Andrew Cox Supply Chain Management A Guide To Best Practice Management Briefings Executive Series PDF

Supply Chain Management
Prentice Hall
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A guide to best practice
ANDREW COX, PAUL IRELAND,

CHRIS LONSDALE, JOE SANDERSON
AND GLYN WATSON
Prentice Hall
FINANCIAL TIMES
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First published in Great Britain in 2003
Andrew Cox, Paul Ireland, Chris Lonsdale,

Joe Sanderson and Glyn Watson 2003
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Joe Sanderson and Glyn Watson to be identified as authors
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About the authors
Andrew Cox is Professor and Director of the Centre for Business Strategy and
Procurement at Birmingham Business School, University of Birmingham in the UK. He
is also Chairman and CEO of Robertson Cox Ltd a UK and US based consultancy.
Andrew can be contacted at: ac@robcox.com
Paul Ireland is a research fellow in the Centre for Business Strategy and
Procurement at Birmingham Business School, University of Birmingham in the UK.
Paul can be contacted at: P.N.Ireland@bham.ac.uk
Chris Lonsdale is a lecturer in Supply Chain Management in the Department of

Commerce and the Centre for Business Strategy and Procurement at Birmingham
Business School, University of Birmingham in the UK.
Chris can be contacted at: c.m.lonsdale.ieb@bham.ac.uk
Joe Sanderson is a lecturer in Supply Chain Management in the Department of

Commerce and the Centre for Business Strategy Land Procurement at Birmingham
Joe can be contacted at: j.r.sanderson@bham.ac.uk
Glyn Watson is a lecturer in Supply Chain Management in the Department of

Commerce and the Centre for Business Strategy and Procurement at Birmingham
Glyn can be contacted at: g.r.watson@bham.ac.uk
v
Contents
List of figures ix
List of tables x
Preface xi
1 Supply chain management and best practice

sourcing 1
Introduction 3
The four basic sourcing options 4
Which of the options is best practice for the buyer? 8
The key enablers of SCM implementation 9
Conclusions 12
References 13
2 Is supply chain management the best strategic

sourcing option? 15
Introduction 17
Selecting the right sourcing strategy 18
Internal investments and the makebuy decision 19
External investments and the four generic sourcing strategies 24
Selecting strategic sourcing options 27
Conclusions 34
References 35
3 Is supply chain management feasible operationally? 37

Introduction 39
Internal success factors 40
External success factors 51
Conclusions 62
References 63
vii
Contents
4 Implementing supply chain management initiatives 65

Introduction 67
The three competitive market and SCM strategy options 67
A framework for developing competitive market and SCM
strategies 71
Creating a physically efficient (lean) supply chain 75
Creating an innovative and market-responsive (agile)
supply chain 89
Market differentiation and cost leadership with an
innovative and process efficiency supply chain strategy 94
Conclusions: the conundrum of knowledge and understanding 97
References 99
5 Software and Internet tools for effective supply

chain management 101
Introduction 103
The theoretical benefit of software and Internet tools for
SCM initiative 103
The major e-sourcing software applications 107
The major Internet sourcing applications 110
A framework for analyzing the utility of software and
Internet-based tools and SCM initiatives 116
Conclusions 119
References 120
viii
Figures
1.1 The four sourcing options for buyers 5

1.2 The Power Matrix between buyers and suppliers 10
1.3 Internal opposition and support for SCM strategies 11
2.1 The 5-step model to proactive supply chain management 17
2.2 Calculating and allocating costs 27
2.3 Calculating post-contractual risk 31
2.4 Calculating the return 32
3.1 Customer portfolio framework: what type of customer is the buyer? 43
3.2 Knowing your enemies and your friends 50
3.3 The attributes of buyer and supplier power 54
3.4 The competence and congruence matrix 57
3.5 Hypothetical idealized power regimes in supply chains 59
3.6 The power regime for in-flight re-fuelling equipment 61
4.1 The three competitive market and supply chain strategy options 68
4.2 Functional and innovative demand profiles 72
4.3 Physically efficient and market-responsive supply chains 73
4.4 Matching supply chains with products/services 75
4.5 An example of big picture mapping 79
4.6 An example of process activity mapping 81
4.7 Strategies for cycle time reduction 92
4.8 Understanding the scope for successful implementation of market
and SCM strategies 98
5.1 Internal and external enterprise process flows 108
5.2 The e-enabled internal and external enterprise process flows 111
5.3 The operational use value of software and Internet-based applications 116
ix
Tables
3.1 Actors involved in the organizational sourcing process 41

3.2 Key tools and techniques for SCM 42
3.3 Potential demand management problems 45
3.4 Rating the power of different functions involved in the sourcing process 49
x
Preface
The work that has supported the production of this short practitioner volume has
been underway for a number of years. It began in the mid-1990s with the publication
of a book that challenged much of the received orthodoxy in procurement and supply
management in particular and business thinking in general.
Since the publication of that book Business Success (1997) the work of the
Centre for Business Strategy and Procurement in Birmingham Business School at the
University of Birmingham has been devoted to testing empirically the theoretical
arguments first outlined in that volume, and then latterly in two companion
volumes Power Regimes (2000) and Supply Chains, Markets and Power (2002).
The latter two volumes were based on work that was generously supported by a
research grant from the Engineering and Physical Sciences Research Council (EPSRC)
(Project No: GR/L86395). This latest volume has been based on work into
Competitive Advantage through Supply Chain Management that has also been
generously supported by the EPSRC (Project No: GR/N34161/01). We would like to
express our gratitude to the EPSRC and also to the collaborating public and private
sector organizations involved in these two research projects. This is because many of
the findings outlined here could not have been made without the generous support
both financial and time that has been provided to the research team.
There will be a companion volume to this particular offering in the near future
exploring the link between types of buyer and supplier power structures and
alternative forms of relationship management. When this is completed we will
have finished the current empirical testing of our original hypotheses about the
ways practitioners can manage business-to-business relationships whether they
are buyers or suppliers.
We hope that, if nothing else, this body of work will challenge our readers to
think logically about how to manage their business relationships and, hopefully,
provide them with some clues as to how they might maximize whatever valued
outcomes they desire from their business interactions with others.
xi
Contents
List of figures ix
List of tables x
Preface xi
1 Supply chain management and best practice

sourcing 1
Introduction 3
The key enablers of SCM implementation 9
Conclusions 12
References 13
2 Is supply chain management the best strategic

sourcing option? 15
Introduction 17
External investments and the four generic sourcing strategies 24
Conclusions 34
References 35
3 Is supply chain management feasible operationally? 37

Introduction 39
Conclusions 62
References 63
vii
Contents
4 Implementing supply chain management initiatives 65

Introduction 67
The three competitive market and SCM strategy options 67
A framework for developing competitive market and SCM
strategies 71
supply chain 89
Market differentiation and cost leadership with an
innovative and process efficiency supply chain strategy 94
Conclusions: the conundrum of knowledge and understanding 97
References 99
5 Software and Internet tools for effective supply

chain management 101
Introduction 103
SCM initiative 103
Conclusions 119
References 120
viii
2
Is supply chain
management the best
strategic sourcing option?
Introduction 17
External investments and the four generic sourcing

strategies 24
Conclusions 34
References 35
15
Is SCM the best strategic sourcing option?
INTRODUCTION
As we saw, the issue of whether to undertake SCM or to pursue alternative

approaches to external relationship management has become a significant topic for
most companies. This is because, faced with increased international competition,
firms have come under intense pressure to cut costs in order to survive and sustain
double-digit returns on investment. In seeking to achieve this, firms have looked
for world-class practices wherever they can be found. One of the sources of
inspiration has been proactive Japanese lean manufacturing and supply chain
practice (Womack and Jones, 1996). This practice can be distilled into a simple
5-step model that companies should follow as shown in Figure 2.1.
Fig. 2.1 The 5-step model to proactive supply chain management
1. Concentrate on core competencies.
2. Outsource all non-core competencies to suppliers.
3. Consolidate all supply inputs into categories of spend.
4. Concentrate internal resources on a limited number of long-term collaborative

relationships with preferred suppliers.
5. Improve supplier and supply chain performance through proactive supply chain
development activities.
As we noted in the preceding chapter, however, any firm has a choice of four
generic supply strategies and not one. The strategic choice that a company has to
make, therefore, is whether or not SCM (as summarized in the 5-step model in
Figure 2.1) is the most strategically relevant approach, rather than supplier
selection, supply chain sourcing or supplier development.
Deciding on which of these approaches makes sense for any company depends
on two major variables. First, practitioners must understand the constraints to be
overcome when trying to implement any strategy. It makes little sense to develop
a plan of action that has almost no hope of garnering support from either internal
stakeholders or external suppliers. Consequently, a detailed account of the
operational constraints facing managers follows in the next chapter.
Second, prior to consideration of operational issues, it is necessary to understand
whether there is a strategic case for the adoption of a SCM approach. Whether this
approach should be developed depends largely on the strategic economic and
commercial case that can be made.
This is because sourcing decisions like business management decisions more
generally require companies to pick the option that offers the greatest possible
17
pay-off (and/or imposes the smallest possible costs). This chapter is therefore divided
into four sections that allow practitioners to understand whether a supply chain
management approach offers a strategically viable choice for their company:
section 1 describes the basic principles behind makebuy selection and provides
a decision-making framework;
section 2 explains when a firm should insource particular supply chain resources
as a core competence;
section 3 outlines how SCM approaches are more ambitious investment decisions
for the firm than the other three sourcing options because of the demands they
make on managerial time;
section 4 concludes by showing how this basic framework can be operationalized
through the use of three strategic sourcing decision-making templates.
SELECTING THE RIGHT SOURCING STRATEGY
Management decisions are investments because they carry with them costs that
are expected to yield returns. This is true even if the cost is the time that it takes
to perform a task. Time, like everything else, is a scarce resource. If companies
spend it pursuing unprofitable activities, then they lose the opportunity to do
something more profitable.
The return that a company receives from any investment is highly variable. It
depends upon what the action is intended to achieve. The yield may take the form
of the firm getting the right man for the job in the case of a human resource
manager properly chasing up references. Alternatively, it may take the form of
reduced production downtime in the case of an operations manager putting in
place a rigorous programme of repair and maintenance.
For the sourcing manager adding-value means receiving the right products or
services from vendors on time, or streamlining operational and logistical processes,
or obtaining simple cost savings. It could also, of course, be a combination of all
three of these potentially beneficial outcomes.
As with all investments, however, the attainment of any of these goals is
speculative because risk is involved in their achievement. Time spent trying to
develop a supplier may take weeks or even months of effort but offer very little by
way of tangible return. Consequently, strategic sourcing competence specifically
requires that sourcing managers take the options that offer the firm the best
investment return ratio after risk has been factored into the equation.
18
INTERNAL INVESTMENTS AND THE MAKEBUY DECISION
When a firm insources it is using investors capital to develop productive capabilities

within the organization that will offer the firm a return in the form of an increased
revenue-generating capacity. Whether the investment actually pays-off in practice
depends upon two major factors:
Does the firms enhanced internal resources lead to the creation of new (or
enhanced) products and services for which there is a demand that leads to
acceptable returns? Business history is replete with examples of new products
that failed to find favour with the public, and up to 80 per cent of all new
product offerings fail to either capture sufficient market share or sustain
profitability over time.
Does the firms investment provoke a competitive reaction that squeezes margins?
When new products and services come to market, if they are successful, the
normal response by competitors is to develop copycat items. When this occurs the
margins achieved by the first mover will be squeezed by competition.
Companies, therefore, have to think seriously about whether it is sensible to

insource activities or whether they should discontinue them. If activities are
essential to corporate strategy, and there is fierce competition, it may be necessary
to find cheaper ways of delivering required (but currently internally unprofitable)
activities by outsourcing these to external suppliers.
Through outsourcing in this way a company may be able to achieve competitive
advantage by finding lower cost or more efficient suppliers than its competitors.
In this way the company may increase its own internal margins, as well as offering
customers better value and/or lower cost products and services.
In recent years many firms have assumed, therefore, that less is more. There is
a widespread belief that there are significant competitive gains to be obtained
from redrawing the boundary of the firm so that suppliers handle more of the
production, with the outsourcing company focusing on strategy, marketing, sales
and supplier contract management.
One survey indicated that 73 per cent of respondent companies were
contemplating outsourcing their printing services; over 63 per cent were considering
outsourcing travel services; and nearly 60 per cent wanted to outsource pensions.
More significantly, however, 26 per cent believed that marketing and research and
development could be safely outsourced (3i, 1994). In a similar survey 12 per cent,
27 per cent and 34 per cent of respondents respectively felt that manufacturing, legal
services and IT services would be outsourced by 2001(PA Consulting Group, 1996).
19
The motives behind these initiatives can be highly varied. Three key drivers
behind the outsourcing phenomena have, however, been isolated (Lonsdale and
Cox, 1998):
1. Cost reduction. Cost reductions are obtained from reducing internal

headcount or through the vendor offering greater efficiency in its production
or servicing techniques. A firm that specializes in a particular activity is often
able to consolidate its clients spend to obtain significant economies of scale.
2. Converting fixed to variable costs. The move to quarterly results focused on
double-digit returns has forced many companies to seek the approval of
investors by outsourcing currently in-house competencies that are required
only occasionally, or for which the company is not able to undertake the
necessary internal investments to retain state-of-the-art capabilities.
3. Improve time to market/plug the competitive gap. In industries subject to
rapid technological change, the ability to maintain a cutting-edge across the
board can be problematic. As a result, delays in new product launches may
occur that can undermine a firms competitiveness. The ability of a firm to
outsource part of the innovation process to suppliers (who possess the
complementary resources that it lacks) can plug this competitive gap.
The first two drivers outlined often make short-term commercial sense for
companies, assuming that they understand the contractual risks in outsourcing
non-core activities. The third driver is more problematic because it touches on
issues that go to the very heart of a companys revenue-generating capabilities.
Companies need to be concerned not just with the costs of ownership but also
with the risks of non-ownership of key supply chain resources. Some resources are
essential to wealth creation. Transferring ownership of these resources to a
supplier not only threatens to de-skill the company but also imposes substantial
sourcing costs on the firm in the long term. The scale of these risks can be
illustrated by considering the case of IBM and Microsoft, quite possibly the
biggest outsourcing mistake in contemporary business history (Case study 2:1).
Case study 2.1

The IBM/Microsoft case
IBM invented the PC and made the theoretical basis of the architecture transparent by
publishing the basic details of how it worked. This allowed new entrants to develop
competing products. The most successful of these was Apple, who were able to reverse
engineer and produce a more customer-focused PC than IBM. The Apple PC had a monitor
and a windows-style software operating system. This was preferred by customers to the
cumbersome IBM system because, at that time, it did not have a monitor or a click and
move software operating system.
20
This forced IBM, who was taking considerable time to develop a customer-focused
operating system, to find a quick-fix for its own products so that it could compete with Apple,
who was winning large market shares. IBM believed that the operating system that it was
perfecting (and that would become known as OS2) would eventually be superior to anything
that currently existed in the marketplace and that it needed to find a competent supplier
with a reasonable operating system until its own system was perfected. IBM firmly believed
that once its operating system was available it would be state of the art and that everyone
would switch to it.
IBM then sourced its initial operating system from a small fledgling company called
Microsoft but used a short-term royalty-based contract, under which Microsoft retained the
intellectual property rights in the software, because IBM assumed that it would purchase a
maximum of 100 000 units. The contract was not exclusive to IBM and Microsoft was
allowed to sell the operating system to anybody else.
Eventually, when IBMs operating system was available, it discovered that nobody wanted
to switch to its new OS2 system from the now industrial standard operating system owned
by Microsoft. In effect IBM had outsourced the critical asset in the supply chain the
operating system to one of its suppliers.
The problem for IBM was that when it came to market, nobody would pay the switching
costs of retraining their staff to the new OS2 system. This was because they were all
standardized on the original IBM operating system that, unfortunately for IBM, did not belong
to them but to one of their suppliers Microsoft. The rest is history. Microsoft is now a much
more profitable and successful company than IBM, which no longer makes double-digit
returns, unlike its supplier Microsoft.
The point of this case study is to demonstrate that companies must be very careful
when they pursue SCM approaches that require them to focus on their core
competencies. One key requirement is that they do not outsource the critical
assets in their supply chains to their suppliers (Cox, 1997).
Deciding what should be insourced and what can be safely outsourced is,
therefore, no simple matter. This is a key strategic decision that requires a
company to consider the following issues relating to the external commercial
environment as it thinks about what its core competencies should be:
Is there a demand for the products and services that the firm is trying to develop?
Is the product capable of satisfying a value proposition that customers want or
need?
Is demand effective? Is there a constituency that will not only like the product
but will also be prepared to pay for it (and in sufficient numbers and at the right
price)?
Do other firms already offer similar, better or cheaper products? Is there a gap
in the market that the firm can profitably fill or is the marketplace saturated
with too many competitors?
21
Internally, the firm must also consider:
Of the resources and capabilities necessary to bring the product or service to

market that are critical to the process of competitive differentiation and
revenue creation, which must be insourced at all costs and which are non-
critical and can be safely outsourced?
The answer to this question depends on what is the basic strategy of a company.
Traditionally there has been a view that companies have only two basic choices
about business strategy (Porter, 1985). We believe, however, that there are in fact
three basic strategic options available that companies can attempt to pursue:
A firm can pursue a competitive strategy of product differentiation by creating

products that perform better than those of its rivals. This could take the form
of bread that is more white or brown, softer or more granular. In the IT market
differentiation might take the form of computer chips that process data faster.
Alternatively, in a pharmaceutical market, differentiation might focus on drugs
that cure more people, more quickly and with fewer side effects.
On the other hand, if a market has become commoditized, and there is little
scope for further product differentiation, it may be necessary to pursue a
strategy of cost leadership. This involves a company seeking to increase its
market share by producing more cheaply than its direct competitors.
A third option is to pass value to customers on a continuous basis by pursuing
product differentiation and cost leadership at the same time. This is the general
approach of Japanese car companies, like Toyota and Honda. These companies
seek to provide greater use value to the customer and at a consistently lower
cost and on a continuous basis. Dell is currently attempting to do the same in
the PC marketplace.
The problem with this latter approach is that the company may win market share
but with only relatively low profit margins. This problem also exists for those
pursuing cost leadership strategies. It is only those able to differentiate that can
normally achieve higher than normal profits because they are able to provide
some mechanism by which competitors are not able to replicate their activities.
It is interesting to note, however, that it is those companies that have historically
pursued the strategy of passing value to the customers, and those that have to pursue
cost leadership, that have been the most active in outsourcing and SCM approaches.
Product differentiating companies do not necessarily have to pursue these
strategies, although they may a still seek to maximize their profitability by
retaining all the cost reductions that they can generate from their supply chains.
Cisco is a company that has been able to achieve product differentiation while at
22
the same time pursuing SCM approaches, especially, in their case, by using the
latest Internet and e-business technology.
Regardless of whether a company is pursuing product differentiation, cost
leadership or the passing of value to the customer it must at all costs retain in-house
all those activities that set it apart from the competition. If a companys advantage
lies in R&D and marketing, then it may be safe to outsource manufacturing. If the
firms advantage lies in the internal efficiency of its production capability, then it
would not be safe to outsource this competence.
Finally, when considering what is core or non-core to its business, a company
must understand whether its differentiator(s) can be defended. Critical resources
and capabilities should be sustainable. It is necessary, therefore, to consider the
barriers to competitive imitation (Rumelt, 1997):
Information impactedness. This means that the knowledge on which an advantage

is based remains largely tacit and uncodified. Unless key personnel within the
organization opt to defect to a competitor, it is hard for the competitor to
determine the causes of success.
Causal ambiguity. This arises when the processes leading to differentiation are
especially complex and difficult to unravel by the differentiators themselves.
Reputation effects. This arises when products are difficult for the customer to
evaluate prior to purchase, making them risk averse. In such circumstances
customers often purchase on the basis of brand and reputation, regardless of
whether the competition can provide better alternatives.
Buyer costs of switch. The reluctance of customers to switch from one supplier
to another may go beyond a simple case of risk aversion. It may be because
once a customer has bought into a suppliers technologies it finds itself locked
into them.
Clearly companies considering SCM approaches that require them to outsource

non-core activities will need to be cognizant of the key issues outlined above.
Key learning point 2.1
The lesson from companies successfully pursuing SCM approaches is that

they always understand which skills and capabilities (competencies) are
critical assets for their own competitive advantage, and these are always
retained in-house.
Only those skills and capabilities (competencies) that are not critical to
competitive advantage should be outsourced and managed by external
suppliers.
23
EXTERNAL INVESTMENTS AND THE FOUR GENERIC

SOURCING STRATEGIES
Just as the question of what should be insourced and outsourced is an investment

decision, the same can be said of the choice a company makes about which of the
four generic external sourcing strategies supplier selection, supply chain
sourcing, supplier development and supply chain management it should adopt.
Clearly, a company must choose that approach which is the most profitable for it
to adopt.
Even the most reactive short-term strategy requires an investment. This can be as
minimal as the time required to research and negotiate a contract and place an order.
For some of the more ambitious proactive strategies available to the outsourcing
company, however, the investments required can be substantial. These can cover
internal administrative costs as well as any dedicated investments that must be made
to mange suppliers effectively.
Generally reactive strategies represent a cheaper option for the firm than proactive
strategies because the up-front investments are largely administrative. By contrast,
in proactive strategies the investment process involves the product development
process as well.
Reactive and proactive strategies also differ in respect to the benefits to be
realized. With reactive strategies the return normally takes the form of the
negotiation of better deals from suppliers. In the case of supplier selection these
gains are confined to the first tier; while in supply chain sourcing they extend into
the supply chain. Proactive approaches normally involve additional benefits such
as continuous waste reduction and/or product development, either at the first tier
or throughout the supply chain. As a result, when considering proactive strategies
it is also necessary to think about the ownership of exploitable technologies.
Sourcing strategy choices also carry with them an element of risk. For example,
a manager might spend many hours researching a supply market in an attempt to
obtain a better deal, only to find that the firm already receives the best possible
price. Similarly, many proactive strategies can involve the outlay of considerable
sums of money with no observable return. In the defence industry, governments
often discover that weapons systems do not materialize, or are late and/or over
budget, despite considerable efforts by the buyer to develop the supplier and their
supply chains.
There is an additional factor that must be considered when selecting one of the four
sourcing strategies. Sourcing strategies are necessarily co-operative undertakings
because they require two separate organizations (the buyer and the supplier) to
interact. At the same time, because they involve two separate organizations that
24
normally seek to pursue their own corporate interests, an element of conflict must
exist in any relationship, with each side attempting to maximize its potential gain.
This insight leads us to conclude that power must impact on this process,
because the relative power resources of the buyer and supplier will determine
which side (if any) assumes the majority of the risk in any relationship and which
side (if any) will obtain the majority of the subsequent gains.
Generally speaking, in an ideal world, it is better to be powerful (in a position
to assign risk and appropriate the maximum share of value) than to be weak and
dependent in any sourcing exchange relationship.
The basic framework that informs the strategic choice about sourcing strategies
is outlined below:
1 Firms need to understand the cost-reward ratios associated with each strategic
option if they are to make the right choice. The best strategy is the one that
offers the greatest gain for the smallest investment.
2 In this context, the basic rule of thumb is that proactive strategies are more
resource intensive than reactive strategies.
3 This is because they require not only administrative investments but may also
require direct financial contributions in order to realize any prospective gains.
4 The potential gains may or may not be greater for proactive sourcing, it
depends upon the particular case. However, the gains tend to be wider in their
scope. They involve product development and process improvement as well as
basic price reduction.
5 Complicating the decision-making process is the concept of risk. It may make
more sense to pursue a low-cost strategy that has a high probability of
delivering modest gains than to pursue a high-cost strategy that offers a
potentially big pay-back, but with only a small probability of success.
6 Complicating the decision-making process is the question of power. This is
because power determines which party will assume the risk and which party
will appropriate the benefits. For example, an advantageous power position
may enable a buyer to pass the risks to the supplier while disproportionately
appropriating the benefits.
A simple hypothetical example can be used to illustrate this decision frame (see
case study 2.2).
Case study 2.2

