharing to create high-performing value systems that provide member organisations a sustainable competitive advantage’ (Handfield & Nichols) • ‘The management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole’ (Christopher) Definitions of supply chain management

Strategic implications of SCM
• The role and positioning (or repositioning) of an organisation within the total supply/value chain (eg through forward or backward integration) • The configuration of the chain or network, and the competitive or collaborative nature of the relationships within it • The selection of strategic supply chain partners. • Internal and trans-organisational processes for materials and information flow: process structure, production and distribution flows, planning and control systems, information systems and so on. • Collaborative and integrative arrangements (eg joint planning and control systems, cross-training of staff, relationship-specific technologies), where appropriate. Strategic implications of SCM

Management components
Components of SCM Business processes Management components Network structure What processes should be linked with each key supply chain member? Who are the key supply chain members? What level of integration and management should be applied for each link? Figure 8.1 Components of SCM

The goals and contribution of SCM
• Reducing non-value-adding (waste) activities throughout the supply chain • Reducing cycle times: supporting innovation, faster and more precise delivery times • Improving service quality and responsiveness to customer requirements – with a knock-on effect on customer loyalty and sales revenue • Enhancing quality • Reducing total costs • Optimising the balance of service levels and costs by measuring them across the supply chain, avoiding sub-optimal conflicts and trade-offs • Improving supply chain communication The goals and contribution of SCM

Contribution of purchasing strategy to corporate objectives
The functional strategies of purchasing and supply can contribute to a number of key corporate objectives. • Quality • Cost reduction and control • Innovation • Delivery Contribution of purchasing strategy to corporate objectives

Influences on make/do or buy decisions
• The effects on total costs of production • Profitability, risk and flexibility • The availability of in-house competencies and capacity; how readily they can be acquired or expanded; and whether they will be consistently available in future. • The availability of suitable external suppliers. A lack of suitable suppliers would push the firm towards the ‘make/do’ end of the spectrum. • The need to retain knowledge and skill in-house for future applications. • HR impacts. Will a decision to buy out lead to redundancies? Will a decision to make/do in-house lead to a need for training and/or recruitment? Influences on make/do or buy decisions

Advantages and disadvantages of strategic outsourcing
• Support for downsizing: reduction in staffing/space/facilities costs • Allows focused investment of managerial, staff and other resources on core/distinctive competencies • Leverages the specialist expertise, technologies, resources and economies of scale of suppliers, with potential to add more value at less cost than the organisation could achieve itself (for non-core activities) • Enables synergy through collaborative supply relationships Disadvantages • Costs of services and relationship/ contract management • Loss of control and difficulties ensuring service standards • Potential reputational damage if service or ethical issues arise • Loss of in-house knowledge and competencies (for future needs) • Loss of control over confidential information and intellectual property • Ethical and employee relations issues of downsizing Table 8.2 Advantages and disadvantages of strategic outsourcing

Competencies and contractor competence
Figure 8.2 Competencies and contractor competence

Threshold competencies and core competencies
• Threshold competencies are the basic capabilities necessary to support a particular strategy or to enable the organisation to compete in a given market. • Core competencies are distinctive value-creating skills, capabilities and resources which (Hamel and Prahalad) add value in the eyes of the customer; are scarce and difficult for competitors to imitate; and are flexible for future needs. Threshold competencies and core competencies

Influences on the design of the purchasing function
• The size, nature and role of the puchasing and supply task in the organisation. • Alignment. • The structure and environment within which purchasing operates. • The strategic objectives of the purchasing function. Influence on the design of the purchasing function

Structural issues for purchasing and supply
• Increasing focus on business processes and supply chains, leading to the increasing integration of supply activities and the creation of ‘horizontal’ (cross-functional and inter-organisational) structures • The existence of diversified and/or geographically dispersed multi-SBU organisations, raising the decision of whether to centralise or decentralise. Structural issues for purchasing and supply

Integration of supply chain activities
Figure 9.1 Integration of supply chain activities Adapted from The Management of Business Logistics, by Coyle, Bardi and Langley

Advantages of centralised purchasing
• Specialisation of purchasing staff • Consolidation of requirement • Greater coordination of purchasing activities • Better control of purchasing activity • Avoidance of competition and conflict between purchasing divisions, due to scarcity of materials, disparities of purchasing expenditure or price anomalies • Skills/contacts/resources for purchasing research, which may not be available at divisional level Advantages of centralised purchasing

Advantages of decentralised purchasing
• Better communication and coordination between purchasing and operating departments • Customer focus • Quicker response to operational/user needs and environmental changes/problems by local buyers who are close to the scene of operations • Knowledge of, and relationships with, locally based suppliers • Smaller purchase quantities • Accountability • Freeing central purchasing staff to focus on higher-level, value-adding tasks Advantages of decentralised purchasing

Duties of local and central purchasing functions
Local purchasing functions Centralised purchasing functions Small order items Determination of major purchasing policies Items used only by the local division Preparation of standard specifications Emergency purchases (to avoid disruption to production) Negotiation of bulk contracts for a number of divisions Items sourced from local suppliers Stationery and office equipment Local purchasing undertaken for social ‘community’ reasons Purchasing research Staff training and development Purchase of capital assets Table 9.1 Duties of local and central purchasing functions

A spectrum of centralisation
• Centralised procurement: procurement strategy, policy, systems and standards are controlled centrally and all procurement activities are carried out centrally. • Co-ordinated devolved procurement: procurement strategy, policy, systems and standards are controlled centrally; procurement of items common to more than one SBU are usually centralised; but other operational procurement activities are carried out within the SBUs. • Consultative centralised procurement: procurement activities – both strategic and operational – are carried out within SBUs, which take guidance and advice from a centralised procurement function. A spectrum of centralisation

Other hybrid structures for purchasing
• The CLAN (centre-led action network) approach. Procurement staff are located in different business units. They report primarily to local mangement, with secondary responsibility to a head-office procurement centre. • The SCAN (strategically-controlled action network) approach. Similar to a CLAN, except that local procurement staff (business purchasing teams) report primarily to the central procurement unit. • The lead buyer approach. Defined procurement responsibilies are delegated to members of user departments, as ‘lead buyers’ for a particular category of purchases. • A business partnering approach. A member of the purchasing team works within a user department where there is large or complex external spend. He or she represents the purchasing function, liaises with the user function, and identifies situations where purchasing can add value. Other hybrid structures for purchasing

Predictions for purchasing and supply management
• The strategic importance of P&SM will increase, and be increasingly integrated with business strategy. • The strategic ‘reach’ of P&SM will increase. • P&SM will become the ‘management of external operations’. • Strategic alliances with suppliers will increase. • P&SM will play a key role in strategic cost management in firms. • ‘Verticalisation’ of supply chains will increase. • Flattening of P&SM organisations will continue. • Management of the ‘white space’ (the space between managerial positions and layers) will become increasingly important for P&SM executives. • P&SM will be increasingly influenced by ‘learning organisation’ principles. • P&SM performance measures will be aligned with general business measures. • P&SM will emerge as a core competence of firms. Predictions for purchasing and supply management

Historical trends in purchasing
• Development towards total strategic integration of purchasing with the major lines of business • Development towards co-ordinated or ‘centre led’ purchasing • Development from functional to cross-functional focus (with increasing organisation of purchasing processes around multi-disciplinary, team-based structures) • Development of supplier relationships from ‘arm’s length’ relationships towards more collaborative partnership relations • Development of supplier management towards supply chain management Historical trends in purchasing

Reasons for cross-functional teamworking
• The increasing involvement of purchasing staff in strategic procurement decisions • The increasing adoption of a supply chain philosophy, creating the need to deal with work flow in a more integrated way • Its ability to make best use of developments in ICT • The adoption of advanced world class systems (such as MRP and TQM) which require co-ordinated cross-functional implementation • The increasing complexity and dynamism of global markets and technologies, creating the need for a range of expert input and support • The need to leverage human resource capability: teams outperform individuals for certain tasks. Reasons for cross-functional teamworking

