SUPPLY CHAIN MANAGEMENT Module Summaries

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Contents Introduction ........................................................................................................................................ 4

Module 1: STRATEGY AND PLANNING ................................................................................................ 4

Chapter 1: SUPPLY CHAIN CONTEXT .............................................................................................. 5

Chapter 2: ORGANISATIONAL STRATEGY ...................................................................................... 5

Chapter 3: SUPPLY CHAIN STRATEGY ............................................................................................ 6

Chapter 4: PURCHASING AND SUPPLY .......................................................................................... 7

Chapter 5: SUPPLY POSITIONING ................................................................................................... 8

Chapter 6: SUPPLY STRATEGY ........................................................................................................ 8

Chapter 7: MARKET ANALYSIS ..................................................................................................... 10

Chapter 8: FINANCE IN THE SUPPLY CHAIN ................................................................................. 11

Module 2: SOURCING........................................................................................................................ 13

Chapter 1: SPECIFICATIONS .......................................................................................................... 14

Chapter 2: SPECIFICATION CONSIDERATIONS ............................................................................. 15

Chapter 3: SUPPLIER APPRAISAL DESIGN .................................................................................... 16

Chapter 4: APPRAISING SUPPLIERS ............................................................................................. 17

Chapter 5: OBTAIN AND EVALUATE OFFERS ............................................................................... 18

Chapter 6: THE TENDER PROCESS ................................................................................................ 18

Chapter 7: PREPARING NEGOTIATIONS ....................................................................................... 19

Chapter 8: NEGOTIATING ............................................................................................................. 20

Module 3: OPERATIONS .................................................................................................................... 21

Chapter 1: CONTRACT MANAGEMENT SETUP ............................................................................ 22

Chapter 2: MANAGING CONTRACTS ............................................................................................ 22

Chapter 3: CONTRACT DISPUTES ................................................................................................. 23

Chapter 4: EVALUATING PURCHASING AND SUPPLY PERFORMANCE ....................................... 24

Chapter 5: IMPLEMENTING PERFORMANCE EVALUATION ......................................................... 24

Chapter 6: EVALUATING SUPPLIER PERFORMANCE .................................................................... 25

Chapter 7: OPERATIONS MANAGEMENT .................................................................................... 26

Chapter 8: PROCESS SUPPORT SYSTEMS ..................................................................................... 27

Module 4: LOGISTICS ........................................................................................................................ 28

Chapter 1: LOGISTICS MANAGEMENT ......................................................................................... 29

Chapter 2: QUALITY IN THE SUPPLY CHAIN ................................................................................. 30

Chapter 3: INVENTORY ................................................................................................................. 31

Chapter 4: MANAGING INVENTORY ............................................................................................ 32

Chapter 5: WAREHOUSING .......................................................................................................... 32

Chapter 6: PACKAGING ................................................................................................................ 33

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Chapter 7: TRANSPORTATION ..................................................................................................... 34

Chapter 8: CUSTOMER RELATIONSHIP MANAGEMENT .............................................................. 35

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Introduction

The supply chain is seen to comprise all organisations and processes involved in the supply of a particular product or service, from the first upstream stage of extracting the raw materials up until the last downstream stage of meeting the end customers’ requirements. It is embedded in organisations or companies but at the same time exceeds their boundaries. Managing the supply chain comprises multiple tasks that are multi-faceted and complex. These tasks enable and direct flows of products/service, information, funds, and expertise/ technology through a chain. This chain leads from the sources of inputs (suppliers) up to the end customers, with - depending on the types of organisations involved - varying supply chain actors, functions, processes and relationships. ITC’s Supply Chain Management Programme consists of four modules; each covering an important part of the supply chain: 1) strategy and planning, 2) sourcing, 3) operations and 4) logistics.

Module 1: STRATEGY AND PLANNING

We start, in Chapter 1, with explaining the context of the supply chain. After emphasising the central role of the customer in the supply chain, we distinguish between the private sector and the public sector context. In Chapter 2 we discuss how organisations go from having corporate strategy to formulating more operational objectives. From there we zoom in on the supply chain itself from an organisation’s point of view and elaborate on supply chain strategy and performance (in Chapter 3). Chapter 4 revolves around an integral part of the supply chain: the purchasing and supply

function. In Chapter 5 we introduce the Supply Positioning Model and discuss different types of buyer-supplier relationships before elaborating on supply strategy for different purchases in Chapter 6. Chapter 7 then focuses on analysing supply markets. Finally, in Chapter 8, we explain some key financial issues relevant for supply chain management.

Learning Objectives

After completing this module, trainees:

Know what supply chains are and what supply chain management is;

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Are familiar with the influence of organisational context on the functioning of the supply chain;

Are able to do calculations related to supply chain performance;

Can explain the importance of the purchasing and supply function;

Are capable of using the Supply Positioning Model and explaining the different types of relationships that buyers want to build with their suppliers;

Have learned about relevant financial supply chain issues including financing techniques and the role of purchasing and supply in budgeting.

Chapter 1: SUPPLY CHAIN CONTEXT

In this chapter, we elaborate on the context of organisations and companies since the organisational context has consequences for the setup and characteristics of the supply chain.

First, we explain the central role of the customer in the supply chain.

Second, we explain some key differences between the private and the public sector.

Last, we provide some background information on the development of supply chain management.

1.1 Serving the customer 1.1.1 Quality 1.1.2 Availability 1.1.3 Customer service and responsiveness 1.1.4 Costs

1.2 The private sector context 1.2.1 Small and medium sized enterprises 1.2.2 Large enterprises

1.3 The Public sector context 1.3.1 Central government ministries and departments 1.3.2 Decentralised provincial and municipal governments 1.3.3 Autonomous or semi-autonomous public sector bodies 1.3.4 How the public sector functions 1.3.5 Key differences between the public and the private sector 1.4 Development of the supply chain

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Chapter 2: ORGANISATIONAL STRATEGY

In order to cope with uncertainty and to survive in a competitive world, it is essential that organisations develop strategies, i.e. plans to achieve their goals.

This chapter zooms in on what corporate strategy is and discusses its main elements.

Further, the levels of management are discussed and we explain the relevance of the balanced scorecard when translating corporate strategy to operations strategy.