Choosing between supplier selection and supplier development
In this example a supply manager is asked to choose between Option A (Supplier Selection)
and Option B (Supplier Development).
25
In the case of Option A, the buyer is operating in a weak power relationship with its supplier.
In the case of Option B, the buyer starts from the same power position but understands that,
as a result of investments that both parties must make in the relationship, both parties will
move to a situation of interdependence.
In Option A the firm believes that its supplier is padding costs. For this reason the
company wishes to increase competition by bidding the business to force the incumbent
supplier to reduce their costs. This approach requires an investment in management time
costing 1000. Given the volume of business that the firm has with the supplier, it has been
calculated that there is a reasonable probability that, through this initiative, the firm can
save 4000. The expected pay-off for the firm can be calculated easily enough by
multiplying the expected return and then subtracting the up-front cost. In this instance the
expected pay-off would be 4000 less 1000 = 3000.
Supplier selection is not, however, the only option available to the buyer because it can
also pursue Option B (Supplier Development) with the incumbent supplier. What the firm
needs to know is which of the two strategies offers the better return.
Supplier Development is a more expensive alternative because it will require not only the
administrative costs of 1000 but also an additional investment to augment the suppliers
manufacturing capability. This cost of dedicated investments in the relationship is estimated
at 4000. It has been calculated that the subsequent gain will, however, generate savings
of the order of 24 000.
What is the pay-off in this instance? Under conditions of interdependence, buyers and
sellers can be expected to share the risks and rewards of any initiative. Since the buyers
administrative costs are 1000 and its share of the dedicated investments are 2000 (50
per cent of 4000), its exposure totals 3000. The costs for the supplier are the same at
3000 for administrative costs and dedicated investments.
If the initiative works, it will deliver gains of 24 000 but the buyer and supplier will each
have to find 3000 (= 6000) and share the net gains (24 000 less 6000). This leaves
both parties with a half share of 18 000 = 9000 each. Consequently, the case for a
strategy of Supplier Development appears, in this situation, much stronger than that for
Supplier Selection.
The attractiveness of particular sourcing options is likely to be highly sensitive

to changes in four key variables. These are:
the level of investment required;

the returns anticipated;
the risks that may arise from adopting a particular option;
the power of the buyer and supplier to assign risk and reward on the other
party.
26
SELECTING STRATEGIC SOURCING OPTIONS
In practice, selecting the appropriate sourcing strategy is an art rather than a

science. Often it is not possible to obtain accurate data on the costs, returns and
risks surrounding any sourcing investment. As a result, most managers have to fall
back on collecting data that are indicative of what is likely to result from the
adoption of a particular option.
What follows is a series of templates designed to assist managers in making
comparisons between the four sourcing options available. Figure 2.2 allows
managers to understand the cost side of the equation. Figure 2.3 allows managers
to analyze the risk elements and Figure 2.4 does the same for the returns/rewards.
When considering any category of spend that it may be deciding to outsource to
the supply market, it is essential that the buying company undertakes the following
analysis for each of the four sourcing options that it might pursue.
Calculating and allocating costs
Fig. 2.2 Calculating and allocating costs

Phase I Phase II Phase III Phase IV
Relative demand Allocation of cost
Nature of the investment that investment Structure
would make of Upfront cost Ultimate cost
Buyer Supplier power
Investment type Cost Buyer Supplier Buyer Supplier
H/M/L H/M/L
Administrative
Dedicated
Other
Phase I: The nature of the investment

In Phase I it is necessary to identify and collect data on the various types of cost
associated with the planned strategy. This includes data on the different
27
administrative tasks that the firm must perform, plus data on any dedicated
investments that the initiative requires. The table calls for cash figures whenever
possible. Consequently, if the initiative will take one full-administrators time for
two months and the administrators salary is 2000 a month, then a figure of
4000 would be entered into the column. Similarly, if the initiative requires one
or either of the two parties to invest in specialized investments in support of the
relationship, then this combined total should also be recorded.
Phase II: The relative demands made by the investment required

The methodology asks the company to calculate any necessary investments but it is
important to remember that there are a number of other issues at stake. Any
investment is relative to the resources that a firm has at its disposal. Companies in
a cash-rich industry (like pharmaceuticals) can often afford to throw money at a
problem. A small company working in the fourth-tier of an automotive supply chain
may not have the personnel or time to consider a proactive initiative of any sort.
Consequently, managers need to consider not just what the upfront cost is but
also what extent the activity is likely to divert scarce resources away from more
productive uses. Generally speaking, therefore, supplier development or supply
chain management tend to be reserved for either major items of spend (i.e. areas
that the firm spends a lot of money on) or commercially sensitive areas (i.e. areas
that contribute to, but are not necessarily essential for, the maintenance of the
firms core competencies).
For this reason the template provides in Phase II the opportunity to record data
pertaining to the relative demands of the investment on both the buyer and the
supplier. If the firm wishes the initiative to work, it must be sensitive to the
demands that it makes on its own and the suppliers time and resources. If the
supplier is overextended, they may not wish (or indeed be able) to deliver.
Phase III: The structure of power

Phase III allows the company to record data relating to the structure of power that
exists between the buyer and the supplier. For further details refer to the
discussions in Chapters 1 and 3 where the Power Matrix (Figure 1.2) can be used
to understand the current power situation.
For the reasons already covered, different power structures will allow costs,
risks and rewards to be divided in different ways. In the case where the supplier
is dominant, for example, the buyer can expect to foot most of the bills up-front
regardless of the ultimate success of the relationship. In an interdependent
relationship, both parties would expect to take a more equitable share of the risks
and rewards.
28
Phase IV: The overall allocation of costs

Phase IV allows managers to allocate the expected division of cost between the
buyer and the supplier. This includes the up-front as well as the final costs
(regardless of whether or not the initiative is successful).
However, managers also have to be able to calculate the costs to their organization
should something go awry. Contingency planning, after all, is part and parcel of
good management. It is possible, for example, that the administrative effort required
has been under or overestimated. It is also possible that the commitment for
dedicated investments has to be revised in the light of new developments in
technology or because of a misunderstanding of the true costs of the initiative before
project commencement.
Whatever the reason, should the costs spiral the additional expenditures need to
be allocated. Furthermore, how they are allocated will determine just how
profitable the initiative proves to be in the long run.
Calculating post-contractual risk
Firms have to be particularly careful because proactive strategies can expose them
to significant contractual risk (what some analysts refer to as moral hazard).
Sustaining the commitment of a supplier depends upon a firms ability to motivate
them. Motivation can take the form of a carrot (bonuses for good performance) or
a stick (the cancellation of the initiative or the whole contract if the performance
is poor).
In order for the incentive structure to work it must be credible. This means
being able to monitor the supplier to see if they are complying with the terms of
the deal and having the ability to punish the supplier (by invoking penalties or by
threatening exit) if they are not.
The buyer must, therefore, be able to spot those areas where there is significant
scope for opportunism by the supplier (in this case in the form of trying to
renegotiate the riskreward allocation) and be able to craft safeguards against the
risk. Where contractual safeguards cannot properly be introduced, then the firm
is probably better to retain the competence within the organization rather than to
outsource it.
Moral hazard is frequently a problem in supply management because effective
monitoring is always an issue. However, sometimes the risks are particularly
acute. Contracting that takes place in a highly volatile or uncertain environment
is difficult because it raises the issue of renegotiation. Buyers attempt to draft
contracts in as complete a fashion as possible, but when an environment is
particularly volatile, specifying all the terms of an agreement in advance is likely
29
to prove next to impossible. This in itself need not present a difficulty unless the
firm becomes locked-in to its outsourced provider. If this happens, the supplier
may choose to renegotiate on terms that benefit it rather than its customer.
Contractual lock-in occurs if the contract requires the buyer to make some form
of highly specialized investment in the relationship. The investment might take the
form of time. An organization that has spent months negotiating and implementing
an outsourced relationship might be reluctant to write-off all of this hard work
especially if re-sourcing means repeating the effort with no greater chance of
success next time around. Alternatively, firms might have made substantial and
non-fungible investments in specialized training or equipment (otherwise known as
asset specific investments).
Less creditably, though, firms are often reluctant to call time on a poorly
performing supplier if the managers who negotiated the contract have a significant
reputational investment in the deal. Calling a halt to the affair means admitting that
they got it wrong, and nobody likes doing that. Whatever the form of the lock-in,
the effect is the same: the firm loses its capacity to impose costs on the supplier and
thus its ability to impose discipline.
Of course, just because a contract presents the firm with a risk, it does not
follow that the risk cannot be managed. For example, one strategy often pursued
by buyers involves unbundling a contract. This means separating out those
elements that pose a risk from those that do not. The highly risky elements are
retained in-house and only the less risky elements are outsourced. The supplier
may even be asked to post a bond, or share the costs of the dedicated investments,
as a sign of its good faith (i.e. to show that its word of honour and commitment
to the relationship is credible).
The purpose of Figure 2.3 is to record and analyze the risks described above by
dividing the issues into four broad phases of analysis.
Phase I: The pre-contractual power position

Phase I simply records the pre-contractual power situation and this can be taken
from the analysis shown in Figure 2.2.
Phase II: The risks of lock-in and dependency

Phase II itself divides into four parts. The first allows the manager to describe the
nature of the investment required to support the relationship. This description can
be transferred from Phase I of Figure 2.2. It is then necessary to indicate the extent
to which the investment required is asset specific (i.e. necessary to make this
relationship work). If it is, then it is necessary to record which of the contracting
parties (buyer and/or supplier) is commercially exposed.
30
Fig. 2.3 Calculating post-contractual risk

Phase I Phase II Phase III Phase IV
Confidence in Net gainer/

Pre- Lock-in-risk Post- investment plan loser from
contractual contractual
structure structure the revised
Is this Is the Is investment
of power Investment cost firm vendor of power H/M/L Revise Revise
type up down plan
sunk? locked-in? locked-in?
Phase III: The post-contractual power position

If the investments on both sides are small, it is unlikely that the power relationship
will have changed at all, however, if they are substantial and asymmetric, a shift
may well have taken place.
Phase III records the post-contractual power situation once the required
investments have been made. Again the matrices linked to the Power Matrix in
Chapters 1 and 3 can be used to ascertain whether the selected sourcing strategy
is likely to lead to a power shift. This is most likely in proactive approaches
because these relationships often require dedicated investments that do not always
come with adequate safeguards against post-contractual lock-in.
Phase IV: Understanding contractual uncertainty

Phase IV requires a consideration of contractual uncertainty. Companies need to
indicate the level of confidence (high/medium/low) they have that their initial
investment estimates will be valid. Should confidence be low, it will be necessary
to indicate whether the costs will ultimately be revised downwards (or more
importantly) upwards.
If it is concluded that there is a significant risk that estimates regarding one of
the more substantial areas of investment are soft, then it will be necessary to
31
allocate this exposure between the buyer and supplier. If it is likely that the
initiative will lead to the company being locked into a relationship, and the cost
figures are also considered soft, it may well be that the strategy does not make
commercial sense. If the gains from the investment justify the initiative, it may
make more sense to internalize (insource) the activity within the firm.
Calculating the return
Figure 2.4 allows companies to think about the returns from any investment. How
some of these gains may be calculated operationally is covered in Chapter 4, which
deals with the operationalization of SCM techniques. Figure 2.4 is restricted to
recording projected gains and losses.
Fig. 2.4 Calculating the return

Phase I Phase II Phase III
Generic
nature of Value of change Confidence in change Projected
change in Type of change gain/loss
product from
Revise Revise initiative
offering Positive Negative Neutral H/M/L up down
Reactive
Price and/or
functionality
change
Proactive
Price and/or
functionality
change
Proactive
Efficiency
(total costs
of ownership
change
Proactive
Revenue
generating
opportunities
This is not straightforward because the concept of Value for Money (VFM) must
be understood by linking functionality with cost options. Improving VFM can be
achieved in the following obvious ways:
improving functionality while reducing cost;

improving functionality while maintaining cost;
maintaining functionality while reducing cost.
32
However, it can also be achieved in a number of less obvious ways:
improving functionality while increasing cost (where the functionality increase

is greater than the cost increase);
reducing functionality while reducing cost (where the fall in functionality is less
than the fall in cost).
It is not, therefore, necessary for all the elements of a deal to improve in order for
the deal itself to improve. Figure 2.4 attempts to capture this through three phases
of analysis.
Phase I: The expected changes in functionality and costs

of ownership
In Phase I the company must describe the changes that are expected to arise as a
result of the adoption of the chosen strategy. These may conceivably fall into one
of four broad options:
If the strategy is essentially reactive, then it is likely that changes in performance

by the supplier will be linked either to the initial purchase price and/or to
increases in functionality of the product or services offered to the buyer.
If the strategy is proactive, there are potentially three major changes possible.
The first is a change in the initial purchase price and/or functionality. The
second arises from a change in the total costs of ownership through supply
chain efficiency gains (this is only possible when supply chain initiatives are
being undertaken). The third is an increase in revenue generating capability, as
a result of innovations from the initiative that generate isolating mechanisms
that contribute to competitive advantages in market closure and/or sustainable
increases in profit margins.
Phase II: The value of the change

Phase II requires that the value of the change for the buyer is recorded. Three
options are available:
Positive. The initiative either results in value for money benefits for the buyer
such as reduced prices and margins from the supplier; improved efficiency;
improved functionality, or delivers exploitable new technologies.
Negative. The initiative provides value for money benefits for the supplier and
undermines the current value received by the buyer.
Neutral. There is no discernible change in value for money for the buyer.
33
Phase III: Mapping uncertainty

Phase III allows uncertainty to be mapped. First, it is necessary to indicate the
degree to which the probability (high, medium or low) of the projected estimates
of achievable outcomes will occur or not. If the probability is medium or low, it
is then necessary to indicate whether the gains/losses estimated have been over- or
under-stated. Following from this it will be necessary to record a revised
projection of the anticipated reward structure.
CONCLUSIONS
Having completed each of the figures for a specific category of sourcing requirement,
and for each of the four sourcing options available, it should now be possible for
companies to make a judgement about which of the four sourcing options available
for this category of spend appears to be the most strategically beneficial.
Any of the sourcing options available is worth pursuing if the projected

gains exceed the projected costs, after the pattern of risk has been factored
into the equation.
The strategy that is optimal is, however, likely to be that approach which
results in the greatest pay-off when all the four alternative sourcing approaches
are compared against one another for a particular category of spend.
It is clear that this approach to sourcing strategy selection may well result in an
answer that says a proactive SCM approach is simply not the most optimal
solution for the buying company. In such circumstances our view is that the
sensible company should opt to undertake the sourcing approach that is most
conducive for its commercial success. Obviously, if the analysis leads to the
conclusion that SCM is optimal, then the buying company should pursue this
option vigorously.
There is one additional caveat that must be addressed before such an approach
is adopted. Identifying what may be the most commercially profitable sourcing
option is not the same thing as identifying a strategy that will work operationally.
Before embarking on any sourcing strategy it is necessary to understand, first,
whether there are any major internal and external constraints that will so affect
implementation that the strategy cannot be made to work in practice, despite the
clear commercial benefits that may be achieved strategically. These issues are
discussed in the next chapter in relation to SCM strategies only.
34
REFERENCES
Cox, A. (1997) Business Success. Helpston: Earlsgate Press.

Lonsdale, C. and Cox, A. (1998) Outsourcing: A Guide to Business Risk
Management Tools and Techniques. Helpston: Earlsgate Press.
PA Consulting Group (1996) Strategic Sourcing: International Survey. London:
PA Group.
Porter, M. (1985) Competitive Strategy. New York: Free Press.
Rumelt, R. P. (1997) Theory, strategy and entrepreneurship, in D. Teece (ed.)
The Competitive Challenge. New York: Harper & Row.
Womack, J. and Jones, D. (1996) Lean Thinking. New York: Simon & Schuster.
3i (1994) Outsourcing. London: 3i.
35
1
Supply chain management and
best practice sourcing
Introduction 3
The key enablers of successful SCM implementation 9
Conclusions 12
References 13
1
Supply chain management and best practice sourcing
INTRODUCTION
In recent years there has been considerable debate amongst consultants, practitioners
and academics about what constitutes best practice for those involved in sourcing.
For many this debate has led to the conclusion that supply chain management (SCM)
constitutes best practice in the search for improved value for money relationships
with suppliers.
The evidence for this viewpoint is the increasing frequency with which old
purchasing, procurement and logistics departments have begun to re-brand
themselves as supply chain management functions. We have also witnessed the
development of SCM practices in all the major consultancy companies and the
creation of dedicated MBA and undergraduate degree programmes, as well as
departments of SCM within major American and European Universities.
Over recent years we have taken something of a contrary view about the
appropriateness of this view of best practice (Cox, 1997a, 1997b, 1998; Cox et
al., 2000a). Much of our criticism of the SCM bandwagon has in the past been
based on deductive reasoning about the logical approaches to sourcing that must
be made under different circumstances of power between buyers and suppliers. At
the same time we have undertaken research into how power regimes create
opportunities, as well as problems, for buyers and suppliers as they seek to
implement particular sourcing approaches in changing circumstances of power
(Cox et al., 2000b, 2001).
Some of this empirical research has been reported already and it

demonstrates clearly that there are some circumstances in which buyers can
pursue SCM approaches successfully, but also that there are many, many
more circumstances when they cannot.
Cox et al., 2002
Despite this general conclusion it is clear that SCM practices when properly
conceived and implemented can provide one of the most powerful mechanisms
currently available for buyers to transform the supply offerings they receive from
their supply chains.
This short volume has, therefore, four major tasks:
to help practitioners understand whether or not it is appropriate for them to

undertake SCM strategically;
to help practitioners to understand if it is possible to undertake SCM strategies
operationally within their own organization, and with the suppliers within their
external supply chains;
3
to help practitioners understand how to implement SCM strategies successfully;

to help practitioners understand whether there is any software and Internet-
based tool(s) that will facilitate the successful implementation of SCM strategies.
It is important for the reader to understand at the outset, however, that the general
argument of this book is that while SCM can be regarded as a best practice
approach for organizations under some circumstances, it is rarely best practice for
companies in most or all of their external sourcing circumstances. Given this, the
first issue to be addressed is not what is the most effective way to undertake supply
chain management, but if it is not always appropriate, what sourcing choices do
managers have?
The best way to address this issue is by first understanding, logically, the ways in
which buyers can work with any supplier and the scope of their activities within a
supply chain. By doing this it is possible to define four basic sourcing approaches
that are always available for buyers to select from when they seek to manage their
supply relationships.
THE FOUR BASIC SOURCING OPTIONS
Ways of working for buyers and suppliers
As Figure 1.1 demonstrates, buyers have two basic choices about the ways they
can work with suppliers. These are as follows.
Proactive ways of working

In this way of working the buyer independently (or jointly with the supplier)
designs and specifies in detail the stretch improvements in functionality and cost
of ownership that the supplier is expected to deliver now and in the future. The
buyer will obviously select the most competent suppliers available and undertake
robust and rigorous measurement and management of performance against
predetermined stretch targets. The buyer will also be heavily involved in
developing the skills and capabilities of the supplier to deliver the required targets
through close and collaborative relationship management.
Reactive ways of working

In this way of working the buyers role is much more circumscribed since it is
normally the supplier who determines what the supply offering to the buyer will
be. The buyer is, therefore, rarely directly involved in the design and specification
of functionality and costs improvements. Here the buyer normally sources at arms
4
length and relationship management is confined to short-term interactions, based

on the selection of the most appropriate supply offering and given the available
choices provided by currently available suppliers in the market. The buyer does not
directly drive innovation in this approach but encourages market contestation so
that, over time, competition provides innovation in functionality and cost.
Fig. 1.1 The four sourcing options for buyers
Proactive Supplier Supply chain

development management
Focus of buyer
relationship with
the supplier
Supplier Supply chain
Reactive
selection sourcing
First-tier Supply chain
Level of work scope with

supplier and supply chain
The scope and level of buyer involvement with supply offerings
Figure 1.1 also demonstrates that to achieve improved leverage of supply inputs,
buyers also have to make decisions about the scope of their involvement within the
supply chain that must be created for the delivery of particular goods and services.
First-tier relationship management

In this approach the buyer lacks the internal capabilities and/or external power
resources to direct innovation from the extended network of suppliers. The buyer,
therefore, can only work with suppliers at the first-tier. The buyer can, of course,
choose either short-term arms length or longer-term collaborative relationship
management styles when sourcing at the first-tier.
Supply chain relationship management

In this approach the buyer has both the internal capabilities and the external
power resources to drive innovation on its own, or jointly, with the extended
network of suppliers within the supply chain (this can be in the total chain or
within significant elements of it). Here the buyer works beyond the first-tier
5
supply relationship to improve functionality and/or reduce costs on a continuous

basis, normally using long-term collaborative relationships.
The four sourcing options facing the buyer
Figure 1.1 further demonstrates that putting these four basic variables together
provides the buyer with four basic sourcing options. These are differentiated on
the basis of the level of external complexity and internal resource intensity that
must be managed by the buyer.
Supplier selection
This option is the one most commonly used by buyers in all types of organization.
Supplier selection implies that the buyers role is confined primarily to reactive
sourcing at the first-tier. This means that the buyer normally selects products and
/or services from the supply offerings made by suppliers currently operating in the
market, with analysis of the power and leverage opportunities between the buyer
and supplier confined only to the proximate supplier of the finished product or
service being sourced.
It is the supplier who designs and specifies requirements, with the buyers role
confined to market analysis of supplier offerings and, using robust supplier
selection procedures, the sourcing of the best value for money supplier(s). This
approach also normally requires robust performance measurement in order that
the buyer can determine whether the supplier has delivered what was expected. If
it has been, then the supplier may expect to receive further orders from the buyer,
assuming no other suppliers can offer a better value proposition to the buyer
when contracts are reviewed.
Of all of the four options available to a buyer, supplier selection makes the least
demands on internal resources and requires the least commitment to long-term
collaborative external sourcing relationships.
Supply chain sourcing

The supply chain sourcing option is similar in many ways to the supplier selection
option. The major difference is that, instead of the supplier assessing the suitability
of suppliers at the first-tier, the buyer is now involved directly in understanding the
structure of the supply chain through which products and services are created. This
approach requires, therefore, that buyers develop rigorous and robust source plans
in order that the current power structures between buyers and suppliers within the
total supply chain can be understood.
Once again, however, the buyers role is confined to market intelligence (but now
within the total supply chain) rather than the detailed design and specification of
6
supply offerings. The buyers motive in undertaking source planning is to understand

whether there are opportunities for effective leverage within the totality of the supply
chain relationships, rather than merely at the first tier. The buyer does not, however,
undertake a proactive role with the supplier or supply chain. The buyer in fact simply
assesses the scope to use the current leverage that is available if sourcing is
undertaken in the supply chain beyond the first-tier.
This approach makes more demands on the internal resources of the buying
company than supplier selection because it involves the development of competence
(and therefore the expending of scarce internal resources) on supply chain not just
first-tier information search and analysis. It also involves the development of more
supply relationships externally and, therefore, more external performance
measurement and relationship management responsibilities.
Supplier development
Supplier development refers to a process by which, having undertaken the same
initial type of analysis and selection as that outlined under Supplier selection
above, the buyer works on a continuous basis with the supplier to transform the
current trade-off between product or service functionality and the overall cost of
ownership. The key difference with supplier selection is that the buyer is now
heavily involved, not only in selection and assessment but also in the fundamental
design and specification of the product and service offering that the supplier will
provide now and in the future. Clearly, depending on the respective resources and
capabilities of the buyer and the supplier, this will either be determined by the
buyer or it will have to be a joint effort.
It is clear that this approach makes much greater demands on the internal
resources, as well as upon the external relationship management skills, of the buyer
than the two more reactive options outlined above. In this approach the buyer has
to commit considerable internal resources to the design and specification process,
as well as to external relationship management.
Furthermore, this approach requires that buyers and suppliers must normally
develop longer-term relationships. This is because, if both parties have to make
dedicated investments in the relationship to make it work, neither side is likely to do
this without some longer-term commitment. It is also essential that the power structure
is favourable to the buyer since it is unlikely that dominant suppliers will be willing to
respond positively to the design and specification requirements of buyers.
Supply chain management

The final option available to buyers is the most demanding of both internal resources
and external relationship management. The approach is similar in all respects to
supplier development except that, having first undertaken source planning, the buyer
7
now assesses the scope to undertake proactive supplier development linking together
all the buyers and suppliers in the chain. The aim of this network relationship
management is to encourage the players in the chain to dedicate their business
strategies to the delivery of improved functionality and lower costs of ownership for
the ultimate customers in the chain.
It is self-evident that this approach, which incorporates the same selection and
performance measurement tools and techniques as outlined under the reactive
approaches provided earlier, is the most difficult for buyers to implement. The reason
being that two major enablers must be in place before any buying organization can
implement this approach. First, the buying company must have the internal
capabilities to shape the stretch design and specification requirements for the chain
as a whole and have the internal resources to embark on the complex and time
consuming role of developing all the buyers and suppliers within the chain.
Second, there must be a power structure that is conducive to buyer-led supply
chain improvement. Obviously, depending on the power relationships within the
chain, it may be necessary for the buyer to work jointly with the buyers and
suppliers within the chain or, if the buyer has sufficient internal resources and
power over the players in the chain (or a substantial proportion of them), it may
be possible for the buyer to dictate what they will do.
WHICH OF THESE OPTIONS IS BEST PRACTICE