Management challenges of cross-functional teamworking
• While representing different viewpoints and interests can enhance decisions (and their acceptability), it also adds potential for time-consuming complexity, conflict and consensus-seeking. • Horizontal structures may lack clear authority structures: members may need to exert informal influence through persuasion, politics, negotiation or personal leadership in order to have their functional perspective heard. • All teams take time to develop before they perform effectively: to overcome conflict, build trust, allocate roles and determine a shared working style. • There may be difficulties of dual authority structures and conflicting demands, if cross-fuctional team members also report to their individual departments. • There may be practical difficulties of organising meetings and information flows, given different functional work patterns, locations and so on. Management challenges of cross-functional teamworking

Key elements in network theory (Harris and Botten)
• Interaction processes: mutual exchanges, social processes, and adaptation. • Bonds or linkages between members (technical, social, administrative or legal), the strength or looseness of which determines the stability of network relations. • Power structures and influencing processes, through which divergent interests are represented, and members’ role and position in the network are determined. • Access to, and development of, competitive resources and competencies through network interactions. Key elements in network theory (Harris and Botten)

Drivers of supply chain thinking
• Cost pressures. Stand-alone purchasing disciplines have not been sufficient to eliminate waste, since wastes occur across the supply chain. • Reduced lead times. Customers have been educated to expect faster delivery of existing products, and reduced time to market for new products – and this depends on supply chain processes. • Increased demand for quality. Quality issues arise not only in manufacturing processes but upstream (in supply) and downstream (in customer service). Drivers of supply chain thinking

Benefits of developing supplier relations
• The costs of appraising, developing and contracting with new vendors is avoided. • Quality/delivery problems can be progressively ironed out, and systems integrated (and often automated) for greater efficiency and reduced transaction costs. • Supplier input and competencies may be better exploited for new product development and process improvements. • Supplier motivation will drive high (and continually improving) performance – and secure preferential treatment in the event of materials shortages, crisis demand and so on. • Long-term relations lower the supplier’s costs, as a result of the learning effect, giving potential for further price benefits to the buyer. • Most opportunities for reducing costs and enhancing value in the supply chain occur at the interface between supply chain partners. • Supply chains compete (not companies) and supply chain competitiveness requires a collective determination of strategy by supply chain partners. Benefits of developing supplier relations

Drawbacks of closer supplier relations
• It can lead to dependence or complacency, with the potential to erode price and performance gains. • Reliance on a single supplier, or small group of suppliers, may make the buyer vulnerable to supply risk if the supplier fails or suffers disruption. • Close association with a supplier may result in reputational damage. • Investment in integration and relationship management makes switching costs high in such circumstances, or if more suitable (innovative, competitive) alternative suppliers emerge in the market. • The exchange of information necessary for collaboration may expose either party to loss of control over confidential data, intellectual property, distinctive competencies and so on. • The investment in collaboration may simply not be warranted by the priority or frequency of purchases: the buyer’s objectives may be better served by using competitive leverage to secure best price or terms, for low-value, non-critical, low-risk items. Drawbacks of closer supplier relations

Supplier relationship strategies
• Supplier relationship management (SRM): establishing sustainable improvement of the total supply chain by creating, managing and supporting relationships with key vendors. • Customer relationship management (CRM): developing, managing and controlling customer relations. • Vendor managed inventory (VMI): an alternative to traditional buyer/supplier relationships, which gives the vendor access to information and delegates responsibility to the vendor to manage and replenish the buyer’s inventory, within policy guidelines. • Collaborative planning, forecasting and replenishment (CPFR): ‘a collection of new business practices that leverage the internet and electronic data interchange in order to radically reduce inventories and costs while improving customer service’. • Partnership sourcing: ‘a commitment by customers/suppliers, regardless of size, to a long-term relationship based on clear mutually agreed objectives to strive for world class capability and effectiveness’ (CBI and DTI). • Supplier development: supporting or assisting suppliers to be able to meet the buyer’s requirements better. Supplier relationship strategies

Cost reduction strategy
• Restructuring: delayering, downsizing or horizontalising purchasing structures. • Centralising purchasing (to take advantage of aggregated orders and bargaining leverage) or decentralising purchasing (to reduce transport and storage costs) • Process engineering or re-engineering, to streamline and integrate processes, eliminating unnecessary activities and process inefficiencies • Outsourcing or off-shoring non-core competencies. • Developing supplier relationships for cost and price advantages. • Applying ICT and automation technologies. • Developing ‘lean’ supply and production. Cost reduction strategy

Value for money techniques
• The use of value analysis in order to eliminate non-essential features • Consolidation of demand • Centralised negotiation of contracts and prices • Proactive sourcing: challenging preferred supplier complacency to ensure competitive value • Buying complete subassemblies rather than components • Encouraging standardisation to reduce costs of spares/maintenance • Adopting whole-life costing methodologies • Eliminating or reducing inventory • Using e-procurement for process efficiencies • Global purchasing Value for money techniques

Cost of quality • The costs of ensuring and assuring quality include prevention costs and appraisal costs • The loss incurred when quality is not achieved includes internal failure costs and external failure costs Cost of quality

Quality control and quality assurance
• Quality control is based on the concept of defect detection. It embraces a range of techniques and activities used to: monitor a batch of items at each step of the supply and production process; identify items that are defective or do not meet specification; scrap or rework items that do not pass inspection; and pass acceptable items on to the next stage of the process. • Quality assurance is a more integrated approach, based on defect prevention. It includes the full range of systematic activities used within a quality system to ‘assure’ or give the organisation adequate confidence that items and processes will fulfil quality requirements. Quality control and quality assurance

Key principles of TQM • ‘Get it right first time’. The costs of prevention are less than the costs of correction: zero defects must be the aim. • Quality chains, which extend from suppliers through to consumers. • Win-win relationships. Supply chain relationships are based on interdependence and mutual benefit. • Process alignment: business processes should be deliberately designed and modified so that every activity is geared to the same end: satisfying customers. • Total involvement. Quality needs to be a way of life and a key cultural value within the organisation. • Quality management. • Continuous improvement. • Sharing best practice. Key principles of TQM

Six Sigma: DMAIC • Identify and prioritise characteristics that are critical to quality (CTQ) for customers • Define detailed performance standards and tolerances for key variables • Statistically measure true process capability, using metrics such as number of defects per number of outputs and probabilities of process success or failure • Control defects and variations in the vital few factors (aiming for zero defects) • Involve management and staff in the process, to create a quality-focused learning culture. Six Sigma: DMAIC

Upstream and downstream activities in a supply chain
Figure 10.1 Upstream and downstream activities in a supply chain

Repositioning an organisation
• Organic or internal development and diversification into activities one step up or down the chain • Acquisition of, or merger with, organisations one step up or down the chain • Strategic collaboration and integration with organisations one step up or down the chain Repositioning an organisation

Ideal organisational positioning
• Acquire, develop and leverage value-adding, distinctive and difficult-to-imitate resources and competencies • Dominate the supply chain in order to deter competitors and appropriate a larger share of value gains or profits • Occupy the stages/activities of the supply chain with the best potential profit margins • Gain synergies which will lead to organisational learning and the potential for new strategic direction in the future Ideal organisational positioning

Linear thinking model First tier suppliers The firm
First tier customers Figure 10.2 Linear thinking model

Definitions of ‘supply chain’
• ‘The supply chain encompasses all organisations and activities associated with the flow and transformation of goods from the raw materials stage, through to the end user, as well as the associated information flows. Material and information flows both up and down the supply chain.’ (Handfield and Nichols) • ‘The supply chain includes all those involved in organising and converting materials through the input stages (raw materials), conversion phase (work in progress) and outputs (finished products). The cycle is often repeated several times in the journey from the individual producer to the ultimate customer, as one organisation’s finished good is another’s input.’ (Baily et al) • A supply chain is ‘that network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer.’ (Christopher) Definitions of ‘supply chain’

Principal flows in a simple supply chain
Information (orders, and schedules) Supplier’s suppliers Supplier Firm Customer Customer’s customers Goods & services Payment Figure 11.1 Principal flows in a simple supply chain

