SCM Learner Guide by AdminGMLS

SAQA 74149 – Module 1 Compulsory Unit Standards

Learner Guide Compiled by:

Global Maritime Legal Solutions A World Class Knowledge Centre

This Module is suitable for training towards the FIATA Diploma, TETA, QCTO Qualifications and similar courses.

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ADVANCED Learner Guide compiled by:

Mark Goodger

WARNING AGAINST PLAGIARISM ASSIGNMENTS ARE INDIVIDUAL TASKS AND NOT GROUP ACTIVITIES. (UNLESS EXPLICITLY INDICATED AS GROUP ACTIVITIES) Copying of text from other learners or from other sources (for instance the study guide, prescribed material or directly from the internet) is not allowed – only brief quotations are allowed and then only if indicated as such. You should reformulate existing text and use your own words to explain what you have read. It is not acceptable to retype existing text and just acknowledge the source in a footnote – you should be able to relate the idea or concept, without repeating the original author to the letter. The aim of the assignments is not the reproduction of existing material, but to ascertain whether you have the ability to integrate existing texts, add your own interpretation and/or critique of the texts and offer a creative solution to existing problems. Be warned: students who submit copied text will obtain a mark of zero for the assignment and disciplinary steps may be taken by the Faculty and/or University. It is also unacceptable to do somebody else’s work, to lend your work to them or to make your work available to them to copy – be careful and do not make your work available to anyone!

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ADVANCED

LEARNER GUIDE

Module 1 – Compulsory Unit Standards SAQA 74149 HC: Supply Chain Management Table of Contents

CHAPTER 1 - INTRODUCTION TO INTERNATIONAL TRADE Page: 22 (US:336705 Demonstrate an understanding of the fundamentals of international trade and execute international purchases) CHAPTER 2 - PROFESSIONAL VALUES AND ETHICS IN THE SUPPLY CHAIN Page:29 (US: 335800 Apply professional values and ethics in the operational environment) CHAPTER 3 - MANAGEMENT PRACTICES IN THE SUPPLY CHAIN Page: 38 336702 Analyse and apply management practices within the supply chain CHAPTER 4 - CORPORATE STRATEGY Page: 45 (336739 Demonstrate an understanding of the key concepts and elements of strategic supply chain management) CHAPTER 5 - VALUE AND ETHICS IN BUSINESS Page: 53 (US: 335800 - Apply professional values and ethics in the operational environment) CHAPTER 6 - SUPPLY CHAIN MANAGEMENT Page: 61 (336709 Evaluate the influences of key components in a supply chain) CHAPTER 7 - WAREHOUSING – AN INTEGRATED SUPPLY CHAIN COMPONENT Page: 82 US:336704 Prepare products for transportation; manage the return of goods and warehousing, CHAPTER 8 - INVENTORY – A CRITICAL SUPPLY CHAIN COMPONENT Page: 105 US: 336709 Evaluate the influences of Key Components in a Supply Chain CHAPTER 9 - INFORMATION TECHNOLOGY IN SUPPLY CHAINS Page: 127 US: 336708 Facilitate processes to ensure the integration of supply chain information CHAPTER 10 - STRATEGIC ALLIANCES IN SUPPLY CHAIN Page: 157 US:336719 Manage relationships between supply chain partners CHAPTER 11 - EFFICIENT TRANSPORT AND DISTRIBUTION STRATEGY Page: 181 US: 336712 Outline the philosophy of Supply Chain Management CHAPTER 12 - SUPPLY CHAIN PERFORMANCE MEASUREMENT, CONTROL AND STRATEGIC LOGISTICS PLAN Page:188 US: 336710 Develop and implement supply chain performance management systems CHAPTER 13 - INFORMATION TECHNOLOGY IN THE SUPPLY CHAIN Page: 210 US: 336703 Design a distribution network CHAPTER 14 - INTERNATIONAL TRANSPORTATION AND SUPPLY CHAIN Page: 218 US: 336712 Outline the philosophy of Supply Chain Management CHAPTER 15 - TRANSPORTATION MANAGEMENT SYSTEM Page: 220 US: 336712 Outline the philosophy of Supply Chain Management CHAPTER 16 - GLOBAL PROCUREMENT & GLOBAL PROCUREMENT RISK Page: 225 US: 252025 Monitor, assess and manage risk CHAPTER 17 - GLOBAL PURCHASING ORGANISATION STRUCTURE Page:258 US: 336713 Demonstrate an understanding of the supply chain environment CHAPTER 18 – GLOBAL PROCUREMENT OPERATIONS Page:273 US: 3336711 Demonstrate an understanding of the key elements in developing strategies to optimise operational supply CHAPTER 19 - GLOBAL STRATEGIC SUPPLIER MANAGEMENT Page: 287 252267 Negotiate with Suppliers CHAPTER 20 - GLOBAL ALLIANCES Page:314 US336707: Demonstrate an understanding of the key issues important for compliance with corporate governance principles and social responsibility CHAPTER 21 - FACILITY & LAYOUT PLANNING Page: 325 US: 336706 Establish a competitive supply chain infrastructure CHAPTER 22 - ECONOMIC ORDER QUANTITY (EOQ) MODEL Page: 348 US: 336707: Demonstrate an understanding of the key issues important for compliance with corporate governance principles and social responsibility

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ADVANCED

INTEGRATED ASSESSMENT GUIDELINES Explanation of Curriculum Content assembly in this Module Content & Assessment based on SAQA Legal Guidelines Level Descriptors, Integrated Assessment Guidelines, Purpose and Objectives of the Unit Standards. Guidelines utilised in all learner guides are based on the below quoted legal context and methodology provided by SAQA. All Assessments will focus on the learner’s ability to demonstrate applied knowledge or competence. According to the National Qualifications Framework (NQF) the evidence of applied competence is the learner’s ability to integrate concepts, ideas, and actions in authentic, reallife contexts. It is expressed as practical, foundational, and reflexive competence, namely: •

Practical competence - the demonstrated ability to perform a set of tasks and actions in authentic contexts;

•

Foundational competence - the demonstrated understanding of what we are doing and why we are doing it;

•

Reflexive competence - the demonstrated ability to integrate our performances with our understanding so that we are able to adapt to changed circumstances and explain the reason behind these adaptations (SAQA, 2001: 11).

Term

Description

Assessment

A structured process for gathering evidence and making judgments about an individual’s performance in relation to registered national unit standards and qualifications

Applied competence

A learner’s ability to integrate concepts, ideas and actions in authentic, real-life contexts which is expressed as practical, foundational, and reflexive competence

Exit level outcome A description of demonstrable and assessable end products of a learning process Formative Self- Assessment that takes place during the process of teaching and Assessment learning and which has as its purpose the progressive development of learners’ abilities Integrated

A form of assessment which permits the learner to demonstrate applied competence and which uses a range of formative and

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ADVANCED Term

Description

assessment

summative assessment methods

Learning programme

The sequential learning activities associated with curriculum implementation, leading to the achievement of a particular qualification or part qualification

Programme

A coherent set of courses, leading to a qualification

Qualification

A planned combination of learning outcomes with a defined purpose(s) that is intended to provide qualifying learners with applied competence and a basis for further learning

Site-based assessment

An assessment undertaken in the workplace making use of naturally occurring evidence

Summative assessment

An assessment undertaken to make a judgment about achievement. This is carried out at the end of a learning programme

Unit standard

A coherent and meaningful outcome of learning or training that is formally recognised

The learner manual is based on the SAQA Level Descriptors for the South African National Qualifications Framework. Purpose and philosophical underpinning the Level Descriptors 1.

The purpose of level descriptors for Levels One to Ten of the National Qualifications Framework is to ensure coherence in learning achievement in the allocation of qualifications and part qualifications to particular levels, and to facilitate the assessment of the national and international comparability of qualifications and part qualifications.