FOR THE BUYER?
Our research and consulting activities over the last ten years have continually
reinforced one conclusion: whatever the hype, most buying organizations do not
in practice do very much SCM (Cox et al., 2001; Cox et al. 2002).
The reason for this is self-evident. Few buying organizations have either the
internal resources or the external power circumstances that are conducive to long-
term and continuous collaborative buyer and supplier relationship management.
This implies that, whatever proselytizers of SCM argue about it being best
practice, for the bulk of their spend, most practitioners will never be in a position
to implement it because the achievable gains are not worth the internal and
external efforts required.
This is not to deny that SCM is a most effective and appropriate thing to do if
the buyer is in circumstances conducive for its implementation. Unfortunately,
however, the empirical evidence seems to confirm that most buyers will only ever
have the internal resources and external power opportunities to undertake reactive
sourcing options.
It is imperative, therefore, that managers recognize this fact and that organizations
begin to analyze the objective circumstances they are in, so that they can properly
8
understand whether they have proactive and/or reactive sourcing opportunities and
which of the four options outlined here is likely to be the most efficacious for
improved leverage in the future for any particular category of spend.
This is because our work with many companies over the last ten years has indicated
clearly that, while SCM may be possible and desirable in some industries like
automotive, food retailing, process construction, personal computer manufacturing,
chemical refining and aluminium (to mention just a few) this does not mean that
this approach is the most appropriate for buyers to adopt in all circumstances.
Indeed our research has demonstrated quite clearly that not only is it impossible
for the majority of organizations to adopt SCM approaches but also, and perhaps
more to the point, companies pursuing SCM approaches in their direct, revenue-
generating supply chains often find it impossible to do so in their indirect,
non-production areas of spend. In these circumstances even SCM-focused
companies are often forced to adopt supplier development, supplier selection and
supply chain sourcing options for some of their categories of spend.
Best practice cannot be about the development of any one particular sourcing
approach.
Rather best practice must be the ability to understand which of the four
sourcing options available is the most appropriate in any given circumstance.
THE KEY ENABLERS OF SCM IMPLEMENTATION
Our work has led us to conclude, therefore, that there must be circumstances
when SCM strategies can work and there must be circumstances when they are
unlikely to do so.
It is interesting that most SCM strategies seem to operate well in circumstances
in which the buyer has high volume and fairly regular and constant demand
relative to a supply market in which there are many suppliers, all of whom have
similar capabilities, and who are normally highly dependent on the buyer in one
form or another.
It is worth noting that many of the industries in which SCM strategies have been
pioneered the automotive, the aluminium, the chemical refining, process
manufacturing and process construction have these demand and supply
characteristics. But there are also circumstances where SCM strategies based on
longer-term collaborative relationship management approaches do not work well.
9
It is interesting that SCM strategies do not appear to work well in circumstances

where the buyer has low volume and infrequent or ad hoc demand, and in which
there are dominant suppliers who are not dependent on the buyer in any form.
It is highly unlikely, therefore, that a buyer (individual or corporate) could currently
force Microsoft or Cisco to adopt SCM strategies against their will, or seek to
appropriate for themselves most of the increased value from working together. The
reason for this is self-evident. From a dominant suppliers perspective, unless a buyer
has sufficient volume relative to its alternative customers and unless that demand is
constant, there is no reason why it should work with any particular buyer to create
value-adding activities. Furthermore, there is no reason why it should want to share
any value created with its customers if it can keep such value for itself.
This is just another way of saying that demand and supply variables create a
situation of power and leverage between buyers and suppliers at all points in a
supply chain we refer to this as the creation of power regimes within the
complex networks of buyer and supplier exchange that exist in any and all supply
chains for products and services (Cox et al., 2000b).
Unless managers understand the ways in which the power circumstances between
buyers and suppliers create opportunities for, and obstacles to, the development of
potential SCM strategies, then there is a significant risk that managers will be
pursing external sourcing approaches that are impossible to implement.
Given this, as Figure 1.2 demonstrates, the ability of managers to undertake
SCM strategies will be heavily dependent on the power relationships that exist
between buyers and suppliers within the supply chains that must be managed if
SCM strategies are to be implemented effectively. In deciding whether it is
strategically or operationally possible for buyers to undertake SCM strategies,
much of the initial decision will have to be made by understanding where the
buyer and supplier sit in The Power Matrix outlined in Figure 1.2.
Fig. 1.2 The Power Matrix between buyers and suppliers
High Buyer
Inter-dependence
dominance
Relative utility and
scarcity of buyers
resources for supplier
Supplier
Low Independence
dominance
Low High
Relative utility and scarcity of

suppliers resources for buyer
Source: Cox, A. et al., Power Regimes, Helpston: Earlsgate Press (2000b) p. 18
10
As Figure 1.2 indicates there are four objective power situations that buyers and
suppliers can find themselves in:
Buyer dominance means that the buyer can control the relationship with the
supplier and can fix the price and quality trade-offs in the buyer and supplier
relationship.
Interdependence means that the buyer and the supplier are both heavily
dependent on one another and they must work together and jointly decide on
price and quality trade-offs in the relationship.
Independence means that neither the buyer nor the supplier have any resources
to determine and shape the specific relationship and both receive price and
quality on the basis of market competition and contestation.
Supplier dominance means that the buyer is in no position at all to shape the
relationship with the supplier and must receive quality and price decisions that
are dictated by the supplier.
The significance of external power relationships for the effective implementation
of SCM strategies is outlined in far more detail in Chapter 3 where the second
major operational enabler is also discussed. This enabler is the issue of internal
capability. As Figure 1.3 demonstrates, there are always power circumstances at
play within organizations, as well as externally with suppliers. Our research has
led us to conclude that effective SCM strategies cannot be undertaken unless there
is clear support within an organization to make them work.
Fig. 1.3 Internal opposition and support for SCM strategies
Understand
what SCM is Enemies Confirmed allies
Dont
understand Zombies Potential allies
what SCM is
Dont want to Do want to

help SCM help SCM
implementation implementation
Once again we discuss these issues in more detail in Chapter 3. It is worth stressing,
however, that unless there are more confirmed allies and potential allies than
enemies and zombies internally within an organization, it is unlikely that such
SCM approaches can ever be made to work successfully however conducive the
11
external power relationships with suppliers. Attention to internal buy-in for SCM
strategies by those managing external resources is clearly a critical success factor.
There are two major enablers of successful supply chain management strategies:
buy-in from a significant proportion of those within the organization who

have the capability to stop effective implementation;
conducive external power structures in the supply chains to be managed
normally of extended buyer dominance or interdependence that allow the
buying organization to drive (or significantly shape) quality and price
trade-offs.
Both of these enablers must be in place for a successful SCM strategy to be

attempted. But even these two factors, while necessary, are not a sufficient
cause of success.
For ultimate success to be achieved, the buying organization must be able to
implement their SCM strategy appropriately given the internal and external
power circumstances they face both pre- and post-contractually.
CONCLUSIONS
SCM strategies can be highly successful mechanisms for the leverage of improved
value for money from suppliers. But it is also necessary for successful implementation
that buying organizations do not fall into serious errors of judgement when they
consider which of their resources and capabilities they should manage using longer-
term collaborative relationships.
This is another way of saying that it will not always be appropriate for buyers
to use SCM strategies for all their supply requirements. On many occasions
supplier selection, supply chain sourcing and supplier development approaches
may be far more appropriate mechanisms by which to leverage value for money
than SCM strategies, and for most buyers these three approaches may well be
their most frequently used sourcing tools.
Having said that, it is also worth stressing again that when SCM strategies can
be used they are an extremely powerful mechanism for leveraging improved value
for money from suppliers and their supply chains. Nevertheless, even when there
is a supportive internal and external environment for the successful
implementation of SCM approaches (as described in Chapter 3) sometimes these
strategies are not adopted successfully. The major reasons for this are threefold
and will be discussed later in some detail.
12
First, as indicated in Chapter 2, buying organizations sometimes outsource the

wrong skills and capabilities to suppliers and do not understand what are core
and non-core competencies. Buying organizations also often misperceive the pre-
and post-contractual power circumstances they are in and, over time, find that
they become victims of post-contractual lock-in to suppliers who were once in the
buyer dominance or interdependence power situations. As result of poor practice,
it is possible for the buying organization to find that during implementation the
power situation reverts to supplier dominance. This error of implementation must
be guarded against at all costs. Sometimes it is also necessary that, whatever the
perceived benefits of SCM approaches, organizations do not outsource their
internal competencies at all.
Second, buying organizations often fail to understand how to implement their
SCM strategies appropriately, because they fail to recognize the differences between
the types of products and services that must be managed, as well as the focus of their
SCM initiative. In Chapter 4 we outline in detail how SCM strategies must be
aligned with the types of products and services (and their underlying demand and
supply structures) if SCM approaches are to be implemented effectively. We
differentiate primarily between SCM initiatives aimed at cost reduction through
process efficiency and those directed at achieving market differentiation through
product and service innovation.
Third, Chapter 5 outlines some of the major software and Internet-based tools
available for those developing SCM strategies. In this discussion we provide
managers with a series of templates to enable them to understand whether any of
these tools can provide them with significant benefits. At the same time we ask
whether any of these tools can create an unacceptable risk of post-contractual lock-
in that makes effective exit difficult for the buyers or the suppliers in the chain.
Having addressed these issues, we hope that practitioners will be in a better
position to understand when SCM approaches make sense for them strategically
and operationally and, if they do, how they can be implemented successfully.
REFERENCES
Cox, A. (1997a) Business Success. Helpston: Earlsgate Press.

Cox, A. (1997b) On power, appropriateness and procurement competence,
Supply Management, 2 October, pp. 247.
Cox, A. (1998) Clarifying complexity, Supply Management, 29 January, pp. 346.
Cox, A. et al., (2001) The power perspective in procurement and supply
management, Journal of Supply Chain Management, (37) 2, 447.
13
Cox, A., Ireland, P., Lonsdale, C., Sanderson, J. and Watson, G. (2002) Supply
Chains, Markets and Power: Mapping Buyer and Supplier Power Regimes.
London: Routledge.
Cox, A., Sanderson, J. and Watson, G. (2000a) Wielding influence, Supply
Management, 6 April, pp. 303.
Cox, A., Sanderson, J. and Watson, G. (2000b) Power Regimes: Mapping the
DNA of Business and Supply Chain Relationships. Helpston: Earlsgate Press.
14
3
Is supply chain management
feasible operationally?
Introduction 39
Conclusions 62
References 63
37
Is supply chain management feasible operationally?
INTRODUCTION
The previous chapter developed a framework for identifying when it is

strategically and commercially sensible to implement a strategy of SCM. In this
chapter we address the question of whether a buying company can operationally
implement SCM strategies in any chosen supply chain.
The answer to this question is essentially a function of two interrelated success
factors. Each of these success factors must be present both within the buying
company and within the supply companies in the extended supply chain if SCM
strategy is to be effective.
There is an internal dimension and an external dimension to the effective
operational delivery of an SCM approach.
The first success factor is the need to have competent managers, who possess a
solid understanding of the technical, operational and commercial tools and
techniques of SCM.
Beyond this operational understanding, however, competence also requires
companies to understand how their particular organizational functions (be it sales
and marketing, production or procurement) must operate to support such a
strategy. The requirement to have competent managers is equally critical both
within the buying company and within the supplier organizations in the extended
supply chain that has to be managed.
The reason for this is that the deployment of SCM strategies requires co-ordinated
managerial effort in a number of interconnected organizations. No single
organization can, nor indeed should, try to manage a supply chain on a unilateral
basis. This is impractical and would imply a greater degree of direct intervention in
the affairs of other companies than is possible without vertical integration.
Another important internal factor in SCM initiatives is the willingness of key
organizational actors, both within the buying company and in the supply chain,
to commit the necessary time and resources. Many companies are so focused upon
making SCM work and, therefore, concerned with matters of managerial
competence, that they fail to ask a vital prior question: What incentive, if any, do
key internal organizational actors have to make the necessary commitment?
SCM initiatives tend to fail not because there is a lack of managerial
understanding or competence but because internal and external actors are not
prepared to commit the substantial resources that are needed (Sanderson et al.,
2001; Cox et al., 2002). It will be important, therefore, to explore what
determines the willingness of internal and external organizational actors to be
supportive and to make the necessary investments.
The second critical success factor, therefore, is the availability of supportive
power structures. It is clear that intra- and inter-organizational power structures
are crucial in understanding the incentives of key managers.
39
It follows, therefore, that an understanding of the resources underpinning these

structures, and a capacity to manipulate these resources, must lie at the heart of a
successful SCM strategy.
There are two basic success factors for successful SCM strategies, both of
which must be present in the buying company and in the supply organizations
in the extended supply chain to be managed. These are:
managerial competence and understanding.

This includes an awareness of the operational tools and techniques used in
SCM strategies and an understanding of what is required of particular
organizational functions to manage demand effectively;
an appropriate alignment of intra- and inter-organizational power and
incentives.
SCM strategies require substantial dedicated investments, both by the buyer
and by their suppliers in the extended supply chain. These investments are
only likely to be forthcoming if internal and external actors have an
incentive to make them. Incentives are a function of power.
INTERNAL SUCCESS FACTORS
Managerial competence and understanding in your organization
It is clearly important to be aware of the competence of those managers working

within the sourcing function, but it is also necessary to be aware of the
competence of managers working within other functions that have an impact
upon sourcing decisions. Studies of organizational buying demonstrate that the
buying decision usually involves a number of actors from several different
functions (Webster and Wind, 1972; Sheth, 1973).
Each of these actors has a specific role to play within the buying process and
each, therefore, influences particular aspects of the relationship between the buyer
and its suppliers. Consequently, the likely success of SCM strategies is crucially
dependent upon the managerial competence and understanding present within the
different functions involved in the sourcing process. These various decision roles
and aspects of influence are summarized in Table 3.1.
40
Table 3.1 Actors involved in the organizational sourcing process
Role Influence on buying process Functional examples
User Initiates the buying process by CEO; Strategy; Strategic Business

recognizing a requirement; often Units; Finance; Marketing; R&D;
involved in writing the specifications Engineering; Production and
for specialist, technical products Operations; HR; Legal; Environ-
or services; may also be involved mental;Shared Services; Facilities
in supplier development activity and Estates; Logistics etc.
Influencer Provides information and opinions As above
used for evaluating alternative
suppliers/products; reviews
specifications
Gatekeeper Affects the search for information Normally Procurement, SCM,
by distributing or screening Logistics; R&D; Engineering;
marketing materials and supplier Production and Operations
bids
Approver Authorizes the proposed expenditure As above under User (if they are
budget holder)
Buyer Selects and develops suppliers; Normally Engineering; Production
negotiates, manages and and Operations; Logistics; SCM;
monitors contracts; monitors Procurement
supplier performance
There are normally two broad categories of managerial competence and

understanding that are crucial to the success of SCM strategies.
The first is operational competence. This is an understanding by managers in the
organization of the various tools and techniques that exist to support the
implementation of SCM strategies.
The most important of these tools and techniques are listed in Table 3.2. While
the majority of these tools are likely to be used by the gatekeepers of the sourcing
functions, it is still vital for the other functions involved in the sourcing process
to be aware of what they can achieve.
This is because, as Table 3.1 suggests, functions such as engineering and production
and operations can have a direct impact upon the effectiveness with which these tools
are implemented. They might do this either by acting directly in the sourcing role or
by providing information (such as supplier performance data) that the procurement,
logistics or SCM function uses in the development of strategy.
The tools and techniques shown in Table 3.2 are discussed in detail in Chapter
4. The remainder of this section is devoted, therefore, to the second main category
of internal competence and understanding: demand management competence.
41
Table 3.2 Key tools and techniques for SCM
Lean Thinking Pareto Curve Approach

Agile Thinking Surge and Base Approach
Critical Asset Thinking The Supply Chain Response Matrix
Seven Principles of Muda The Production Variety Funnel
JIT Production and Supply Quality Filter Mapping
Big Picture Mapping Demand Amplification Mapping
Value Stream Mapping Decision Point Analysis
Vendor Managed Inventory Physical Structure Mapping
Cycle Time Reduction
Supplier Associations and Networks
Demand management competence means that each function involved in the

buying process understands the need to configure the organizations demand in a
way that makes it attractive to current and potential suppliers.
Demand management is an important competence because the more attractive
the buyer is perceived to be by its suppliers, the more willing those suppliers will
be to invest in SCM initiatives. The willingness of suppliers to make the necessary
investments is a function of their incentives to do so, and those incentives are in
turn a function of the power structures that exist between the buyer and each of
its suppliers.
One key power resource is the attractiveness of the buyers expenditure for
particular suppliers. In short, the more attractive or important the buyer is as a
customer, the more likely a supplier is to co-operate with their SCM initiatives.
Presented in Figure 3.1 is a simple Customer Portfolio Framework that can be
used to assess how attractive the buyers business is to each of its suppliers.
As Figure 3.1 shows there are two main factors to consider when analyzing the
relative attractiveness of the buyers business to a supplier. The first is the ease
with which a supplier can service the buyers requirements and, by extension, how
costly it is for that supplier to work them.
The key costs incurred by suppliers in servicing their customers requirements
fall into two main categories:
Transaction costs. These are the costs incurred by a supplier in drawing up,
managing and monitoring its contract with the customer, in particular the costs
of invoicing and ensuring that payment is made. The fewer invoices that a
supplier is required to send out and the more prompt are a customers payments,
the lower these transaction costs will be.
42
Production costs. These are the costs incurred by a supplier in the production
of goods or services to meet the buyers requirements. The less standardized/the
more bespoke or unique are the buyers requirements, the higher these costs are
likely to be because the product or production process will have to be
redesigned. Equally, if the buyer requires a supplier to produce a product or
service at short notice, these costs are likely to rise because the supplier will be
forced to make unplanned demands on its own production processes and to
acquire material inputs from its suppliers without a significant lead time.
Fig. 3.1 Customer portfolio framework: what type of customer

is the buyer?
Development Key
High customer customer
Ease of
(win more business) (aim to please)
servicing
buyers
business Nuisance Leverage
Low customer customer
(ignore) (take advantage)
Low High
Value of buyers
business to supplier
Clearly, all else being equal, a supplier is likely to prefer a customer that is relatively
easy and therefore inexpensive to service, because its profit margin is likely to be
more substantial. It is possible that customers that are difficult/expensive to service
will see any additional costs being passed on in the price that they pay. Market
competition dictates, however, that this is not always possible.
The second main factor is the value of your business to the supplier. The issue
of value can be understood in a number of ways:
the size of buyer expenditure with the supplier relative to their overall turnover;
the regularity and predictability of buyer expenditure;
the prestige/marketing value of the suppliers association with the buyer;
the suppliers association with the buyer leads to product innovations that they
can sell to other customers, or process innovations that reduce their costs/improve
their profitability.
43
Putting these two factors together (ease of servicing and value of business) creates
four basic types of customer as shown in Figure 3.1. As the figure suggests, the
most attractive, or key customer, is one which is relatively easy to service and
whose business is highly valuable to the supplier. This type of customer is likely
have substantial power or influence over its supplier. Consequently, a key customer
should expect its supplier to be willing to invest and participate in SCM initiatives.
At the other end of the spectrum of attractiveness lies the nuisance customer.
This is a customer whose demands make it difficult/costly to service and whose
business is not particularly valuable to the supplier. Consequently, a nuisance
customer is unlikely to receive support from its supplier for costly SCM initiatives.
The remaining two types of customer, the development customer and the
leverage customer are in intermediate positions. It seems likely, however, that a
development customer would receive greater support from its supplier for SCM
initiatives given the suppliers desire to increase the volume and regularity of
business that it receives from such a customer. A supplier servicing a leverage
customer will not have to pursue such initiatives, but it may if it feels there is some
benefit for itself from going along with the customers wishes.
Exercise 3.1 Locating suppliers in the customer matrix
It is clearly vital, therefore, to understand how suppliers view the buyer before
embarking upon SCM initiatives.
The matrix shown in Figure 3.1 allows a buyer to locate each of its suppliers
by asking two key questions:
1 How easy is it for the supplier to service the buyers business?

2 How valuable is the buyers business for the supplier?
It is also vital to understand that it is the configuration and management of

the buyers internal demand that will dictate the type of customer that
suppliers perceive the buyer to be.
There are five main potential problems to be considered when thinking about the
way in which the buyer manages the demand for everything that it buys from
external third parties. These are shown below in Table 3.3 with a brief explanation
of the impact they might have on the buyers attractiveness as a customer.
As can be seen from Table 3.3, each of the five demand management problems
can have a serious negative impact on the buyers attractiveness as a customer
and, by extension, the willingness of suppliers to support SCM initiatives.
The key question that arises, therefore, is what are the primary causes of these
problems, and what, if anything, can you do about them? At least some of these
44
problems will have purely technical or operational causes, such as a lack of

comprehensive and compatible information technology, or the demand for rigorous
safety standards from the buyers own customers.
It is less often understood, however, that a good many of these demand
management problems arise as a result of the political struggles that go on between
different functions within an organization.
Table 3.3 Potential demand management problems
Demand management problem Impact on customer attractiveness
Over-specification Makes the buyers requirements more

difficult/costly to service, which may impact
on the suppliers profitability (nuisance or
leverage customer)
Unplanned changes in specification May require the supplier to make costly last-
minute alterations to the product/production
process (nuisance or leverage customer)
Poor demand information Makes it difficult for the supplier to pre-plan
its production activities and may require the
supplier to pay a premium for its supply
inputs (nuisance or leverage customer)
Fragmentation of expenditure Each separate transaction undertaken with a
supplier will be of limited value, and multiple
interactions will increase transaction costs
(nuisance customer)
Maverick buying Diminishes the volume/value of business
awarded to approved suppliers (nuisance or
development customer)
Intra-organizational power and incentives
This section explores the idea that organizations are a political battleground. This
is because individual functions within an organization have a tendency to pursue
their own interests and objectives and to interpret the overall goals of the
organization in light of those interests and objectives. It is the pursuit of these
individual agendas by different functions that often causes the demand
management problems discussed above.
One of the key internal challenges facing anyone in trying to implement SCM
initiatives is to persuade those functions causing these problems that they should
change their behaviour and support the initiative.
45
Two important questions arise as a result of this line of argument:
What creates the ability to persuade other organizational functions to change

their demand management behaviour in support of SCM initiatives?
What is the attitude of other organizational functions to SCM initiatives? Have
they been co-operative historically or unco-operative?
The ability to persuade other functions to support SCM initiatives, or any other
sourcing initiative for that matter, is largely determined by the power of one
function relative to that of other functions. With this in mind a simple predictive
model of intra-organizational power is provided based on three factors in the
sourcing process:
the ability of different functions to cope with uncertainty in the sourcing

process;
the centrality of different functions to the process;
the substitutability of different functions in the process.
This simplified strategic contingencies model (Hickson et al., 1971; Pettigrew,