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2.1 Corporate strategy

2.1.1 Choose products/services to sell 2.1.2 Make or buy 2.1.3 Choose markets 2.1.4 Set conditions of products/services 2.1.5 Enter markets 2.1.6 be cost-effective 2.1.7 Shift from order qualifiers to order winners

2.2 Levels of management and decision-making 2.3 Operations strategy

2.3.1 Operations objectives 2.3.2 Trade-offs between key competencies 2.3.3 Productivity 2.3.4 The balanced scorecard

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Chapter 3: SUPPLY CHAIN STRATEGY

In this chapter, we elaborate on what the supply chain entails and what supply chain management is. We then link corporate strategy to supply chain strategy and explain how to measure supply chain performance. 3.1 The supply chain 3.2 The supply chain management

3.2.1 Product and service flows 3.2.2 Information flows 3.2.3 Funds flows 3.2.4 Expertise and technologies flows

3.3 Developing a supply chain strategy 3.3.1 Key elements to developing a supply chain strategy 3.3.2 Other relevant factors to developing a supply chain strategy

3.4 Supply chain performance 3.4.1 ROI and the DuPont Model 3.4.2 ROE and the equity multiplier 3.4.3 The cash-to-cash cycle Learning Check

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Chapter 4: PURCHASING AND SUPPLY

Purchasing and supply are an integral and crucial part of the supply chain in an organisation. Purchasing and supply cuts through the main tasks of supply chain management (sourcing, logistics and operations). This chapter discusses the role of purchasing and supply, including the differences between the public and the private sector, policies, and the operation and organisation of the purchasing and supply function. 4.1 The role of purchasing and supply

4.1.1 Purchasing and supply function 4.1.2 Purchasing and supply function in the private sector 4.1.3 Purchasing and supply function in the public sector 4.1.4 Preferential procurement policies 4.1.5 Public private partnerships

4.2 Purchasing and supply objectives 4.2.1 Factors influencing purchasing and supply objectives 4.2.2 Characteristics of objectives 4.2.3 Linking objectives to required offers 4.2.4 Setting and prioritising objectives

4.3 Purchasing and supply policies 4.3.1 General purchasing and supply function policy 4.3.2 Ethics policy 4.3.3 Environmental purchasing policy

4.4 Operating the purchasing and supply function 4.4.1 Purchasing and supply process 4.4.2 The internal role of the purchasing and supply function

4.5 Organising a purchasing & supply department 4.5.1 The importance of the purchasing and supply function 4.5.2 (De) centralisation of the purchasing and supply function 4.5.3 Links with other departments 4.5.4 Product and customer orientation of work 4.5.5 Human resources at the purchasing and supply department

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Chapter 5: SUPPLY POSITIONING

Supply positioning has to do with understanding your position (what you need, how, why, previous results etc.) and your suppliers’ position (what can they do for you) in the market. It also entails taking specific decisions to influence these positions. 5.1 Supply planning

5.1.1 Plan the purchases 5.1.2 Setting priorities 5.1.3 Purchase expenditure 5.1.4 Level of impact

5.2 Supply Positioning Model 5.2.1 Using the Supply Positioning Model to prioritise 5.2.2 Kraljic model

5.3 Improving your supply position 5.3.1 Increase expenditure per type of purchase 5.3.2 Reduce risk

5.4 Buyer-supplier relationships 5.4.1 Spot purchases 5.4.2 Regular trading 5.4.3 Call-off contracts 5.4.4 Fixed contracts 5.4.5 Partnership 5.4.6 Joint ventures 5.4.7 Early supplier involvement 5.4.8 Internal provision

5.5 Influence of suppliers’ perceptions 5.5.1 Suppliers’ perceptions 5.5.2 The effect on supplier relationships 5.5.3 Reverse marketing 5.5.4 Trade-offs between switching costs and supplier development 5.5.5 Linking the Supplier Perception Model to the Supply Positioning Model

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Chapter 6: SUPPLY STRATEGY

In Chapter 4, we discussed what supply objectives are and have as such already touched briefly on the concept of supply strategy. Having a supply strategy means knowing the way you intend to achieve supply objectives and targets. The various products and services that you are buying – because they often differ in terms of levels of expenditure, importance to your organisation and degree of supply risk – will require adopting different supply strategies. Supply strategy involves having a clear idea about issues such as:

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How many supply market segments to buy from? Should you buy everything from one and the same supply market or buy from multiple supply markets (or market segments)?

How many suppliers to buy from? Should you seek to do business with a single supplier, with two suppliers, or with many suppliers?

The type of relationship to have with the supplier(s) of a purchase item. For example, and as discussed in the previous chapter: Should you adopt an arms-length or a collaborative relationship?

The type of contract to have in order to support this relationship. Should the contract be short- or long-term? What type of contractual terms should you use? Should the contract be used to enforce compliance or to encourage innovation?

The types of operational procurement strategies to be pursued. Operational strategies are those that follow once a supplier or suppliers have been contracted. They include dealing with issues such as how much stock should you hold? Should you carry out value engineering? Should you use purchasing cards?

The answers to the above questions constitute elements of the supply strategy for a purchase requirement. Adopting the wrong supply strategy may result in not being able to achieve your company’s supply objectives and targets. It will often result in problems such as higher costs, unsatisfactory relationships with suppliers, quality shortfalls and disruptions in the continuity of supply. Developing supply strategy involves making a number of choices that will later have implications for the type of supplier that you need to have. 6.1 From corporate strategy to supply strategy 6.2 Strategy for routine items

6.2.1 Number of suppliers 6.2.2 Type of supplier relationships 6.2.3 Type of contract 6.2.4 Generic operational strategies 6.2.5 Specific operational strategies 6.2.6 Implications for the type of suppliers and buyers 6.2.7 Supply strategy for routine items in a nutshell

6.3 Strategy for leverage items 6.3.1 Number of suppliers 6.3.2 Type of supplier relationships 6.3.3 Type of contract 6.3.4 Generic operational strategies 6.3.5 Specific operational strategies 6.3.6 Implications for the type of suppliers and buyers 6.3.7 Supply strategy for leverage items in a nutshell

6.4 Strategy for bottleneck items 6.4.1 Number of suppliers 6.4.2 Type of supplier relationships 6.4.3 Type of contract 6.4.4 Generic operational strategies 6.4.5 Specific operational strategies 6.4.6 Implications for the type of suppliers and buyers

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6.4.7 Supply strategy for bottleneck items in a nutshell 6.5 Strategy for strategic items