In order to advance the objectives of the NQF, the South African Qualifications Authority is responsible for the development of the content of the level descriptors for each level of the NQF in agreement with the three Quality Councils: The Council on Higher Education, Umalusi and the Council for Trades and Occupations.

The philosophical underpinning of the National Qualifications Framework and the level descriptors is applied competence which is in line with the outcomes based theoretical framework adopted in the South African context.

Ten categories are used in the level descriptors to describe applied competencies across each of the ten levels of the National Qualifications Framework: -

Scope of Knowledge

Knowledge literacy

Method and procedure

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ADVANCED -

Problem Solving

Ethics and professional practice

Accessing, processing, and managing information

Producing and communicating of information

Context and systems

Management of learning

Accountability

NQF Level Knowledge Guidelines a.

Scope of knowledge, in respect of which a learner is able to demonstrate an informed understanding of the core areas of one or more fields, disciplines or practices, and an informed understanding of the key terms, concepts, facts, general principles, rules and theories of that field, discipline or practice;

b. Knowledge literacy, in respect of which a learner is able to demonstrate an awareness of how knowledge or a knowledge system develops and evolves within the area of study or operation; c.

Method and procedure, in respect of which a learner is able to demonstrate an ability to select and apply standard methods, procedures or techniques within the field, discipline or practice, and to plan and manage an implementation process within a well-defined, familiar and supported environment;

d. Problem solving, in respect of which a learner is able to demonstrate an ability to identify, evaluate and solve defined, routine and new problems within a familiar context, and to apply solutions based on relevant evidence and procedures or other forms of explanation appropriate to the field, discipline or practice demonstrating an understanding of the consequences; e.

Ethics and professional practice, in respect of which a learner is able to demonstrate an ability to take account of, and act in accordance with prescribed organisational and professional ethical codes of conduct, values and practices and to seek guidance on ethical and professional issues where necessary;

Accessing, processing and managing information, in respect of which a learner is able to demonstrate an ability to gather information from a range of sources, including oral, written or symbolic texts, to select information appropriate to the task, and to apply basic processes of analysis, synthesis and evaluation on that information;

Producing and communicating information, in respect of which a learner is able to demonstrate an ability to communicate information reliably, accurately and coherently, using conventions appropriate to the context, in written and oral or signed form or in

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ADVANCED practical demonstration, including an understanding of and respect for conventions around intellectual property, copyright and plagiarism, including the associated legal implications; h. Context and systems, in respect of which a learner is able to demonstrate an ability to operate in a range of familiar and new contexts, demonstrating an understanding of different kinds of systems, their constituent parts and the relationships between these parts, and to understand how actions in one area impact on other areas within the same system; i.

Management of learning, in respect of which a learner is able to demonstrate the ability to evaluate his or her performance or the performance of others and to take appropriate action where necessary; and take responsibility for his or her learning within a structured learning process and to promote the learning of others;

Accountability, in respect of which a learner is able to demonstrate an ability to account for his or her actions, to work effectively with and respect others, and, in a defined context, to take supervisory responsibility for others and for the responsible use of resources where appropriate an understanding of different kinds of systems, their constituent parts and the relationships between these parts, and to understand how actions in one area impact on other areas within the same system;

NQF level 5 - Applied Competence

Autonomy of Learning

TYPICALLY, A PROGRAMME LEADING TO THE AWARD OF A QUALIFICATION OR UNIT STANDARD AIMS TO DEVELOP LEARNERS WHO DEMONSTRATE THE FOLLOWING ATTRIBUTES: A Fundamental knowledge of the main areas of one or more L. The capacity to take fields or disciplines personal responsibility for learning within a B An informed understanding of the important terms [used], supervised environment; rules concepts, principles, and theories in one or more fields or disciplines

M. An ability to take personal decisions about and personal responsibility for actions; and

C. An understanding of the organisation or operating environment as a system within a wider context and in relation to the society; Does this mean a particular professional society or society in general? If the latter, it should be merely ‘society’ without a definite article. N. An ability to evaluate personal performance D An ability to effectively apply essential methods, procedures against given criteria. and techniques of the field or discipline E

An ability to interpret, convert and evaluate texts and operational symbols or representations

F An ability to use ‘acquired’ knowledge to solve well-defined __________________________________________________________________________________ 7 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED problems both routine and unfamiliar within a familiar context G

An ability to adjust an application of a solution within relevant parameters to meet the needs of changes in the problem or operating context

An ability to evaluate the change using relevant evidence efficient information-gathering, analytical and synthesising, and evaluating skills;

Presentation skills using appropriate technologies k an ability to communicate information coherently and reliably both verbally and in writing using basic conventions of an academic/ professional discourse.

An ability to communicate information coherently and reliably both verbally and in writing using basic conventions of an academic/professional discourse.

Example of a Supply Chain __________________________________________________________________________________ 8 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

End-User

ADVANCED Supply Chain Management Introduction Managing and Leading People in the Supply Chain

Example of a Supply

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ADVANCED Chapter 1 - Introduction to International Trade (US:336705 Demonstrate an understanding of the fundamentals of international trade and execute international purchases) PURPOSE: This lesson will enable you the learner to demonstrate an understanding of the fundamentals of international trade and execute international purchases, also, to gain a more comprehensive understanding of the challenges facing businesses and government when they enter the arena of cross border trade. Learning Objective  Analyse the fundamentals of international trade.  Assess the role of trade policy in facilitating or inhibiting international trade.  Analyse and apply the international purchasing process.  Analyse and apply the fundamentals of counter trade.  This section will first show why nations export and import goods, and then examine barriers to trade and various steps that have been taken to lower barriers to trade. The Fundamentals of International Trade

What is International trade? Definition and meaning International Trade Business refers to the exchange of products and services from one country to another. In other words, imports and exports. Global trade consists of goods and services moving in two directions: __________________________________________________________________________________ 10 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 1. Imports – flowing into a country from abroad. 2. Exports – flowing out of a country and sold overseas. 3. Visible trade refers to the buying and selling of goods – solid, tangible things – between countries. 4. Invisible trade, on the other hand, refers to services. Most economists globally agree that global trade helps boost nations’ economical wealth. Consequences:  When a person or company purchases a cheaper product or service from another country, living standards in both nations rise.  There are several reasons why we buy things from foreign suppliers. considering, the imported options are cheaper.  Their quality may also be better, as well as their availability.  The exporter also benefits from sales that would not be possible if it solely sold to its own market.  The exporter may also earn foreign currency. It can subsequently use that foreign currency to import things. Why does global trade exist?  In global trade countries will trade when there are lack of certain resources or capacity to satisfy local needs and wants domestically.  In global trade nations will venture into developing and exploiting their domestic resources, countries can produce a surplus.  Countries may use this surplus to buy goods they need from abroad, i.e., through global trade business.  International trade has existed for more than 9,000 years.  Long distance trade – before the existence of nation states and national borders – goes back much further. In fact, it goes back to when pack animals and ships first came onto the scene.  Modern industrialized world would not exist if countries did not import and export.  In fact, global trade business is at the heart of today’s global economy.  Global interdependence is a fact of life for every country today. We import goods and services for several reasons. Below are some reasons:  Price: a foreign company can produce something more cheaply.  Quality: may be superior abroad. For example, Scotch whisky from Scotland, in most people’s opinion, is superior to any local alternative. That is why Scotland exports about 37 bottles of Scotch every second.  Availability: it might not be possible to produce the item locally. Therefore, the only way consumers can buy it is by importing it. __________________________________________________________________________________ 11 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED  Commodities: A raw material, such as oil, iron, bauxite, gold, etc. might not exist at home. Japan, for example, has no domestic reserves of oil. However, it is the fourth largest consumer of oil in the world. Japan imports virtually all its oil.  Demand: might be greater than local supply. To satisfy the difference, it is necessary to import. With international trade, there is greater competition and more competitive pricing in the market. This means that consumers have more choice and more affordable options. The economy of the world – which is driven by supply and demand – also benefits. Imagine one world in which every single country traded internationally. Now imagine another world where international trade did not exist. In which world would consumers be better off? Also, in which world would the countries be richer. In the world with international trade, both the consumers and the countries would be better off. Adam Smith (1723-1790), a Scottish moral philosopher and pioneer of political economy, believed in international trade. Many economists today call Smith the ‘father of modern economics.’ Advantages of international trade – Comparative Advantage: trade encourages a nation to specialize in producing or supplying only those goods and services which it can deliver more effectively and at the best price, after taking into account opportunity cost. – Economies of Scale: if you sell your goods globally, you will have to produce more than if you sold just domestically. Producing in higher volumes provides greater economies of scale. In other words, the cost of producing each item is lower. – Competition: international trade boosts competition. This, in turn, is good for prices and quality. If suppliers have to compete more, they will work harder to sell at the lowest price and best quality possible. Consumers benefit by having more choice, more money left over, and top-quality goods. – Transfer of Technology increases thanks to international trade. Transfer of technology goes from the originator to a secondary user. In fact, that secondary user is often a developing nation. – Jobs: great trading nations such as Japan, Germany, the UK, the USA, and South Korea have one thing in common. They have much lower levels of unemployment than protectionist countries. Disadvantages of International Trade – Over-Specialization: employees might lose their jobs in large numbers if global demand for a product decline. __________________________________________________________________________________ 12 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED – New Companies: find it much harder to grow if they have to compete against giant foreign firms. – National Security: if a country is totally dependent on imports for strategic industries, it is at risk of being held to ransom by the exporter(s). Strategic industries include food, energy and military equipment. International trade influences a whole range of activities including jobs, consumption and the fight against poverty. It also affects the environment and relations among countries. In turn, trade is shaped by a host of influences ranging from natural resources to fashion. Trade-related issues can give rise to strong feelings, and trade measures such as banning or limiting imports are often called for to respond to major economic problems. An understanding of the benefits and downsides of trade, and of what trade policy can and cannot achieve, will help us to form our own opinions on debates about international trade. International trade theories:

