Chapter 13 Supply Chain Integration:

Aligning Incentives for Supply Chain Inefficiency Background:

Organizational changes are also behavioral Problems with people is that they react to how they are incentivized tell me how you will pay me and I will tell you what I will do, this is the main problem

Background of Walmart:

Sam Walton became a pioneer of retail set up relationships with suppliers through establishing a distribution center with the "hub and spoke" model competitive advantage was in supply chain started everyday low prices which smoothed demand and relationship with suppliers

2006: New Programs: REMIX:

wanted to have less inventory while keeping steady sales and reduce out of stock amounts this was especially crucial around high velocity centers for food

Uniquely against hierarchy:

Allowed entry level employees to override the system, benefit of local knowledge to work for him Inclusive environment against hierarchy to uncover best practices

1) Increase Safety Stock and Forward Buy:

Although this is a bad idea if shortages or other disruptions may happen this can actually be a good idea, depending of availability and amount of substitutes However these are only temporary solutions

Post Contract Local-Knowledge:

And this is costly or hard to sale to others, its difficult to share this information

Thinking of Standard Deviation and Average:

Average can be constant and not changing, but the standard deviation may be very small or very large

Walmart Skills: What did they have first as far as technology:

Buyers worked with retailers to make sure good were easily shipped and easy use, had close relationships First EDI and wide use of barcodes for real time information and a computer which was connected with suppliers heavy in IT and communication across the country Handheld POS devices Begun with RFID but don't use it anymore Retail Link Walmart was also leading accurate forecasting and leading technology

Part of 3 is Key Supply Chain Processes:

CRM building with customers, customer service management, and proper metrics of customer service, Demand management - forecasting, ERP use, discounting, order fulfillment system, manufacturing flow system, supplier relationship management, product development and design collaboration Efficient or Responsive Processes

9.) Evaluate Annually:

Continuous evaluation annually, embrace changes and continuous improve, be okay to something new and okay to changes expect this when attempting to move to new markets

5) Develop a Formal Risk Management Program:

Create a plan and start at the top, with a priority of problems and a quick recovery and measures for risk management, need a disaster recovery plan

2006 Problems:

Doing poorly global and growth was stagnating, they were looking for a way for greater success

Structure Based: Eliminates What:

Deals with proper structure integration to allow relationships that previously didn't work Eliminates the need for agents if they use vertical integration structure based compared with the costs of having an agent

Proactive initiatives:

Director of security, formal leader with formal risk assessment and advanced training and participation within the security system and external to all parts of the supply chain sometimes with a geo specific approach based on threats

Important when fixing incentives:

Don't make it worse, try to align for all firms and the key decision makers within those firms reduce goal incongruence

Problem 1: Demand Forecast Updating:

Each time an actual sale is made this causes each step on the supply chain to update their forecasts Lets share actual information instead and just update to actual this allows everyone to make and replenish based on actuals instead and we can use vendor managed inventory programs to work together Another tip lets reduce SC length and reduce lead times so we can reduce safety stock without reducing customer service level

7.) Assess and Improve External Processes:

Eliminate poor relationships -> to make time to strengthen and focus on existing relationships and build them up Resulting in external process integration -> meet your internal goals and then your external goals, and be willing to share

What is this called in time of need?

Emergency sourcing and in some cases it can be beneficial natural disasters

Appendix to Smart Contracting:

Enforceable, measureable contracts on actual final consumer sales, sometimes weak governments hurt the enforceability of a contract

Lots of Principal Agency Theory:

Especially a problem for substitute products and how do you observe what the agent is doing is the best for you and the problem is that you can't

Activities Causing Bullwhip Effect: Why:

Even if demand is constant from the customer demand and lead times between each step within the supply chain can cause the bullwhip effect Differences in orders to actuals and actuals to forecasts, amount of safety stock, all of these hurt customer service level

6.) Develop SC Performance Measures for Key Processes:

External comparison: monitor links with trading partners and monitor measures across entire supply chain and reward proper alignment good work aligning internal and external

Chapter 13 Obstacles --

Favorite Slide

SCM Integration Model: Step 1: Identify Critical trading partners:

For focal products, there is a difference in partners for paper clips vs computers narrow down suppliers to just critical ones is great, trusted ones

What is pre-contact private information and what is a good example of that?

Insurance companies selling insurance policies to people they think are completely healthy but as it turns out they are sick insurance is sold to people who really need it

Vocab Word for willing to share with external:

Knowledge management solutions does this for real-time flow & collaboration

Lack of Knowledge: Term for teaching supply chain partners:

Less excuses now because of the way that technology has really grown, but it still takes skill to properly persuade and educate must influence internal capabilities then external You can also train your supply chain partners to work collaboratively to achieve success, and prepare them for proper change implementation Collaborative education Even more pressure and knowledge gap during global expansion, need to use proper on-going education and training to avoid errors

Basis initiatives:

Limited physical protection without much thought, standard protection, look out for cargo ship theft but its pretty basic, also lookout for corruption

Reactive initiatives:

Limited training security, larger organization of security, in the united states there is a customer trade partnership against terrorism, and at least some planning for events against terrorism with limited training

What did his location strategy enable him to do:

Made it very centralized from the beginning, everything was within driving distance decreased the standard deviation able to use economies and scale and his truck for frequent deliveries cut out the middleman biggest goal was against stockouts

Lack of Trust:

Major obstacle to supply chain integration and its really something that develops overtime it starts small and successful process integration really needs this less hierarchy and more collaboration, without bullying trust inside for a win-win

5.) Assess & Improve Internal Integration of Key SC Processes:

Measure it -> now in this part we need to continuously improve what we have measured, internally, process coordination and collaboration internally -> we need teamwork & cooperation which is backed by management support helped by ERP and an Internal understanding of supply chain

3) Diversify the Supply Base:

More than 1 supplier and more than 1 geographical area

Bullwhip Effects Results in:

Overall higher supply chain costs and possibly dissatisfied customers

2.) Review and Establish Supply Chain Strategies For: Key part here:

Parts purchased, design products, manufacturing process, transportation, training and returns See what your overall strategy is and try to support it maybe profit and maybe sustainability

Combat Silo Approach:

Performance reviews which rank amount of integration internally and externally so this would really promote benefits

Why narrow down? What is this term called?