The metaphor of a ‘chain’
• It emphasises ‘serial co-operation’ (Jespersen and Skjøtt-Larsen): each player contributing value via a process or sequence of activities. • It emphasises mutual dependency and collaboration, because each link in the chain is essential to the completeness and strength of the whole: weak links and breakages may disrupt the flow of supply. • It emphasises ‘linkages’ or interfaces between members. • It is continuous (any given link in the chain can be regarded as the ‘focal’ firm for the purposes of analysis, with activities upstream and downstream of it) and non-directional (allowing conceptualisation of flows both ‘forwards’ and ‘backwards’ along the chain). The metaphor of a ‘chain’

A retail supply network
Figure 11.2 A retail supply network

Contribution of the network metaphor
• It is a more strategic model for mapping and analysing supply chain relationships, and therefore for seeking to exploit synergies and improve performance in innovative, systemic and responsive ways. • It raises the possibility of a wider range of collaborations which may offer mutual advantages – and perhaps alter the balance of power in supply relationships. • It represents both ‘nodes’ and the links between them. • It recognises the potential of ‘extended enterprises’ and virtual organisations: extending the strategic capability of the firm through the collective resources and performance of network contributors. • It recognises that extended enterprises may overlap, creating complex patterns of relationship, competition and potential risk. Contribution of the network metaphor

Challenges in developing supply networks
• The need to view strategy development as a collective process, seeking competitive advantage for the whole marketing network (focused on consumer value and satisfaction), rather than individual players. • The need to develop win-win thinking: being prepared to let go of a competitive, distributive or zero-sum mindset in buyer-supplier relations, in order to explore options for mutual advantage. • The need for open communication: sharing information in order to facilitate collaborative efficiency, co-ordination, flexibility and innovation. This may involve a degree of transparency that requires mutual trust. Challenges in developing supply networks

Collaborative processes in SCM
• Product/process information exchange (eg joint demand forecasting or open-book costing) • Operational linkages or ‘technical bonds’ (eg e-procurement links and just in time arrangements) • Co-operative definition of norms and expectations (eg through trust-building and collaborative strategic planning exercises); and • Relationship-specific adaptations (eg joint projects and investments). Collaborative processes in SCM

Collaborative relationships
• ‘Adversarial-collaborative’ relationships may be developed where collaboration is used to create value, but competition is used to claim a larger share of the value gains. In other words, collaboration ‘enlarges the pie’, while adversarial competition seeks to gain a bigger slice of it. • In the UK public sector, compulsory competitive tendering appears to limit the potential for close co-operation between buyer and seller. Collaborative relationships

Benefits of SCM • Reducing non-value-adding (waste) activities throughout the supply chain • Reducing cycle times • Improving responsiveness to customer requirements – with a knock-on effect on customer loyalty and sales revenue • Giving access to complementary resources and capabilities: joint investment in research and development; technology and innovation sharing; and so on • Enhancing quality and service • Improving supply chain communication • Reducing total costs • Optimising the balance of service levels and costs by measuring them across the supply chain, avoiding sub-optimal conflicts and trade-offs Benefits of SCM

Limitations of SCM • A firm must first coordinate its own internal processes. • There must be sufficient resources and appropriate systems in place to develop suppliers effectively. • The investment in integrated systems, supplier development and so on may not be worth the quality/cost gains for a given organisation. • Increased collaboration and integration may expose the firm to risks of: over-investment in relationship-specific assets. • SCM, as a radical strategic shift, requires both internal support and supplier willingness: either or both may not be available. • Network information-sharing may expose the firm to loss of informational and intellectual assets and distinctive competencies. • It is difficult to measure the effectiveness of (or business case for) SCM co-operation in meaningful ways. • There may be problems in fairly distributing the gains and risks of co-operation among supply chain partners. Limitations of SCM

Strategic considerations in adopting SCM
Internal conditions External conditions What benefit is expected/desired from implementing the SCM concept? (Customer relations, market penetration, improved capacity utilisation, cost savings etc) Who will be the firm’s SCM partners? (With whom, and why? With what goals and expectations? With what effect on other vendor relations?) Does the vision for SCM fit overall corporate strategy and culture? (Generic strategy, openness, criteria for selecting partners.) What kind of integration is optimal? (What level of integration? Which processes? Is there mutual agreement and compatibility?) What role does the firm want to play within the overall supply chain? What kind of co-operative agreement will be established? (What individual motivations/expectations? What shared goals? What ‘playing rules’? How are gains/risks divided?) Is the firm ready for SCM, what needs to be done to increase its readiness – and is it willing to change? How will the collaborative change programme be managed? (Joint steering committee, project organisation, contribution of resources, internal marketing) How can SCM be implemented internally? (Internal sponsor, change programme) How will performance be measured ? (Goals, milestones, measures, reporting systems) Table 11.1 Strategic considerations in adopting SCM

Principal flows in a (simplified) internal supply chain
Figure 12.1 Principal flows in a (simplified) internal supply chain

Integrated planning and control systems
• Materials requirements planning (MRP) systems break down orders and delivery schedules into requirements for raw materials and components. • Manufacturing resources planning (MRPII) systems build on key areas of MRP by considering all the resources needed for production: materials plus manpower, machinery and money. • Enterprise resource planning (ERP) systems extend this capability to consolidate a firm’s materials, manufacturing, logistics, supply chain, sales/marketing, finance and HR information into a single integrated management system. Integrated planning and control systems

Historical development of purchasing (Syson)
• Clerical (transactional): purchasing is perceived as a low-ranking routine function, characterised by a focus on internal performance and efficiency. • Commercial: the focus shifts to price/cost savings, obtained mainly through the interface with suppliers. This stage is characterised by adversarial relationships with suppliers and the exploitation of short-term tactical advantages. • Strategic (proactive): the focus is on effective contribution to competitive advantage. Strategies are introduced to improve the performance of external supply chains, through a more holistic approach to logistics or supply chain management. Historical development of purchasing (Syson)

Historical development of purchasing (Minkema)
• Independence: purchasing operates within its own guidelines, with a focus on functional efficiencies and improvements. • Dependence: purchasing dovetails with other functions via consultation and reporting, but still uses a standalone information system. • Business integration: purchasing systematically integrates with other functions in the internal supply chain. Integrated information systems are to support tactical decision-making, with a focus on efficient materials/information flows. • Chain integration: purchasing has a key role in securing systematic co-operation and information-sharing across the supply chain. Historical development of purchasing (Minkema)

External customer/supplier links
• Information integration: sharing of information and knowledge (eg sales forecasts, production plans, inventory status, promotion plans, costs) • Co-ordination and resource sharing: realignment of decisions and responsibility in the supply chain • Organisational relationship linkages (communication channels, shared performance measures and joint strategy/goal setting). External customer/supplier links

Top-level purchaser outsources most manufacturing
Figure 12.2 Top-level purchaser outsources most manufacturing

Potential reasons for tiering suppliers
• The top-level purchaser wants to develop partnerships with key suppliers, but only has time/resources to develop a limited number of such relationships. • The top-level purchaser can focus on strategic issues, rather than transactional and operational details of procurement. • The top-level purchaser accesses shared contacts and competencies for improving the supply chain. Potential reasons for tiering suppliers

Closed-loop supply chains and reverse logistics
• The closed-loop supply chain, where the end-users effectively become suppliers of goods (once past their useful life) back to the manufacturer – making what was previously the ‘end’ of the supply chain part of a new cycle. • Increased emphasis on reverse logistics: ‘the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin, for the purpose of recapturing value or proper disposal.’ (Rogers and Tibben-Lembke) Closed-loop supply chains and reverse logistics

Management issues in closed-loop supply chains
• Effective supply base management, integration and collaboration • Effective supplier and customer relationships • Accreditation and contract award on the basis of recycling or ecologically friendly disposal capacity (among other green issues) • Product and packaging design to facilitate return, recycling and safe disposal • Quality and conformance management systems • Visibility: the ability to access and view relevant logistics data • Reverse logistical activities Management issues in closed-loop supply chains

Network relationships (multiple markets)
Figure 12.3 Network relationships (multiple markets)