6.5.1 Number of suppliers 6.5.2 Type of supplier relationships 6.5.3 Type of contract 6.5.4 Generic operational strategies 6.5.5 Specific operational strategies 6.5.6 Implications for the type of suppliers and buyers 6.5.7 Strategy for strategic items in a nutshell

6.6 Strategy for commodities 6.6.1 Purchasing commodities traded on recognised exchanges 6.6.2 Purchasing commodities directly

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Chapter 7: MARKET ANALYSIS

The supply market can be defined from a buyer’s perspective as the arena containing potential sources of supply. This supply market – although part of the external environment of the enterprise – has a major impact on the performance of the supply chain. It is the starting point for developing supply strategies and supplier management activities that will influence most supply chain operations. Ideally, the supply market is well understood and actively managed rather than just reacted to. 7.1 Market analysis benefits 7.2 Prioritising market analysis 7.3 Understanding supply markets

7.3.1 Step 1: Preparing for a supply market analysis 7.3.2 Step 2: Assessing the degree and effects of competition 7.3.3 Step 3: Forecasting market developments 7.3.4 Step 4: Understanding market drivers 7.3.5 Step 5: Assessing the price (cost/price) 7.3.6 Step 6: Segmenting the supply market 7.3.7 Step 7: Screen out less relevant segments

7.4 Appraising market segments 7.4.1 Step 1: Identify types of supply risks and opportunities 7.4.2 Step 2: Identify and screen the relevant events 7.4.3 Step 3: Research the risks and opportunities for these events 7.4.4 Step 4: Build scenarios to assess the extent of the risks and opportunities 7.4.5 Step 5: Identify which supply targets are affected 7.4.6 Step 6: Determine how much the risks and opportunities may affect your

targets 7.4.7 Step 7: Select segment(s) with best balance of risks and opportunities 7.4.8 Step 8: Continue to monitor supply market risks and opportunities

7.5 Reassessing a purchase item’s rating in the Supply Positioning Model 7.6 Information support to supply market analysis

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7.6.1 Types of information and information providers 7.6.2 Processing gathered information Learning check

Chapter 8: FINANCE IN THE SUPPLY CHAIN

This chapter deals with financial issues in and of the supply chain – and therefore focusing on matters concerning money. However, we have to recognise and remind ourselves that – even in the private sector – profit and money are not the only measures of success. All kinds of organisations – whether or not they are also profit-oriented – need always to keep in mind how important it is to contribute to overall social and economic development, and to environmental sustainability. Organisations are not islands, and if the world that they inhabit becomes better and stronger, so will they. International trade and finance are strong contributors to improving a country’s economic growth and to uplifting its people. The impressive and ongoing trade performance of many emerging economies around the world has amply demonstrated how exports and promoting international trade can dramatically enhance development and reduce poverty. In addition, trade cannot function without finance. Finance for supply chain operations is the discipline that deals with the management of money, credit, banking operations and related financial activities needed to facilitate and carry out commercial activities along a supply chain, including imports and exports. Finance for supply chain operations is thus a far larger concept than just money and banking. It includes credit insurance, discounting, factoring, forfaiting and several other short-term financial instruments required by an organisation. 8.1 Financial needs

8.1.1 Assets and liabilities, working capital and liquidity 8.1.2 Assessing financial resources 8.1.3 Debt, equity and fixed assets 8.1.4 Working capital requirements

8.2 Payment 8.2.1 Main methods of payment 8.2.2 Payment risks in case of international trade

8.3 Financing techniques 8.3.1 Local Trading 8.3.2 International Trading 8.3.3 Hedging currency risks 8.3.4 Trade Cycle and Finance Instruments

8.4 Legal and financial implications 8.4.1 Implications of dealing with suppliers and buyers 8.4.2 Implications of documentary credits 8.4.3 Implications of bank loan facilities 8.4.4 Implications of claims

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8.5 Purchasing and supply’s role in budgeting 8.5.1 Budgeting for operational requirements 8.5.2 Budgeting for capital requirements

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Module 2: SOURCING

The eight chapters of this module revolve around

the sourcing process, which is part of the purchasing, and supply process and one of the main tasks of supply chain management. This module is a continuation of Module 1 ‘Strategy’, and precedes Module 3 ‘Operations’. The layout of this module follows the steps of the sourcing process, covering the following steps of the purchasing and supply process as discussed in Module 1: specifying, appraising suppliers, obtaining and evaluating offers, and negotiating. We start, in Chapter 1, with explaining about the importance of specifications and how to determine these in order to ensure that suppliers will be able to meet the needs and wants of your organisation in an optimal way. We continue in Chapter 2 with discussing a number of specific considerations in relation to specifying

requirements. These considerations are forecasting demand, sustainable sourcing and

collaborative purchasing. We then zoom in on supplier appraisal. In Chapters 3, we look at criteria to appraise supplier’s capabilities and ways to determine supplier motivation in order to design the appraisal. In Chapter 4, we discuss the appraisal process. This includes weighting and rating supplier capabilities and assessing suppliers’ financial health. Chapter 5 is about the important step of obtaining and selecting offers. This includes, amongst other subjects, a description of different evaluation methods. The actual tender process is the subject of Chapter 6, in which we elaborate on preparing supply contracts, composing the invitation to tender package and receiving and evaluating supplier offers. Chapters 7 covers negotiating in terms of preparing negotiations, learning about negotiation styles and setting negotiation objectives. In the final Chapter 8 we discuss aspects of the actual negotiation itself. With this course book comes a separate book with annexes. These annexes serve as illustrations of the study material of this course book.

Learning Objectives

After completing this module, you:

Are familiar with the particularities of formulating specifications to efficiently match your organisation’s needs for products and services;

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Know how to setup a supplier appraisal system and are able to appraise your suppliers according to that system;

Are capable of choosing adequate ways to obtain and subsequently evaluate offers based on carefully formulated criteria;

Can explain the different stages of the tender process and the most important activities therein;

Understand what should (not) be included in contracts with suppliers and why;

Have learned how to prepare and execute effective negotiations.