Several different models have been proposed to predict patterns of trade and to analyze the effects of trade policies such as tariffs. 1. Ricardian model:TheRicardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best. 2.Heckscher-Ohlin model: The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. The theory argues that the pattern of international trade is determined by differences in available factor of production. So that countries will export those goods that make concentrated use of locally abundant factors and will import goods that make concentrated use of factors that are locally scarce. 3.Gravity model: The gravity model, in its basic form, predicts trade based on the distance between countries and the relations of this countries. The model copy the law of gravity for chemical elements which also considers distance and physical size between two objects. But in economic approaches use through econometric analysis. Other factors such as income level, diplomatic relationships between countries, and trade policies are also included in the model. Regulation of international trade:

· Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became dominant. While foreign trade is not as emotionally loaded as say, taxes and government spending, like most topics in economics it stirs the blood of certain people those whose livelihoods and lifestyles are most affected by exports and imports. These people have very real concerns, but those concerns are specific to their individual lives. Economists almost universally believe that __________________________________________________________________________________ 13 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED foreign trade in a free global marketplace will create the greatest good for the greatest number of people. Let us start with why they would believe this. Exports, Imports Why Bother? The fundamental reason for foreign trade is quite simple: Some nations are better at producing certain things than others. This means that they will all be economically better off if they specialise in what they do best and exchange a portion of what they produce for the goods of other nations who also specialise in what they do best. In a way, the rationale for international trade follows the same line of logic that caused a worker in a medieval village to specialise in butchering or baking or candlestick making, and then exchange her goods with other specialists. International trade works the same way, only on a larger scale. To illustrate this, let us suppose that there are only two countries on the planet the United States and Japan and they make only two products: food and personal computers. The following two tables show the production possibilities, per week, for each nation. Table U.S. Production Possibilities (in thousands per week) Possibility

Bushels of Food Personal Computers

Table Japan's Production Possibilities (in thousands per week) Possibility

Bushels of Food

Personal Computers

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ADVANCED Figure shows the production possibility functions of each nation. It is simply the graphic representation of the values in above Tables.

Each nation can produce the same number of personal computers in a week. But the United States can produce three times as much food as Japan. In other words, if each nation chose to produce only computers, they would each produce 12,000, but if each chose to produce only food, the United States would produce 12,000 bushels and Japan would produce only 4,000. At first glance, it may seem as if the two nations particularly the United States has no reason to engage in foreign trade. After all, the United States is just as efficient at producing computers and three times as efficient at producing food. Why would the United States be interested in trade? Here is where the notion of comparative advantage comes in. The United States can produce either food or computers at a one-to-one trade off. In other words, if the United States chooses to produce another personal computer, it must give up one bushel of food. That bushel of food is the United States' opportunity cost of producing another computer. However, if Japan gives up one bushel of food, it can produce three personal computers. The opportunity cost of producing personal computers in Japan is only one-third what it is in the United States. Japan sacrifices less food than the United States would in order to increase its production of personal computers. The nation with the lower opportunity cost in producing a good has a comparative advantage in the production of that product. In this case, Japan has a lower opportunity cost than the United States in producing computers. The U.S. has what economists call an absolute advantage in producing food. The U.S. can produce 12,000 bushels of food per week while Japan can produce only 4,000. But absolute advantage does not necessarily indicate that a nation should export that product. That is because the nation might have to give up producing some elements of a product in which it has an even greater absolute advantage. __________________________________________________________________________________ 15 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Comparative advantage arises for a nation when its opportunity cost of producing a good is lower than that of another nation. Absolute advantage arises when a nation can produce a good more cheaply than another nation. Comparative advantage, not absolute advantage, indicates which good a nation should export or import. The British economist David Ricardo (1772-1823) developed the concept of comparative advantage to answer the question, “Which nation should specialise in producing which good?” He found that the nation having a lower opportunity cost than other nations in producing a product should specialise in that product and called that the principle of comparative advantage. So, in this example, even though the United States has the absolute advantage in producing food, and is equally efficient at producing personal computers, Japan has a comparative advantage in producing personal computers. However, the United States also has a comparative advantage relative to Japan in food. Why? Because the United States only has to give up one personal computer to produce an additional bushel of food, while Japan must give up three computers. The United States faces a lower opportunity cost than Japan when it chooses to produce food instead of computers. That means that the United States should produce food and exchange it with Japan for computers. So, in our example and in theory, the United States would produce only food, Japan would produce only personal computers, and they would each exchange some of their production with one another. The Argument for Free Trade Obviously, the example here is incredibly oversimplified. In the real world, there are hundreds of nations producing thousands of products, most with different cost structures and at different levels of efficiency. However, in this simple example is the fundamental argument for free trade, which most economists support both in theory and in practice. Economists support free trade because in general they want an economy, including the global economy, to deliver the greatest good to the greatest number of people. A look back at the example of U.S. and Japanese food and computer production will reveal the benefits of specialisation and exchange. If you pick any possibility from the range of production possibilities in Tables 17.1 and 17.2, you will see that the greatest total production of food and computers occurs when the United States produces only food and Japan produces only personal computers. The following table below shows one example: Table Food Computers Possibility C: __________________________________________________________________________________ 16 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED United States