Distribution channel management
Figure 12.4 Distribution channel management

Marketing orientation in supply chains
• Customer service. There needs to be a clear recognition that contact and service quality is key to (internal and external) customer satisfaction and retention, and to product/service differentiation. • Relationship marketing. As with supplier relationships, we can distinguish between transactional marketing and relationship marketing. • Customer relationship management. Internal systems must be integrated to provide seamless service and coherent, consistent messages to customers. Their experience should be horizontal – without having to be passed from one isolated ‘silo’ of the organisation to another. Marketing orientation in supply chains

Statistical methods of forecasting
• Simple moving average: the forecast for the coming period is an average of demand in recent past periods. • Weighted average: giving added weight to more recent past periods and less to earlier ones (adding subtlety by reflecting recent trends) • Time series trend: based on detailed examination of past demand patterns, and isolating underlying trends (long-term upward or downward movements over time) by identifying and discounting variations caused by seasonal, cyclical or irregular data series fluctuations. Trends can then be projected into the future. • Regression analysis: deriving correlations between two variables thought to be connected with each other (eg advertising spend and demand) and predicting the effect of manipulating one variable on the other. Statistical methods of forecasting

Qualitative methods of forecasting
• Marketing research: the use of survey questionnaires, interviews, focus or discussion groups, and prototype or test marketing to measure demand (among other factors) among purchasers, users or potential users of the product/service • Expert opinion: gathering and collating views, judgements or opinions from people regarded as knowledgeable or experienced in relevant business areas. • Delphi method: imposing some statistical rigour on expert opinion, to minimise subjectivity and bias. Questionnaires are sent to a dispersed panel of experts: anonymous individual responses are collated, analysed and refined by follow-up questionnaires, to develop a ‘group’ response (but without the social influence effects). Qualitative methods of forecasting

Manufacturing supply chains
• The introduction of world class techniques such as just in time, total quality management and materials requirements planning has extended the integration of supply networks and the role of supply chain management. • Operations management is the focal point of the supply chain (and the key internal customer of purchasing). • The value of materials bought on a regular basis is likely to be a high proportion of total purchasing spend. • Accurate demand forecasting is vital to avoid over-production (with possible waste) or under-production (with possible customer dissatisfaction). • The effective management of quality issues throughout the supply chain is essential to ensure a steady flow of consistently high-quality output. Manufacturing supply chains

Trends in service supply chains
• Services are increasingly about the management and supply of information: financial services, information and research, entertainment and transport bookings, consultancy, advertising and design and so on. • Information can replace inventory (eg in the case of Dell’s assembled-to-order computers). • Services are increasingly outsourced, as organisations focus on core activities and subcontract support functions such as security, catering, printing, IT, sales and customer service, fleet management, HR selection and training, logistics and facilities management. • The combination of automation and outsourcing has enabled the development of virtual service organisations and networks. Trends in service supply chains

Smart defence acquisition strategy
Capability to accept different strategies for different procurements More flexible approach Greater openness Processes Revised front-end process Streamlined approvals and oversight Integrated project teams More effective supplier/ contractor incentives Organisation Clearly-defined customers within MoD Restructured acquisition organisation Professional, recognised, competent personnel Figure 12.5 Smart defence acquisition strategy

Drivers of globalisation
• Improvements in transport technology, creating the ‘shrinking’ of distance for logistics • Improvements in ICT (including the e-commerce potential of the internet), abolishing distance for communication, and enabling ‘virtual’ global organisation • Reduction in trade barriers, facilitating direct investment and the movement of goods and labour • Increasing numbers of multinational corporations through joint ventures and foreign direct investment • Convergence in cultural values and consumer tastes, creating the potential for more global brands • The business benefits of larger markets, economies of scale, outsourcing to low-cost-labour economies, moving beyond intense domestic competition, extending product lifecycles by introducing products to new markets and so on. Drivers of globalisation Drivers of globalisation

Classifying the drivers to globalisation (Yip)
• Market factors • Cost factors • Government factors • Competition factors Classifying the drivers to globalisation (Yip)

Market factors in globalisation
• Similar customer needs. Customer needs and preferences are becoming similar, in markets such as soft drinks, jeans, computers and electrical goods. • Global customers. As markets globalise, firms operating within them also become global customers – seeking suppliers who can also operate on a worldwide basis. • Transferable marketing. The development of global communication and distribution channels further supports globalisation. Market factors in globalisation

Cost factors in globalisation
• Scale economies. Economies of scale may be available through large volumes of global sales. • Sourcing efficiencies. There may be sourcing efficiencies in global sourcing: selecting the lowest-cost supplier from anywhere in the world. • Country-specific costs. Country-specific cost factors (such as labour costs and exchange rates) encourage strategic sourcing, as global companies seek to match the advantages available to local competitors. • Product development costs. Product lifecycles are shortening because of consumer demand for new and improved versions, and firms need to recoup increased product development costs through volume sales. Cost factors in globalisation

Government factors in globalisation
• Trade policies, which have tended to support free markets between nations (reducing protectionist barriers to trade). • Harmonisation of technical standards, which has enabled the sourcing of standardised components, compatible systems and so on. • Host government policies, aimed at encouraging global operators to base themselves or invest in their countries eg via tax incentives, in the attempt to stimulate local economic activity and improve infrastructure and living standards. Government factors in globalisation

Arguments in favour of globalisation
• International trade stimulates local economic activity (due to the theory of comparative advantage). This leads to improved productivity and output, and helps to create employment, leading to greater prosperity, educational development and other standard-of-living benefits. • The siting of operations in developing countries may bring investment in technology, infrastructure, education and skill development which the host country could not afford on its own. • There may be improvements in human rights and labour conditions in developing economies, where foreign investors and buyers operate ethical/CSR policies and monitoring. • Global consumers benefit from more product/service choice and competitive pricing. • It has been argued that international trade is a primary mechanism for positive international relations and a deterrent to conflict. Arguments in favour of globalisation

Arguments against globalisation
• It encourages the exploitation of labour in developing nations for lower-cost production. • It encourages the exploitation of local markets, using them as dumping grounds for poor-quality or obsolete goods, and leading to increased foreign debt. • It ‘exports’ pollution, deforestation, urbanisation and other environmental damage to developing nations. • It undermines governments in the management of their own domestic economies, particularly through the influence of the World Bank (loan conditions and so on) and the power of global corporations. • It causes unemployment in developed nations, where justified expectations of pay and conditions make labour ‘uncompetitive’ with cheap-labour competitors. • It squeezes small, local businesses out of markets, with negative effects on competition, communities and cultures. • It encourages the homogenisation of cultures, through consumption, media and the anglicising of language. Arguments against globalisation

Drivers of changing global supply chains
Increased competition Increased competition creates key strategic challenges: to identify viable supply and product markets (eg using Porter’s Five Forces model) – and to deliver quality and efficiency (even to distant and diverse markets). It has also created pressure to develop world class techniques – and global best-practice monitoring, benchmarking and standards development. Meanwhile, competitive pressures for differentiation and cost leadership increasingly focus on supply chain performance. Drive for cost reduction Cost reduction is a driver of international sourcing and outsourcing (to take advantages of low-cost producers/providers) and the development of ‘lean’ (waste-reducing) supply chains, often built on long-term collaborative supply chain relationships. Technology development Technology development supports international sourcing, virtual supply networks and supply chain co-ordination and integration, regardless of location. Speed of new product development Shorter product lifecycles require more frequent review and modification of offerings – which in turn require ‘agile’ or flexible supply chains: supportive of innovation (eg through early supplier involvement), able to handle just in time delivery for late customisation and so on. Table 13.1 Drivers of change in global supply chains