Chapter 1: SPECIFICATIONS

The specification of your requirements is an important step of the purchasing and supply process (for more information please refer to the purchasing and supply process in Chapter 4 of Module 1). It lays the fundament for all subsequent steps: supplier appraisal, preparing the contract, obtaining and evaluating offers, and negotiating. In this chapter, we discuss general aspects in relation to (the preparation of) specifications. We also go into detail on how to specify products and services and the use of standards, technical regulations and measures. 1.1 General aspects of specifications

1.1.1 Roles in specifying requirements 1.1.2 Types of purchase items 1.1.3 Elements of the purchase specification 1.1.4 Approaches to specifying requirements 1.1.5 Value Analysis and Value Engineering

1.2 Specifying products and services 1.2.1 Specifying quality and performance 1.2.2 Specifying packaging, delivery and acceptance 1.2.3 Specifying supplier services 1.2.4 Specifying requirements for services 1.2.5 Analysing prices and costs 1.2.6 Other information to be included in the specification

1.3 The use of standards, technical regulations & measures 1.3.1 Using external standards 1.3.2 Technical regulations 1.3.3 Sources of information 1.3.4 Internal standardisation

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Chapter 2: SPECIFICATION CONSIDERATIONS

An indispensable part of specifications is stating how much of a certain product or service is required. This can be a single requirement or a series of requirements scheduled over time. It may require long-term estimates of demand, e.g. for the next twelve months or more. In addition, stock replenishment systems require estimates of demand in order to calculate requirements in the supply lead-time and to determine safety stocks and order quantities. In this chapter, we discuss ways to forecast demand. After this, we look into two other important subjects of professional sourcing practices: sustainable sourcing and collaborative purchasing. Sustainable sourcing is relevant for all organisations, irrespective of their size and product or service offering. Collaborative purchasing can be interesting for many organisations, and is especially relevant for small and medium sized enterprises. 2.1 Forecasting demand

2.1.1 Types and characteristics of demand 2.1.2 Ways to forecast demand 2.1.3 Quantitative analysis to forecast demand 2.1.4 Using computers to forecast demand 2.1.5 Avoiding inaccuracy in forecasts

2.2 Sustainable sourcing

2.2.1 Developments harming the environment 2.2.2 Strategies for making supply chains sustainable 2.2.3 Corporate social responsibility and ethical purchasing 2.2.4 Environmental laws and policies

2.3 Collaborative purchasing 2.3.1 What is collaborative purchasing? 2.3.2 Benefits of collaborative purchasing for SMEs Learning check

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Chapter 3: SUPPLIER APPRAISAL DESIGN

Carrying out supplier appraisal is critical to all companies. It is essential to determining which suppliers are best suited to respond to a particular purchase requirement. If supplier appraisal is not carried out as carefully and systematically as needed, there is an increased risk that suppliers chosen by the firm will fail to perform adequately. Supplier appraisal is generally carried out when you have an up-coming requirement and wish to prepare a list of suppliers that are worth considering, or to whom you can send an invitation to bid. Supplier appraisal can also be done when you want to create a short list of approved suppliers that your organisation is allowed to use for purchasing certain goods or services. It can only be carried out when a proper understanding of the purchase requirement is known. You might also undertake a supplier appraisal when a new supplier approaches you, or if you have identified a new potential supplier of an ongoing and/or future requirement. For ongoing requirements, appraisal of new suppliers must be undertaken on a continuous basis. This is the only way for a purchasing firm to ensure that it will make best use of its potential supply options to maintain its competitive edge. When referring to supplier appraisal in this module, we will be primarily concerned with the assessment of whether the potential exists for a business relationship. It is important to distinguish this from the assessment and selection of actual supplier offers, although evaluation and assessment techniques may be similar. Only when you are ready to receive offers that are tailored to your specified requirements, a supplier will show you what it is willing to offer especially to you - by submitting a tailor-made and guaranteed proposal. In Chapter 5 we will look at how to evaluate and select a specific supplier’s offer. 3.1 Determine criteria for supplier appraisal

3.1.1 Quality 3.1.2 Availability 3.1.3 Service and responsiveness 3.1.4 Cost 3.1.5 General supplier capabilities and business attitudes

3.2 Selecting appraisal criteria for categories of purchase items 3.2.1 Routine items 3.2.2 Leverage items 3.2.3 Bottleneck items 3.2.4 Strategic items

3.3 Assessing supplier motivation 3.3.1 Supplier Perception Model 3.3.2 Determining supplier motivation 3.3.3 Implications of a position in the perception model 3.3.4 Determining a supplier’s overall motivation rating 3.3.5 A note of caution

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Chapter 4: APPRAISING SUPPLIERS

The process of supplier appraisal involves a number of steps. It begins with the appraisal design as discussed in Chapter 3. Based on this, you will need to identify and screen the suppliers that you will want to appraise, and then collect the information that you need for this purpose. For each purchase requirement, you will need to determine which weights to give to the relevant assessment criteria, and rate the various potential suppliers accordingly. This will allow you to come up with your short list of potential suppliers. Once this rating is completed, you will need to analyse the overall strengths and weaknesses of the shortlisted suppliers to determine what can be expected from each one. The results of the appraisal will then have to be recorded on the company’s supplier database. The results of the assessment are preferably shared with the suppliers themselves, to determine what can be done – if needed – to help develop their potential to supply your company. 4.1 Identifying suppliers 4.2 Screening Suppliers 4.3 Researching suppliers 4.4 Weighting and rating supplier capabilities

4.4.1 Determining weight factors for appraising supplier capability 4.4.2 Rating potential suppliers’ capabilities 4.4.3 Combining the capability and motivation ratings

4.5 Assessing financial health 4.5.1 Financial statements 4.5.2 Financial ratios 4.5.3 Conclusion

4.6 Working with the appraisal results

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Chapter 5: OBTAIN AND EVALUATE OFFERS

After determining specifications and going through the process of supplier appraisal, you will be ready to obtain supplier offers and select the one that best suits your organisation’s needs and wants. In this chapter, we elaborate on methods of obtaining offers and on methods of evaluating offers. These two aspects should be decided on before the invitation to tender package can be drafted and communicated to suppliers. 5.1 Methods of obtaining offers

5.1.1 The informal approach 5.1.2 The enquiry-quotation approach 5.1.3 Formal tendering

5.2 Methods to evaluate offers 5.2.1 Lowest price 5.2.2 Lowest Total Cost of Ownership (TCO) 5.2.3 Weighted scoring 5.2.4 Value for money 5.2.5 Other methods to evaluate offers

5.3 Choosing an evaluation method 5.4 Undertaking the financial evaluation

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Chapter 6: THE TENDER PROCESS