6,000

Japan

2,000

6,000

Total

8,000

12,000

Japan

12,000

Total

12,000

Total production = 20,000 units

With Specialisation: United States

Total production = 24,000 units

Specialisation generates the highest level of production of the two goods. Then, through trade, each nation can consume the amount of the good that it wants to consume. In this way, production is maximised because each nation is doing what it does most efficiently. Again, this is an oversimplification. A range of issues, including transportation costs, quality, differences in domestic demand, and national security considerations, are all left out of the analysis. Yet the very real principle of comparative advantage and the equally real benefits of trade form the basic argument in favour of free trade. Unfortunately, numerous arguments and measures against free international trade have taken hold in the world. Arguments against Free Trade Today, most arguments against free international trade are mounted by special interest groups. Both labour unions and management oppose free trade when they believe sometimes correctly, sometimes incorrectly that it will make them worse off. What they conveniently ignore is that free trade will make everyone else better off. It is true that if the U.S. auto industry loses 5,000 jobs to foreign competitors, those 5,000 workers and their households are worse off. However, the millions of other households that can purchase less expensive, more efficient vehicles from a wider range of choices are better off. The pain endured by one of those 5,000 households may well be greater than the benefit enjoyed by any given car-buying household. That is why labour unions fight so hard to keep their members' jobs. But an economist would argue that if another nation can make cars more efficiently, those autoworkers should move into another U.S. industry and let the whole population enjoy the benefits of free trade with the more efficient auto industry of another nation. __________________________________________________________________________________ 17 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Special interest groups put forth various arguments to support their view. Some of these arguments make a certain amount of economic sense, and others are incorrect or at least suspect. The truth, however, is that those asking for protection from free trade usually stand to benefit the most. The arguments most often heard are: 

It is important to keep jobs in the United States.



We do not want money leaving the country.



National security is at stake.



Other nations do not treat their workers fairly.



Other nations are “dumping” and do not open their market to us.

Let us look at these positions one at a time. Keeping jobs in the United States is important, but it is more important to keep jobs in industries in which we operate efficiently. Otherwise, we are subsidising inefficiency, which hurts national productivity as well as consumers. If, indeed, another nation is more efficient has a comparative advantage in producing a product, it is in our interests to buy it from them. As to the idea that we are “exporting jobs” when, say, U.S. auto manufacturers set up assembly plants in Mexico the autoworkers' union has a point. But the same counterargument applies. If Mexico is the least expensive place to assemble the vehicles, from the economic standpoint, that is where it should be done as long as it can be done with the same level of quality. The quality argument is often put forth as a reason to keep jobs in the United States. In reality, however imported goods of inferior quality sell at lower prices which reflect their quality and give the consumer another choice. (Some people like cheap shoes.) Also, foreign producers have a good record of improving the quality of their goods to meet U.S. standards. The Japanese auto industry of the 1970s provides an outstanding example of this. American producers in certain industries have done the same thing.

For instance, over the past 20 years the California wine industry has improved the quality of its wines to compete with imports from France in the States. That created jobs in the United States' wine industry and in trucking, warehousing, advertising, retailing, and restaurants (thereby employing otherwise unemployable wine stewards) while combating imports of burgundy and Bordeaux. We do not want money leaving the country may sound like a sensible argument when you look at the GDP formula. If we import more than we export, GDP is lowered. Doesn't that mean we are worse off? ~ In a way yes, but in a way also, no. __________________________________________________________________________________ 18 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The money-leaving-the-country argument goes all the way back to mercantilism, the economic theory that international trade generates wealth for a nation. The mercantilists believed that exports should be encouraged, imports should be discouraged, and gold should be hoarded. Mercantilism flourished in the 1600s and 1700s and fuelled the worldwide exploration and imperialism of Western European nations in those centuries. However, as economic theory, mercantilism is dead. Keeping money in the country is not a priority. We do not want exports to be high because they keep money in the country but because they fuel domestic production and incomes. If those incomes are spent on imports, that can be a particularly good thing for consumers. From the economists' point of view, the way to promote exports is not by limiting imports. Other nations will retaliate against protectionist policies anyway. The way to promote exports is to be as innovative, productive, and efficient as we can be. National security is at stake with regard to some industries. Defence is the best example of an industry that requires protection on the basis of national security. Steel may be another, but the steel industry has been only partly successful with this argument. Oil is another industry on which national security can depend, although U.S. consumption of and dependence on foreign oil has been virtually encouraged by the phase out of fuel efficiency standards for passenger vehicles and low gasoline taxes (relative to those in Europe). Although economists disagree about various ways to protect industries on which national security depends, most agree that some industries warrant such protection. They also agree that some industries that have claimed this status, such as the American watch industry (I am serious), probably do not warrant it. Other nations' unfair treatment of their workers is a relatively new argument against imports, and it can be a tough argument both to document and deflect. It is hard to document because, as we have learned, everything is relative. The awful truth is that jobs in sweatshops may enable people in poor nations to feed and clothe themselves. Limiting imports from these nations may hurt the very people we would be trying to help. These arguments are hard to deflect because the truth is that low cost foreign production sites often do not meet reasonable health and safety standards. Then there is the issue of child labour and forced labour, which virtually everyone sees as highly exploitative. The U.S. Congress estimates that at least 250 million child labourers between the ages of 5 and 14 are now working worldwide, about half of them full time. The United States has funded and contributed to a number of efforts to prevent child labour and is the world's largest contributor to the International Program for the Elimination of Child Labour. Several efforts to have other nations voluntarily comply with guidelines for eliminating child labour are underway. In fact, the United States devotes some $30 million a year to international programs to end abusive child labour. In 1999, the United States ratified a new international initiative to eliminate child slavery, debt bondage, and forced labour. In addition, the Child __________________________________________________________________________________ 19 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Labour Deterrence Act was introduced as a bill to the U.S. Congress in 1999, but it has yet to pass. If it became law, the act would prohibit the importation of manufactured or mined products produced by children under the age of 15. Other nations “dumping” goods in the United States and keeping our imports out do give protectionists ammunition in their battle against free trade. Dumping occurs when a nation sells its goods in a foreign market at a price that is lower than its price in the domestic market or lower than it cost to produce. The objective is to drive the domestic producer out of the market and out of business and then to raise the price when the domestic competition has gone out of business. Both dumping and protectionism by other nations can put the United States at a disadvantage. Under current laws and trade agreements, dumping is illegal. If U.S. producers can prove that dumping is occurring, special duties can be added to the price of the goods being dumped. One reason that dumping occurs is that many foreign industries are subsidised by their government in ways that ours are not (although U.S. agriculture is highly subsidised, as is agriculture in most industrial nations). The steel industry is a good example of an industry that recently won protection, and in March 2001, President Bush levied tariffs of up to 40 % on certain types of steel imports. When other countries practice protectionism, the preferred method is to work toward free or at least fair trade through a process of negotiation. These processes have been quite useful in recent years and have brought the world into an age of much freer international trade. Barriers to International Trade Free trade refers to the elimination of barriers to international trade. The most common barriers to trade are tariffs, quotas, and nontariff barriers. A tariff is a tax on imports, which is collected by the federal government and which raises the price of the good to the consumer. Also known as duties or import duties, tariffs usually aim first to limit imports and second to raise revenue. A quota is a limit on the amount of a certain type of good that may be imported into the country. A quota can be either voluntary or legally enforced. The effect of tariffs and quotas is the same: to limit imports and protect domestic producers from foreign competition. A tariff raises the price of the foreign good beyond the market equilibrium price, which decreases the demand for and, eventually, the supply of the foreign goods. A quota limits the supply to a certain quantity, which raises the price beyond the market equilibrium level and thus decreases demand. Tariffs come in different forms, mostly depending on the motivation, or rather the stated motivation. (The actual motivation is always to limit imports.) For instance, a tariff may be levied in order to bring the price of the imported good up to the level of the domestically produced good. This so-called scientific tariff which to an economist is anything but has the __________________________________________________________________________________ 20 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED stated goal of equalising the price and, therefore, “levelling the playing field,” between foreign and domestic producers. In this game, the consumer loses. A peril-point tariff is levied in order to save a domestic industry that has deteriorated to the point where its very existence is in peril. An economist would argue that the industry should be allowed to expire. That way, factors of production used by that inefficient industry could move into a new one where they would be better employed. A retaliatory tariff is one that is levied in response to a tariff levied by a trading partner. In the eyes of an economist, retaliatory tariffs make no sense because they just start tariff wars in which no one least of all the consumer wins. Nontariff barriers include quotas, regulations regarding product content or quality, and other conditions that hinder imports. One of the most commonly used nontariff barriers are product standards, which may aim to serve as “barriers to trade.” For instance, when the United States prohibits the importation of unpasteurised cheese from France, is it protecting the health of the American consumer or protecting the revenue of the American cheese producer? Other nontariff barriers include packing and shipping regulations, harbour and airport permits, and onerous customs procedures, all of which can have either legitimate or purely anti-import agendas, or both. International Trade Agreements Trade agreements regulate international trade between two or more nations. An agreement may cover all imports and exports, certain categories of goods, or a single category. The United States is currently engaged in some 320 trade agreements with various nations. However, several general trade agreements have shaped trade policy on broad levels. The most important general trade agreement is called, simply enough, the General Agreement on Tariffs and Trade (GATT). The GATT Agreement was signed in October 1947 to liberalise trade, to create an organisation to administer more liberal trade agreements, and to establish a mechanism for resolving trade disputes. The GATT organisation is small and located in Geneva. More than 110 nations have signed the general agreement, which originally was signed by 24 nations, including the United States. To a large degree, the role of GATT as an organisation has been superseded by the World Trade Organisation, which I discuss later in this section. Since GATT was signed, several “rounds” of talks to liberalise trade have occurred. The most significant of these were the Kennedy rounds, which eventually led to a one-third reduction in tariffs and, more recently, the Uruguay rounds. The Uruguay rounds dealt with general barriers to trade and the relatively new issues of intellectual property rights, fishing practices, and environmental concerns.