Drivers of changing global supply chains (continued)
Changing customer demand Customer demand is constantly changing with demographic, cultural and economic factors. Despite convergence, it also differs between markets. This is another pressure for ‘agile’ supply chains. ‘Green’ and ethical pressures Consumer, political and legal pressures increasingly focus on ‘green’ and ethical issues: pollution/waste control, minimisation of environmental impacts, sustainable trading, workers’ rights and so on. These are becoming a key part of supply management policy, eg in regard to reverse logistics, environmental sourcing or supplier ethical monitoring. Collaborations and joint ventures There is a steady increase in collaborations and joint ventures (partly as a vehicle for direct foreign investment in overseas markets), enabling synergies within supply chains and creating more networked structures. ICT links have enabled global project management using ‘virtual’ teams and organisation, supporting a ‘think global, act local’ strategy (global data- and expertise-sharing plus local market relationships). Global outsourcing Many companies now constantly review their core competencies to identify opportunities to outsource non-core (non-distinctive, low value-added, high cost-of-specialisation) activities. The term ‘offshoring’ is used to refer to the relocation of business processes to a lower-cost overseas location. Supply management has increasingly become management of ‘external operations’. Table 13.1 Drivers of change in global supply chains (continued)

Configuration strategies for global sourcing (Lamming)
• Source from a domestic supplier which is linked to a global network: eg a first tier supplier or managed services supplier with a global second-tier supply base. • Source from overseas suppliers who can supply direct to your overseas business locations. • Use overseas suppliers with the ability to support your core business location (eg by having a local agency, development or distribution centre in your head office country). • Create supply chain management (and product design and development support) teams in your overseas business locations, so that they can source locally. Configuration strategies for global sourcing (Lamming)

Increasing integration of global sourcing strategies
• Stage 1: a head-office purchasing department buys items internationally. • Stage 2: the head-office purchasing department seeks the help of overseas SBUs to source items. • Stage 3: international purchasing offices are set up in overseas SBUs. • Stage 4: product design and development, as well as sourcing, are decentralised to overseas sourcing and support teams. • Stage 5: the network of offices is co-ordinated to produce an integrated global sourcing strategy. Increasing integration of global sourcing strategies

Globalisation and adaptation
• Globalisation (or standardisation) means that a company operating in international markets provides the same offering/branding worldwide. • Adaptation means that the company changes its product and marketing mix to suit local needs and conditions. (Johnson and Scholes refer to this as a ‘multi-domestic’ strategy.) Globalisation and adaptation

Arguments for international or global sourcing
• Access to required materials, facilities and/or skills, which may not be available at the right price in local supply markets • Flexibility to switch sources of supply • Competitive price and cost savings • Competitive quality • Less onerous constraints and costs in relation to environmental protection, health and safety or employment protection legislation • Leveraging available technologies for virtual organisation, e-sourcing and e-procurement and supplier relationship management • Reciprocal trading • Ability to compete with competitors benefiting from these advantages Arguments for international or global sourcing

Risks and challenges of international or global sourcing
• Costs of identifying, evaluating and developing new sources of supply • High transaction costs • Transport risks, costs and delays • Currency management issues and exchange rate risk • Payment risk • Tariff and non-tariff barriers to trade • Supply risks posed by factors • Differences in legal frameworks • Differences in ethical standards • Differences in language • Differences in culture, tastes and values Risks and challenges of international or global sourcing

Objectives of the WTO • To eliminate quota restrictions
• To reduce tariff barriers progressively • To remove restrictive non-tariff barriers to trade • To ensure that measures applied to one are applied equally to all • To ensure that any remaining protectionist measures are transparent to all Objectives of the WTO

Forms of economic integration
• A free-trade area (such as EFTA and NAFTA) represents the least restrictive economic integration between nations. Essentially in a free-trade area all barriers to trade among members are removed, and no discriminatory taxes, tariffs or quotas are imposed. • A customs union is one further step along the chain of economic integration. Members not only enjoy tariff-free trade among themselves but also apply a common tariff to imports from non-member nations. • A common market (eg the European Common Market) is the closest form of integration: a trading group with tariff-free trade among members and common external tariffs on imports from non-members, which also regulates collectively on quotas and other non-tariff barriers. Commercial law is also drafted centrally, and overrides the domestic laws of member states. Forms of economic integration

Key features of the European Union
Description Three pillars The ‘three pillars’ of the Union are the European Community (covering issues of economics, law and trade), the common foreign and security policy, and the common approach to justice and home affairs. Economic union Goods and capital can flow from one member state to another without hindrance. A common currency (the euro) has been adopted by many of the member states. There are no exchange controls or customs barriers. Mobility There is a unified transport system with no impediment to movement across national borders. EU members may take up employment in any of the member states (mobility of labour). Product protection A single patent office covers all member states. Once a patent is registered it is protected throughout the EU. Common standards of specification exist. Table 13.2 Key features of the European Union

Key features of the European Union (continued)
Description Procurement Decisions on public procurement in the EU for contracts above a certain value must be based on value for money, ensured by competition. This particularly applies to tenders, which must be advertised widely. The tendering process must ensure that all tenderers are treated equally, regardless of nationality, by being transparent at all times. In particular, EU directives have focused on public contracts for utilities, non-discrimination in specifications, and objective decision criteria. Table 13.2 Key features of the European Union (continued)

Objectives of NAFTA • Create new and sustainable business opportunities in expanding markets, especially within the rapidly developing Mexico. • Help to lower consumer prices through a widening and deepening of competition. • Assist Mexico to earn fresh additional foreign exchange to help it meet its foreign debt burden. • Reduce the rate of emigration from Mexico to the United States of America by providing new job opportunities in Mexico itself. • Generally stabilise and then increase employment throughout the region. • Improve and consolidate political relations between the United States of America, Canada and Mexico. • Create a stable and predictable environment that will encourage investors. • Enhance the competitive advantage of US, Canadian and Mexican businesses to trade on an international scale. Objectives of NAFTA

Non-tariff barriers to trade
• Quotas – limits on the quantities of specified products that are allowed to be imported • Complex customs procedures • The need to comply with different health and safety regulations in different countries • Government subsidies to domestic producers (which make it more difficult for overseas firms to compete on price) • Exchange controls – limits on the ability of a domestic importer to obtain the foreign currency needed to pay his overseas supplier. Non-tariff barriers to trade

Low-context and high-context cultures
• Low-context cultures (eg Germanic, Scandinavian, North American) tend to take the content of communication at face value: words say what they mean. They prefer clear, written, explicit communication. • High-context cultures (eg Japanese, Asian, African, Latin American, Middle-Eastern, Southern European) interpret and exchange more complex messages. They prefer face-to-face and oral communication, and are good at developing networks and using non-verbal cues and unspoken implications. They tend to divulge less information in official/written forms Low-context and high-context cultures

The concept of value • A firm creates value – by performing its activities better, differently or more efficiently than its competitors. • Customers purchase value – measured by comparing a firm’s products and services with those of its competitors. The concept of value

Core, actual and augmented product
• The core product represents the key benefits received directly from purchasing the product: in the case of a car, transport. • The actual product is the key elements of the product which differentiate one product from another. This may include brand name, packaging, features, quality and so on: in the case of a car, the model, design and performance, say. • The augmented product, however, may include a range of tangible and intangible elements which add value (and often differentiate competing products). This may include: optional extras, warranties, delivery and credit facilities, after-sales service, installation, the esteem/prestige value of ownership – and the total ‘customer experience’. Core, actual and augmented product

The value chain Figure 15.1 The value chain Support activities
Primary activities Figure 15.1 The value chain

Primary value activities
• Inbound logistics are the activities concerned with receiving, storing and disseminating inputs: materials handling, warehousing, inventory control etc. • Operations are concerned with the transformation of inputs into finished goods or services. • Outbound logistics are concerned with storing, distributing and delivering the finished goods to customers: warehousing, materials handling, transport planning, order processing and so on. • Marketing and sales are responsible for communication with the customers to provide a means by which they can purchase the product (as well as an inducement to do so). • Service covers all of the activities which occur after the point of sale to enhance or maintain the value of the product for the customer: installation, repair, training, parts supply and maintenance. Primary value activities

Support activities in the value chain
• Firm infrastructure refers to systems and assets for planning, finance, quality control and management. • Human resources are all the activities involved in recruiting, deploying, retaining and developing people in the organisation. • Technology development activities relate to both equipment, systems and methods of work organisation: product design and improvement of production processes and resource utilisation. • Procurement is – as you know – all activities to acquire inputs for primary activities. Support activities in the value chain