1973; Pfeffer and Salancik, 1974) explains which functions are most powerful in the
sourcing process and which are less influential in decision-making. By combining
this information with that on their attitude to cross-functional initiatives, it is
possible to categorize each function and decide whether the internal balance of
power is conducive to SCM initiatives. In short, it is possible to assess whether there
are too many enemies or whether there are sufficient allies.
Uncertainty
Uncertainty means that decisions are taken about suppliers and their products and
services where there is limited information about future outcomes. In other words,
supply alternatives and their possible outcomes in terms of value for money can
often be highly unpredictable.
This problem of supply uncertainty is particularly acute in the outsourcing of
complex IT services (Lonsdale and Cox, 1998; Audit Commission, 2001). There
is evidence that there are significant cost overruns and operational delays
associated with buying such services. Moreover, these problems can often become
much more than an irritation for the buying organization, because information
processing is now fundamental to so many activities.
Uncertainty might contribute to such difficulties in one of two main ways.
The buying organization might suffer from needs uncertainty. This means that
the buyer is unable to provide the supplier with a full and detailed statement of
requirements, because it is uncertain as to how its needs might change over the
life of the contract. Consequently, even if the supplier acts in good faith, it
46
might still be forced to charge more or to fall behind in delivery of the

customers requirements, because these requirements change in radical and
unforeseen ways.
The buying organization might also suffer from means uncertainty. This implies
that the buyer has a fairly clear understanding of its needs, but that it is
uncertain as to the means by which those needs might best be fulfilled. In this
case, there is a very real danger that the supplier might act opportunistically
and fulfill the buyers needs in ways that allow it to earn more money than is
strictly necessary.
It is clear that these different types of uncertainty can have an enormous impact
upon the value for money that buyers are able to achieve. Consequently, those
functions within a buying organization that are best equipped to help the
organization cope with or manage such uncertainty will have a critical power
resource in the sourcing process.
Coping with uncertainty in the sourcing process could mean:
Prevention. A function could prevent needs uncertainty by providing expert

advice that enables the organization to plan its requirements over an extended
period;
Information. A function could provide technical/operational information on
alternative methods of fulfilling a requirement to help the buying organization
overcome means uncertainty;
Absorption. A function could react to supplier opportunism by helping to
develop and implement an exit strategy.
Centrality
Centrality refers to the importance and closeness of a particular function to the
sourcing process.
There are two key variables that can affect the centrality of a function to any
sourcing decisions.
The first variable is the extent to which a particular function performs activities
in the sourcing process that impact directly upon the sourcing activities or
decisions of other functions.
For example, in many manufacturing organizations it could be said that the
production and R&D departments enjoy a high degree of centrality in the
sourcing process, because they are key players in recognizing and defining the
organizations need and in drawing up the original specification. These decisions
are fundamental in driving the activities of all other actors involved in sourcing.
In contrast, we might argue that the sales and marketing function has a high
degree of centrality in the sourcing process of a service sector organization,
47
because it defines the market offering and thereby determines the organizations
input requirements. Finally, it might be argued that in all types of organizations
the finance function enjoys a high degree of centrality by virtue of its capacity to
veto or approve major items of expenditure.
The second variable that determines a functions centrality to the sourcing
process is the extent to which the function performs activities that are deemed
essential to the successful completion of the process.
In other words, if an organization were unable to buy any products or services
without an input from a particular function, then that function would be deemed
to possess a high degree of centrality. Conversely, a function would have a lower
degree of centrality if it only had an involvement with the buying of certain
categories of goods or services, or if it was only active when certain types of buying
decisions were being taken (i.e. buying a new item from a new supplier).
This is an important point, because it emphasizes that the centrality of a particular
function to the sourcing process is likely to be variable and context specific. Indeed,
on many occasions the procurement function itself might have no involvement in the
buying process. For example, it is not unusual for an organizations procurement
department to have no involvement in capital expenditure, with these items being
handled instead by Business Units or production functions.
Substitutability
Substitutability is the third factor that determines the power of a particular
function in the sourcing process. This refers to the ease with which the activities
performed by that function can be performed equally well by other actors, either
inside or outside the organization.
If a function has no substitute in the process because it is a repository of tacit
and therefore non-transferable skills and understanding, it has a critical power
resource. For example, certain engineers in the oil industry gain a power resource
from the fact that they are part of a select band that understand the way in which
the drilling equipment interacts with different geological environments.
As a consequence of this knowledge these engineers are non-substitutable actors
when an oil companys requirements for equipment and maintenance services are
being specified. Conversely, if one or more other actors, either internal or
external, can perform a functions activities equally well, then its power resources
in this dimension are limited.
This issue of substitutability has become particularly topical in recent years with
the increased use of outsourcing. The outsourcing trend has inevitably caused
those functions faced by the threat of transfer to a third party to argue that they
are non-substitutable, because they understand the historical legacy and
idiosyncrasies of the organization.
48
On occasion such arguments win out, but more often the pressure for headcount
reduction and cost efficiencies takes precedence. It might be argued therefore that
non-substitutability has been significantly eroded as a basis of internal power by
the increased willingness of organizations to shift their external boundaries.
An understanding of the relative power of different functions in the sourcing

process can be acquired by considering three factors:
the ability of different functions to cope with uncertainty in the process;

the centrality of different functions to the process;
the substitutability of different functions in the process.
A highly powerful function, therefore, will be characterized by a significant

ability to cope with uncertainty, a high degree of centrality in the sourcing
process, and by non-substitutability. Conversely, a function that is relatively
lacking in power will display an opposite set of characteristics.
Table 3.4 presents in summary form the relationship between different combinations
of these variables and the commensurate degree of intra-organizational power. This
table can be used as a quick checklist to rate the relative power of different functions
within any organization.
Table 3.4 Rating the power of the different functions involved in the
sourcing process
Coping with uncertainty Centrality Substitutes Power rating
Good High None Very High

Good High Many High
Good Low None High
Poor High None High
Good Low Many Medium
Poor High Many Medium
Poor Low None Medium
Poor Low Many Low
The power of different functions within the sourcing process is a necessary but not
sufficient factor in any decision as to whether the internal environment of a company
is conducive to SCM initiatives. The insights that are gleaned from the above analysis
49
must also now be combined with information on the historical attitude of different
functions in an organization to sourcing initiatives. It is necessary to ascertain
whether a particular function has tended to be co-operative in the past or whether
they have had a tendency to act as a brake on new SCM initiatives.
The reason for doing this, as can be seen in Figure 3.2, is to create a
categorization that differentiates between a powerful and co-operative function
and one which has power but is unco-operative. Figure 3.2 also brings back into
the picture the managerial competence issues discussed earlier.
We argued that each of the functions involved in the sourcing process must have
two different competencies if SCM initiatives are to be successful. These are an
operational understanding of the tools and techniques used in SCM initiatives and
an understanding of how internal demand should be configured to make the
organization attractive to its suppliers.
Categorizing functions
The basic categorization shown in Figure 3.2 divides functions into those with a
high level of competence and those with a low level of competence. The former
are those functions with a solid grasp of both the operational and the demand
management requirements of SCM. The latter are those functions that have
neither of these competencies or where they are significantly under-developed.
Fig. 3.2 Knowing your enemies and your friends
Attitude of function to procurement initiatives
Co-operative Unco-operative
Power of function in procurement process
Lowmedium Highv. high Lowmedium Highv. high
High Ally Key ally Enemy Key enemy
Competence
of function
Potential
Low Potential ally Irritant Loose cannon
key ally
The primary managerial benefit of categorizing the functions in an organization

as shown in Figure 3.2 is that it enables managers to decide what kind of strategies
50
they need to follow to build a coalition of support for SCM initiatives. This point
is illustrated in the following exercise.
Exercise 3.2 Linking management styles to SCM initiatives
Use the above matrix to categorize the various functions involved in sourcing
in the organization and then answer the following questions:
What type of managerial style should be adopted with each function based
on its position in the matrix conciliatory, confrontational, mentoring,
avoidance?
How might each type of function fit into a strategy to build support for
SCM initiatives?
EXTERNAL SUCCESS FACTORS
The success of SCM initiatives has both an internal and an external dimension.
The remainder of the chapter discusses the key external factors that must be
present if SCM is to be successfully implemented. These key external factors are
an exact mirror image of those discussed about the internal context: a high level
of managerial competence and understanding in the organizations in the supply
chains to be managed; and, an appropriate alignment of inter-organizational
power and incentives.
We can summarize these two factors by asking whether the organizations in the
supply chain that you want to manage are both competent and congruent (Cox,
1999). We turn first to the issue of competence.
Managerial competence and understanding in

supply chain organizations
When managers ask questions about the competence of their suppliers, they are
usually interested in whether they can deliver effectively on specified quality, cost
and delivery (QCD) requirements. Indeed, it is these three factors, in combination
with the financial stability of a supplier, that form the basis of the vast majority
of supplier assessment and selection procedures.
This definition of supplier competence is, however, far too narrow if the aim is
to select suppliers to be part of SCM initiatives. To achieve proper alignment with
suppliers in SCM initiatives it is necessary to consider whether a supplier is also
competent in the two spheres that we discussed earlier in the internal context.
51
Do suppliers have an operational understanding of the tools and techniques that

underpin SCM, and do they understand how to manage their demand effectively
so that their own suppliers view them as attractive customers?
In short the buyer should be interested in whether a supplier is competent not
only to meet QCD requirements but also to improve upon them through the
deployment of SCM tools and techniques and the effective alignment of its own
internal demand.
The exercise below provides a simple checklist that can be used to assess the
competence of suppliers on these two important measures. To be truly competent
a supplier must demonstrate a robust understanding of both the operational and
the demand management requirements of SCM.
Exercise 3.3 Are suppliers competent for SCM?

Name of supply chain organization
Operational competence Demand management competence
How much knowledge/experience does the supplier To what extent does the supplier exhibit the
have of the following SCM tools and techniques? following demand management problems?
Tools Substantial Limited None Problems Substantial Limited None
Lean thinking Over specification
Agile thinking Unplanned changes
Critical asset thinking in specification
Seven principles of Poor demand
Muda information
JIT Fragmentation of
Big picture mapping expenditure
Process activity Maverick buying
mapping Other (specify)
Value stream
mapping
Vendor managed
inventory
Cycle time reduction
Supplier association
and networks
Pareto Curve
approach
Surge and Base
approach
Supply chain
response matrix
The production
variety funnel
Quality filter mapping
Demand amplification
mapping
Decision point
analysis
Physical structure
mapping
Clearly, the checklist shown in Exercise 3.3 provides only a fairly basic insight into
the competence of the organizations in the supply chain that has to be managed.
52
That said, this analysis should enable managers to take a view on whether a
particular supply chain organization already understands what is required and how
to do SCM, or whether it needs to be educated.
Moreover, if a supplier is deemed not to be competent, a judgement must also
be made about whether it can be persuaded to commit the time and resources
needed to bring its competence up to the required level. This issue is important
because it is illogical and impractical to suggest that a supplier could ever be
forced to develop its competence. A supply chain organization must be willing to
learn what is necessary to participate in any SCM initiative.
This question of persuading other actors to support the initiatives of the buyer
requires a consideration of power and incentives. This requires consideration of
the inter-organizational power circumstances in which a supplier might be
expected either to improve its competence or, if already competent, to use what it
knows in support of a buyers SCM initiative. Equally, those power circumstances
in which a supplier is unlikely to be willing either to improve or to deploy its SCM
competence must be considered.
Inter-organizational power and incentives
When selecting suppliers to be part of SCM initiatives it is not enough to think

solely about their competence. It is also necessary to understand whether a
particular supply chain organization has an incentive to make the substantial
investments that are needed to be part of such an initiative. These investments are
of two basic types.
The first type of investment relates to developing and improving the required
operational and demand management competencies. The focus here is primarily
on management education to promote knowledge and understanding of SCM
tools and techniques and the commercial implications of poor buying behaviour.
The second type of investment relates to the organizational change process that
might be necessary to make SCM initiatives effective. For example, a supply
chain organization might be required to redesign its internal production process,
alter its capacity planning/allocation, introduce a new management information
(ERP) system, or reorganize its in-bound and out-bound logistics to create a
synergy with any SCM initiative. All these organizational innovations will carry
a substantial cost in terms of managerial and financial resources.
The key question is, therefore, under what inter-organizational power circumstances
would a supply chain organization be willing to make such substantial up-front
investments?
Before this question can be answered the range of power circumstances that
might exist between a buyer and any supplier must be identified. These issues were
53
discussed in Chapter 1 but, as Figure 3.3 shows, the four basic buyersupplier
power circumstances have key attributes for buyers and suppliers.
This model provides a simple checklist of criteria that you can use to assess your
power relative to particular suppliers (Cox et al., 2000; Cox et al., 2001). The
same criteria can also be used to assess the relative power positions of buying and
selling organizations further upstream in the supply chain that the buyer is seeking
to manage.
Fig. 3.3 The attributes of buyer and supplier power
Buyer dominance (>) Interdependence (=)
Few buyers/many suppliers Few buyers/few suppliers

Buyer has high % share of total market Buyer has relatively high % share of
for supplier total market for supplier
Supplier is highly dependent on buyer for Supplier is highly dependent on buyer
revenue with few alternatives for revenue with few alternatives
High Suppliers switching costs are high Suppliers switching costs are high
Buyers switching costs are low Buyers switching costs are high
Buyers account is attractive to supplier Buyers account is attractive to supplier
Suppliers offering is a standardized Suppliers offering is relatively unique
commodity Buyers search costs are relatively high
Buyers search costs are low Supplier has moderate information
Supplier has no information asymmetry asymmetry advantages over buyer
advantages over buyer
Attributes of
buyer power
relative to supplier Independence (0) Supplier dominance (<)
Many buyers/many suppliers Many buyers/few suppliers
Buyer has relatively low % share of Buyer has low % share of total market
total market for supplier for supplier
Supplier has little dependence on buyer Supplier has no dependence on buyer
for revenue and has many alternatives for revenue and has many alternatives
Suppliers switching costs are low Suppliers switching costs are low
Low Buyers switching costs are low Buyers switching costs are high
Buyers account is not particularly Buyers account is not particularly
attractive to supplier attractive to supplier
Suppliers offering is a standardized Suppliers offering is relatively unique
commodity Buyers search costs are very high
Buyers search costs are relatively low Supplier has substantial information
Supplier has very limited information asymmetry advantages over buyer
asymmetry advantages over buyer
Low High
Attributes of supplier power

relative to buyer
Robertson Cox Ltd, 2000 All Rights Reserved.

Source: Adapted from Cox et al. (2001) p. 14.
As Figure 3.3 shows, a buyers power position relative to a particular supplier is

a function of how dependent they are on one another:
buyer dominance, represented by a greater than symbol (>), implies that a

buyer has little or no dependence on a particular supplier, whilst suppliers are
highly dependent upon the buyers business;
supplier dominance, represented by a less than symbol (<), is characterized by
precisely the reverse situation.
54
In the remaining two categories, the level of dependency is balanced:
interdependence, represented by an equal sign (=), occurs when both buyer and
supplier are highly dependent on the other;
independence, represented by a zero (0), the level of dependence is low on both
sides.
The Figure 3.3 also shows that relative dependency can be understood as a
function of three important attributes:
Scarcity. How many comparable suppliers/customers are there for each side to
do business with?
Utility. How important/attractive is a particular supplier/customer in the
context of an organizations overall business objectives?
Switching and information costs. How difficult/costly is it for a supplier/customer
to find and switch to an alternative source of revenue/supply?
Exercise 3.4 Managing in different power circumstances
Use the checklist of criteria shown in Figure 3.3 to assess your power position
relative to a number of your suppliers and answer the following questions:
What might you do to improve your power position relative to a dominant

supplier?
Would you manage interdependent relationships differently than those in
the buyer or supplier dominant situation?
What might you do to protect a position of buyer dominance?
Clearly, the incentives necessary for a supplier to make the investments necessary
to support SCM initiatives will be strong both where there is a position of buyer
dominance and where the interdependence occurs between the buyer and the
supplier.
In each case the supplier is highly dependent upon the buyer for business, it has
few comparable alternative customers, the buyers account is highly attractive,
and the costs of finding and switching to alternative customers are prohibitive.
In combination these factors suggest that the supplier would be willing to make
sacrifices and investments in order to maintain a good working relationship with
the buyer. This is what can be described as a highly congruent supplier.
There is, however, an important difference between these two power
circumstances in terms of the way in which the buyer can manage the relationship
with the supplier to ensure that the necessary investments are forthcoming.
55
In the case of buyer dominance, there is room for the buyer to direct and to
provide leadership for the suppliers activities.
In the case of interdependence, however, a more negotiated, bilateral style of
management is appropriate, because this is a relationship of equals.
The important differences between power circumstances are often overlooked

by buyers and suppliers in their eagerness to get on with the task of managing
their relationships, often with disastrous consequences.
It can be equally damaging for a dominant buyer to give a dependent supplier
too much control as it can be for a buyer to attempt to direct a supplier in a
situation of interdependence.
This emphasizes the vital importance of having a clear idea of which power
circumstances are being managed before launching SCM initiatives.
The two other power circumstances illustrated in Figure 3.3, supplier dominance and
independence, provide little or no incentive for a supplier to support SCM initiatives.
Supplier dominance is a situation in which the buyer is only one of many
alternative customers, whose account is not particularly attractive, where the
costs of finding and switching to alternative customers are negligible. The buyer,
on the other hand, is highly dependent upon the supplier and would find it
difficult and costly to switch to an alternative.
Consequently, it is highly unlikely that such a supplier would be willing to
support any SCM initiative that a buyer might suggest. It is possible that such a
supplier might launch SCM initiatives of its own, requiring its customers to fund
all the up-front investment while it retains the bulk of the benefits in the form of
a higher profit margin.
In the case of independence the supplier lacks an incentive to support any SCM
initiatives, because it has little or no dependence on and therefore commitment to
the buyers business. The buyer is one of many easily interchangeable customers
and their business is not particularly attractive. The buyers level of dependence on
the supplier is equally low, however, which suggests that this power circumstance
is too unstable for either party to undertake the substantial dedicated investments
required by SCM initiatives. Given the ease of switching, neither the buyer nor the
supplier can be sure that the relationship will last long enough for the initiative to
bear fruit.
In this case and in the case of supplier dominance, therefore, the level of supplier
congruence is relatively low.
56
It is clear, therefore, that the selection of a supplier to participate in any SCM

initiative should ideally be based on both a high level of competence and an
appropriate alignment of power and incentives, or what is called congruence.
The Ideal Supplier Quadrant in Figure 3.4 illustrates this point.
Fig. 3.4 The competence and congruence matrix
Competent Ideal
High supplier supplier
(Improve congruence) (Select)
Supplier
competence
Worst Congruent
Low case supplier
(Avoid) (Develop competence)
Low High
(0/<) (=/>)
Supplier congruence
Robertson Cox Ltd, 1998 All Rights Reserved.

Source: Adapted from Cox (1999) p. 31.
Figure 3.4 also illustrates the three other possible combinations of competence and
congruence and suggests how the buyer should proceed in each of these situations.
Clearly, the second most attractive type of supplier in the matrix would be one
exhibiting a high degree of congruence, but a low degree of competence. The
reason for this is that such a supplier would have a very strong incentive to
improve its level of competence and would be much easier to manage than a
supplier with a lower level of congruence.
A buyer might consider selecting a supplier that is highly competent, but not
highly congruent, with the objective of improving over time the power position
relative to this supplier. This represents a high-risk strategy, however, and
should be pursued only if a more congruent supplier cannot be found.
Finally, those suppliers that are neither competent nor congruent should be
avoided at all costs.
57
The extent to which SCM strategies can be implemented in a particular

supply chain is determined by how far along that chain the competence and
congruence of suppliers are appropriately aligned.
In other words, if the buyer is seeking to cascade SCM strategies right back
to the raw material stage of a particular supply chain, this will require the
companies operating at every intermediate stage to be both highly competent
and highly congruent.
Supply chain power regimes
The concepts of power, and relational competence and congruence, can be applied
not only to dyadic buyer and supplier exchange relationships but also to the
extended network of exchange relationships within the total supply chain (Cox,
1999; Cox et al., 2000). When this is done it sometimes becomes apparent that
companies attempting to implement SCM initiatives will not always be operating
within a commercial environment that is conducive.
The best way to explain this point is for us to consider how the analysis of
power can be applied to simple supply chain circumstances. Let us assume that a
company is seeking to manage a simple supply chain. This supply chain has four
participants that are arranged in a sequential physical flow. Let us then apply all
four of the power relationships to this chain in an idealized manner. This can be
seen in Figure 3.5.
What might be expected to happen in each of these four situations commercially
and operationally if the focal company was attempting to implement SCM
initiatives?
Scenario 1: A buyer dominated power regime. In this scenario a situation exists

where each relationship is characterized by buyer dominance. In this scenario we
might expect that company A will be able to use its influence over its supplier B to
ensure collaboration both operationally and commercially in its SCM initiatives.
This is because the buyer is likely to be a major source of business to the supplier
and, as a result, the supplier will be keen to keep the buyer happy and, thus, be
willing to invest management time and other scarce resources in creating a closer
relationship. In turn, B will be able to use its influence to ensure that C also
becomes involved in these collaborative SCM initiatives and the same in the case
of C in its relationship with D. A supply chain characterized by a series of buyer
dominant relationships, therefore, is normally highly conducive for buyer-led SCM
initiatives, in which the original buyer (A) can determine the commercial and
operational outcomes of the extended supply chain relationships.
58
Fig. 3.5 Hypothetical idealized power regimes in supply chains
Scenario 1:
> > >
Buyer dominant
power regime
A B C D
Scenario 2:
= = =
Interdependent
power regime
A B C D
Scenario 3:
0 0 0
Independence
power regime
A B C D
Scenario 4:
< < <
Supplier dominant
power regime
A B C D
Scenario 2: An interdependent power regime. In this scenario the prospects for

effective SCM initiatives are also promising. Here the interdependence of the four
companies in the chain will again provide an incentive for collaboration. In a
situation of interdependence, both parties are highly dependent upon one another
because there is a lack of other options. Under these circumstances, the
relationships are likely to last beyond the short term and the companies involved
are more than likely to realize that their destinies are tied together. If there is,
therefore, a perceived need for the chain to collaborate to improve its prospects
of meeting end-customer expectations, there is a commercial and operational
incentive structure that is likely to be facilitative. The major difference here is that
any commercial and operational outcomes will have to be negotiated and shared
between all the parties in the chain rather than appropriated by the dominant
buyer at the head of the chain as in scenario 1.
Scenario 3: An independence power regime. In this scenario the situation is

somewhat different because all the relationships in the chain are characterized by
buyersupplier independence. This means that in each of the relationships neither
the buyer nor the supplier is particularly important to the other party. The purchase
59
for the buyer is of low value and it has many other potential sources of supply. The
sale for the supplier is also of low value and it has many other customers. Under
these circumstances there is little incentive for any of the companies to put in the
resources necessary to create successful collaborative relationships such an
investment would not be justified by the importance of the transaction. Each of the
relationships will be characterized by market behaviour, where each is looking for
short-term tactical advantage. This type of supply chain will not, therefore, be
conducive for highly collaborative and integrated forms of SCM.
Scenario 4: A supplier dominance power regime. In this scenario there is also a

relatively low prospect of effective SCM initiatives. In this case it is because in each
of the relationships the buyer is a relatively unimportant customer to the supplier.
Therefore, while the supplier is important to the buyer, and the buyer may wish the
supplier to take part in performance improvement initiatives, the supplier will often
not consider the relationship sufficiently important to warrant the deployment of
management resources and the making of dedicated investments. This is unless the
buyer is willing to pay a significant premium. Yet, paying such a premium normally
does not make sense because all the benefits achieved are normally appropriated by
the supplier rather than by the buyer.
There are in practice few, if any, supply chains in the real world that conform in their
entirety to this ideal alignment of power. What tends to happen instead is that
supply chains are made up of a combination of zones or sub-regimes, some of which
are conducive to SCM initiatives and some that do not support its implementation
at all (Watson, 2001).
As a consequence, the majority of supply chains contain what might be called
management breakpoints or sub-regimes of power. The existence of these suggests
that the best that can be achieved is partial SCM. The case example given below
illustrates the existence of a management breakpoint in an aerospace supply chain
and the impact that this had on the attempted implementation of one SCM initiative
(Cox et al., 2002).
Case study 3.1

Managing the supply chain for in-flight re-fuelling equipment
This case study provides a sketch of the power regime currently operating in an aerospace
industry supply network and explains how this regime has impacted on the relationship
management choices of particular focal firms. For reasons of commercial confidentiality,
none of the firms in this case are identified by name.
Figure 3.6 shows the current power regime in the supply network that delivers in-flight
re-fuelling equipment to military end customers. The figure reveals that even a limited supply
network can have enormously complex power dynamics. For the purposes of this brief
60
discussion, attention is focused on the power structures that exist between the tanker
converter (A), the equipment assembler (B) and the supplier of sub-assemblies (C).
Fig. 3.6 The power regime for in-flight re-fuelling equipment
B>D
A=B B<C C<D D0E