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ADVANCED A major trend of the past 25 years has been the creation and growth of free trade zones among nations agreeing to form regional trade blocs. The agreements that create free trade zones all share the same aims: to liberalise trade, promote economic growth, and provide equal access to markets among the member nations. The most significant free trade zones are the European Union (EU), the North American Free Trade Agreement (NAFTA), and the Association of Southeast Asian Nations (ASEAN). In addition, the World Trade Organisation (WTO) is a global organisation, headquartered in Geneva, for dealing with trade between nations. Established in January 1995 by the Uruguay round negotiations under GATT, the WTO included 144 nations as of January 2002. The WTO administers trade agreements, provides a forum for trade negotiations and resolving trade disputes, monitors trade policies, and provides technical assistance and training for developing countries. Let us Trade Despite calls for protectionism from those who stand to lose from free trade, the world has clearly been liberalising trade policy, lowering barriers to trade, and forming regional trade blocs. As a result, international trade is freer than it has ever been. We can all thank economists for this. They are without a doubt the steadiest, strongest, clearest voices in favour of free trade. U.S. tariffs stand at their lowest level in history. Before World War II they ranged up to 40 per cent on some imports. Today, tariff revenues amount to less than 5 per cent of import dollar volume and many imports are exempt from tariffs and quotas. Nontariff barriers to trade have also been largely but not completely eliminated. This does not mean that all is rosy in the world of foreign trade, nor does it mean that the United States always plays fair in the global marketplace. U.S. agricultural subsidies and textile tariffs, for example, hinder imports of food, cloth, and clothing from poor nations in order to protect these domestic industries. Nevertheless, the United States and the world in general are expected to continue on the path towards freer international trade.

Formative Self-Assessment Test yourself True or False – indicate with a  whether the following statements are true or false. Question 1

True

False

The fundamental reason for foreign trade is quite simple: All nations are equally good at producing certain things than others

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ADVANCED 2

Specialisation generates the highest level of production of any two goods

The most common barriers to trade are tariffs, quotas, and nontariff barriers

Nontariff barriers include quotas, regulations regarding product content or quality, and other conditions that hinder imports. One of the most commonly used nontariff barriers are product standards which may aim to serve as “barriers to trade.”