Value along the supply chain
Figure 15.2 Value along the supply chain

Problems with Porter’s value chain model
• Despite its customer perspective, the model still focuses on profitability as the primary objective, and defines value creation as the profit margin of each firm – rather than a whole-chain focus on consumer satisfaction. • Despite its recognition of the importance of linkages, the model is not highly integrative: it shows interfaces between separate activities and value chains, rather than integration. • The distinction between primary and support functions is somewhat arbitrary, and misrepresents the relative importance of some functions. • It is a static model, based solely on American firms: it fails to take into account more innovative values (eg in Japanese firms), modern information technologies (enabling the creation of ‘virtual’ value chains) and the competitive challenges of dynamic markets. Problems with Porter’s value chain model

Integrated materials value pipeline (Hines)
• The value chain runs from right to left, emphasising the consumer as key driver of value. The primary objective is consumer satisfaction, rather than profitability: the process is a ‘pull’ (demand-driven) rather than a ‘push’ (supply-driven) system. • Rather than a series of linked chains, there is one holistic flow from consumer to raw material source. Similarly, the primary activities are no longer separated, but integrated: internal vertical barriers and external adversarial relations are broken down. • The primary activities comprise teams concerned with marketing, materials, engineering, quality, R & D and design. • The secondary activities are identified as: activity based costing; human resources management; total quality management; electronic data interchange and profit. Integrated materials value pipeline (Hines)

Issues in the value system
• Where cost and value are created • Which activities are centrally important to the organisation’s own strategic capability, and which are less central. • Where the ‘profit pools’ are: the potential profits at different parts of the value network. Strategy can then focus on areas of greatest profit potential. • Make/do or buy (outsourcing) decisions. • Who might be the best partners in the various parts of the value network, and what kinds of relationships will best leverage their potential? Issues in the value system

Five principles to lean thinking (CIPS)
• Specify what creates value as seen from the customer’s perspective: this implies a need for close relations with the customer to ensure that its perception of value is embodied in what the supplier is offering. • Identify all steps across the value stream: the aim is to eliminate non-value-adding activities and processes, leaving just a stream of value-adding activities. • Make those actions that create that value flow: link value-adding activities effectively to deliver total value to the end customer. • Only make what is pulled by the customer just in time. Traditional production and supply models often lead to production in advance of customer requirements: this is minimised by lean thinking. • Strive for perfection by continually removing successive layers of waste: activities that add cost (or consume resources) but are not operationally necessary and do not add value. Five principles to lean thinking (CIPS)

Taichi Ohno’s seven wastes
Waste caused by … Comments Over-production Producing output which customers are not yet demanding leads to stockholding costs, product deterioration/obsolescence and scrap. This refers both to finished goods for external customers, and to work in progress for the next stage in the production process. One solution is to use ‘pull’ systems (such as kanban) to trigger production according to demand. Transportation Moving materials between different locations adds cost, and risks damage and deterioration. This may refer to moving materials from their source to our production facility, or to moving materials within the production facility. Either way, effective materials handling, transport and load planning can minimise movements. Waiting Delays or queues in processing mean that more time is taken than is really needed, without adding value. Waiting time may be minimised, or used for value-adding activity (such as training or maintenance). Motion Unnecessary motions (bending, reaching and so on) violate sound ergonomic principles. This can reduce productivity and cause fatigue (and possibly injury) to staff. Table 14.1 Taichi Ohno’s seven wastes

Taichi Ohno’s seven wastes (continued)
Waste caused by … Comments Over-processing This can happen when unnecessarily sophisticated equipment is used to produce relatively simple goods, adding to their cost. It may also create inefficient facilities layouts and materials handling. Value analysis (and value engineering for new product design) is often used to remove non-value adding features and processes. Inventory Lean supply aims to eliminate the use of buffer stocks. Stockholding incurs cost without adding value, and can mask inefficiencies in production planning or processes. Just in time (JIT) systems are used to ‘pull’ inventory through the system in response to demand. Defects/corrections The costs of rework and scrap do not add value, but reduce bottom-line profit. Defects are regarded as opportunities for problem-solving and improvement, often using a kaizen or continuous improvement approach. Table 14.1 Taichi Ohno’s seven wastes (continued)

Customer-supplier relationships in lean supply
Factor Lean supply characteristics Nature of competition Global operation, local presence Based upon contribution to product technology Dependent upon alliances/collaboration The basis of sourcing decisions Early involvement of established suppliers Joint efforts in target costing and value analysis Single and dual sourcing Suppliers providing global benefits Re-sourcing as a last resort, after attempts to improve Exchange of information between supplier and customer True transparency (eg on costs etc) Two-way discussion of costs and volumes Exchange of technical and commercial information Electronic data interchange Management of capacity Kanban system signalling demand in real time Regional strategic investments discussed Synchronised capacity Flexibility to operate with fluctuations Table 14.2 Customer-supplier relationships in lean supply

Customer-supplier relationships in lean supply (continued)
Factor Lean supply characteristics Delivery practice True just in time (JIT) Local, long-distance and international JIT Dealing with price changes Price reductions based on cost reduction from order onwards: joint efforts of supplier and customer Attitude to quality Supplier vetting schemes become redundant Mutual agreement on quality targets Continual interaction and improvement (kaizen) Perfect quality as a goal Table 14.2 Customer-supplier relationships in lean supply (continued)

Target costing • The traditional model of product pricing starts by analysing the total cost of a product. A profit margin is then added to determine a selling price – which may or may not correspond to what the market is willing to pay. • Target costing starts at the other end, with an estimate of the selling price that the market will be willing to pay for a product with specific features. The members of the supply chain can then work backward to calculate the costs that must be achieved in order to provide a reasonable profit. Target costing

Benefits of lean supply
• The progressive removal of wastes, reducing costs and improving quality • Closer collaborative relationships within the supply chain, creating opportunities for shared competitive advantage and synergies • Cross-functional teamworking, involvement and flexibility within the organisation (with flow-on benefits for organisational learning and continuous improvement) • Reduced inventories (also improving cashflow) • Shorter cycle/delivery times, enabling better service to consumers • More efficient process flows, allowing better resource utilisation • Fewer defects, creating customer loyalty and lower failure costs. Benefits of lean supply

Drawbacks of lean supply
• The reduction of wastes can reduce capability to respond flexibly to contingencies, eg by removing buffer stocks that would minimise vulnerability to emergency orders or supplier failure. • Highly integrated, downsized supply chains can increase supply risk. • There may be a narrow focus on reducing cost (or on shop-floor technologies and techniques) rather than enhancing quality, service and creativity, for long-term customer value. • Less powerful members of the supply chain may incur heavy costs becoming lean, and make themselves vulnerable through open book costing, without sharing equitably in the value gains. • Lean supply primarily suits high-volume industries with long lead times and relatively predictable demand: it is less effective in low-volume, dynamic industries. Drawbacks of lean supply

Detrimental effects of lean supply (New and Ramsay)
• Lean chains focus on small supplier bases and partnerships with preferred suppliers. While this benefits the organisations concerned, it reduces competition. • Lean thinking may lead to rationalisation within industries, reducing overall manufacturing capacity and causing job losses, with potentially significant social and economic costs in affected areas. • Lean chains allow producers to satisfy customer demand swiftly. This may have undesirable effects such as increasing the overall level of consumption and overproducing swiftly-obsolescent, disposable goods. Detrimental effects of lean supply (New and Ramsay)

Prerequisites of agile supply
• Streamlining the physical flow of parts from suppliers • Streamlining and synchronising the flow of information • Adaptability in responding to changing needs of the market • Measuring the performance of the supply chain using suitable agility metrics Prerequisites of agile supply

Lean vs agile supply • Lean manufacturing aims to produce goods only when ‘pulled’ by a customer (just in time) and to the standard of quality required by the customer. • Agile manufacturing goes one step further, by means of ‘late customisation’. This is familiar to anyone who has ordered a computer from the Dell website: Dell allows the online customer to specify exactly what components are required in the computer system and then manufactures it exactly to the customer specification. This can be done very rapidly, because all of the component parts are finished to a high degree and ready for incorporation in the finished product. Lean vs agile supply