We start with looking into preparing the supply contract, as the draft contract will be an important part of the tender invitation package. This includes an introduction to working with Incoterms®. We will then discuss the tender process following the main steps of preparing the invitation to tender package, selecting suppliers to bid, evaluating received supplier offers and informing and debriefing suppliers. 6.1 Supply contracts

6.1.1 The importance of a supply contract 6.1.2 Points of attention when preparing a contract 6.1.3 A good contract 6.1.4 Linking contract types to supply strategies

6.2 The use of Incoterms® 6.2.1 Background of the terms 6.2.2 Explanation

6.3 Stages in the tender process 6.3.1 Prepare and issue the invitation to tender package 6.3.2 Receive offers and award the contract 6.3.3 Inform and debrief unsuccessful suppliers 6.3.4 Keeping a record of the process

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Chapter 7: PREPARING NEGOTIATIONS

We use the following definition of negotiation: Negotiation is a process whereby two or more parties, with differing views initially, attempt to reach an agreement on a common objective by the selective use of different methods of persuasion. In this chapter, we first discuss the importance of negotiating and then look into elements of preparing negotiations. These comprise creating a solid understanding of the purchasing context, identifying and applying negotiating styles and assessing the balance of power between parties. We also discuss the setting of objectives and aspects of organising negotiation meetings.

7.1 The importance of negotiating 7.2 Elements of preparation

7.2.1 Understanding the purchasing context 7.2.2 Understanding the supplier organisation and vice versa 7.2.3 Negotiating styles 7.2.4 Determining the balance of power 7.2.5 SWOT analysis

7.3 Setting negotiation objectives 7.3.1 Variables and options 7.3.2 Setting targets 7.3.3 Determining the negotiable zone

7.4 Organising the negotiation meeting 7.4.1 Composing your negotiation team 7.4.2 Choosing location and duration 7.4.3 When not meeting face-to-face

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Chapter 8: NEGOTIATING

The negotiation itself is actually the point at which all of the issues that we have been considering previously come together. We discuss choosing the right approach and using effective techniques and tactics to help you achieve the best deal. We start this chapter with looking into the typical stages of a negotiation and each stage’s do’s and don’ts. At the end of the chapter, we discuss body language and cultural aspects as well as following-up on negotiations 8.1 Do’s and don’ts in each stage of the negotiation 8.2 Negotiation approaches

8.2.1 Win-win versus win-lose 8.2.2 Deciding on your starting position 8.2.3 The order of the issues to be negotiated

8.3 Persuasion tactics and negotiating techniques 8.3.1 Persuasion tactics 8.3.2 Negotiation techniques 8.3.3 Asking questions and listening

8.4 Body language and cultural aspects 8.5 Follow-up on negotiations

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ANNEXES

1. INTERNATIONAL ENVIRONMENTAL AGREEMENTS 2. ENVIRONMENTAL STANDARDS AND LABELLING 3. INFORMATION SOURCES FOR SUPPLIER ASSESSMENT 4. SUPPLIER AUDIT QUESTIONNAIRE 5. EXAMPLE REQUEST FOR QUOTATION 6. THE TENDER PROCESS 7. PREPARING THE TENDER INVITATION PACKAGE 8. CLAUSES FOR SPOT AND REGULAR TRADING CONTRACTS 9. CLAUSES FOR CALL-OFF AND FIXED CONTRACTS 10. CLAUSES FOR PARTNERSHIPS AND JOINT VENTURE CONTRACTS 11. STANDARD CONTRACTS - LIST OF EXAMPLES 12. INFORMATION SOURCES FOR PREPARING SUPPLY CONTRACTS 13. THE SUPPLY POSITIONING MODEL

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Module 3: OPERATIONS

The eight chapters of this module revolve around operations from contract management to performance evaluation, and from the basics of operations management to the systems and techniques that can be used. We first focus on contract management in Chapters 1 and 2, elaborating on how to go about managing contracts, followed by an explanation (in Chapter 3) on what to do when disputes surrounding contracts arise. We continue in Chapter 4 by explaining what evaluation of purchasing and supply entails, including the process. We follow up, in Chapter 5, by discussing how performance measurement (also for the supply chain as a whole) is conducted. Chapter 6 zooms in on evaluating supplier performance, connecting to supplier appraisal and supplier offers from Module 2. Finally, we talk about operations

management with the basics in Chapter 7 and the applicable systems and techniques in Chapter 8.

Learning Objectives

After completing this module, you:

Can explain what contract management is and you know how to perform contract management;

Have learned which disputes may arise between partners in the supply chain and how they may be resolved;

Know what evaluation of the purchasing and supply function entails and how to implement performance evaluation in general;

Are capable of carrying out supplier performance;

Are familiar with operations management and know which systems and techniques apply and when to use them.

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Chapter 1: CONTRACT MANAGEMENT SETUP

After completing, the sourcing process (as extensively covered in Module 2) and once a contract is signed, it is important to ensure its successful implementation. This chapter focuses on the main approaches to implementing and executing a contract, as well as the roles and responsibilities involved. It covers issues such as forming a contract management team, the various kinds of information to be included in a contract management plan, main indicators of contract performance and dealing with risks. It also discusses contract review reports and contracts review meetings dealing with changes and variations in contracts. 1.1 Approaches to contract management 1.2 Contract management responsibilities 1.3 Contract management plan

1.3.1 Contract information items 1.3.2 Contract budget 1.3.3 Contract quality plan 1.3.4 Setting priorities 1.3.5 Finalising the plan

1.4 Risk register 1.4.1 Schedule risks 1.4.2 Cost risks 1.4.3 Quality risks 1.4.4 Commercial and other risks 1.4.5 Contract risk register

1.5 Monitoring and managing performance 1.5.1 Measuring performance and reporting 1.5.2 Integrated approach 1.5.3 Managing time 1.5.4 Managing costs 1.5.5 Managing quality 1.5.6 Contract review meetings

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Chapter 2: MANAGING CONTRACTS

Where the previous chapter discussed all issues concerning setting up contract management in your organisation, the current chapter focuses on issues around actual management of contracts Contract management goes beyond simply ensuring that both parties fulfil their contractual obligations. It includes the management of change to the contract whenever needed, in order to correct errors or to accommodate additions. Through good contract management, you can avoid many of the problems, which could otherwise result in unexpected costs, delays or inferior quality. In short, the purpose of contract management is to ensure that the expected contributions of your organisation’s contracts to its objectives and targets are fully realised.