The acronym GATT standards for the General Agreement on Trade and Transport

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ADVANCED CHAPTER 2 - PROFESSIONAL VALUES AND ETHICS IN THE SUPPLY CHAIN (US: 335800 Apply professional values and ethics in the operational environment) PURPOSE: The individual learners should develop an increased understanding of their own belief system and how it relates to the organisational code of conduct as well as the implications of inappropriate ethical conduct in the operational environment. LEARNING OBJECTIVES - Learners will be able to: • Analyse issues relating to professional and ethical conduct. • Evaluate an ethical code of conduct as it applies to the operational environment. • Apply professional ethics in practical situations. Introduction to Corporate governance principles in South Africa Introduction and definitions Definition: Corporate governance is often described as a vague concept, with loose definitions. In essence it relates to the practice by which companies are managed and controlled. Directors’ duties and the organs of a modern company Definition: A company is a legal entity that is separate from its management and shareholders. The company must act through individuals. The directors carry out managerial functions and responsibilities on behalf of the company. Company directors are subject to various duties. These duties include: (a) statutory duties in terms of the Companies Act, for example, sections 234–240 deal with the disclosure of conflict of interests that a director may have in a contract; and (b) common law duties. These duties are categorised into fiduciary duties of good faith and the duty to act with the necessary care and skill when performing his or her duties; (c) directors’ fiduciary duties can be categorised into four headings, namely that (1) directors should prevent a conflict of interests, (2) not exceed the limitation of their power, (3) maintain an unfettered discretion and (4) exercise their powers for the purpose for which they were conferred. The fiduciary duty of a director to act in good faith is probably the most important duty. The term “fiduciary” is applied to a large number of persons in diverse capacities, including commercial relationships. A company directorship is generally regarded as one of the most complex fiduciary offices. The relationship between a company and a director of that company is an example of a commercial fiduciary relationship. A director can be seen as an agent, due to the fact that the director does not act on his or her own behalf, but on behalf of the company. A director can also be regarded as a trustee, since he does not own company assets, but controls them and exercises powers for the company and not for his own benefit. But the relationship between a director and a company remains unique. Categorising directors as __________________________________________________________________________________ 24 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED agents or trustees is intended to prove the existence of a fiduciary duty rather than to equate directors with those particular positions. Many of directors’ fiduciary duties have been confirmed in case law. See, for example Symington v Pretoria-Oos Privaat Hospitaal Bedryfs (Pty) Ltd 2005 (5) SA 550 (SCA) at 562 (the court refers to the situation where a director makes a profit through a breach of his fiduciary duties to the company – such a director will not be allowed to retain such a benefit); Cyberscene Ltd v i-Kiosk Internet and Information (Pty) Ltd 2000 (3) SA 806 (C) at 813–814 (a director stands in a fiduciary relationship to the company from the moment he begins to act as a director, even if he has not been formally appointed); Sibex Construction (SA) (Pty) Ltd vs. Injectaseal CC 1988 (2) SA 54 (T) at 64 (this case dealt with directors who formed a close corporation in competition with the company of which they were directors). The two main organs of the modern company in South Africa are: (a) the general meeting of shareholders and (b) the board of directors. The board of directors are involved in the management of the company. The board has powers to bind the company to legal transactions, but these powers are limited. General meetings are convened by the board of directors. They should convene such a meeting at an annual basis and also at other times if it is in the best interest of the company as a whole. The board of directors performs certain acts of management and agency. The directors are appointed by the members at an annual general meeting. The general meeting may also remove directors from office by way of an ordinary resolution. The board of directors’ act with the general meeting concerning internal matters, but there is a clear separation of powers. There is a debate as to who is the superior organ, the board of directors or the general meeting. The legal position is that if certain matters are assigned to the board of directors in terms of the articles of association, then only the board has the power to deal with those matters. The general meeting may, however, intervene with the powers of the board in certain matters. These matters include situations where the board of directors refuses or is unable to institute action on behalf of the company; when the board of directors cannot or will not exercise powers reserved for it; or when certain powers have been reserved for the board of directors, but the particular act is voidable because the board has exceeded or abused its powers. The board of directors also acts on behalf of the company in transactions with third parties, but the directors do not have unlimited powers to bind the company. Corporate Governance Initiatives in South Africa The King Committee on Corporate Governance Corporate governance in South Africa was institutionalised by the publication of the King Report on Corporate Governance in 1994. The King Committee was formed in 1992 under the __________________________________________________________________________________ 25 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED auspices of the Institute of Directors. The purpose of the King Report was to promote good standards of corporate governance. The King Report of 1994 did not only provide guidelines on financial and regulatory matters, but also advocated for an inclusive approach. An inclusive approach to corporate governance stipulates that directors should have regard to a wide variety of interests when managing a company. Triple-bottom line management is important. The triple-bottom line approach refers to economic, social, and environmental factors. Directors should consider all three of these factors when they manage a company. The economic aspect of this approach concerns financial and non-financial aspects of the business of the company. The environmental aspect relates to the effect on the environment caused by the products or services of the specific company. The social aspect embraces relationships with stakeholders, other than only the company’s shareholders. Another King Report was issued in 2002 (King II). In King II the seven characteristics of good governance are listed. They are: (a) Discipline (a commitment by the company management to adhere to behaviour that is universally accepted). (b) Transparency (the ease with which an outsider is able to make meaningful analysis of a company’s accounts). (c) Independence (the extent to which mechanisms have been put in place to minimise or avoid potential conflicts of interests). (d) Accountability (individuals in a company should be accountable for the actions they take). (e) Responsibility (this pertains to behaviour that allows for corrective action and or for penalising mismanagement). (f) Fairness (the systems that exist in a company must be balanced in considering all those that have an interest in the company and its future). (g) Social responsibility (a well-managed company will be aware of social issues and respond thereto). King II contains a Code of Corporate Practices and Conduct. This Code is applicable to: (a) all companies listed on the JSE Limited; (b) banks, financial and insurance entities as defined in the applicable legislation; (c) public sector enterprises and agencies. All other enterprises should also consider the provisions of the Code. It is important to note that the provisions in the Code are only recommendations and compliance is thus voluntary. The Code should not be regarded as a set of detailed rules on directors’ conduct. The Code operates on a “comply or explain” basis. If the enterprises listed above, do not comply with the Code they need to explain their reasons. __________________________________________________________________________________ 26 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The next section provides some of the most important recommendations on corporate governance. Boards of directors, directors, auditors, and the company secretary are focused on. The following are important recommendations concerning directors and the board of directors as contained in King II: (a) Every board should have a charter setting out its responsibilities. (b) The board should determine the company’s purpose, values, and stake holders relevant to the business of the company. (c) The board must monitor management in the carrying out of board plans and strategies. (d) The board should comprise a balance of executive and non-executive directors. The majority should preferably be non-executive directors. Executive director: An individual involved in the day to day management of the company or in the full-time salaried employment of the company. Non-Executive director: An individual not involved in the day to day management of the company and not a full-time employee receiving a salary. A non-executive director should have the necessary skills and credibility to bring judgment independent to those of the executive directors to the board. Non-executive directors should limit the number of other appointments in order to be as independent as possible. (e) The board must find the correct balance between conforming to governance constraints and performing in an entrepreneurial manner. “Box ticking” should be avoided at all costs. Box-ticking refers to the situation where corporate governance boxes are ticked, indicating that there was compliance with a specific aspect. It is, however, important that there is substantive compliance with the rule and not just with the form: (f) The chairperson of the board should preferably be a non-executive director. (g) The board should appraise the performance of the chairperson on an annual basis. (h) The Chief Executive Officer and the chairperson should not be the same person. (i) Companies should appoint a remuneration committee to make recommendations to the board concerning the remuneration of executive directors. This committee should mainly or entirely consist of non-executive directors. (j) Companies should provide full disclosure of directors’ remuneration on an individual basis. (k) The board should ensure that processes are in place to assess risks facing the company. The assessment should address, for example, physical and operation risks, human resource risks and technology risks. Companies should appoint a risk management committee to assist the board in reviewing the risk management process and significant risks facing the company. Recommendation relating to Auditors __________________________________________________________________________________ 27 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED (a) Companies must have an effective internal audit function. Internal audit is responsible to the board and the executive management. They should provide the board and management with reasonable assurance regarding the effectiveness of the company’s corporate governance, risk management processes and system of internal control. (b) Internal audit should report at all board meetings. (c) The board should appoint an audit committee and they should approve the internal audit work plan. The work plan should be based on risk assessment and on issues highlighted by the audit committee. (d) The audit committee should consist of a majority of non-executive directors. The board chairperson should not chair the audit committee. (e) The audit committee should also review the external audit and its cost effectiveness as well as the independence of the external auditors. (f) An external audit provides an independent check on the way in which the financial statements of a company have been prepared and presented by the directors. An annual audit is an essential part of good corporate governance principles. The Companies Act is amended from time to time to implement necessary changes. The most recent amendments were brought about by the Corporate Laws Amendment Act 24 of 2006 which was passed in April 2007 and came into operation on 14 December 2007 when it was published in the Government Gazette. It contained important amendments regarding auditors and audit committees. These amendments to the Companies Act are aimed at establishing and maintaining the independence of auditors in support of the Auditing Profession Act 26 of 2005 (which Act repealed the Public Accountants’ and Auditors’ Act 80 of 1991). The Auditing Professions Act introduced more stringent regulation for the auditing profession with the establishment of an Independent Regulatory Board for Auditors (“IRBA”) and for a Standard-Setting Board for Auditor Ethics and Auditing and covers issues relating to the conduct and accountability of auditors. The amendments to the Companies Act complements the Auditing Profession Act by introducing a number of measures aimed at ensuring that in future the auditor of a widely held company will not have too close an association with its client and that a degree of independence is maintained in respect of widely held companies. Before the latest amendments, it was required that a company’s financial statements had to fairly represent the affairs and results of the company. One of the important amendments is the introduction of legal backing for accounting standards in terms of which statements have to comply with specific published standards. In this regard, a distinction is made between widely held and limited interest companies and separate sets of standards apply to each type. In terms of a new Section 1(6)(a) a company is widely held if: __________________________________________________________________________________ 28 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED (i) its articles provide for an unrestricted transfer of shares (ii) it is permitted by its articles to offer its shares to the public at large (iii) it decides by special resolution to be a widely held company, or (iv) it is a subsidiary of a company described in subparagraph (i), (ii) or (iii) Section 1(6)(d) provides that a company is a limited interest company if it is not widely held. Further measures aimed at auditor independence include the establishment of audit committees, the rotation of auditors; and the prohibition on certain non-audit services by the auditor. Audit committees A new section 269A has been inserted into the Companies Act 1973 in terms of which the board of directors of a widely held company are required to appoint an audit committee for every financial year. The audit committee must have at least two members and consist only of non- executive directors of the company who must act independently. A non-executive director is one who is not involved in the day-to-day management of the business and has not in the previous three financial years been a full-time salaried employee of the company or its group and is also not a member of the immediate family of an aforementioned person. The audit committee must, for the year it is appointed, perform the following functions: 

nominate for appointment a registered auditor who is independent of the company



determine the auditor’s fees and terms of engagement



ensure that auditor’s appointment complies with the Act and other legislation relating to the appointment of auditors



determine the nature and extent of any non-audit services which may be provided by the auditor to the company



pre-approve any proposed contract with the auditor regarding the provision of non-audit services by the auditor



insert in the financial statements a report describing how it carried out its functions and that it is satisfied that the auditor was independent of the company, and



deal with any complaints relating to the accounting practices and internal audit of the company or to the content of its financial statements.