A B C D E
B0C
C0E
B0E
Key: A Tanker converter D Bespoke component manufacturer

B Equipment assembler E Generic component manufacturer
C Sub-assembler
Source: Adapted from Cox et al. (2002) p. 156.
It is immediately obvious that the interdependent power structure between A and B might
be expected to provide these firms with a basis on which they can successfully co-ordinate
their relationship. This interdependence is essentially a function of the fact that, for various
cost and technological reasons, the markets on either side of this exchange relationship are
highly restricted.
It might also be expected, however, that any efforts by A and B to co-ordinate the supply
network beyond their own relationship are likely to fail. The problem is that B has a
combination of dependence and independence in its relationship with C, depending on
which particular sub-assembly is being supplied.
The equipment assembler is dependent upon its supplier for those sub-assemblies that
exhibit a high degree of asset specificity (Williamson, 1985). An independent relationship
exists between B and C for those sub-assemblies that are generic and that are bought by a
wide range of customers from other industries. Moreover, even if C could be persuaded to
participate in SCM initiatives, its dependent and independent relationships with D and E
make it unlikely that these firms could be brought into the initiative.
The operation of this supply network is intimately linked to the price sensitivity of the
military end customer. The commercial problem for the tanker converter and, by extension,
the equipment assembler is that their revenues from in-flight re-fuelling equipment are at
61
present restricted by the relatively high price of this product as compared with the ground-
based alternative.
An obvious solution to this problem, and one that has been championed by the Supply
Chain Relationships in Aerospace (SCRIA) initiative, is for the members of this supply network
to work more closely together to reduce costs and improve lead times. Logically, if such an
initiative was successful one might expect all, or at least most, members of the network to
benefit from a greater demand for their products.
Despite this seemingly flawless logic, however, the SCM efforts of both the tanker
converter and the equipment assembler have been focused solely on their own relationship.
In recent years there has been a number of joint initiatives aimed at reducing both costs
and lead times. These have focused both on the internal operations of the equipment
assembler and on the assemblers relationship with the tanker converter.
There is a limit, however, to the impact that these efforts can have on the total cost of
the equipment, because approximately 70 per cent of the unit cost lies in the sub-
assemblies and their constituent parts. Repeated efforts have been made by both the
assembler and the converter to involve the suppliers of various sub-assemblies in these
initiatives, but these appeals have fallen largely on deaf ears.
From the perspective of most of these sub-assemblers the expenditure of the equipment
assembler is of relatively little importance. Sales of these sub-assemblies to this particular
supply network are just a small portion of the business activities of what are generally very
large multinational engineering and electronics companies. Moreover, as we have noted, the
equipment assemblers demand for these sub-assemblies is relatively low and very irregular.
Consequently, the equipment assembler is considered by the sub-assemblers to be a
nuisance customer. According to the standard marketing literature a firm should give such
customers a low priority, even at the risk of losing their business.
The evidence presented here shows that several of the sub-assemblers in this supply
network have taken this advice to heart. A senior manager from the equipment assembler
reported that the sub-assemblers are very difficult to negotiate with, that they show little
interests in becoming involved in supply chain management initiatives and that, in some
cases, they insist on having lead times that are four or five times longer than those for which
the assembler has been asking.
CONCLUSIONS
It is clear that deciding whether it is possible to undertake SCM initiatives

successfully depends on many operational factors and it is not just a matter of
deciding that someone else has done it so anybody can. The major factors that
must be considered are as follows:
internally within both the buying and supplying organizations in the chain
there must be managerial competence and understanding of SCM tools and
62
techniques, the ability to manage demand effectively and a supportive internal

power structure;
Externally there must be a supportive power structure normally of buyer
dominance and/or interdependence and the capability on both sides to make
either or both of these relationships work effectively.
Having outlined the salient factors that provide for the successful initiation of any
SCM initiative it is now necessary to explain how to make them work in practice, so
that the anticipated benefits in terms of sustained cost reductions and improvements
in functionality can be achieved. This is the subject matter of the final two chapters.
REFERENCES
Audit Commission (2001) Report on the NIRS2 Contract Extension. London:

HMSO.
Cox, A. (1999) Improving procurement and supply competence, in R. Lamming
and A. Cox (eds) Strategic Procurement Management: Concepts and Cases.
Helpston: Earlsgate Press.
Cox, A. et al. (2000) Power Regimes: Mapping the DNA of Business and Supply
Chain Relationships. Helpston: Earlsgate Press.
Cox, A. et al. (2001) The power perspective in procurement and supply
management, Journal of Supply Chain Management, (37) 2, pp. 447.
Cox, A. et al. (2002) Supply Chains, Markets and Power: Mapping Buyer and
Supplier Power Regimes. London: Routledge.
Hickson, D. J. et al. (1971) A strategic contingencies theory of intra-organizational
power, Administrative Science Quarterly, (16) 21629.
Lonsdale, C. and Cox, A. (1998) Outsourcing: A Business Guide to Risk
Management Tools and Techniques. Helpston: Earlsgate Press.
Pettigrew, A. M. (1973) The Politics of Organizational Decision-Making.
London: Tavistock.
Pfeffer, J. and Salancik, G. (1974) Organizational decision-making as a political
process, Administrative Science Quarterly, (19) 13551.
Sanderson, J. et al. (2001) Power regimes: a new perspective on managing in supply
chains and networks, 10th Annual IPSERA Conference, Jonkoping, Sweden.
Sheth, J. N. (1973) A model for industrial buyer behaviour, Journal of Marketing,
(37) 506.
Watson, G. (2001) Sub-regimes of power and integrated supply chain
management, Journal of Supply Chain Management, (37) 2, 3641.
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Webster, F. E and Wind, Y. (1972) Organizational Buying Behaviour. Englewood

Cliffs: Prentice Hall.
Williamson, O. E. (1985) The Economic Institutions of Capitalism. New York:
Free Press.
64
4
Implementing supply chain
management initiatives
Introduction 67
The three competitive market and SCM strategy

options 67
A framework for developing competitive market and
SCM strategies 71

supply chain 89
Market differentiation and cost leadership with
an innovative and process efficiency supply
chain strategy 94
Conclusions: the conundrum of knowledge and
understanding 97
References 99
65
Implementing supply chain management initiatives
INTRODUCTION
Supply chain management refers to a situation where the buyer (or the buyer and
its suppliers jointly) proactively seeks to drive performance improvement in value
for money throughout the totality of a supply chain. This co-ordination is
achieved through the development of longer-term and highly collaborative
working relationships between buyers and suppliers within the chain.
One of the key problems in successfully implementing SCM initiatives like this
is understanding exactly what the focus of activity is that all players in the supply
chain must be driving towards. Our research has demonstrated that there is often
significant misunderstanding during the implementation stage of SCM initiatives
about what the players in the chain should be focusing on, as well as how to do
so effectively.
It is clear, therefore, that one of the critical success factors in implementing SCM
initiatives is clarity about the competitive market and supply chain strategy being
pursued, and then the development of the requisite operational tools to implement
the strategy effectively.
In this chapter we address these issues in detail by first explaining the three
major competitive market and supply chain choices available to practitioners
involved in implementing SCM initiatives, and then outlining the major tools and
techniques available for effective implementation.
THE THREE COMPETITIVE MARKET AND SCM

STRATEGY OPTIONS
In the implementation phase, assuming that the strategic and operational enablers
discussed in Chapters 2 and 3 are already in place, SCM initiatives are normally
directed towards three major competitive market and supply chain strategic
objectives. These are outlined in Figure 4.1.
As the figure demonstrates, the three basic market and supply chain strategies
that can be pursued are as follows.
Market differentiation, with supply chain innovation. This is sometimes referred

to in the literature as the responsive, innovative or agile SCM approach (Fisher,
1997; Christopher, 2000). This refers to a situation where the focal company
driving a supply chain initiative wants to find ways of differentiating itself from
its competitors by being more responsive, agile or innovative in the ways in which
it provides products or services to its customers.
By proactively working on R&D internally and throughout its supply chains,
the focal company hopes to find innovative ways of increasing the functionality
67
that customers receive from its market offerings and, by so doing, it expects to
close the market to its competitors and achieve higher than normal returns.
Obviously the speed with which competitors can replicate the innovations that are
made will determine the frequency and regularity with which these types of
innovation will have to recur.
Fig. 4.1 The three competitive market and supply chain strategy options
The three competitive market The three aligned supply chain

strategy options management strategies
Supply chain management strategy focuses on

Market product/service innovation, without major concern
1 differentiation for cost reduction through the removal of
unnecessary waste and inefficiency in processes.
Supply chain management strategy focuses on

Market the active removal of all unnecessary waste and
2 cost leadership inefficiency in processes, without major concern
for product/service innovation.
Supply chain management strategy focuses equally

Market differentiation on product/service innovation and the removal of
3 and cost leadership unnecessary waste and inefficiency in processes.
It is clear under this approach that cost reduction through the removal of
unnecessary waste and inefficiency in operational processes is not a key determinant
of competitive success. The reason for this is normally because the profit margins
that can be made from these types of products/services are relatively high, even
though they may (or may not) be short-lived, depending on the speed of competitive
imitation in both the market and the supply chain.
Market cost leadership, with supply chain process efficiency. This is sometimes
referred to in the literature as the functional or lean SCM approach (Womack and
Jones, 1996; Fisher, 1997). This approach implies that the competitive market
strategy of the focal company driving SCM initiatives is directed towards cost
leadership rather than differentiation. This normally suggests that technological
innovation for product or service differentiation is difficult to achieve and/or that
any innovations that can be made will be quickly replicated. This is because the
product or service is already well understood and many alternative companies can
provide it to the end customer.
In such circumstances the focal company must compete by providing the same
products or services but now at a lower cost than its competitors. The focal
company must now direct its efforts internally to the removal of all unnecessary
waste and inefficiency in its own internal processes.
68
Obviously, an enlightened company will recognize that focusing on internal

process efficiencies can only take it so far. A company may recognize that it can
only hope to achieve cost leadership if it focuses not only on its own internal
process improvement opportunities but also those available to it by working
closely with its immediate suppliers and their suppliers in the total supply chain.
In this way the focal company may wish to compete on cost leadership by
engineering a much more efficient and low waste producing SCM process than its
competitors are able to do. One way of doing this is by outsourcing all non-core
activities to lower cost suppliers and managing their own and their suppliers
supply processes proactively.
It is clear, therefore, that supply chain process efficiency will become a major
imperative for those companies that have already outsourced a high proportion of
their manufacturing and production processes to their suppliers and their supply
chains. In such circumstances the focal companys own internal process efficiency
activities are likely to have only a minimal impact on cost reduction and efforts
must be directed towards the suppliers in the supply chain.
The major problem with this approach is that even when successful it normally
does not generate above normal returns. This is because the cost savings generated
from both internal and external process improvement are generally passed on to
the customer in the form of lower prices, rather than retained as higher levels of
profitability. The major benefit for the successful company, however, is that they
obtain a larger market share, until others catch up and replicate the same internal
and external supply chain process efficiencies.
Market differentiation and cost leadership, with supply chain innovation and
process efficiency. In this final approach the focal company is directing the most
ambitious approach to competitive market and SCM strategy. This approach
focuses on both differentiation and cost leadership relative to competitors and, at
the same time, seeks to drive product/service innovation through the supply chain,
as well as internal and external process efficiency.
There is little doubt that this approach, which requires the fusion of two very
different ways of thinking about market and supply chain management strategy,
is rarely adopted in practice. The reason for this is because those companies
having the opportunity to differentiate their market offerings normally do not
need to pursue process efficiency strategies to generate above normal returns.
Thus, even though they could generate even more profit if they also developed
internal and external process efficiency strategies, most successful differentiating
companies do not see the need to do so.
It is interesting to note although much of the lean literature has focused
primarily on process efficiency improvements internally and externally within
supply chains that the original focus of Toyota (from which the lean ideas on
69
SCM have been developed) has always been focused on the development of both
differentiation and process improvement. The major problem for Toyota (and any
other car manufacturer for that matter) is that product differentiation is difficult
to sustain against competitive imitation in this industry, forcing the potential
innovator to fall back on to lean and efficient process efficiency in its supply
chains as the only mechanism by which to compete effectively.
It is interesting to remark on this because the basic approach of Toyota as a
company strategically has been to continuously pursue innovation and cost
reduction at the same time. This approach which we refer to as the customer-
focused market and SCM approach is not in our view the same as the lean
approach. This is because lean implies that the basic strategy of the focal company
will always be on process efficiency, internally and externally. There is some
debate about this because proponents of lean argue, quite correctly, that process
efficiency may also require difficult to replicate innovations in supply chain
processes, if not in the ultimate products or services being delivered.
Nevertheless, companies that seek to operate so that they pass all the value from
product/service innovations and from process efficiencies to the customer must learn
to develop a bifurcated approach to SCM. This is because they have to fuse process
efficiency and innovation strategies together, and this can be quite confusing for
suppliers as well as mangers to manage.
Whatever one thinks about these issues, it is transparently obvious that the
major problem facing any company that wishes to adopt SCM initiatives must be
to understand exactly which type of strategic and operational focus process
efficiency and/or innovation, or a combination of both it should be driving
through its supply chain relationships, as well as how to do so effectively.
This latter point is also of major significance because the ways in which suppliers
will need to be managed will also be a function of the power structures (regimes
and sub-regimes of power) that exist within particular supply chains. As a result,
there may well be circumstances when firms will need to operate a different
strategy in different parts of the same supply chain.
Managers must understand that there are three very different ways of developing
market and supply chain strategy. These can be defined as:
market differentiation/ supply chain innovation;

cost leadership/ supply chain process efficiency;
market differentiation and cost leadership/supply chain innovation and
process efficiency.
Continued
70
Managers must not only understand which of these three market and supply
chain strategies is the most appropriate to pursue, but also the specific tools
and techniques needed to implement any of these strategies effectively.
In this chapter, the different ways of managing differentiation/innovation and cost

leadership/process efficiency market and supply chain strategies will be discussed
in detail, with advice given on how to match strategy with circumstance.
First, we provide a framework that practitioners may find useful in determining
whether they should be pursuing differentiation/innovation or cost leadership/
process efficiency SCM strategies. After that we describe some of the key tools
and techniques used in SCM initiatives to create innovation and process efficiency.
A FRAMEWORK FOR DEVELOPING COMPETITIVE

MARKET AND SCM STRATEGIES
One of the most common mistakes managers make is to believe that their problems
are so unique that they require a unique solution. While any management solution
must be tailored to the firm(s) concerned, it is also the case that across firms and
industries there are many common sources of problems to which generic frameworks
can be applied. This is undoubtedly the case in the development of SCM strategies.
In order to understand whether an innovation or process efficiency approach is
to be adopted, it is first necessary to understand the structure of demand that drives
customer requirements (Fisher, 1997). There are three factors that practitioners
will need to consider once they have already ascertained that SCM initiatives are
strategically and operationally practical:
identify the demand profile for your own product/ service;

understand the three generic types of SCM approach that can be created;
link your product/ service to the right supply chain type.
Each of these is discussed below.
Identifying product/service demand profiles
In order to clarify the complexity of the products/services that firms have to

manage, Fisher has provided a simple classification of the demand patterns.
Products/services can either be predominantly functional or predominantly
innovative. Functional items are those with a stable demand pattern and a long
life cycle, whilst innovative items have a volatile demand pattern and a short life
cycle, as outlined in Figure 4.2.
71
Fig. 4.2 Functional and innovative demand profiles
Aspects of demand Functional Innovative

(Predictable demand) (Unpredictable demand)
Product life cycle more than 2 years 3 months to 1 year
Contribution to margin 5% to 20% 20% to 60%
Product variety Low (10 to 20 variants High (often millions of
per category) variants per category)
Average margin of error in 10% 40% to 100%
the forecast at the time
production is committed
Average stockout rate 1% to 2% 10% to 40%
Average forced 0% 10% to 25%
end-of-season markdown
as percentage of full price
Lead time required for 6 months to 1 year 1 day to 2 weeks
made-to-order products
Source: Reprinted by permission of Harvard Business Review. Fisher, T. (1997) What is the right supply
chain for your product, Harvard Business Review, MarchApril, p. 107.
1997 by the Harvard Business School Publishing Corporation. All rights reserved.
An example of a classic functional product is Campbells soups. Each year, only 5

per cent of Campbells product line is new. The sales of existing products are
highly predictable, with their life cycles in many cases running into decades. An
example of a classic innovative product is Sport Obermeyer fashion skiwear. In
contrast to Campbells soups, 95 per cent of Sport Obermeyers product range is
new each year. Furthermore, demand forecasts for these products are often wrong
by as much as 200 per cent. The product life cycle for such fashion products is
only a matter of months (Fisher, 1997).
Understanding the nature of supply chains
Having identified the nature of demand for a product/service, the next task is to
consider the nature of supply chains. Supply chains fulfil two distinct functions:
providing a physical function (that is it transforms raw materials into finished

goods or services);
providing a market mediation function. The nature of this function is to ensure
that the variety of products reaching the end market matches what the
consumers in that market want to buy.
72
Fig. 4.3 Physically efficient and market-responsive supply chains
Physically efficient Market-responsive

process process
Primary purpose Supply predictable Respond quickly to
demand efficiently at unpredictable demand in
the lowest possible cost order to minimize stockouts,
forced markdowns and
obsolete inventory
Manufacturing focus Maintain high average Deploy excess buffer
utilization rate capacity
Inventory strategy Generate high turns Deploy significant buffer
and minimize inventory stocks of parts or finished
throughout the chain goods
Lead-time focus Shorten lead time as Invest aggressively to
long as it does not reduce lead time
increase cost
Approach to choosing Select primarily for cost Select primarily for speed,
suppliers and quality flexibility and quality
Product-design strategy Maximize performance Use modular design in order
and minimize cost to postpone product
differentiation for as long
as possible
Each of these two functions incur costs:
the costs associated with the physical function are the costs of production, the
costs of distribution and the costs of storage;
the costs associated with the market mediation function are what can be called
marketability costs. These are the costs of not being able to meet demand
stock out costs and the costs of holding obsolete stock (Harrison and van
Hoek, 2002).
Depending on the nature of the product concerned, the dominant focus of

management attention should be on one type of cost rather than the other. Where
demand is stable, the risk of incurring heavy marketability costs is low. Therefore,
managers can focus on making the supply chain as efficient as possible by
reducing the supply chains physical costs. However, where demand is unstable the
risks of incurring heavy marketability costs are high. Therefore, managers should
73
focus on trying to avoid such marketability costs, even if it means incurring

additional physical costs (Fisher, 1997).
From this, two broad types of supply chain can be defined:
those that are predominantly concerned with being physically efficient;

those that are predominantly concerned with being market responsive.
A fuller description of the features of these two types of supply chain can be seen
in Figure 4.3. When the objective is physical efficiency, managers can work with
customers and suppliers on lean SCM strategies to remove waste from the supply
chain like excessive inventory or process duplication.
When the objective is market responsiveness, managers can work with customers
and suppliers on agile or responsive SCM strategies like reducing the time it takes
for the supply chain to get a new product or service into the marketplace by using
time compression tools and techniques.
Matching products/service to types of supply chain strategies
The final part of this approach is to match products/services with supply chain
types. It can be argued that functional products should be produced through a
physically efficient and lean supply chain because the nature of the product/services
will normally mean a highly competitive end-market. Innovative products, on the
other hand, should be produced through an innovative or market-responsive
supply chain. In this type of market it will normally be possible to pass on to the
end-customer the costs associated with ensuring market-responsiveness as the
product will, initially, have no direct competition (Fisher, 1997).
The framework in Figure 4.4 allows managers to answer one of the key questions
that they must address for successful implementation of SCM initiatives, namely:
Does the product or service concerned require a supply chain management
strategy that is based on efficiency (lean) or responsiveness (innovation)?
Having answered this question, the next step is to understand more fully what
is required to develop these two types of supply chain effectively. To achieve this,
first the tools and techniques that have been developed to create physically
efficient supply chains will be outlined. These tools are aimed at reducing waste
in supply chains and are, perhaps, better known as lean supply tools and
techniques. Second, the tools and techniques that have been developed to create
market-responsive supply chains will be described. These tools are known as agile
supply tools and techniques.
74
Fig. 4.4 Matching supply chains with products/services
Functional Innovative
products products
Physically efficient
supply chain Match Mismatch
Market-responsive
supply chain Mismatch Match
CREATING A PHYSICALLY EFFICIENT (LEAN)

SUPPLY CHAIN
Physical efficiency is about reducing waste in processes, such as unnecessary

production, distribution and storage costs. The exemplar company that pioneered
this way of thinking about process efficiency was the Toyota Motor Corporation.
In the 1970s and 1980s Toyota emerged as a serious competitor to the Western
automotive assemblers. A key reason for this was Toyotas rejection of mass
production thinking and the adoption of just-in-time thinking. The just-in-time
production and supply chain system that Toyota employed is very effective in
reducing waste and as a result has been branded by observers as lean (Womack and
Jones, 1996). The principles and techniques behind lean production and SCM are an
essential toolkit for those pursuing waste reduction initiatives within supply chains
aimed at supporting physical/process efficiency and cost leadership market strategies.
75
Why is supply chain waste reduction so important?
Over the past two decades, the level of competition in many business sectors has
increased significantly due to advancing technology and domestic and global
deregulation. For those working in the public sector, financial pressures have also
increased as governments around the world have sought to reduce government
expenditure. One response to such circumstances is an attempt to reduce internal
sources of waste in order to increase the efficiency of existing management processes.
When seeking to reduce waste in processes most organizations focus their
attention on their internal operations. However, although this internal focus is
necessary, it has been recognized that it may not be sufficient for success. Rather,
it has become clear that waste reduction initiatives must also focus on the supply
chain as whole.
This should not be surprising because IBM, for example, has 70 per cent of the
cost of the goods it sells outsourced to its suppliers. This means that IBM spends
around $40 billion with external suppliers (Fletcher, 2000). This is not untypical
in manufacturing firms, especially after a decade in which many firms have
pursued an aggressive outsourcing policy.
As a result, many practitioners have turned to waste reduction tools and techniques
in order to improve both internal and external process efficiency. The starting point
in understanding how to improve supply chain process efficiency is to understand the
different types of waste that need to be removed.
The seven supply chain wastes
The Japanese word for waste is muda. Toyota identified seven different types of
muda in its production processes (Ohno, 1988; Hines et al., 2000):
Overproduction. This is regarded as the most serious waste as it interrupts the

smooth flow of goods and services through the chain and can delay the
detection of defects.
Waiting. This refers to the time when the product or service is standing idle
within the chain, rather than being worked upon or transported.
Transportation. This is when the distances the product travels is greater than
the minimum necessary. Excessive movement will cause delays and increase the
likelihood of the goods becoming damaged.
Inappropriate processing. This is the application of complex solutions to simple
problems. An example of this would be the adoption of a level of technology
that is not necessary to complete the particular production task.
Unnecessary inventory. When communication is poor within the supply chain,
a natural tendency is to hold inventory. However, high levels of inventory cause
76
high storage costs and inhibits the rapid identification of problems within the
chain. Holding high levels of inventory only serves to put off the day when the
chains problems are properly addressed.
Unnecessary motion. This waste is essentially related to the ergonomics of the
production process. Unnecessary motions can affect both the productivity and
the health of the worker and lead to quality problems.
Defects. This waste leads to additional costs through the need to undertake
remedial action or discard the defective products.
Reducing supply chain waste the principles of lean thinking
Having identified the different types of waste that can exist within production
processes and supply chains, it is now necessary to design a strategy to eliminate
it. This strategy can be based upon the principles of lean thinking, as follows
(Womack and Jones, 1996):
specify value from the customer perspective, not the perspective of any of the
supply chain participants;
identify the value stream that delivers the value proposition to the customer;
identify those activities within the value stream that add-value, are non-value-
adding but necessary or are non-value-adding;
make those actions that create value flow without interruptions or impediments;
only make what is pulled by the customer. The value stream should be operating
a just-in-time pull system, rather than a producer-focused push system;
create transparency of strategies and costs within the supply chain. The issue of
competitive advantage must be understood at a supply chain level rather than
at the individual firm level;
constantly pursue perfection the process of reducing waste never ends.
In the rest of this section each of these principles is explained in more detail to
show how waste reduction can be achieved in practice. The place to start is with
the customer.
Specify value from the customer perspective
Organizations are divided into a number of sub-units; for example, marketing,

human resources, purchasing and manufacturing. Managers in each of these sub-
units have performance targets that they are expected to meet. However, these
targets are often unrelated to the real needs of the business.
77
In the case of the manufacturing function, targets are often focused on machine
and employee utilization. As a result, many firms manufacture goods that, at that
time, are not demanded by any customer. Although the manufacturing manager
will not be simply making products at random, the result may still be a stock of
finished goods or components that may never be sold.
This approach is anathema to lean thinking. In a lean manufacturing environment
business decisions are customer driven, not undertaken for the convenience of
manufacturing or any other business unit within the business or supply chain. The
whole of the supply chain responds to the requirements of the customer and tries to
satisfy that end customer demand in the most efficient manner possible.
Identifying and improving the value stream
Having identified the customers value proposition, the supply chain participants
can then focus on how to deliver that value proposition most efficiently. The
starting point for this is to understand what is happening at the moment the
current state. A useful way of doing this is to map all the processes necessary to
deliver the product or service to the customer. It is recommended that this be done
in two stages.
First, managers need to map the supply chain (or value stream) descriptively. This
overview is meant to highlight, at a high level, the main areas that require attention.
This type of mapping is often called big picture mapping (Rother and Shook, 1998).
The second stage is much more detailed. Here individual processes identified within
the value stream are broken down to a level that records each individual activity.
These activities are mapped as a process flow. This more detailed form of mapping
is often called process activity mapping (Hines and Rich, 1997).
In Figure 4.5 an example is given of big picture mapping that contains:
a mapping of the physical flows;

a mapping of the information flows;
the linkage between the two;
a timeline showing the length of the process.
The purpose of big picture mapping is:
to help managers visualize the overall flow of the chain from raw materials
to finished goods;
to help managers identify the main areas of waste that require attention;
to allow managers to agree a way forward, both in terms of what to do and
who should be involved.
78
Fig. 4.5 An example of big picture mapping
Long-term 26 3 20 Long-term
forecast hours hours hours forecast Customer
Supplier
Weekly
schedule
Box size = Weekly order Variable
Material Manufacture Customer (daily call-off) quantity
800
Daily planning planning schedule
expedites 2 days stock
Shortages
x2
weekly
Q Daily priorities x 5 daily
shop floor supervision shipments
Shortages Rework
loops
Rejects
?
Q Q Q Q Q Q
I I I 100% I I 100% I I 100% I 100% I
Variable 3 Days Variable Variable Variable Managed Variable Variable
Material Material Vacqua Wash and Honing and Pack and
Pollard Assembly Test
receipt inspect blast lubrite wash despatch
24 412 110 16 832 15 514 16 321

hours hours hours hours hours hours hours hours hours
Random Supplier 160/hour Trolley=160 Bin size=4000 Trolley=240 Trolley=240 3 min cycle 4.30 daily
arrival confidence
low Plan to Rate=160/90min Target rate= Target Target Rate=180/hour Own transport
eliminate? 120/hour rate=160/hour rate=122/hour
45min/batch 10% retest Returnable
Variable batch Variable batch Variable batch packaging
Up-time 80% 3% rejects
Up-time 85% Up-time 95% Up-time 95% Multiples of
pack quantity
1 shift 3 shifts
3 shifts 3 shifts 3 shifts
24 trays of 10 1 piece flow Right 1st

Production lead time output time=low
= 26110 hours
1.5 hours 0.75 hours 4 hours 0.5 hours 3 hours
Value adding = 9.75 hours
Source: Hines and Taylor (2000) p. 24.