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Contract management is a key contribution to overall supply chain management performance. 2.1 Contract administration and evaluation

2.1.1 General contract administration 2.1.2 Variations and change control 2.1.3 Payment 2.1.4 Administration at and beyond contract completion 2.1.5 Contract evaluation

2.2 Operational contract management 2.2.1 Differences between project and operational-type contracts 2.2.2 Contrasting the approach 2.2.3 Line of Balance contract management technique 2.2.4 Implementation of operational supply strategies 2.2.5 Managing the service level 2.2.6 Contract renewal vs. switching to a new supplier

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Chapter 3: CONTRACT DISPUTES

When drafting contracts, it is important to consider scenarios where things do not go as planned. Although contract default cannot always be prevented, careful consideration during the drafting of contracts may prevent default and legal conflict. Note that contract preparation is discussed extensively in Module 2 3.1 Addressing risks when drafting a contract 3.2 Handling claims

3.2.1 Claims 3.2.2 Approaches to handling claims 3.2.3 Termination of a contract

3.3 Applicable law 3.3.1 The need for a common understanding 3.3.2 The importance of determining applicable law 3.3.3 How to select applicable law?

3.4 Dispute resolution 3.4.1 Dispute resolution methods 3.4.2 Advantages and disadvantages of various methods 3.4.3 Arbitration 3.4.4 Stating the dispute resolution method in the contract

3.5 Changing the contract in response to default Learning check

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Chapter 4: EVALUATING PURCHASING AND SUPPLY PERFORMANCE

This chapter focuses on evaluating the performance of the purchasing and supply function. As such, it is different from evaluating markets (see Module 1) or individual suppliers (see Chapter 6). Evaluating performance is an essential part of the management process. This applies to any area of management, not just purchasing and supply or supply chain management. 4.1 General aspects

4.1.1 Purpose of performance evaluation 4.1.2 Elements of performance evaluation 4.1.3 The behavioural impact of evaluating performance

4.2 Performance evaluation process 4.2.1 General considerations 4.2.2 Steps in the performance evaluation process 4.2.3 Scope of the evaluation

4.3 Purchasing and supply performance management model 4.3.1 Performance outcomes 4.3.2 Performance related to internal factors 4.3.3 Performance related to external factors

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Chapter 5: IMPLEMENTING PERFORMANCE EVALUATION

We will now look into setting performance indicators, measures and targets and collecting the data needed to obtain these measures. As indicated earlier, where and how to obtain the data will already have been important considerations in the decision of which measures to use. There is no point in using a measure if the required data will be so difficult or costly to obtain that it becomes impracticable. In this chapter, we will also discuss various ways to obtain data and to ensure the accuracy of information and look into how data and measures can be presented and reported. An important part of the evaluation report will focus on lessons learned and the actions to improve the performance of the purchasing and supply function. Finally, we will look into obtaining feedback on the evaluation results from those who receive the report. This feedback in itself can be valuable input for improving performance. One has to take into account that implementing performance evaluation can be a complex and time-consuming project. It should be designed in proportion to the objectives and the relative importance of the performance that is going to be measured. In addition, keep in mind that once implemented it requires continuous time and attention to execute

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performance management evaluate the outcomes and implement improvement actions resulting from it. 5.1 Performance measures and targets

5.1.1 Steps in defining measures and target setting 5.1.2 More on measures 5.1.3 Setting targets

5.2 Collecting measurement data 5.2.1 Where to obtain data? 5.2.2 Frequency of measurement and data collection 5.2.3 Data accuracy

5.3 Analysing and interpreting measurement data 5.3.1 Organising and processing data 5.3.2 Interpreting results 5.3.3 Define recommended actions and report results 5.3.4 Feedback on performance evaluation

5.4 Performance evaluation of integrated supply chain management 5.4.1 Complexity of supply chain performance measurement 5.4.2 The need for a performance measurement system in SCM 5.4.3 Guidelines for developing a supply chain performance evaluation system 5.4.4 SCM performance evaluation process 5.4.5 Models of SCM performance evaluation

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Chapter 6: EVALUATING SUPPLIER PERFORMANCE

In this chapter, we will look into carrying out supplier performance evaluations. There is an important parallel to what is discussed in Module 2, where we elaborated on supplier appraisal (Chapters 2 and 3) and evaluating supplier offers (Chapter 4). Although Module 2 focuses on the pre-contract situation in which the purchasing organisation has not yet officially engaged with the suppliers and this Module 3 focuses on the post-contract situation in which the supplier is actually executing a supply contract, much of the underlying theory is the same. An important difference is that the information used for supplier assessment and evaluation of supplier offers has to be derived from generally accessible sources and supplier offers, while the information for evaluating supplier performance is real-life and first-hand. In this chapter, we will look into the specifics of evaluation supplier performance in the context of an actual supply contract. Obviously, a supplier’s performance is an integral part of the performance of the supply chain that it operates in, and therefore included in performance evaluations as described in the previous chapter. However, supplier performance is often evaluated individually and evaluation results are important input for contract management and supplier relationship management. 6.1 Mutual agreement on measures and targets 6.2 Methods for evaluating supplier performance

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6.2.1 Stakeholder review 6.2.2 The weighted-point method 6.2.3 Financial performance evaluation 6.2.4 Sharing evaluation results with suppliers

6.3 Monitoring supplier performance 6.3.1 Conformity assessment 6.3.2 Inspection 6.3.3 Testing 6.3.4 Third party certification 6.3.5 Supplier’s declaration of conformity 6.3.6 Supplier audit

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Chapter 7: OPERATIONS MANAGEMENT

Operations management is the management of processes that add value by transforming inputs into goods and services for customers. A more detailed definition is: operations management is the key function in most organisations that is responsible for planning, scheduling and controlling the efficient, effective production of manufactured goods and/or services for customers, and which often includes the maintenance and improvement of processes used to produce these goods and services. In this chapter, we deal with the key elements and issues relating to operations management. 7.1 Operations management basics

7.1.1 Operations managers 7.1.2 The transformation model 7.1.3 Products: goods and services

7.2 Product and service design 7.2.1 The development of new products and services 7.2.2 Product life cycle 7.2.3 Concept generation 7.2.4 Other important aspects in product and service design

7.3 Process design 7.3.1 Manufacturing processes 7.3.2 Service processes

7.4 Operations planning and control 7.4.1 Balancing supply and demand 7.4.2 Independent and dependent demand 7.4.3 Capacity management 7.4.4 Aggregate planning 7.4.5 Scheduling, loading, sequencing and expediting 7.4.6 Inventory planning