Agile v lean supply Dimension Agile supply Lean supply Focus
Rapid response to unpredictable demand (to minimise stockouts and obsolete inventory) Meeting predictable demand efficiently (at lowest possible cost) Eliminating waste from the supply chain Most powerful when: Service and customer value enhancement are key Cost and quality are key Inventory strategy Deployment of buffer or work-in-progress stock to meet demand Minimal inventory, high stock turn Capacity management Late-customisation Pull systems (eg JIT) Lead time strategy Invest aggressively in resources for shortest possible lead times Shorten lead time where compatible with cost reduction Supplier selection Based on speed, flexibility plus quality Based on cost, quality Supplier relationships Fluid ICT-integrated (virtual) network: rapid/short-term partnership to seize opportunities Long-term partnerships with downsized supply base Table 14.3 Agile v lean supply

Agile v lean supply (continued)
Dimension Agile supply Lean supply Work organisation Self-management, entrepreneurship, flexible response Standardisation for efficiency Performance measures Customer-facing metrics (eg on-time-in-full deliveries) World class measures (eg quality, productivity) Table 14.3 Agile v lean supply (continued)

Sources of power (French and Raven)
• Legitimate power (or ‘position power’): the legal/rational, formally-conferred authority associated with a position or role in an organisation. • Expert power: the power of expertise or knowledge which is both recognised and valued by the group, so that they are willing to be influenced by the expert. • Reward power (or ‘resource power’): recognised control over resources and rewards that are valued by the group, so that they are willing to be influenced in return for rewards. • Referent power (or ‘personal power’): emanating from the attractive and inspiring personality, image or ‘charisma’ of the individual, and the perception by others of his or her ‘leadership quality’. • Coercive power (or ‘physical power’): the power to threaten sanctions, hand out punishments or physically intimidate others if compliance is not obtained. Sources of power (French and Raven)

Different forms of power
• Overt power is obvious, or transparent – through direct tactics such as physical or economic coercion, autocratic leadership, logical persuasion or the offering of incentives. • Covert power is subtle, hidden or implied – through indirect tactics such as withholding information or excluding someone from a negotiation or network. • Structural power (Cox) is built into the situation, context or relationship – as in the case of legal obligations on organisations, buyers who are dependent on suppliers (or vice versa), or employers who control the rewards of labour. Different forms of power

Ways of exercising power constructively
• Mutual obligations, expressed through negotiated purchase contracts and service level agreements (with penalties for non-compliance) • The offer of approved/preferred supplier status, accreditation or public acknowledgement for high levels of service • Fair competitive pressures to meet price and non-price criteria (eg in the case of public sector competitive tendering) • Commercial/operational incentives to integrate/adapt systems and procedures (eg for quality assurance, training or e-procurement), which builds power through greater dependency, but also offers benefits arising from improvement, learning and development • The potential for ongoing business. Ways of exercising power constructively

Buyer power and supplier power
• Buyer power may be used to force down prices or obtain higher quality or improved service. The bargaining power of buyers/customers is relatively high when: they are limited in number and/or large in size relative to supplying firms; products are undifferentiated or substitutable (so it is easy to switch brands); their spend is a high proportion of the supplying firm’s revenue; or there is backward integration (ie the buyer owns or controls the supplier). • Supplier power is generally used to raise prices. The bargaining power of suppliers is relatively high when: they are limited in number and/or large in size, relative to buying firms; their product is strategically important to the buyer’s business, highly differentiated and not readily substituted; the volume purchased by the buyer is not important to the supplier; or there is forward integration (ie the supplier owns or controls the buying firm). Buyer power and supplier power

The power/dependency matrix
B is dominant over A A and B are interdependent A and B are independent A is dominant over B High Low Importance of B’s resources to A Importance of A’s resources to B Figure 15.1 The power/dependency matrix

Controls to ensure ethical behaviour
• Rotation of buyers to avoid any particular buyer becoming too ‘cosy’ with any particular supplier • Controls over single sourcing deals to ensure that they are in the best interest of the organisation and not merely entered into for personal gain • Controls over the authority levels of individual buyers • Encouraging suppliers to use a known hotline number to report any wrongdoing, in confidence • Encouraging employees to report ethical breaches without fear of reprisal • Establishing an ethics forum or committee to discuss ethical conflict and issues arising in the course of work: open communication is a cornerstone of an ‘integrity based’ (as opposed to a mere ‘compliance based’) approach to ethics management. Controls to ensure ethical behaviour

Social responsibility objectives
• Sustainability issues: the conservation and perpetuation of the world’s limited natural resources, and the promotion of local and small businesses • Environmental issues: the reduction of environment pollution, waste management, the avoidance of environmental disfigurement, land reclamation, recycling, energy conservation and so on • Ethical trading, business relationships and development: consumer protection, improvement of working (and social) conditions for employees and subcontractors (particularly in developing nations), avoidance of exploitation, debt minimisation, contribution to local communities and so on. Social responsibility objectives

Key areas for CSR policy objectives
Environmental responsibility Considered desirable for ethical and sustainability reasons, but also increasingly addressed by legal regulations (for example, the EU Environment Liability Directive). Human rights Key issues include the eradication of slave and child labour, and improvement of working conditions, wages and rights to freedom of association (ie worker organisation and representation). Equal opportunities Equality of opportunity (non-discrimination on the basis of sex, race, disability and now age) has been the subject of legislation in the UK for many decades. Purchasing professionals must support equal opportunities in terms of the products and services produced, and in terms of the supply base (diversity). Diversity This implies the structuring of the supply base to reflect the diversity of the population as a whole. Many organisations in both the public and private sectors are adopting supplier diversity programmes, which foster economic growth – but may also militate against lean supply. Table 15.1 Key areas for CSR policy objectives

Key areas for CSR policy objectives (continued)
Corporate governance This has come to prominence in the wake of well publicised company failures. Policies and agreements with suppliers may cover such areas as limiting the organisation’s exposure to unnecessary risk, putting in place measures to control the circumstances under which risk will be borne, and positioning the organisation with regard to ethical matters. Sustainability This implies living in ways that do not compromise the wellbeing of future generations: controlling the use of non-renewable resources; supporting small and local business and employment and so on. Impact on society In its upstream activities, an organisation may be concerned about the conditions and wages provided by its suppliers. In downstream activities, it should consider how its products are disposed of or recycled. Meanwhile, excessively lean supply may, as we have seen, create unemployment, or dysfunctional increases in consumption and disposal; transport links may cause traffic congestion; and so on. Table 15.1 Key areas for CSR policy objectives (continued)

Key areas for CSR policy objectives (continued)
Ethics and ethical trading Discussed earlier. Biodiversity Biodiversity is ‘the total variety of life on Earth’. In principle, most people support the idea of preserving diversity of habitats, genetic profiles and species. It is a responsibility of organisations to minimise any adverse impact on these areas. Table 15.1 Key areas for CSR policy objectives (continued)

Environmental concerns relevant to purchasing staff
Recovery and recycling of materials and waste products (reverse logistics) Safe disposal of waste products that cannot be recycled Supplier selection policies to support firms that conform to environmental standards with regard to air, water and noise pollution Supplier and product selection policies that reflect concern for conservation and renewal of resources Safe testing of products and materials Concern for noise, spray, dirt and vibration in the operation of transportation facilities Table 15.2 Environmental concerns relevant to purchasing staff

CSR and the interests of the firm
• Law, regulation and Codes of Practice impose certain social responsibilities on organisations. There are financial and operational penalties for failure to comply (eg ‘polluter pays’ taxes). • In the public sector, additional government policy and regulation supports socio-economic goals such as public interest disclosure, competition, sustainability, the equitable treatment of tenders and so on. • Voluntary measures may enhance corporate image and build a positive brand. • Above-statutory provisions for the treatment of employees and suppliers may be necessary to attract, retain and motivate them to provide quality service and commitment. • Increasing consumer awareness of social responsibility issues create a market demand for CSR (and the threat of boycott for irresponsible firms). CSR and the interests of the firm