Having identified the main problem areas in the big picture mapping exercise,
managers have to resolve them. Some of the problems in the value stream will be
of a macro nature. There may be obvious flaws in the operations layout, for
example. Other problems, however, will require more detailed attention. This is
where process activity mapping comes into play. When using this tool, managers
select a process in the value stream that appears to be weak and map the
individual activities in the process in detail.
An example of the level of detail required is shown in Figure 4.6. The focus here
has changed to individual parts of the value stream and the minutiae of activities
involved therein. There are five stages to process activity mapping from the initial
identification of activities to their reconfiguration (Hines and Rich, 1997):
the study of the flow of activities there are four types of activity: operation,
transport, inspection and storage;
the identification of waste the activities are divided into value-adding (in terms
of the customer value proposition), non-value-adding and non-value adding but
necessary for operational sustainability;
a consideration of whether the process can be rearranged into a more efficient
sequence;
a consideration of a better flow pattern involving different flow layout or
transportation routing;
a consideration of whether everything that is being done at each process is
really necessary and what would happen if superfluous tasks were removed.
Taken together, these two mapping tools allow managers to understand where
there is waste and inefficiency in their value stream or supply chain. However,
there are other tools that can be used that also focus in more detail on the
identification of the seven supply chain wastes (Hines et al., 2000). These are:
The supply chain response matrix. This tool provides a diagrammatic representation
of the cumulative lead-time required for a particular process, as well as how much
cumulative inventory is held in the process.
The production variety funnel. This tool provides mangers with a descriptive flow
map of the production supply chain from raw materials to end product presented
in a way that allows them to understand the similarities and dissimilarities
between different types of production process and supply chain. Some have
limited raw materials with many products (V plants); some have the same raw
materials and same products (I plants); some have a wide range of products
manufactured from a restricted range of sub-components (T plants); and, others
have many raw materials with limited products (A plants).
80
Fig. 4.6 An example of process activity mapping
Step Flow Area Distance Time People O T I S D Comments

(m) (min)
1. Driver takes paperwork to office T Outside/office 50 0.5 1 O T I S D
2. Check booked in/issue ticket I Office 10 1 1(+1) O T I S D (Driver)
3. Driver to vehicle T Office/outside 50 0.5 1 O T I S D
4. Open back of truck O Outside 1 1 O T I S D
5. Back onto bay T Outside/bay 30 1 1 O T I S D
6. Wait for pump truck D Bay 15 1 O T I S D
7. Unload lorry T Splitting 25 1 1(+1) O T I S D
8. Wait for total unloading D Splitting 20 2(+1) O T I S D 10 pallets
9. Wait for paperwork D Splitting 10 1 O T I S D Driver (total 30)
10. Driver to office for paperwork T Outside/office 20 0.5 1 O T I S D
11. Get paperwork I Office 3 1(+1) O T I S
12. Delay to start splitting D Splitting 120 O T I S D
13. Splitting O Splitting 50 2 O T I S D
14. Move pallet to quantification T Quantification 20 1 1 O T I S D Pump truck
15. Delay to quantify D Quantification 240 O T I S D
16. Quantify I Quantification 10 1 O T I S D
17. Move to lift and load T Inspection/lift 3 2 1 O T I S D
18. Move to WIP T Lift to WIP 5 0.3 O T I S D
19. Delay D Lift top 5 O T I S D
20. Remove from lift T Lift top 2 2 1 O T I S D
21. Place in storage area T Floor 10 1 1 O T I S D
22. Storage D Floor 2880 O T I S D
23. Collect production order T To office 25 15 1 O T I S D
24. Pull stock to production area T To packing 10 2 1 O T I S D Hand pump
25. Delay D Packing 15 O T I S D Set up
26. Load machine and cycle O Packing 2 0.1 1 O T I S D
27. Place in tote T Packing 0.5 0.1 (1) O T I S D
28. Wait for batch D Packing 30 O T I S D
29. Load conveyor T Packing to conveyor 12 0.5 1 O T I S D
30. Travel to crane T To crane 150 5 O T I S D
31. Wait for crane D Crane 5 O T I S D
32. Put into main store T Crane/store 75 1 1 O T I S D
33. Store D Store 155.4 O T I S D
33.6
TOTAL 489.5 158.8 29
84.1
Operations 51.1 4
Percentage operations 322 mpm 13.8%
Key: O Operation; T Transportation; I Inspection; S Store; D Delay
Source: Adapted from Hines et al. (2000) p. 38.

Quality filter mapping. This tool enables managers to identify whether they have
any of three different types of quality problem in their supply chains and production
processes. These are: product defects; service defects; and internal scrap.
Demand amplification mapping. This tool allows the manager to understand the
mismatch between actual demand (often sales) against the orders placed within
the supply chain between buyers and suppliers and the actual production of goods
and services that is either held as inventory or unconsummated demand. This tool
allows mangers to identify what is called the Forrester Effect so that the gap
between actual and planned activities can be understood to see if anything can be
done to eradicate excess or inadequate orders or excess or inadequate stocks.
Decision point analysis. This tool allows mangers to understand the point within
the production process or supply chain that actual demand-pull gives way to
forecast driven push. In other words it explains where products are being made,
not against actual sales but on the basis of forecasts about potential sales.
Knowing this is important, because it allows managers to develop future scenario
plans about moving the decision point to see if a more efficient and effective
supply chain can be constructed with less waste.
Physical structure mapping. This tool is used to analyze and describe the structure
of the industry in which a firm is operating. It normally involves description of
two structural elements: cost and volume. The aim is to determine whether there
may be ways of restructuring the industry in such a way that unnecessary waste
and inefficiencies can be eradicated.
It is worth stressing that all the tools outlined here may be of useful
heuristic value for managers in understanding what is happening in an
industry, in a supply chain and/or in a company.
But while it is one thing to understand what causes waste and inefficiency,
it is altogether another thing to be in a position to restructure buyer and
supplier relationships within an industry and supply chain so that
unnecessary waste and inefficiency can be eradicated.
That is why attention to the structures of internal and external power in
business relationships is always of equal, if not more, importance in first
defining and, then, effectively implementing market and SCM strategies.
82
Only make what is pulled by the customer
A further principle of lean thinking is just-in-time (JIT), which is a key element of

the whole lean philosophy. JIT refers to a method of production where a process
only operates when a customer signals a need for more parts from that process.
When a JIT production process is working effectively, goods or services are
produced and delivered just-in-time to be sold.
This philosophy needs to operate all the way along the supply chain, so that
finished goods are produced just in time to be sold to end-customers, but
sub-assemblies are also made and delivered just-in-time to be assembled.
Likewise, components are produced and delivered just-in-time to be fitted into the
sub-assemblies and so on (Harrison and van Hoek, 2002).
This philosophy is in contrast to the traditional push system of manufacturing.
Here products are pushed through the process to the next stage regardless of
whether the next process requires those products. Push production systems have
been popular for two reasons.
First, they allow managers in parts of the value stream to maximize the
utilization of their capacity. If a machine is idle it can be utilized, even if what is
being produced is not currently required and might never be. Under this system
managers are able to meet production targets, but the firm potentially suffers
from very high levels of inventory.
Second, many managers believe that the holding of high levels of inventory is a
good thing as it insures the firm against delays and quality problems. The problem
with this view is that it assumes that what is held in safety stocks will be what the
customers eventually require. In any case, holding high levels of inventory as
safety stock only delays the time when the firm must address the root cause of its
production problems.
Just-in-time manufacturing in practice

The ideal for a JIT system is for materials to be flowing at a controlled and co-
ordinated rate through the supply chain in line with end-customer demand
(Harrison and van Hoek, 2002).
To understand how a JIT system can be made to work we need to follow a
hierarchy of cause and effect. This starts with inventory. If a JIT system is working
effectively, it requires the firm to hold a minimum of inventory. This is potentially
beneficial to the firm because it frees capital, reduces storage costs, reduces the
chance of materials becoming damaged, allows the firm to recognize process
problems more quickly and minimizes the risk of stock becoming obsolete.
83
However, in order for a firm to feel confident about holding a minimum of

inventory, a production system must be created where there is a minimum of delays.
This leads to the issue of the causes of delays. There are two main causes: defects
and unplanned downtime.
Defects can cause delays because they lead to a need for the reworking of
defective products. They can also lead to increased production to make up for the
fact that many products have had to be scrapped.
Unplanned downtime occurs when machinery breaks down. This can be avoided
if a culture is established within the firm and supply chain that sees the checking
and maintaining of machinery as a continuous task.
A further cause of inventory is high changeover times. This problem can be
illustrated with an example. A production unit produces a range of products.
Each product requires different moulds to be used in a part of the production
process. As a result, there is a need for tooling to be changed at that part of the
process. If the time it takes to effect a changeover is high, then there will be a
temptation to have long production runs. Where a mould takes, say, five hours to
change, the production run may last for five days at a time. This will lead to a
high level of inventory across all the different products.
The aim in a JIT system, therefore, is to reduce changeover times to a minimum.
If this is achieved, then batch sizes can be reduced, hopefully to a point where they
can be aligned to actual customer demand.
The practices discussed above are underpinned by three further elements (Harrison
and van Hoek, 2002):
1 An effective JIT system will include an optimal operations layout to limit

transportation levels and increase the visibility of the production process.
2 The machinery in a JIT system will be designed to facilitate efficient repair and
maintenance.
3 A JIT system will also benefit from a way of thinking about product design that
considers the implications of design for production efficiency. Lean product
design will consider the number of parts and the type of materials used, the
potential for creating features that aid assembly and modular designs to facilitate
upgrade during the product life cycle.
The ultimate aim of a JIT system is single piece flow. This refers to a situation
when the production process is so efficient and flexible that it is able to pull
through from production a customers demand for a single item. This is an ideal
but the identification of an ideal provides direction to managerial efforts to create
a more lean production system.
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Pursue perfection
The struggle to reduce waste never ends. As new technology emerges, new
efficiencies and new ways of organizing processes become possible. A lean system
is based therefore on the principle of never-ending continuous improvement.
Creating a physically efficient supply chain through collaboration
For a physically efficient supply chain to be created it requires that the participants
in that chain work together. In particular, there is a requirement that supply chain
participants should share the same objectives. In this section the nature of
collaborative relationships is explored from a lean perspective directed towards the
creation of a physically efficient supply chain.
First, we look at how a buyer and a supplier can collaborate to create a system
of vendor-managed inventory. Second, we look at how a number of supply chain
participants can come together to form a supplier association.
There are many interpretations of what constitutes a collaborative relationship.
Perhaps the most helpful contribution has come from Cannon and Perrault
(1999). They argue that buyersupplier relationships consist of four elements:
product/process information exchange;

operational linkages;
co-operative norms;
relationship-specific adaptations.
For Cannon and Perrault, the nature of a buyersupplier relationship depends on

the degree to which the two parties are active with regard to each of these four
elements. Relationships where there is little activity with regard to those four
elements can be considered arms length. On the other hand, relationships where
there is considerable activity with regard to those four elements can be considered
collaborative. The four elements are described in more detail below.
Product/process information exchange. The first element refers to the sharing of

proprietary information, the sharing of cost information, the sharing of forecasting
information and mutual involvement in product development meetings.
Operational linkages. The second element refers to a situation where the systems,
procedures and routines of the buyer and supplier are, to a lesser or greater extent,
linked to facilitate the flow of goods, services or information. These linkages can
operate across many participants within the chain.
85
Co-operative norms. The third element refers to the terms of engagement that are
developed by a buyer and a supplier. It is important in a collaborative relationship
for the two parties to work out an agreed set of expectations about how each of
the two parties should behave in the relationship. The two (or more) parties can
also establish rules and systems for dealing with any problems that might arise
during the relationship.
Relationship-specific adaptations. The final element refers to the investments that

might be made during a buyersupplier relationship. Specifically, it refers to
investments in adaptations to process, products or procedures that are non-
transferable to relationships with other suppliers. These can be made by one or both
parties and will affect the ability of the parties to exit the relationship.
If the supply chain is to be capable of creating physical efficiencies, it is critical
that the relationships within the chain contain significant levels of product/process
information exchange, operational linkages, co-operative norms and relationship-
specific adaptations. An example of an activity that contains these elements is the
practice of vendor-managed inventory.
Buyer-supplier collaboration in practice: vendor-management inventory

Vendor-Managed Inventory (VMI) is an approach whereby the supplier is
responsible for the management and replenishment of inventory. This process works
by the supplier gaining access to the sales and inventory information of its customer.
This enables it to replenish the customers stocks on an ongoing basis. For the
customer to be willing to give the supplier access to such information trust has to be
established between the two parties. This is a key concept in all collaborative
relationship theories (Lamming, 1993; Hines, 1994; Christopher, 1998, although it
is disputed by others Williamson, 1985; Cox, 1997).
The aim of VMI is to avoid the traditional trade-off between product availability
and inventory. Traditionally, if the supplier were to provide its customer with a
high level of product availability, it would have to hold a significant level of
inventory, so as to provide a buffer against sudden orders. However, by having
access to the customers demand and inventory information it can square the circle.
As Harrison and van Hoek (2002, p. 158) comment:
Having the supplier take the decision on replenishment aims to minimize the
impact of demand amplification. This critical problem erodes customer
service, loses sales and increases costs. The ability to dampen demand
amplification caused by infrequent, large orders from customers is key to the
success of VMI. The surplus capacity and excess finished goods held by
suppliers to counteract such variation can then be reduced.
86
Particular attention should be paid here to the concept of demand amplification.

Poor demand information within the supply chain leads to suppliers holding
excess stock to cover possible future customer requests. If there are ten tiers in a
supply chain and it is the case that all the suppliers in these tiers are all insuring
themselves against sudden, unexpected orders from customers, it is easy to see
how inefficiencies can be amplified through the supply chain.
VMI can allow suppliers to see demand coming in advance, thus obviating the need
for such safety tactics. Using VMI the supply chain can, by replicating such practices
throughout the chain, gradually develop a pull capability, whereby the supply chain
meets the demand of the customer out of production rather than stocks. An
important point to note, therefore, is that even for products with a stable demand
pattern, poor supply chain management and poor supply chain information can
create uncertainty and, as a consequence, lead to supply chain inefficiency.
Supplier associations: developing a collaborative supply network

VMI is an example of how buyersupplier collaboration can be used to create
physical efficiencies in the supply chain. As was mentioned previously, the idea with
supply chain integration is that such a collaborative initiative is not an isolated
incident but part of a series of collaborative relationships all the way through the
chain. The impact of the lean techniques will be much reduced if it creates only
islands of excellence.
One mechanism that allows participants to deal with supply chain challenges as
a collective is the supplier association. Again originating in Japan, under the name
kyoryoku kai, a supplier association is a formal or informal group that meets to
plan and implement supply chain improvement projects.
The association will usually consist of the key suppliers in the chain, for
example, the first tier and key players in the second tier. The role of the supplier
association is sixfold (Hines et al., 2000):
to develop and devolve strategy throughout the supply chain;

to create a common mission on the part of supply chain participants;
to strengthen the relationships and develop trust between the supply chain
participants;
to share knowledge and technical expertise;
to facilitate joint learning and provide learning to smaller firms that are not
able to afford the training programmes that are taken for granted by the larger
firms in the chain;
to work on specific projects that will improve supply chain performance.
When working upon specific projects, the supplier association will use lean tools and
techniques. Therefore, a supplier association could undertake big picture mapping,
87
or focus on a specific process using the process activity-mapping tool. Other meetings
will commonly concern quality problems or other pressing concerns of the time.
Summary: creating the physically efficient supply chain
When the demand for a product is relatively stable, firms within the supply chain are
at a relatively low risk of incurring high marketability costs those costs associated
with missing fleeting sales opportunities and being left with obsolete or cut-price
stock. As a result, firms in such supply chains can focus on reducing the physical costs
being incurred within the chain i.e. production, distribution and storage.
To achieve these cost reducing and physical process improvements the principles
of lean thinking would normally be utilized. These principles start with customer
need and, through the development of a pull production system, point the way to
the gradual reduction of the seven supply chain wastes.
Being successful in reducing waste is obviously critical in those markets and
supply chains where excess costs cannot be passed onto the end-customer because
of the intensity of competition. In such circumstances cost leadership strategies
may dictate the need, not only for internal cost reduction and process efficiency
initiatives but also for their extension throughout the supply chains that support
the focal companys activities.
It goes without saying that, as we discussed in some detail in Chapters 2 and 3,
these initiatives cannot be undertaken unless there is an internal and external power
structure conducive to successful implementation. Even though it may be necessary
in practice to pursue cost leadership through process efficiency in the supply chain,
when there is a non-supportive internal and external power environment then it may
be wisest for practitioners not to bother at all.
If the internal and external power structures are conducive, then cost leadership
and process efficiency initiatives may provide some temporary advantage to a first
mover and we would recommend that practitioners pursue such opportunities
aggressively whenever they exist.
For many practitioners it may also be necessary, when the internal and external
power structures are conducive, to pursue such a strategy even when they are
playing catch-up with the current innovator in process efficiency and cost
reduction. This is because if they do not, they may find that they are not able to
compete at all. Many car companies have found themselves playing catch-up to
Toyota in this regard in the past.
However, not all supply chains are characterized by the type of stable demand
that is normally found when functional products are being produced in normally
highly contested markets with many potential customers and suppliers. Demand in
some supply chains is volatile and there are sometimes opportunities for suppliers
to innovate in ways that provide for significant short-term competitive advantages.
88
In these circumstances, as we noted earlier, there is a need for a different type of

approach to supply chain management. This alternative approach focuses on
innovation and market responsiveness.
CREATING AN INNOVATIVE AND MARKET-RESPONSIVE

(AGILE) SUPPLY CHAIN
In this section the basic principles of innovative and market-responsive SCM

strategies are described.
Why is innovation and market responsiveness so important?
The impact of lean thinking on SCM thinking cannot be underestimated.

Nevertheless, the demand patterns for products and services can vary quite
widely, and companies must not always focus their strategic and operational
efforts only on cost efficiency. Companies must also look at ways of innovating
so that the functionality of what they sell allows them to differentiate themselves
from their competitors. This strategic and operational need will also impact upon
the way practitioners think about SCM initiatives.
This is doubly important to understand because if a supply chain strategy that
is suited to functional items is applied to innovative items, then the chances are
that the strategy will do more harm than good. Why is this so? Surely it can never
be damaging to reduce the physical costs being incurred in a supply chain. To
answer this question we need to return to the two types of costs incurred within
supply chains, which are, as we discussed earlier:
marketability costs, the costs of missed market opportunities;

holding obsolete stock and physical costs, the costs of production, distribution
and storage.
On some occasions, even when firms are managing innovative goods, addressing
both of these two costs will not be in conflict. However, on some occasions there
will be a very real conflict. This is because any efforts made to reduce the physical
costs in the chain (for example, by reducing inventory) might significantly reduce
the responsiveness of the chain to market demand. In this way the strategy might
increase the marketability costs incurred by the chain.
When firms are managing innovative products, the main risks lie with
marketability costs. If the customers demand is volatile and provides the supply
chain with only a small window of opportunity to sell a certain product, or
version of a product, all the efforts of the supply chain need to be focused on
89
ensuring that the window of opportunity is not missed. This is not least because
of the high profit margins that are often only temporarily available.
It needs to be remembered that the reason why the reduction of physical costs
is so important to the management of functional products is that the end markets
for such products are usually highly competitive. This means that profits in such
markets will tend towards zero. Firms cannot pass additional cost on to the
end-customer because the end-customer is price-sensitive.
The markets for innovative products are very different. By their very nature,
innovative products do not have competitors and so are able to command a
premium. But, given the volatility of demand, the strategic window of opportunity
is small. In such circumstances it could, therefore, be beneficial to incur extra
physical costs in order to avoid incurring potentially punitive marketability costs.
Creating innovation and market-responsiveness: the principles

of agile supply chain management thinking
The ability to create a supply chain that is innovative and able to respond quickly to
volatile customer demand has become known as agility. Agility has been described as
a business-wide capability that embraces organizational structures, information
systems, logistics processes and, in particular, mindsets. (Christopher, 2000, p. 37).
The concept originally emerged out of work undertaken into flexible manufacturing
systems. In this section the way in which an innovative, market-responsive (agile) SCM
approach can be created is outlined.
Accepting the uncertain demand pattern of innovative goods

The first step in creating an agile supply chain is to accept that uncertainty for this
type of product is inevitable. Firms that for many years produced functional
products have a great deal of difficulty in adapting their mindset in this respect.
Only when managers have accepted the inherent uncertainty of their environment
can they plan their response appropriately. This response should be based upon
three co-ordinated strategies (Fisher, 1997):
uncertainty reduction;
uncertainty avoidance;
hedging against uncertainty.
Uncertainty reduction
Managers can reduce uncertainty by finding new sources of information about
customer demand. The more the supply chain can operate on the basis of actual
90
demand rather than forecasts, the greater the scope for creating agility. The key
here is that the demand information is shared with the whole supply chain and
pushed up the supply chain as far as possible. This will allow the inventory in the
chain to be held in a generic form rather than in the form of finished goods.
To understand how this works we need to consider the concept of the de-coupling
point. The de-coupling point is the point at which real demand penetrates upstream
in a supply chain (Christopher, 2000).
If demand information penetrates right up to the point of manufacture, then
inventory can be held in the form of generic components or raw materials. If, on
the other hand, demand is only visible at the end of the chain, close to the end-
customer, then the inventory will have to be held in the form of finished goods.
As one proponent of agile has noted: The aim of the agile supply chain should
be to carry inventory in a generic form that is, standard semi-finished products
awaiting final assembly or localization. (Christopher, 2000).
The practice of holding inventory in this form, only undertaking final assembly
when the specific customer demand is known, is referred to as postponement.
The practice of postponement also requires a second uncertainty reduction tactic.
This is a product design strategy based upon simplification and modularization.
Firms can reduce uncertainty if they design products so that they share common
components, thus making the demand for those products more predictable.
Given the importance of information for uncertainty reduction, it goes without
saying that information technology plays a critical role in this supply chain
integration strategy. Whilst firms have for some time used EDI, the advent of the
Internet in the 1990s has potentially reduced the costs of linking firms in the
supply chain. It is now possible, therefore, for firms within the supply chain to
obtain information like Electronic Point of Sale (EPOS) data.
Uncertainty avoidance
A second strategy for responding to uncertainty is avoidance. The supply chain
can avoid uncertainty by reducing lead times and increasing flexibility. This will
lead to avoidance as reduced lead times and increased flexibility will allow the
supply chain to produce to order or, at the very least, produce at a time when
demand can be forecast more accurately (Fisher, 1997). Mason-Jones and Towill
(1999) have identified four ways in which lead times can be reduced. These are
shown in Figure 4.7.
Hedging against uncertainty