Primary Partners, and you devote all of your time and resources to a few and the best for good customer satisfaction

4) Utilize a Supply IT System:

Proper communication of information is important and using an ERP can help with this

What is the integration process to achieve this goal look like:

Proper training, communication and information sharing, with trust, culture change management

How is it easier now and with what:

RFID and Cloud technology has made it easier, it has allowed for a real-time response and be online within minutes and automated this can be really important during expansion to new markets or similar type expansion End goal here is to make the customer happy and we need all of this data to help us do that lets go ahead and source and mine the data effectively

Trust Based Solutions:

Really a great way to eliminate long contract negotiations also can build reputation "relationship contracts" take the place of legal ones a previous relationship allows for easier renegotiation, dispute resolution, and removes heated decision makers

3 Steps to Aligning Incentives:

Recognize the Problem Pinpoint the problem Use all the solutions to combat it

Problem 2: Order Batching: Solution:

Similar to price fluctuations buy more caused on the supplier side than the main. Throughout the year, due to supplier reasons sometimes they buy more and sometimes they buy less inventory lets do frequent small batching instead, with more info visibility, delivery consultants can help arrange this

Against Templates:

Stores of the community targeting items to be purchased around that area

Managing Supply Chain Risk:

Supply chain is as weak as it weakest link and you can't afford to not vet your entire supply chain.

Overcoming: What is the best:

The use of technology and information sharing, with communication using the resources of computer technology development Information sharing is the best

What is and why does principal have moral hazard:

They can't observe what the agent is doing and their welfare is determined by the agent and their profitability Its hard to examine effort you can only examine and incentivize things that you can control and have effort over

Rationing and Shortage Gaming:

This happened with tickle me elmo, and this is filling part of an order based on the total amount ordered, this causes people to order more than they need and then demand collapses once the order is completely filled Its better to short order based on historical demand and each side will share full information and plan for distribution

Price Fluctuations:

This is a problem on our end, sometimes we offer discounts and this is when people buy everything and they plan around these discounts Its a better idea just to use everyday low pricing to even out demand, and just eliminate promotions, you even want your end seller to do this

Any money earned or any cost savings would go where:

To cheaper prices for customers on average 8 cents to 27 cents cheaper

Silo Approach: Traditional systems from Systems, Decentralized vs Centralized

Traditional decentralized approach "I win you loose" ignoring customers, just only caring about costs, "low cost suppliers/emphasis" Extra: cheap suppliers with no care for customers, can result from culture problems, results in customer service problems and costs going up

Pinpointing:

Understand the tradeoff behind the decision making see the difference of mismatched goals

Unique about Walmart Trucking: 2 Key words

Vetted them very well used cross-docking and standardized sizes and crates Backhaul - from stores back to distribution centers They were non-union and allowed to make money on the side when they weren't doing walmart operations

RFID program:

Wanted to use this tracking technology to reduce tracking costs and increase in-stock rates by reducing costs most out of stock stock is just missing in the warehouse and RFID chips could allow this to be more visible and be fixed

8.) External Process Integration to 2nd Tier Supply Partners:

We don't have to work quite as hard to link these 2nd sources now that we have technology it improves information sharing of real time information and RFID

Another Problem: Lack of Supply Chain Visibility:

common problem its fast changing going on with the data and that needs to be relayed real-time, all of these global things are real issues and they need to be passed around quickly for success

Contracting Based solutions:

changing incentives based on observable outcomes Sales vs stales theft vs sales

Advanced initiatives:

customer and supplier collaboration on security and learning from the past failures industry leader to all partners with proper drills, simulations, and emergency control center

Key about nonunion:

introduce technology without a tough pushback union groups did not like their success

Manage Supply Chain Security:

its a global and complex issue and you have to protect yourself international differences can cause problems theft of product or information theft and you are only has good as your weakest link lets provide security to ourselves and supply chain partners or put that in the contracts need to prioritize vulnerabilities

Still a problem today and why:

knocking down the silo's is hard have to fix and work on your internal problems first and then you can fix your external ones. if you don't fix your internal ones first then you are never going to fix your external ones

3.) Align SC Strategies with Key Supply Chain Process Objectives:

process linking partners and establish objectives to ensure the end strategy is supported sometimes you can only integrate with one key partner and this is okay

Best Solution is Information Based: Insurance Result to this:

more observable: meaning measure more variables and reward end sales without rewarding forward buys send in "mystery shoppers" to examine\ Give health physicals to reduce private information, banks do this for mortgages, and so do credit card companies for taking on new customers

4.) Develop Internal Performance Measures for Key process Effectiveness:

must collect and report data on measurable changes (chapter 14) develop a system for this, and that is continuously monitored and tracked progress

Goal of Supply Chain and Supply Chain Integration:

proper value to customers and value to everyone across the supply chain

Recognizing:

realize there is a problem with the incentives and designated outcomes also can happen even when reengineering a process

2) Identify Backup Suppliers and Logistics Providers:

use if preferred supplier is unavailable however this may cause some damage to your existing

Typical Example Internally/Externally:

too functionally oriented and internally competitive like Ford vs Honda, problem with profit centers within one company compete Ford -- screwed suppliers Honda -- worked with them