Countering the case against CSR
• Sustainable development is an investment, not just a cost. Impacts may fall outside the normal budgetary cycle – and this needs to be reflected in indicators, targets and benchmarks for performance management. • Environmental, economic and social responsibility need not be incompatible with efficiency targets. • Purchasers need to think about whole-life costs – and be more imaginative in seeking added value. ‘Energy efficient light-bulbs, for example, may cost more upfront but the savings will come further down the line.’ • Purchasers need to focus attention on high-value, high-risk areas, where the greatest differences can be made. ‘For example, construction contracts with high environmental considerations are very relevant. But at the same time you have to focus on contracts for, say, recycled paper, as people… can associate with this and it will help to raise the profile of sustainable procurement internally.’ Countering the case against CSR

A modern approach to supply relationships
• Supply must be managed strategically and with a view to the whole supply chain and the relationships with and between different members: a network is a more appropriate metaphor than a linear, dyadic relationship based chain, to describe the complexity of these interrelationships. • Firms must take a flexible, contingent approach to deciding where the effective boundary of the organisation lies and what type of relationships should be adopted. There needs to be a balance between supply chain co-operation (in order to create value) and competition (in order to maximise the share of that value appropriated by the firm). A modern approach to supply relationships

The Kraljic matrix Bottleneck Strategic or critical items
Non-critical or routine items Leverage items High Low Risk: Sourcing difficulty Buyer vulnerability to supply failure Profit potential of item Importance of purchase to business Figure 16.1 The Kraljic matrix

Kraljic’s matrix • For routine items (such as common stationery items) an arm’s length systems contract approach will provide routine efficiency. • For bottleneck items (such as a proprietary spare part or specialised consultancy need, which could cause operational delays if unavailable), the buyer’s priority will be ensuring continuity and reliability of supply – which may suggest entering into longer-term contractual relationships with suppliers, or developing alternative sources of supply. • For leverage items (such as local produce bought by a major supermarket) the buyer’s priority will be to secure best prices and terms on a transactional basis. • For strategic items (such as key subassemblies for a car maker) there is mutual dependency and investment – and therefore a need to develop long-term, mutually satisfying partnership relationships. Kraljic’s matrix

Four generic relationship strategies (Cox and Lamming)
• Supplier selection: for routine items where supplier and buyer are independent, and the aim is routine efficiency. A reactive strategy, where the buyer merely has to select the best supplier for a given transaction (perhaps via competitive bidding). • Supply chain sourcing: for leverage items where the buyer is dominant, and the aim is cost reduction. Again, an essentially reactive strategy, but the buyer sources in a more integrated way across the supply chain (through a number of tiers). • Supplier development: for bottleneck items, where the supplier is dominant, and the aim is reduced risk. A more proactive strategy, involving joint investment in the capability of preferred first-tier suppliers. • Supply chain management: for strategic items, where supplier and buyer are interdependent and the aim is competitive advantage. A proactive strategy of integration and collaboration across the supply chain. Four generic relationship strategies (Cox and Lamming)

Characteristics of network sourcing
Supplier tiering Few direct suppliers High asset specificity Low value-added ratios (maximum buy strategy) Bilateral design Supplier innovation Close, long-term, high-trust relations Rigorous supplier grading Supplier co-ordination Supplier development Table 16.1 Characteristics of network sourcing

Developing non-replicable competencies
• Identify and develop unknown suppliers, which competitors are unlikely to be able to access. • ‘Enclose’ a supplier (eg by acquisition, joint venture, exclusive supply agreement or confidentiality agreement), in order to secure sole access to its resources. • Apply procurement strategies which are hard for competitors to imitate eg exploiting high bargaining power in an industry or relationship, or exploiting ‘special relationships’ with suppliers (based on personal relationship, knowledge-sharing, relationship-specific investment, adaptations and integration and so on). Developing non-replicable competencies

Adversarial strategies
• Buyer and supplier compete to maximise benefits for their own organisation, at the expense of the other party (a ‘zero-sum game’). • To get the best price, and guard against supplier failure, multiple suppliers are used to stimulate competition. • Contracts are therefore typically short-term, to permit opportunistic switching, and compliance is rigorously enforced. • To minimise each party’s vulnerability, there is minimal sharing of information and intellectual property: there is little or no trust. • Improvements, if any, are unilateral (often the responsibility of the supplier): there is little co-operation on problem-solving or proactive development, and the attitude to change is largely reactive. Adversarial strategies

Shortcomings of the adversarial model
• The emphasis on confrontation, rather than co-operation, means that each party fails to derive the full benefits of the other party’s expertise (let alone potential synergies). • Time and management effort are wasted because each purchase is in principle a new negotiation, rather than building on relational foundations. • More waste arises from the size of the supply base, each supplier requiring identification, screening, evaluation, motivation, management and so on. • Suppliers are unlikely to be focused or motivated by small, short-term contracts: effort will have to go into performance management in order to secure compliance with standards. • There is little potential for improved quality and reduced costs arising from integration and co-operation. Shortcomings of the adversarial model

Features of a collaborative approach
• The buyer seeks to develop long-term relationships with a smaller number of preferred suppliers. • The strategic view is that both organisations share common interests, and both can benefit from seeking ways of adding value in the supply chain. • Relationship management is therefore based on trust, mutual obligation – rather than compliance with contract terms – and co-evolution. • The supplier participates proactively with the buyer in looking for improvements and innovations, the benefits of which will be shared (according to the balance of power in the relationship). • Information will be shared more or less freely (in areas of shared activity) in both directions, to support joint problem-solving and development. Features of a collaborative approach

The benefits of co-operative strategies
Benefits of a collaborative relationship to the supplier Benefits of a collaborative relationship to the buyer There will be established points of contact, enabling the development of trust. Purchasing attention is focused on developing relationships with fewer suppliers. Better information about the buyer and its needs enables the supplier to manage the buyer’s expectations and offer better service. Better information, supplier commitment and collaborative improvement-seeking should result in better service and quality gains. Better information (or systems integration) allows forward planning and better capacity utilisation. A smaller supplier base and systems integration leads to process efficiencies and reduced sourcing costs. Joint improvement, development and value gains will be shared by the supplier. The buyer may get preferential treatment (eg in the case of supply shortages or emergency orders) arising from goodwill. The supplier is likely to get more business, as a preferred supplier. The buyer should be able to develop a high degree of trust and confidence in the supplier. Table 16.2 The benefits of co-operative strategies

Adversarial/collaborative combinations
Way of working Arm’s length Collaborative Favouring buyer Adversarial Arm’s length (buyer dominant) Adversarial Collaborative (buyer dominant) Balanced Non-adversarial Arm’s length (interdependent) Non-adversarial Collaborative (interdependent) Favouring supplier Adversarial Arm’s length (supplier dominant) Adversarial Collaborative (supplier dominant) Share of value gains Figure 16.2 Adversarial/collaborative combinations

Circumstances that favour partnership sourcing
• Where the customer has a high spend with the supplier. • Where the customer faces high risk: continual supply of the product or service is vital to the buyer’s operations, regardless of its market value. • Where the product supplied is technically complex, calling for advanced technical knowledge by the supplier (and making the cost of switching high). • Where the product is vital and complex, requiring a lot of time, effort and resources (‘high hassle’) to manage. • Where the supply market for the product is fast-changing, so that an up-to-date knowledge of technological or legislative changes in the market is essential. • In a restricted supply market, where there are few competent and reliable supplier firms: closer relationships could improve the security of supply. Circumstances that favour partnership sourcing

Prerequisites for successful partnership
• Cultural compatibility between the partners • A relationship of trust between the partners • Mutual acceptance of the concept of win-win within the supply chain: that is, collaborating to add value and achieve competitive advantage which benefits all participants • Open-book costing (or cost transparency) • Expertise, or relevant complementary competencies • Meaningful performance measures to assess supply chain performance (focused on quality, cost and service) • Top management support • The use of cross-functional teams to enhance co-ordination, process alignment and continuous improvement Prerequisites for successful partnership

LEVEL 6 Strategic Supply Chain Management

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