Having reduced and avoided uncertainty as much as possible, the remaining degree
of uncertainty can be dealt with using a third strategy. Hedging in this context
91
means the holding of inventory. Where the inventory will be held will depend on
the quality of the demand information that is held by the supply chain (see above).
The holding of inventory will act as a buffer against the remaining unpredictability.
Fig. 4.7 Strategies for cycle time reduction
Tactics adopted Engineering procedure

Elimination Removing a process
Compression Removing time within a process
Integration Re-engineering interfaces between
successive processes
Concurrency Operating processes in parallel
Source: Reprinted from Mason-Jones, R. and Towill, D. (1999) Total cycle time compression and the agile
supply chain, International Journal of Production Economics (62) p. 65.
Another way in which the agile supply chain can hedge against uncertainty is by
holding excess capacity. Firms within the supply chain, rather than placing orders,
will reserve capacity with suppliers within the chain. How this capacity is utilized
will depend on the demand information that is received at a later date.
Innovation in functionality: the ghost in the machine of market

responsive supply chains
It can be seen from the discussion of the three factors outlined previously that an
innovative and market responsive SCM approach will largely be dictated by the
scale and frequency of the demand signals emanating from customers. Often the
agile approach is required operationally because the supplier, and the supply chain
supporting this focal company, is unable to predict demand signals with sufficient
scale and volume to be able to engineer a continuous process for supply chain cost
reduction and efficiency. In such circumstances operational reality imposes agility
on the players in the supply chain.
But there is another dimension altogether when one thinks about a market
responsive supply chain. This is the strategic dimension associated with innovation
around the utility functions that customers use when deciding to purchase any
good or service. To be truly successful strategically, companies must innovate in
terms of the functionality (quality and service levels) of the goods and services they
provide to customers, as well as the costs of delivery.
The agile approach outlined above explains how SCM strategies can be
constructed in an environment where there is significant uncertainty about when,
and in what form, any goods and services will be required by the customer. In this
92
circumstance the functionality desired by the customer is responsiveness, and the

customer may be prepared to pay a premium to have the goods or services
delivered when required.
To stay this is to state the obvious, namely, that one key to business success is the
ability to understand the utility functions of customers and the value propositions
that they bring to market. This implies that when market differentiation is the
chosen strategy of the focal company, it requires that the company and its chosen
supply chain partners focus their R&D activities continuously on innovations in
the functionality of what the customer requires from specific goods and services,
rather than focusing primarily on cost reductions through process efficiency.
Obviously, many companies understand the need to undertake this activity
internally within their own R&D functions. To be truly innovative and market
responsive it may also be necessary especially in industries and markets in which
there is rapid and continuous technical innovation to develop SCM initiatives
that allow the company to focus continuously on new technical innovations within
the supply chains that support its own and its customers value propositions.
In scanning the supply chain for technological innovation (or any other market
closure advantages that it may be possible to engineer) it will be imperative for the
focal company to understand the strengths and weaknesses of its own R&D
capability. But it will also be necessary to understand the areas within the supply
chain where newly emerging start-up and/or established companies are innovating
in ways that will provide for non-replicable and difficult to imitate innovations.
In other words, when such innovations are discovered, it will then be necessary
for the focal company to be able to understand the significance of critical asset
thinking (Cox, 1997).
The aim of critical asset thinking is to understand how to own and/or control
those supply chain resources that provide a competitive advantage for the focal
company. The most effective source of control is nearly always ownership through
the insourcing of the competencies that provide a critical supply chain asset.
Sometimes, however, a company is not in a position to own particular supply
chain resources and must seek all other means available to control those resources
and to deny them to their direct competitors.
This control is normally achieved through the development of preferential
external sourcing relationships. This implies that companies must understand
how to mange their external supply and supply chains using joint ventures and
single-sourced, longer-term collaborative relationship management approaches
with newly emerging technology companies, or with other similarly advantaged
suppliers within particular supply chains (Cox, 1996).
Clearly, this type of approach is a far cry from market and SCM strategies focused
exclusively on process efficiency and cost reduction. In this approach the major aim
may be to deny information to others and to minimize trust and openness in business-
93
to-business relationships. This is because buyers and suppliers are combining to

sustain their competitive advantage and to limit this to a few preferential
relationships to the exclusion of all other players in an industry or supply chain.
When developing an innovative and market responsive SCM strategy, it is

likely that the underlying imperatives in buyer and supplier relationship
management may be diametrically opposed to many of those found in a
cost leadership and process efficiency SCM strategy.
Cost leadership and process efficiency approaches make a premium of the
sharing of information and the development of openness and trust in
business-to-business relationship management.
This is because there is no basis, other than through working on process
efficiency improvements with suppliers, that competitive advantage can be
achieved. In such circumstances it makes sense for buyers and suppliers to
collaborate openly together especially if the suppliers are never a threat to
the supply chain position controlled by the buyer.
Innovative and market responsive strategies may require very different
enablers. This is because the whole purpose of this approach is the search
for sustainable differentiation with higher profit margins rather than just an
increase in market share.
Thus, innovative and market responsive strategies may well require the use
of self-seeking interest with guile on the part of buyers and suppliers with
one another or, if they do collaborate together for mutual benefit, against
all other players within an industry and supply chain.
MARKET DIFFERENTIATION AND COST LEADERSHIP

WITH AN INNOVATIVE AND PROCESS EFFICIENCY
SUPPLY CHAIN STRATEGY
As we discussed earlier most SCM literature focuses primarily on the debate between
lean and agile approaches. It is our view, however, that there is an ideal situation that
all companies should aspire to, but which few appear to even understand.
This ideal state is the ability to differentiate and to pursue cost leadership
simultaneously in the marketplace. In seeking to achieve this it is also essential for
the focal company to seek whenever internal and external power structures
permit to achieve innovation, well as process efficiency, in their supply chains.
94
This is because even a company able to sustain differentiation and achieve higher
than normal returns would make higher profits if it were able to continuously
reduce its costs of ownership through process efficiencies.
Given that few companies appear to be able to understand when, and how, to
adopt either lean or agile SCM strategies, it is no surprise that there are even fewer
companies that have the capability to undertake the complex task of managing
these very different SCM approaches simultaneously.
It is worth stressing, however, that when Toyota initially developed its production
and supply management system it did so in an attempt to undertake both tasks.
Indeed, the Toyota model was always based on the idea that its products should be:
The Car in Front to quote one of their famous advertising slogans.
This implies that Toyotas business model was based on passing value to the
customer by focusing on innovation in product and service functionality. In this
way Toyotas competitive market positioning strategy was always to provide the
customer with more value for money (quality and service), while at the same time
reducing cost on a continuous basis. To achieve this given that it was heavily
outsourced for the delivery of the product Toyota also had to drive this twin-
track approach of product and process innovation down its supply chains on a
continuous basis.
This is not the same as saying that Toyota simply tries to take cost out if its
processes, which is the somewhat mistaken impression that has been developed
about both the Toyota model and its approach to SCM by the proponents of the
lean school. By choosing the concept lean to describe the Toyota model, we
believe that Womack and Jones have led far too many practitioners to believe that
SCM is focused on nothing more than operational efficiency and that reducing
process costs is the be all and end all of supply chain management thinking.
Clearly, as we have argued here, this is far from the case. It is due to Toyota that
most of us drive better cars than we ever did in the past, and at a lower cost of
ownership. This could not have been achieved merely by focusing on process
innovations directed at efficiency and cost reduction. On the contrary, Toyota and
their emulators in the car industry have been competing not just on cost
leadership but also on improvements in the functionality (higher quality and
service levels) of the finished product.
In other words the functionality experienced by the end-customer has been
increased as a result of product and service innovation, while the total cost of
ownership has been reduced as well by process innovation. This demonstrates clearly
that Toyota has always pursued a bifurcated competitive market and SCM strategy.
The problem for Toyota has been, however, that its ability to create sustainable
differentiation has been limited due to the ease with which its direct competitors
have been able to replicate both its product and service, as well as its process,
innovations. This does not mean that Toyota has been wrong to pursue a combined
95
differentiation and cost leadership strategy, it is just that the competitive

circumstances in the car industry make it difficult to create a sustainable closure of
the market in favour of the product/service or process innovator.
That said, it is clear that most companies struggle when it comes to managing
together these two types of market and SCM strategy. The challenge for
managers, however, if they wish to be successful over time, is the ability to develop
the competence to understand when they should adopt either or both of these
market and SCM strategies, and how to implement them effectively within
specific market and supply chain circumstances.
The true test of competence in SCM is the ability to understand the difference
between cost leadership and process efficiency strategies, and those focused
on differentiation through innovation and market responsiveness.
Beyond this distinction competence also requires that the manager is able to
understand when either approach is necessary and how to implement each
one effectively.
The most capable managers and companies are those who are able to manage
both types of strategy at the same time.
A simple operational example can illustrate how there is often a need for a
bifurcated approach even within the same supply chain. To understand this we
need to recognize that within supply chains there is often a de-coupling point.
Before that point production will be based upon forecasts about anticipated
demand. After that point it will be based upon real or effective demand.
The further effective demand information penetrates up the supply chain
towards raw materials, the more it is possible for players at each stage in the chain
to hold inventory in the form of generic components because they have certainty
about demand signals. For the production of these generic components it is
obvious that a lean approach can be adopted. For the tasks after the de-coupling
point, when players have to rely on anticipated demand, it is likely that a more
agile approach may be necessary. This is because there is far less certainty about
demand signals for the players at this point in the chain.
This bifurcated strategy has been adopted by Hewlett-Packard to customize its
products as late as possible. For example, its basic printer is made in a generic
form using lean methods. The customization of this basic model is then undertaken
using agile methods, once the actual demand for the specific product has been
received from the customer (Harrison and van Hoek, 2002).
There are two other ways by which managers can combine these two SCM
strategies. The first method is through the adoption of the Pareto Curve Approach.
96
The product range within many firms will obey the Pareto 80:20 rule that is 20
per cent of the products account for 80 per cent of the firms turnover. Under these
circumstances, managers may wish to manage the high volume products using a
lean approach and the low volume products using an agile approach.
The second method is the Base and Surge Approach. Under this approach the two
strategies can be used operationally to cope with surges in demand. The base demand
that is steady throughout the year is dealt with using the lean approach; whereas the
surge demand is dealt with using agile methods (Harrison and van Hoek, 2002).
CONCLUSIONS: THE CONUNDRUM OF KNOWLEDGE

AND UNDERSTANDING
It is clear, therefore, that the most strategically and operationally aligned

organizations, and the most competent managers, will be those that can develop and
sustain the implementation of both differentiation and cost leadership market and
supply chain strategies. Few companies appear to be able to do this successfully but
the problem of competence goes much deeper than this singular failing.
All too often in our experience there appears to be a failure by managers to
understand that, just because something can and has been done by others, does
not mean that it is an appropriate thing for them to do as well. This is particularly
true in the area of SCM because, in recent years, too many practitioners appear
to have been caught up in the mistaken belief that lean SCM is best practice
sourcing for everyone.
What has been worrying about this is that many practitioners have failed to
recognize that lean is only one way of thinking about SCM and, even though it is a
highly appropriate strategy for some companies to undertake in some circumstances,
it may not be an appropriate strategy for all managers and companies to pursue in
all circumstances.
In putting this short volume together it was our hope that we would be able to meet
this problem head on. By describing the different ways that SCM can be tackled and
implemented and also, before that, explaining how a company might decide whether
it is an appropriate sourcing option to pursue, we hope that we will have
demonstrated the range of sourcing choices that are available for managers.
By way of conclusion we provide in Figure 4.8 a decision framework to allow
managers to understand which type of SCM strategy they should be pursuing, and
whether the internal and external power circumstances are in place to allow them
to implement such a strategy successfully.
In the final chapter we provide a short analysis of the currently available
software and Internet-based tools that are available to assist managers with the
implementation of their SCM strategies.
97
Fig. 4.8 Understanding the scope for successful implementation of market and SCM strategies
Is the implementation strategy viable or not?
1 Cost leadership and process innovation strategy possible.
Cost leadership and process innovation strategy only possible

2 if the right external partners can be found.
4 Cost leadership and process innovation strategy only possible if
2 3 internal capabilities and supportive power structures can be developed.
Cost leadership/process 3
1
innovation strategy 4 Cost leadership and process innovation strategy unlikely to succeed.
8
Differentiation/
6
7 5 Differentiation and product/service innovation strategy possible.
product and service 5
innovation strategy 12 Differentiation and product/service innovation strategy only possible
10 6
Pass value to 11 if the right external partners can be found.
the customer 9 Not supportive y
ilit Differentiation and product/service innovation strategy possible if
(bifurcated strategy) ab 7 internal capabilities and supportive power structures can be developed.
Supportive p
a r
Market and supply chain strategies

l c we
Supportive Not
terna d po 8 Differentiation and product/service innovation strategy unlikely to succeed.
supportive Ex an
9 Bifurcated strategy possible.
Internal capability and power
10 Bifurcated strategy only possible if the right external partners can be found.
Bifurcated strategy only possible if internal capabilities and supportive

11 power structures can be developed.
12 Bifurcated strategy unlikely to succeed.

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Fletcher, T. (2000) Creating Best in Class Procurement Management. IBM
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Harlow: Pearson.
Hines, P. (1994) Creating World Class Suppliers. London: Pitman.
Hines, P. and Rich, N. (1997) The seven value stream mapping tools,
International Journal of Operations and Production Management, (17) 1, 4664.
Hines, P. and Taylor, D. (2000) Going Lean, Cardiff: Lean Enterprise Research
Centre.
Hines, P., Lamming, R., Jones, D., Cousins, P. and Rich, N. (2000) Value Stream
Management: Strategy and Excellence in the Supply Chain. Harlow: Pearson.
Lamming, R. (1993) Beyond Partnership. New York: Prentice Hall.
Mason-Jones, R. and Towill, D. (1999) Total cycle time compression and the
agile supply chain, International Journal of Production Economics, (62) 6173.
Ohno, T. (1988) The Toyota Production System: Beyond Large-Scale Production
Portland: Productivity Press.
Rother, M. and Shook, J. (1998) Learning To See: Value Stream Mapping to Add
Value and Eliminate Muda, Brookline, MA: The Lean Enterprise Institute.
Williamson O. E.(1985) The Economic Institutions of Capitalism. New York:
Free Press.
Womack, J. and Jones, D. (1996) Lean Thinking: Banish Waste and Create Wealth
in Your Corporation. New York: Simon and Schuster.
99
5
Software and Internet tools
for effective supply chain
management
Introduction 103

SCM initiative 103

Conclusions 119
References 120
101
Software and Internet tools for effective SCM
INTRODUCTION
In this final chapter the scope for software and Internet-based tools to assist with
the effective implementation of SCM initiatives is discussed. The chapter provides
an initial theoretical discussion of the ways in which software and Internet tools
can impact upon SCM initiatives, as well as providing a summary overview of
some of the major software and Internet-based tools available. A final section
provides a decision-making framework to allow managers to understand whether
software and Internet-based applications will be beneficial in implementing
particular types of SCM initiatives.
The discussion demonstrates that, while there are some tools that may assist
SCM initiatives, many of the current tools available are not necessarily directly
relevant. Furthermore, those that are relevant tend to assist primarily with process
efficiency initiatives associated with the eradication of waste resulting from poor
information flow.
THE THEORETICAL BENEFIT OF SOFTWARE AND

INTERNET TOOLS FOR SCM INITIATIVES
The first question that a practitioner must ask when considering the relative utility of
any software or Internet tool for SCM initiatives concerns the purpose of the SCM
initiative itself. This is an important question because there has been tremendous
hype in recent years (not least from potential application providers) about how the
Internet and software applications will enable companies to optimize the efficiency
of their supply chains.
At the outset, therefore, it is imperative that we understand theoretically and
practically what any SCM initiative is seeking to achieve, and only then consider
the ways in which any software and Internet based tools can assist with such
initiatives. As we saw earlier, SCM initiatives can be focused on three very different
(if sometimes inter-related) areas:
1 Process efficiency to reduce costs in the delivery of existing goods and services.
2 Innovations to change the functionality of the goods and services produced.
3 Achievement of both these desired outcomes at the same time.
It is clear, therefore, that at the outset practitioners must be sure about the real
purpose of any SCM initiative and fundamentally understand how any particular
software or Internet-based tool will, or will not, assist with the delivery of any
specifically desired outcome.
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A few theoretical examples may serve to explain this point. We look at two
hypothetical examples here: a process efficiency case study and a product/service
innovation case study.
Case study 5.1

A hypothetical process-efficiency SCM case
The major benefit that many companies aim to achieve from the development of SCM
initiatives devoted to process efficiency is twofold. First they expect, by reducing the number
of suppliers they have to deal with and developing longer-term relationships with them, to
reduce their internal and external transactions costs associated with the normal practice of
organizing competitions and constantly having to source and select new suppliers.
Second, related to this, by working closely and over a longer period of time with preferred
suppliers, one major aim is to develop the level of trust and commitment on both sides so
that management processes are inter-locked in such a way that information is shared openly
between both parties, thus eradicating inefficiencies that might arise due to any mistrust.
This example shows that by reducing the need to continuously select suppliers, the buyer
reduces transaction costs and the supplier may also reduce transaction costs because of
not having to incur marketing costs. These actions may, ultimately, reduce the costs of
producing goods and services and allow the two parties to achieve a competitive advantage
in the market.
Similarly, by working closely together and by providing timely and accurate information it
may be expected that many of the process inefficiencies that arise through demand
amplification problems (Forrester Effects) can also be eradicated. Furthermore, it may also
be possible to optimize lean production and supply models based on JIT thinking and take
out unnecessary waste and inefficiency within processes between the buyer and the supplier.
Clearly, if there is a continuous and orderly linkage between all the buyers and suppliers
within the total supply chain, the scope for total optimization of information flow is enhanced
and, in theory at least, so is the scope for process efficiency. Any software and Internet tools
that can assist with the eradication of poor and untimely information may, therefore, be
seen as a major benefit for the effective implementation of SCM initiatives focused on
process efficiency.
It is important to understand, however, that these optimization benefits only occur

if the key problem in the supply chain is one associated with a lack of timely and
accurate information and all the players in the chain are signed up to the same
information management software systems. While there are clearly major problems
of this nature in supply chains, one has also to recognize that many of the problems
that SCM initiatives are trying to resolve (even within process efficiency focused
approaches) may not relate to information flow at all.
It may be that the major benefits of an SCM initiative arise as a result of
bringing together all the players in the supply chain through supplier networks or
supplier association meetings. In such meetings the supply chain players may
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develop a common understanding of physical operational problems and not just

those created by the flow of order-related information.
Indeed, one can argue that much of the best practice in SCM arises from the
development of this common understanding amongst participants about the sub-
optimal physical processes that exist within companies and the ways in which
they operate internally. The benefits of SCM initiatives may then arise due to the
willingness of participants to work together to redesign processes and systems to
allow optimization through a common understanding of problems. In such
circumstances it is a sharing of problems rather than having timely and accurate
information that will be the basis on which the SCM initiative succeeds, not the
availability of the latest software or Internet-based systems and processes to link
information flow.
There is also another problem that relates to the lock-in problem that faces any
buyer when it selects and installs particular software or Internetbased
applications. While recognizing the significance of accurate and timely information
flow for supply chain optimization, it is also essential that practitioners understand
that buying IT applications has unique problems in its own right.
This is because, while there may be many suppliers of IT software applications
pre-contractually, once a sourcing decision has been taken to use one supplier a
buyer is often inadvertently committed to a situation of post-contractual lock-in
to one application supplier. In other words, what may be a competitive market
pre-contractually, rapidly becomes one of single sourced supplier dominance post-
contractually.
This can also create immense problems operationally if the buyer is not careful
since the buyer is not just being locked into a long-term relationship with the IT
infrastructure/application provider, but may also be potentially locked into a
permanent relationship with operational suppliers of goods and services. The reason
for this is that software and IT costs make heavy demands on the budgets of all
companies, and it is highly likely that once dedicated investments in software and
IT infrastructure systems have been made, the buyer may find it extremely difficult
to exit from the operational supply relationships that have been created.
This may not be a problem if the buyer is working with the best suppliers
possible, but it could become a major issue if, over time, new and more innovative
potential suppliers become available who cannot make the dedicated software and
IT investments that a buyer may wish them to make, or if the switching costs for
the buyer to move to them are also too high because of incompatible IT systems.
It may be the case that far-sighted suppliers (both of software application systems
and of operational goods and services) understand this problem of post-contractual
supplier dominance and are keen to encourage buyers to become locked-in to
particular infrastructure systems and software tools, so that switching later will
become difficult (Lonsdale, 2001).
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The buyer of software and Internet-based tools must, therefore, think carefully
about exit from existing applications over the long term and not just focus on the
immediate short-term benefits that can be achieved from the initial optimisation
of SCM process efficiencies. If they do not, then they may find later that they are
in a sub-optimal supply chain relationship. The problem of power must be
considered carefully here and must always be factored into any specific supply
chain software and Internet-based sourcing decision.
Nevertheless there definitely appear to be some circumstances in process-
efficiency SCM initiatives when software and Internet-based tools will provide
significant benefits. The benefits from types of these applications are perhaps less
apparent when one considers product/service innovation SCM initiatives.
Case study 5.2

A hypothetical product/service innovation SCM case
In this type of SCM initiative the buyer is normally seeking to find ways to increase the
functionality of the goods and services currently being produced by itself and in conjunction
with its supply chain partners. In this scenario there are two potential sub-categories of
innovation.
In the first case, that associated with market responsiveness where the buyers and suppliers
are attempting to provide goods and services in a timely manner to the end-customer, the case
for software and Internet-based tools will be much the same as in the circumstances of
process efficiency improvements discussed previously. In such cases the need for accurate
and timely information flow will be equally imperative and critical to success.
There is, however, a very different category of cases associated with product/service
innovation where the major focus of improvement is on new R&D initiatives aimed at
increasing the utility value of particular goods and services to the end-customer.
In this scenario it is unlikely that timely and accurate information flow will be one of the
major problems that the SCM initiative is attempting to resolve. On the contrary, the
initiative itself may be focused on the need to brainstorm new ideas, or to come up with
new technological means of solving problems.
In this environment, while having access to the R&D processes of supply chain partners
(through innovations like CAD-CAM systems) may be beneficial, it is more than likely that the
brainstorming activity will be most assisted by close working relationships on a continuous
and regular basis by all the relevant parties. The hope here might be that the close proximity
of working relationships, rather than the timely and accurate flow of information assisted by
the latest software tools and techniques, would provide for a fortuitous development of
serendipitous innovation.
In such circumstances software and Internet-based tools are unlikely to provide anything
other than a minor support to the major purpose of the SCM initiative the brainstorming
of new ideas.
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It follows from this discussion that all that glitters is not gold when it comes to
the relative utility of software and Internet-based tools and techniques. Sometimes
the tools will help and sometimes they will not. The task for managers is to know
which tools are available and to understand whether they can assist them with
their SCM initiatives. In the next section we describe and analyze some of the
major SCM and e-sourcing tools currently available on the market.
Software and Internet-based tools can provide a major benefit to the

development of SCM initiatives, but sometimes they are of little value
whatsoever.
In general terms one might expect software and Internet-based tools to be of
major significance for SCM initiatives focused on process efficiency, especially
where one of the major problems affecting supply chain optimization is a lack
of timely and accurate order processing information.
In product/service innovation SCM initiatives the benefits of software and
internet-based tools are less apparent because timely and accurate information
flow may not be the major problem that the initiative is attempting to resolve.
When a product/service innovation strategy is directed towards market
responsiveness, it is likely that software and Internet-based tools will be of
value.
When considering the use of any software and Internet-based tools,
practitioners must always understand the pre- and post-contractual risks
they are running when they decide to source a particular IT infrastructure
or software system.
THE MAJOR E-SOURCING SOFTWARE APPLICATIONS
There are essentially four major elements in the e-sourcing software industry.
ERP software
ERP (Enterprise Resource Planning) software is the internal technological hub of

the organization. It is used to support existing business strategies and provides the
company with the flexibility required to improve customer responsiveness (the
demand-side) and to better manage production needs, inventory and the
107
procurement of inputs (the supply-side). It is also the ultimate tool for allocating
scarce resources. Using ERP, a company can create a new information foundation
(that is organized, consistent, codified and standardized) by replacing the existing
diverse legacy systems.
ERP software tools took the concepts of MRP (Materials Requirement
Planning) and attempted to integrate other departments and functions that were
outside the manufacturing-planning arena but were still related. Essentially, ERP
systems are the software infrastructure that facilitates the flow of information
between all functions in a company (e.g., manufacturing, finance, HR, sales and
marketing, logistics and procurement).
When combined with Internet-based technology, the companys internal
information infrastructure can also be extended into the external environment.
The internal and external processes that require the efficient flow of information
within the supply chain are shown in Figure 5.1.
Fig. 5.1 Internal and external enterprise process flows
Customer Organization Supplier
Delivered orders Order fulfilment Manufacturing Production materials