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Chapter 8: PROCESS SUPPORT SYSTEMS

This chapter revolves around systems and techniques that organisations deploy to enable and improve their operations. We look at MRP, ERP (in 8.1) and just-in-time (in 8.2), being operations management systems. E-procurement is discussed in 8.3 because of its general relevance to creating efficiency in the supply chain management context. 8.1 MRP and ERP

8.1.1 Material Requirements Planning (MRP I) 8.1.2 Manufacturing Resource Planning (MRP II) 8.1.3 Enterprise Resource Planning (ERP)

8.2 Just-in-time 8.2.1 Defining just-in-time 8.2.2 Foundations of JIT 8.2.3 Elimination of waste 8.2.4 Continuous improvement 8.2.5 Respect for people 8.2.6 Philosophy of JIT: comparison with traditional systems 8.2.7 Maintenance 8.2.8 Benefits of JIT

8.3 E-procurement 8.3.1 Limitations to traditional purchasing 8.3.2 E-procurement solutions 8.3.3 Choosing a solution

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ANNEXES 1. TYPES OF APPLICABLE LAW 2. PURCHASING AND SUPPLY PERFORMANCE MANAGEMENT MODEL 3. PERFORMANCE EVALUATION FOR PROCESS MANAGEMENT 4. SAMPLE PERFORMANCE MEASURES AND TARGETS 5. SELECTION CRITERIA FOR E-PROCUREMENT SOLUTIONS

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Module 4: LOGISTICS

The eight chapters of this module revolve around the logistics of Supply Chain Management. From the strategy behind logistics and the origins of logistics principles and methods, to operational methods for inventory planning and operations, decisions concerning location and layout, warehousing management, transportation, and packaging. We also pay attention to customer relationship management in this module. We start in Chapter 1 with discussing the responsibilities of the logistics function, and we introduce logistics strategy and the changing context of logistics. In Chapter 2, we explain the fundaments of logistics principles relating to quality management. We then discuss the setup of inventory in Chapter 3, followed by inventory management in Chapter 4. Consequently, we discuss the warehousing and location decisions

(Chapter 5), packaging (Chapter 6), and transportation (Chapter 7). Finally, Customer

Relationship Management is covered in Chapter 8.

Learning Objectives

After completing this module, you:

Have insights in the broad responsibilities of the logistics function in an organisation;

Know the most important principles of quality management that form the foundation of many best practices in logistics management;

Understand the role of inventory in balancing costs and customer service in the supply chain;

Have learned methods and techniques used for inventory management, including methods for demand forecasting methods and calculating order quantities;

Understand the trade-offs in location and layout decisions, and are able to explain the most important decisions and options in warehouse and transportation management;

Have a solid understanding of Customer Relationship Management and its importance.

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Chapter 1: LOGISTICS MANAGEMENT

This chapter explains what logistics entails, describing the role of logistics in supply chain management, and providing an overview of the most relevant challenges and developments. We first discuss the responsibilities of logistics, and how logistics relates to the supply chain. We then look into strategic aspects of logistics and the context of internationalisation. We conclude this chapter with a discussion of the most important information technology

systems used in logistics. 1.1 Responsibilities of logistics

1.1.1 Operational responsibilities of logistics 1.1.2 Strategic responsibilities of logistics

1.2 Logistics and the supply chain 1.3 Logistics strategy

1.3.1 Supply chain strategy 1.3.2 Push versus pull strategy 1.3.3 Supply chain performance objectives 1.3.4 Outsourcing logistics 1.3.5 Reverse logistics

1.4 Internationalisation 1.4.1 Four forces framework 1.4.2 Challenges and issues in internationalisation 1.4.3 Advantages and risks from internationalisation

1.5 Information technology and logistics 1.5.1 Enterprise Resource Planning 1.5.2 Analysing supply chain information 1.5.3 Exchanging supply chain information 1.5.4 Accessing supply chain applications and technology

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Chapter 2: QUALITY IN THE SUPPLY CHAIN

In Section 2.3.1 of Module 1, we introduced the ‘Big Six’ performance objectives or competitive priorities that enable businesses to achieve a competitive advantage. These are quality, service, flexibility, delivery, time, and cost. Quality is not only the first of the key performance objectives, but unarguably the most important as it can provide an organisation with a sustainable competitive advantage for its products. Quality of goods or quality of service is most often, how customers judge an organisation. However, it is not only external customers’ perceptions but internal customers as well, and perceptions change with time. To be successful, organisations must be committed to never-ending improvement in order to stay ahead of the competition. Yet this continuous improvement and quest for excellence is no longer confined to a single organisation but to every organisation along a supply chain. 2.1 Definition of quality

2.1.1 Dimensions of quality 2.1.2 Service quality 2.1.3 Hurdles for quality

2.2 Evolution in quality management 2.2.1 The history of quality management 2.2.2 Four components of quality management 2.2.3 The triple role within the supply chain 2.2.4 Supplier development

2.3 Quality philosophies and systems 2.3.1 Deming’s 14 points 2.3.2 Total Quality Management 2.3.3 Kaizen 2.3.4 Continuous improvement techniques 2.3.5 Japanese 5S 2.3.6 Lean philosophy 2.3.7 Just-in-Time 2.3.8 Agile supply chains 2.3.9 Six Sigma

2.4 Tools for quality control 2.4.1 Flowcharts (process mapping) 2.4.2 Check sheets 2.4.3 Histogram or bar chart 2.4.4 Pareto diagram 2.4.5 Run charts 2.4.6 Scatter diagrams 2.4.7 Cause-and-effect (fishbone) diagrams 2.4.8 Statistical process tools 2.4.9 Additional tools

2.5 The cost of quality 2.5.1 Consequences of poor quality 2.5.2 Quality cost categories 2.5.3 Distribution of quality costs

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2.5.4 Costs incurred for non-value adding activities 2.5.5 The benefits of the right quality

2.6 The standardization of quality

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Chapter 3: INVENTORY

Inventory, or stock, is defined in supply management as the stored accumulation of material resources to be used in a transformation process. Inventory management is the way that the accumulation of these materials is optimised so that the business can satisfy its customers’ demands for the delivery of a required quantity and quality of products, at the right time and at minimum cost to the business. It includes: analysing the build-up and evaluating the need for keeping inventory in the supply chain, forecasting demand for materials and components, and the development of inventory monitoring, supply planning and control mechanisms. Along with the management of internal logistics, it also deals with physical inventory handling locations and facilities. In this chapter, we discuss the responsibilities for the inventory manager, and the key challenges in keeping inventory for organisations: the ‘why’ and ‘what’ of inventory. 3.1 The inventory management function