In addition, further requirements have been introduced regarding the way in which the auditor of a widely held company must be appointed. The purpose of these requirements is to ensure auditor independence.

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ADVANCED The appointment of a firm as auditor of a widely held company will only be valid if the appointment specifies, in addition to the name of the firm, the name of the individual registered auditor, who must be a member of the firm, who undertakes the audit.

Audit rotation The Companies Act now provides for the rotation of auditors and provides that the same individual may not serve as the auditor or designated auditor of a widely held company for more than five consecutive financial years. With the purpose of further ensuring the independence of the company auditor, the Act provides, in addition, that an individual auditor who has served as the auditor or designated auditor of a widely held company for two or more consecutive financial years and then ceases to be the auditor or designated auditor, may not be re-appointed as auditor of that company until after the expiry of at least two further financial years. This requirement of rotation applies to individual auditors only and not to firms and further not to limited-interest companies. Prohibition on certain non-audit services by the auditor An auditor appointed to a widely held company may not perform for that company, for the duration of his appointment, services prohibited under the code of professional conduct mentioned in section 21(2)(a) of the Auditing Profession Act. Section 21(2)(a) provides that the committee for auditor ethics must assist the IRBA” to determine what constitutes improper conduct by registered auditors by developing rules and guidelines for professional ethics, including a code of professional conduct”. The IRBA is required to define and prohibit in this code the provision by an auditor of certain non-audit services which may result in being subjected to the auditor’s own auditing. As pointed out above, the audit committee of the company may further limit the services that an auditor of the company may render. Civil liability Section 58(2) of the Auditing Profession Act states that the Apportionment of Damages Act 34 of 1956 will also apply to a claim by the company for damages based on a breach of contract by an auditor. Recommendation relating to the Company Secretary (a) The board should empower the company secretary to perform his or her duties properly. (b) The company secretary has certain statutory duties and must provide the board of directors with guidance as to how they should perform their duties and responsibilities in the best interests of the company. __________________________________________________________________________________ 30 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED (c) The company secretary must assist new directors as well as the chairperson and chief executive officer. (d) The company secretary should undertake a fit and proper test. The King II Report also contains recommendations relating to risk management, internal audit, integrated sustainability reporting and compliance. The board is responsible for its own risk management policy and to evaluate the effectiveness thereof. Companies should also have an effective internal audit function. Internal audit is an independent, objective assurance and consulting activity to add value and to improve the company’s operations. A company should also, at least annually, report on its social, safety, health and environmental management policies and practices. On 25 February 2009, a King III Report on Corporate Governance was published for public comment. This Report will only become operative during March 2010. For now, King II still applies. Below is a short summary of the most important principles of King III. 

King III applies to all entities regardless of the manner and form of incorporation or establishment. It operates on an “apply” or “explain” basis.



The following are the key principles of King III (see par 7 of the Preface):



Good governance is about effective leadership.



Sustainability is the primary moral and economic imperative for the 21st Century. Nature, society, and business are interconnected in complex ways and directors need to understand that.



Innovation, fairness, and collaboration are important regarding sustainability.



Integrated sustainability and social transformation will give rise to greater opportunities for the company and society.



Sustainability reporting is a key facet of good corporate governance.

Sustainability Companies must focus on more than just reporting on sustainability. An integrated approach must be followed. King III also follows the inclusive approach with specific reference to the enlightened shareholder value approach. Directors must therefore consider the interests of various stakeholders when making business decisions. King II also states that there should be a balance between the rights of stakeholders without facilitating abuse during business rescue proceedings (par 9 of the Preface). This was not in King II, however it is in line with the new business rescue provisions in the 2008 Companies Bill.

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ADVANCED King I and King II did not deal with fundamental and affected transactions, but a section in King III deals with it. It is important to ensure that directors are aware of their duties in regard to mergers, acquisitions, and amalgamations (par 9 of the Preface): 

Should ensure that the company acts as a responsible corporate citizen.



Should act as the focal point for corporate governance. Every board should have a charter setting out its responsibilities.



Should consider the interests of stakeholders.



Should promote an ethical culture.



Should appreciate that strategy, risk, performance, and sustainability are interlinked.



Should consider sustainability as a business opportunity. Value has to be measured in terms of the triple-bottom line (social, economic, and environmental performance).



Should appoint the CEO.



Is responsible for risk management.



Should act in the best interests of the company.



Should comprise of a balance of executive and non-executive directors. The unitary board structure is still applicable.



Should establish a formal process of continuous training for new and current directors.



Should be assisted by a competent company secretary.



Should elect a chairman who can provide the board with the necessary direction. The chairman should be independent. The CEO and the chairman should not be the same person. The chairman should not be a member of the audit committee, should not chair the remuneration committee, but may be a member of it. The chairman must be a member of the nomination committee and may also chair it. The chairman should not chair the risk committee but may be a member of it.



Should delegate functions to well-structured committees, but not abdicate their own responsibilities.

With regard to remuneration: companies have to remunerate directors fairly and responsibly. Companies should adopt remuneration policies that create value for the company over the long term. The remuneration committee must assist the board in this regard. They should also regularly review incentive schemes. Non-executive directors should not receive share option. Companies should also disclose the remuneration of each director. Chapter 2 deals with corporate citizenship, integrity, and responsibility. It is stated that the board is not only responsible for the financial bottom line, but for the company’s performance regarding the triple-bottom line. __________________________________________________________________________________ 32 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED King III follows the enlightened shareholder value approach where directors should not just manage a company for profit maximisation but should also consider the interests of other stakeholders. Chapter 3 deals with audit committees. It is stated that a company should have an effective audit committee. This committee should consist of at least 3 members who should be independent non-executive directors. They must report to the board and the relevant stakeholders on how they performed their duties. In Chapter 4 risk management is addressed. The management is responsible for the implementation of risk management policies. They should also adopt a risk management plan. Risk assessment should be performed on an on-going basis. Internal audit should then provide independent assurance on the risk management policies. The board should report on the effectiveness of its risk management. In Chapter 5 internal audit is discussed. The board should ensure that there is effective riskbased internal audit. Chapter 6 deals with integrated sustainability reporting and disclosure. Effective communication with stakeholders is essential. In Chapter 7 it is stated that companies have to comply with relevant laws, regulations, rules, and standards. Chapter 8 provides practical guidelines on how relationships with stakeholders should be managed. The board should identify the important stakeholders and develop a strategy and suitable policies on how they will manage relations with each of the stakeholder groups. Corporate Social Responsibility and Stakeholder Protection One of the fundamental principles of corporate governance relates to stakeholder protection. There is often a tension between profit maximisation (for the shareholders collectively) and the social responsibilities of companies. A company is said to be socially responsible when directors manage a company in such a way that the company “voluntarily expends its resources to do something not required by law and without immediate economic benefits”. The current viewpoint is that companies should be managed in the best interests of the shareholders collectively. There has, however, been a shift in public opinion towards recognition of a wider variety of interests that should be considered than only those of the shareholders. The wider variety of interests includes, inter alia, environmental concerns and the interests of the following stakeholders: investors, employees, consumers, the general public and the environment. The King Committee of 1994 advocated for an inclusive approach regarding stakeholder protection. They held that directors should also consider the interests of stakeholders, other than the shareholders collectively, when managing a company. In terms of King II social, safety, health, and environmental factors have also been introduced as important factors to which __________________________________________________________________________________ 33 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED company management must have regard. In terms of King II company directors should act in a socially responsible manner. The issue of stakeholder protection has been widely debated during the current company law reform process in South Africa. The reform process dealt with an overall review of corporate laws in South Africa, comprising the Companies Act 61 of 1973, the Close Corporations Act 69 of 1984 and the common law relating to these corporate entities. The law relating to partnerships was not included. The Department of Trade and Industry issued a Policy Document on company law reform during May 2005. The objective of the review process was to ensure that company law in South Africa is in line with social, economic, and legal developments. In February 2007, a draft Companies Bill was issued. In June 2008, the final Bill was published. The Companies Act 71 of 2008 aims: 

to provide for the incorporation, registration, organisation and management of companies, the capitalisation of profit companies, and the registration of offices of foreign companies carrying



on business within the Republic;



and directors;