(outbound logistics) process process (inbound logistics)
Customer forecast Planning and forecasting processes Forecast requirements
After sales and

Returns and repairs support process
Procurement and Procurement
sourcing process requirements
Order capture
Customer orders process
Design and specification Design and specification

requirements Support processes requirements
(including design, finance, etc.)
Invoices and
Invoices and payments payments
ERP systems can be visualized as huge database applications for storing transaction
data driven by software that connects the components of the company. When data
becomes available at one point in the business, it courses its way through the
software, which automatically calculates the effect of the transaction on other
areas such as manufacturing, inventory, logistics, procurement, invoicing and
booking the sale to the financial ledger.
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For example, when the sales department receives an order, it enters the order into
a computer. This should then generate either an order in the shipping department (if
there are stocks) or in the manufacturing department so that it can be produced.
This may require the ordering of specific inputs from suppliers through the
procurement department. Additionally, each step to the receipt of revenues from the
customer has accounting implications (e.g., debit the accounts receivable account).
ERP deals with a highly complex problem organizing and executing the millions
of transactions that are required to efficiently operate a modern business. ERP
software companies see sourcing as a data processing and database management
problem, not as a mathematical modelling and supply chain optimization problem.
However, while these systems are not oriented towards problem solving, ERP
vendors have purchased vendors in the other markets to provide modelling/solving
capabilities.
ERP software companies are very well known. The industry is led by SAP AG and
Oracle two of the worlds largest software companies and also includes Baan,
PeopleSoft and JD Edwards. This market plays host to about 60 other suppliers.
Despite the power of the leading players, the intensity of competition is forcing ERP
software companies to rethink their products role within the organization. They are
seeking ways to broaden functionality by incorporating front-end technology, to
create trading communities through portals and to forge collaborative associations
with Internet-based technology and other suppliers.
Supply chain management solutions
Although sometimes misperceived as a niche, ERP specialty market SCM solution

providers focus primarily on matching supply with demand, rather than tracking
individual transactions. Most of these applications are based on sophisticated
forecasting methods for demand planning, a production planning and scheduling
module for supply planning, and some analysis tools for examining supply-demand
match-ups.
The best SCM tools turn on their ability to gather and synthesize point-of-sale
data and turn it into useful demand data, while pulling together actual supply
information (inventory information, production schedule status, etc.) relevant to
decision making.
The leaders of the SCM solution market include Ariba, Manugistics and i2, with
a few other suppliers occupying industry-specific niches. This area has seen
significant growth in recent years, as companies that have implemented ERP
systems to facilitate better internal management information have realized the
significant benefits that SCM solutions may provide in the management of their
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internal and external supply chain operations. As a result of the growing market,
the leading ERP software suppliers have developed SCM tools to add functionality
to their well-established offerings.
Optimization tools
Another technique used by some of the tools is constraint-based optimization.

This is a heuristic, or rules-based approach, to finding solutions to very complex
problems while it still early enough to do something about them. Put simply, these
tools use operations research and mathematical techniques to solve issues such as
transportation resource optimization, vehicle routing and scheduling, inventory
allocation and manufacturing schedule optimization. These tools generally have
direct links into most ERP systems, allowing users to extract key data.
Analysis tools
The final set of tools have very few interactions with the tools discussed previously.
They are used largely for analysis and understanding of system dynamics, or as
strategic design tools. Like optimization tools, they rely on complex mathematical
techniques.
Conclusion
The previous discussion has demonstrated that while there are four distinct types
of e-sourcing software that all claim to do supply chain analysis and optimization,
it is clear that the companies operating in these different categories and their tools
do remarkably different things. This same logic applies when we consider the
major tools developed as Internet-based solutions.
THE MAJOR INTERNET SOURCING APPLICATIONS

The use of the Internet in business-to-business supply chain applications has grown
rapidly in recent years. From basic use in the area of transportation and
warehousing, the Internet is now being used to manage key supply chain activities
including raw materials inventory management, sophisticated warehousing, finished
goods inventory management, production scheduling, purchasing, procurement and
customer service.
New tools in the areas of e-Procurement, e-Requisitioning, e-Auctioning,
e-Markets, e-Fulfilment, e-Design and Manufacturing, e-supply chain collaboration
and synchronization, e-real-time event monitoring, e-optimal pricing and e-logistics
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co-ordination expand the operational and strategic options available to firms in the
area of sourcing in general and SCM specifically.
Even with the caveats introduced in our earlier discussion, the benefits of the use
of e-applications in the field of sourcing and SCM can be multi-dimensional. In
addition to improving the quality of information flows and speeding up
communication between buyers and their suppliers at all stages of the supply
chain, their use may also lead to lower transaction costs, lower purchase prices,
increased levels of service, enhanced asset productivity, reduced logistics costs and
increased operational flexibility in terms of delivery and response time.
Until the advent of the Internet, the ability of firms to achieve these goals was
limited, since the communication and knowledge links in the existing supply chains
did not bring together all the key databases. Also, there was, and in some cases still
is, justifiable reluctance on the part of firms in the supply chain to share data with
each other. This hesitancy is due to a variety of factors, including the perceived
threat of giving away competitive advantage to other firms, the sharing of sensitive
information such as inventory levels and production schedules with other channel
members and the potential of losing customers to other competitors.
Figure 5.2 shows the impact that e-applications and the Internet can have on the
key internal and external information and process flows within the organization,
but only when a company has decided that the benefits of e-Enablement far
outweigh the risks that may occur from implementation.
Fig. 5.2 The e-enabled internal and external enterprise process flows
Customer Organization Supplier
Delivered orders Order fulfilment Manufacturing Production materials

(outbound logistics) process process (inbound logistics)
eFulfilment eDesign eManufacturing
Customer forecast Planning processes (including demand and supply forecasting) Forecast requirements
Order capture
Customer orders process
Procurement and Procurement
sourcing process requirements
CRM and
eCommerce eProcurement
After sales and
Returns and repairs support process ePurchasing eContracting
eDesign
Design Design
requirements requirements
Support processes
(including design, finance, etc.)
Invoices and
Invoices and payments payments
ERP system
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To understand how the Internet provides additional sourcing and SCM tools, we
discuss potential applications in five major areas:
procurement;
inventory management;
transportation planning;
customer services;
production scheduling.
Procurement on the Internet
The use of the Internet for purchasing has developed rapidly over the last ten years.
It has fundamentally streamlined the function and is now used for a variety of key
purchasing activities including communication with suppliers, checking and
comparing supplier price quotes and making purchases from suppliers catalogues.
General Electric, for example, has reduced its purchasing staff by more than 50 per
cent and permits on-line purchasing from supplier catalogues by each department.
The paperwork flows have been reduced, and order-cycle times the time from when
the order is purchased to the time it is delivered to the company has decreased by
40 per cent.
Arguably the most popular use of the Internet within the procurement department
is in e-applications that facilitate order placement, approval and order status.
Indeed, e-Requisitioning has dramatically reduced the costs of order processing,
which before the Internet accounted for approximately 1820 per cent of the total
cost of managing a supplier relationship. A major component of this cost saving is
the reduction of paperwork involved in traditional order processing systems.
Another advantage of the Internet in order processing is the speed and accuracy
at which orders can be processed. The reduction in order-cycle time has been
reduced by as much as 50 per cent. Errors can now be detected more easily (e.g.,
through out-of-stock notifications) and corrected more quickly (e.g., through the
efficient handling of returned goods).
The Internet has also proven itself to be an important tool for communicating
and negotiating with suppliers. Face-to-face negotiations are not used as
frequently because the negotiations can be effectively conducted through the
Internet. E-Procurement, e-Contracting and e-Auction applications have all been
found to be beneficial in aspects of the buyersupplier bargaining process.
Another important factor in supplier relations is the ability of a buyer to rate and
compare the performance of its suppliers, based on the key elements agreed to in
their negotiated contracts. Inherent within many e-Procurement applications, the
benefits of these evaluating systems improve the overall quality of supplier
112
performance, lower purchasing costs, and improve the productivity of supplier

operations. This information enables companies to form the appropriate strategic
supplier relationships based on solid informational bases developed from Internet
monitoring systems.
Despite the benefits that may arise from the use of Internet-based applications there
is considerable confusion surrounding the different offerings from the various B2B,
e-Business and e-Procurement application providers. Notwithstanding the confusion
amongst practitioners, there appear to be five major categories of applications within
the procurement and supply chain field:
e-Procurement software (including e-Auctions, e-Catalogues and other

content creation, management and aggregation);
e-Marketplaces and Internet exchanges (including additional services);
e-Marketplace-making technology;
e-Marketplace aggregators or intelligent agents;
integration software (to integrate front-end e-Procurement or e-Sales systems
with back office ERP or other legacy systems).
Much of the confusion amongst practitioners about the strengths and weaknesses of
these applications stems from the fact that few of the companies offering solutions
categorize themselves so neatly. For example, e-Marketplace makers frequently sell
themselves as providers of hosted e-Procurement software. Another source of
confusion is that some application providers may have started operations in one
segment of the market and have now moved into another with some becoming
more precisely focused, and others becoming less so.
The primary task for managers is to understand in detail what the strengths and
weaknesses are of these particular applications (which tend to deal primarily with
the dyadic buyersupplier exchange relationship rather than with the total supply
chain that may need to be managed) and how (given this) any of them can assist
with the development of a particular type of SCM initiative. We discuss how
practitioners may begin to think about this issue in a structured way for all of
their potential applications in the final section of this chapter.
Inventory management and the Internet
One of the most costly aspects within supply chains is the management of inventory.
These costs can potentially be reduced by the effective use of the Internet to inform
relevant parties when problems with stock availability may arise. Through the use
of e-fulfilment applications, firms are able to inform their suppliers that raw
material inventory levels are low, or inform their customers that finished product
inventory levels are low.
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The Internet has also enabled companies to institute EDI programs with their
customers more quickly. Prior to the development of the Internet, EDI took
considerable time to implement in a supply chain. In addition, each player had to
invest heavily in IT, software and training before EDI systems could be made
operational. Since the introduction of the Internet, EDI systems (and their JIT
counterparts) can be developed and put into operation more quickly.
The Internet potentially provides mangers with the opportunity to improve the
quality and speed of information available for inventory management so that
inventory levels are kept low, overall holding costs are reduced, while still
providing high levels of customer service.
Transportation and the Internet
Another popular use of the Internet is in the management of transport logistics.

Transportation typically is the second highest cost component in many supply
chains, accounting for approximately 25 per cent of overall operating costs.
The monitoring of pickups at regional distribution centres by carriers is one of
the most popular Internet applications in this area. This is particularly important
since tracking shipments to regional depots provides the firm with data on the
reliability performance of the carriers being used. It also provides managers with
the information they need to inform carriers of shipment delays as they occur and
allows them to take immediate corrective action.
The examples below provide an indication of some of the benefits that companies
have received from the use of Internet-based transport logistics applications:
General Electric, in its appliance division, uses the Internet to schedule shipments
out of centrally located warehouses in metropolitan areas. The goal is to allow
the company to deliver its products on time and more cost effectively. The
numbers of deliveries per hour has increased significantly while transportation
costs per order have dropped dramatically.
The Ford Motor Company uses the Internet to track small quantities of spare
parts shipped to customers on a daily basis.
PPG Industries, Inc. utilizes the Internet to monitor the weekly route performance
of carriers from its main production plants. The company also uses the Internet
to track long-haul deliveries across the country.
Air Products and Chemicals Inc. uses the Internet in its global sourcing process.
The Internet informs the firm of which delivery terminal and which plant is the
best for servicing the customer.
Weyerhauser uses the Internet to monitor vessel-shipping while taking into
consideration the stop-off costs for the sites.
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Customer service and the Internet
An important function that the Internet can offer a firm is the creation and
maintenance of excellent relationships with its customers. The Internet has provided
customers with another way to contact the firm regarding service issues. Companies
may use the Internet to receive customer complaints, emergency notifications and
provide customers with 24-hour access to a companys service department, enabling
customers to notify companies immediately of any service issues or problems that
may arise. The overall effect can be reduced response times and rapid resolution of
customer service problems.
The Internet can also improve the two-way flow of communication between firms
and their customers. Companies are using the Internet not only for service issues but
also for selling their products and services as well. This two-way communication
capability can have a profound effect on cementing customerfirm relationships.
Experience with Internet service systems shows that those customers whose service
issues are dealt with quickly, and to their satisfaction, are more likely to purchase
the firms products again. The Internet can build strong product and service loyalty
if used appropriately in the customer service area.
Production scheduling and the Internet
Production scheduling has traditionally been one of the most difficult problems in
SCM initiatives. The reasons for this include:
the high level of inaccuracy of sales forecasts;

the lack of raw material information from suppliers;
the general paucity of information regarding fluctuations in supplier-stock levels
and customer demand.
The Internet can help firms to minimize these difficulties in their production
scheduling by improving the information flow and communication between
suppliers and buyers at all stages of the supply chain. Indeed, firms may use the
Internet to co-ordinate their JIT programmes and co-ordinate their production
schedules with their suppliers.
While the issue of customer demand analysis using the Internet is not discussed
directly here, the application of the Internet to order processing (by linking EPOS
data with production scheduling) provides firms with real-time information on the
sales of their products and services. This can result in more accurate sales forecasting,
which in turn can significantly improve production and inventory scheduling.
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A FRAMEWORK FOR ANALYZING THE UTILITY

OF SOFTWARE AND INTERNET-BASED TOOLS
FOR SCM INITIATIVES
Clearly, there is tremendous noise (or lack of clarity about means and ends) in
the sourcing area around software and Internet-based tools. The reason for this
noise is simple enough to understand. Many practitioners are operating with
bounded rationality. This simply means that they do not fully understand the
utility of particular applications for the specific sourcing and SCM initiatives that
they are attempting to implement, nor do they understand the technology and its
implications for their own legacy-based IT systems and processes. In addition they
do not understand the change management costs over the long term that will need
to be incurred to implement many of the software and Internet solutions being
offered to them (Cox et al., 2001).
Despite this, as we have shown above, there is considerable evidence that the
judicious use of software and Internet-based applications can have a significant
impact on some sourcing and SCM initiatives. The key task for practitioners,
therefore, must be to understand whether any particular applications will materially
assist the development of their sourcing and SCM initiatives.
To assist practitioners in their task of understanding the costs and benefits of
particular software and Internet-based applications for their SCM initiatives we
provide a decision-making framework in Figure 5.3. We have found this framework
to be of value when working with companies that have had to understand whether
particular applications can provide them with significant benefits.
Fig. 5.3 The operational use value of software and

Internet-based applications
B D
A C
High
Impact on process
efficiency and
reduction in
transaction costs
Low
F H High
t/
uc
E G Low p rod tion
n va
t o no
Low High p ac e in
Im rvic
Impact on reliability and quality of se
information flow
116
As can be seen from Figure 5.3, when thinking about the utility of particular
software and Internet-based applications, it is essential for companies to understand
the impact of an application on three major variables:
process efficiency and transactional cost reductions;

reliability and quality of information flow;
product/service innovation.
Clearly any application may have a high or low impact on any of these variables,
but the way these three variables interact will provide an early indication for which
type of sourcing and SCM initiatives the application may be best suited. This is
indicated below with reference to the eight scenarios AH outlined in Figure 5.3.
Scenario A. In this scenario an application will have a high impact on process

efficiency and offer scope for a significant reduction in transaction costs, but with
only a low impact on the reliability and quality of information flow and with only
low impact on product and service innovation. This would seem to suggest that
the application may have some value for a cost leadership/process efficiency SCM
initiative but not for a differentiation/product and service innovation initiative.
Scenario B. In this scenario there is high impact in both the process efficiency/cost
reduction and in the product/service innovation areas but low impact on the quality
of information flow. This implies that applications in this area may be of some value
for differentiation/innovation strategies, as well as for cost leadership/ process
efficiency strategies, but they will not be as potentially valuable as those applications
in Scenario D (for all strategies) or in Scenario C (for cost leadership/ process
efficiency strategies) or Scenario H (for differentiation/ innovation strategies).
Scenario C. In this scenario there is a high impact on process efficiency and cost
reduction opportunities and a high impact on the quality and reliability of
information flow, but a low impact on product and service innovation. This
implies that this type of application will be of significant benefit for a cost
leadership/process efficiency initiative, and it may also be of value for a market
responsive differentiation strategy. It is, however, unlikely to be of much value for
an R&D product/service innovation strategy.
Scenario D. In this scenario an application has a high impact in all three areas.
This implies that it must be the most valuable application whether for cost
leadership/process efficiency or for differentiation/innovation SCM initiatives, as
well as for bifurcated strategies.
117
Scenario E. In this scenario the impact is low in all areas of potential benefit. This
would imply that the application is of little value for any type of SCM initiative.
Scenario F. In this scenario there is a low impact in both the process efficiency and
the information areas, but high impact in the product/service innovation areas.
This implies that an application in this area would have some value for a
differentiation/product and service innovation strategy, but perhaps not on an
innovation strategy focused on market responsiveness and certainly not for cost
leadership/process efficiency strategies.
Scenario G. In this scenario there is low impact on process efficiency and

product/service innovation, but high impact on information flow. This implies that
applications in this area may be of some value for differentiation strategies based
on market responsiveness rather than on product/service innovation. There is likely
to be little of value here for process efficiency and cost leadership initiatives.
Scenario H. In this scenario it is clear that the impact on cost leadership and
process efficiency is very low, but that there is high impact for both information
flow and product and service innovation. This means that applications in this area
would be of high value for differentiation strategies based on both product/service
innovation and market responsiveness.
As the analysis above demonstrates, there are clearly some applications that will
have more value than others for particular sourcing and SCM initiatives.
Applications in Scenario D are the ideal solution for all types of initiative,
and especially for bifurcated SCM strategies.
Applications in Scenarios A, B and C will be of most value for cost
leadership/process efficiency strategies.
Applications in Scenarios C, G and H will be of most value for differentiation
strategies based on market responsiveness.
Applications in Scenarios B, F and H will be of most value for differentiation
strategies based on product/service innovation.
Applications in Scenario E are of little value at all.
It is important to recognize here one final issue when applying this logic to SCM
initiatives. The analysis above can be applied to software and Internet-based tools
that impact on simple dyadic exchange relationships between buyers and suppliers,
and this may be of significant value in any sourcing relationship. The point to keep
118
in mind when considering SCM strategies is that applications must also be assessed
on the basis of their capability to provide improvement within the total supply
chain of buyer and supplier relationships, not just at the first-tier.
It follows, therefore, that when considering the value of particular applications
sensible companies, especially those pursuing SCM initiatives that involve more
than first-tier buyer and supplier relationships, must assess the capability of
applications to provide benefits within the supply chain as a whole.
CONCLUSIONS
Although there are many potential benefits from the application of software and
Internet-based tools to buyer and supplier, as well as supply chain, relationships,
it is imperative that buyers do not simply accept the marketing hype of application
providers. There has been far too much of this in the past, and it is clear that
companies must become more sophisticated about the relative costs and benefits
of particular applications for specific types of SCM strategy.
This is, however, a conclusion that needs to be made and this refers not only to
the sourcing of SCM software and Internet-based applications. Our final
conclusion is that there is a need for companies and their managers to become
smarter at understanding the answers to five basic questions listed in Key learning
point 5.3 that this volume has tried to address.
1 Does the company understand what supply chain management is, and
how it differs from other sourcing approaches that the company might
consider for the leverage of improved value for money?
2 Is supply chain management the best strategic option available when
compared with other sourcing approaches that might be adopted by the
company?
3 Is supply chain management operationally feasible both internally and
externally?
4 Does the company understand what type of supply chain management
strategy it is adopting, and is it fully aware of the tools and techniques that
will be necessary to implement such a strategy effectively?
5 Does the company fully understand the full costs and benefits of any
software or Internet-based tools that might be used to assist with the
implementation of its supply chain management strategy?
119
If this volume assists practitioners and their companies in answering these

questions, so that future SCM strategies are more successful in the future than
they have been in the past, then it will have served its purpose.
REFERENCES
Cox, A., Chicksand, L. and Ireland, P. (2001) The E-Business Report. Helpston:
Earlsgate Press.
Lonsdale, C. (2001) Locked-in to supplier dominance: on the dangers of asset
specificity for the outsourcing decision, Journal of Supply Chain Management,
(37) 2, 227.
120

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Supply Chain Management

In an increasingly competitive world, we believe its

Thats why we work with the best minds in business

Under a range of leading imprints, including

To find out more about our business publications, or tell

For other Pearson Education publications, visit

ANDREW COX, PAUL IRELAND,

An imprint of Pearson Education

First published in Great Britain in 2003

Andrew Cox, Paul Ireland, Chris Lonsdale,

The right of Andrew Cox, Paul Ireland, Chris Lonsdale,

ISBN 0 273 66270 8

British Library Cataloguing in Publication Data

All rights reserved; no part of this publication may be reproduced, stored

Typeset by Monolith www.monolith.uk.com

The Publishers policy is to use paper manufactured from sustainable forests.

Chris Lonsdale is a lecturer in Supply Chain Management in the Department of

Joe Sanderson is a lecturer in Supply Chain Management in the Department of

Glyn Watson is a lecturer in Supply Chain Management in the Department of

1 Supply chain management and best practice

2 Is supply chain management the best strategic

3 Is supply chain management feasible operationally? 37

4 Implementing supply chain management initiatives 65

5 Software and Internet tools for effective supply

1.1 The four sourcing options for buyers 5

3.1 Actors involved in the organizational sourcing process 41

1 Supply chain management and best practice

2 Is supply chain management the best strategic

3 Is supply chain management feasible operationally? 37

4 Implementing supply chain management initiatives 65

5 Software and Internet tools for effective supply

Selecting the right sourcing strategy 18

Internal investments and the makebuy decision 19

External investments and the four generic sourcing

As we saw, the issue of whether to undertake SCM or to pursue alternative

Fig. 2.1 The 5-step model to proactive supply chain management

1. Concentrate on core competencies.

2. Outsource all non-core competencies to suppliers.

3. Consolidate all supply inputs into categories of spend.

4. Concentrate internal resources on a limited number of long-term collaborative

SELECTING THE RIGHT SOURCING STRATEGY

INTERNAL INVESTMENTS AND THE MAKEBUY DECISION

When a firm insources it is using investors capital to develop productive capabilities

Companies, therefore, have to think seriously about whether it is sensible to

1. Cost reduction. Cost reductions are obtained from reducing internal

Case study 2.1

Internally, the firm must also consider:

Of the resources and capabilities necessary to bring the product or service to

A firm can pursue a competitive strategy of product differentiation by creating

Information impactedness. This means that the knowledge on which an advantage

Clearly companies considering SCM approaches that require them to outsource

Key learning point 2.1

The lesson from companies successfully pursuing SCM approaches is that

EXTERNAL INVESTMENTS AND THE FOUR GENERIC

Just as the question of what should be insourced and outsourced is an investment

Case study 2.2

Key learning point 2.2

The attractiveness of particular sourcing options is likely to be highly sensitive

the level of investment required;

SELECTING STRATEGIC SOURCING OPTIONS

In practice, selecting the appropriate sourcing strategy is an art rather than a

Calculating and allocating costs

Fig. 2.2 Calculating and allocating costs