3.1.1 Role of the inventory manager 3.1.2 Importance of inventory management 3.1.3 Why inventory is kept 3.1.4 The cost of inventory

3.2 Setting the stage for effective inventory management 3.2.1 Strategic inventory choices 3.2.2 Inventory in the supply chain 3.2.3 Lead time management 3.2.4 The Forrester effect 3.2.5 Improving certainty of delivery and lead-time estimation

3.3 Enterprise Resource Management systems 3.3.1 Supply chain management and advanced planning and scheduling systems 3.3.2 Optimised production technology 3.3.3 Project Planning and Control and Project Evaluation and Review Technique 3.3.4 Manufacturing Planning and Control systems

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Chapter 4: MANAGING INVENTORY

The previous chapter introduced inventory management and discussed principles, strategic decisions, and management techniques concerning inventory management. In this chapter, we discuss in more detail the planning and operational aspects of inventory management. We describe inventory management techniques and operational inventory management – focusing on the ‘how’ of inventory management. 4.1 Inventory planning

4.1.1 Service level policies 4.1.2 Inventory categorisation 4.1.3 Inventory Management Plan 4.1.4 Insurance 4.1.5 Disaster recovery

4.2 Demand forecasting 4.2.1 Forecasting demand patterns 4.2.2 Forecasting methods

4.3 Inventory operations 4.3.1 Monitoring movements 4.3.2 Measurement and valuation of inventory 4.3.3 Receipt and issue of inventory 4.3.4 Systems to replenish inventory 4.3.5 Determining order quantity

4.3.6 When to place an order Learning check

Chapter 5: WAREHOUSING

This chapter focuses on the logistics of warehousing. Before discussing strategic, tactical and operational aspects of warehousing, we introduce two important topics that are very relevant to warehousing, but which are more generic: determining locations and layouts. Location is one of the most significant strategic decisions that an organisation can make, whether it is a new power plant, a processed food manufacturer, a toyshop, or a fast food restaurant. The right choice of geographical location can enhance market share and profits, whereas a poor location may have catastrophic consequences. Subsequently, we turn our attention to layout decisions for your organisation. In the last part of this chapter, we elaborate on such decisions in the warehousing context. Besides these strategic decisions, we discuss more operational aspects of warehousing such as equipment selection and materials movement within warehouses. We also cover the transactional requirements needed to run an effective stores operation. 5.1 Location decisions

5.1.1 The importance of locations 5.1.2 Factors to consider in location decisions

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5.1.3 Evaluation of locations 5.2 Layout

5.2.1 Types of layouts 5.2.2 Layout design methods

5.3 Warehousing 5.3.1 Warehouse location and acquisition options 5.3.2 Warehouse design 5.3.3 Warehouse layout 5.3.4 Material handling and equipment 5.3.5 Warehouse operations 5.3.6 Record keeping and communication 5.3.7 Warehouse Management Systems 5.3.8 Quality standards in warehousing

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Chapter 6: PACKAGING

The packaging of finished products is much more than the simple ‘container’ of the product. In this chapter, we will discuss packaging from a supply chain perspective, discussing its importance and functions. Furthermore, this chapter discusses the relation between packaging and other logistics areas such as storage of products in the warehouse, discussed in Chapter 5 of this module, and transportation, which will be discussed in Chapter 7. 6.1 The functions and importance of packaging

6.1.1 The importance of packaging 6.1.2 The functions of packaging 6.1.3 Packaging principles 6.1.4 ITC packaging publications

6.2 Packaging and supply chain management 6.3 Labelling and traceability

6.3.1 The legal (statutory) function 6.3.2 The information function 6.3.3 The identification and traceability function 6.3.4 Labelling for exports 6.3.5 Eco-labelling

6.4 Packaging and sustainability 6.4.1 Criteria for sustainable packaging 6.4.2 Sustainability concepts and packaging 6.4.3 Initiatives to improve sustainability

6.5 Packaging developments Learning check

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Chapter 7: TRANSPORTATION

Transportation, like inventory, is regarded as a driver of logistics and supply chain efficiency and value. This chapter looks at the decisions involved in transportation and provides an overview of the operational analysis for transportation planning. Transportation management involves:

Assessing alternative transport modes;

Understanding regulations affecting transportation;

Taking the decision on whether to use a third-party logistics provider or the company’s own fleet of vehicles;

Having procedures for evaluating carrier performance;

Balancing the trade-offs between cost and service in transportation. There are many modes of transport. In this section, we pay particular attention to road vehicles. We distinguish between inbound and outbound transportation. However, decisions relating to inbound and outbound transportation are similar, and so transportation will be treated within this chapter as a whole process. 7.1 Fleet decisions

7.1.1 In-company versus outsourced transportation 7.1.2 Vehicle economics

7.2 Inter-stores transport 7.2.1 Vehicle routing 7.2.2 Planning and scheduling deliveries 7.2.3 Fixed versus variable delivery schedules 7.2.4 Using communications equipment to facilitate scheduling

7.3 Customer delivery routing and scheduling 7.3.1 Advanced planning and routing applications

7.4 Developments in transportation Learning check

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Chapter 8: CUSTOMER RELATIONSHIP MANAGEMENT

This chapter aims to provide you with an understanding of what Customer Relationship Management (CRM) is its significance in business environments, and its impact on the way enterprises perceive their customers. Before discussing CRM, we set out to introduce the concept of customer value. We then set out a framework model of CRM that highlights the three main customer-oriented competencies required to be a successful CRM enterprise. It provides practical guidelines that can be turned into immediate actions by any enterprise, and it sets out advice for the management of CRM programmes once they are established. 8.1 Customer value 8.2 Understanding CRM

8.2.1 Definitions 8.2.2 The need for CRM 8.2.3 CRM data and applications 8.2.4 Problems with CRM

8.3 The CRM framework 8.3.1 The language of CRM 8.3.2 Value-creating processes 8.3.3 The exchange space 8.3.4 The CRM framework

8.4 Three CRM-competences 8.4.1 Learning 8.4.2 Connecting 8.4.3 Managing CRM

8.5 E-business and CRM

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