  

to define the relationships between companies and their respective shareholders or members to provide for equitable and efficient amalgamations, mergers and takeovers of companies; to provide for efficient rescue of financially distressed companies;

to provide appropriate legal redress for investors and third parties with respect to companies;

to establish a Companies and Intellectual Property Commission and a Takeover Regulation Panel to administer the requirements of the Act with respect to companies, to establish a Companies



Tribunal to facilitate alternative dispute resolution and to review decisions of the Commission;



record-keeping and reporting by companies;

to establish a Financial Reporting Standards Council to advise on requirements for financial

to repeal the Companies Act, 1973 (Act No. 61 of 1973), and make amendments to the Close Corporations Act, 1984 (Act No. 69 of 1984), as necessary to provide for a consistent and



 

harmonious regime of business incorporation and regulation; and

to provide for matters connected therewith. Amends

Registration of Copyright in Cinematograph Films Act 62 of 1977 Patents Act 57 of 1978

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ADVANCED

    

  

Copyrights Act 98 of 1978

Share Blocks Control Act 59 of 1980 Trade Marks Act 194 of 1993 Designs Act 195 of 1993

Co-operatives Act 14 of 2005 Commencement

1 May 2011 (Gazette 34239 of 26 April 2011) Amendments

Amended by Companies Amendment Act 3 of 2011 Amended by Financial Markets Act 19 of 2012 Amended by Companies Act 71 of 2008

Visit www.dti.gov.sa for more information. Some of the more interesting changes that the Bill will bring about are: The provision for, profit and non-profit companies - profit companies include public companies, personal liability companies, private companies, and state-owned companies. The Bill also partially codifies the duties of directors, but the common law is still applicable. The Bill contains a substantial new process concerning business rescue proceedings. In addition to requiring listed companies to comply with King II, as explained before, the JSE Limited also launched a Socially Responsible Investment Index (SRI Index) in May 2004. In terms of this Index the JSE developed criteria to measure the “triple-bottom line performance of the FTSE/JSE All Share Index.

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ADVANCED

Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

Corporate governance is often described as a vague concept with loose definitions. In essence it relates to the practice by which companies are managed and controlled.

The relationship between a company and a director of that company is an example of a commercial fiduciary relationship

Non-Executive Director: An individual involved in the day-to-day management of the company or in the full-time salaried employment of the company

The audit committee must have at least two members and consist only of non-executive directors of the company who must act independently

Directors do not have to consider the interests of various stakeholders when making business decisions

True

False

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ADVANCED

CHAPTER 3 - MANAGEMENT PRACTICES IN THE SUPPLY CHAIN (336702 ANALYSE AND APPLY MANAGEMENT PRACTICES WITHIN THE SUPPLY CHAIN) PURPOSE: This chapter will enable learners will demonstrate a detailed understanding of the fundamental management functions and activities as well as the latest trends in leadership and management and will be able to apply these functions, activities and principles within the supply chain. Learning Objectives: Learners will be able to:   

Interpret the origins and evolution of management practices. Use a set of principles and pro forma formats to evaluate the effectiveness of basic management practices within a supply chain. Apply basic management practices within the supply chain.

Supply Chain Management Practices From ecommerce to global supply chains, from start up to turnaround, for many different industries and markets, Supply Chain Management Practice covers:          

Improve performance Reduce costs Increase inventory turns and inventory velocity Compress cycle time Enhance supplier performance Segment your supply chain Negotiate transportation pricing and contracts Manage your supply chain for success Create flexibility and agility Gain competitive advantage.

Analyse and apply management practices within the supply chain Managing a supply chain effectively requires sophisticated coordination of human resources throughout the nucleus firm and other firms in the chain. In a multiple-firm supply chain with true collaboration, this is clearly more challenging than in a single film, although generations of __________________________________________________________________________________ 37 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED organisational development specialists can testify that the perfect organisational chart remains elusive. Organisational and human resources challenges were addressed in Section B at the level of strategy. Managing well is largely a matter of implementing the strategy, which requires skilful management plus strong leadership. What follows here recaps themes from the discussion of strategy and elsewhere regarding organisations and roles necessary to manage a supply chain. We will also briefly introduce the concept of leadership as a set of attributes distinct from those required in day-to-day management. Organisations Organisational design can either support or undermine the management of the supply chain. If all the functional areas in the nucleus organisation (or in a vertically integrated manufacturing company) are trapped within their silos, there can be no collaborative management of the flow of goods and information that constitute the supply chain. So, the essential requirement for successful supply chain management is process oriented organisations. Within that orientation it is possible to develop visibility across the supply chain and develop a team approach to synchronising the activities required to source, make, deliver, and return the supply chain's products. Clearly, executive management must be committed to the process orientation and cross-functional teamwork across the supply chain's organisations. EXTENDED ENTERPRISE

Roles One of the challenges of the transition from functional organisation to pursuit of business process excellence is the development of new roles that relate to processes rather than specific functional activities. There is not universal agreement on how to include and exclude business functions from the supply chain. __________________________________________________________________________________ 38 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED If you take a more traditional view, for example, you might say that a company develops a product and then designs a supply chain to purchase supplies, manufacture the product from those materials and components, and deliver the finished product to customers. From that functional perspective, supply chain tasks are performed in isolation. Procurement selects vendors; transportation finds a way to get materials from the vendor to the plant; warehousing handles storage needs; and so on, without any collaboration. Once a firm decides that the process from extraction of raw material to sale of finished product is a set of linked activities, teamwork, technology, and process optimisation begin to look like necessities. You will see in the remainder of this and subsequent modules emphasis on collaboration among what once were discrete functional roles. Transportation and warehousing, for example, can be optimised in software that plots the various possible routes taken by different modes of transportation and matches that with warehousing considerations, such as the number and location of warehouses. Given the large number of options in a global marketplace, technology becomes a necessary tool in these considerations. Moreover, the end-to-end process pulls in people whose roles might once have seemed irrelevant to such logistics issues. The design of a product, it has become apparent, is too important to be left to design engineers. The entire supply chain has a stake in product design (which is covered in Module 2). Manufacturing can provide important contributions to design, because they know what is going to work well or badly when the blueprint gets sent to the plant for production. Logistics and design can work together to produce a product that is easier to store and ship. For example, a logistically intelligent design team is responsible for all those desks that can be collapsed into components and shipped to distribution centres in convenient boxes, which can then be stored, shelved, and sold to retail customers much more easily than finished desks. Purchasing, too, contributes to design with its knowledge of sources of materials that provide the durability, cost effectiveness, or other attribute that will best fit with the strategic considerations. Marketing, of course, weighs in with its knowledge of what the end user is looking for in the way of features. Management of all this cross-functional activity can be handled by people in organisations with specific supply chain responsibilities/roles that have been added as supply chains evolved. From a leadership and organisational perspective, supply chain resources can either be represented by an executive level supply chain leader and organisation or they can be located within operations, marketing and sales, or finance. Positions, directly related to supply chain management, require professionals with the following attributes: • An ability to view the supply chain as a series of linked processes rather than a series of isolated activities joined by arm's length transactions • The skill and experience necessary to manage critical relationships • An understanding of the business model __________________________________________________________________________________ 39 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED • The ability to make decisions based on statistical analysis and facts • Advanced cost management ability • An understanding of electronic business systems Outside of areas and managers specifically designated for the supply chain, other areas need to know about supply chain strategies and understand their roles in furthering the success of those strategies. Here is a list of some areas that contribute to the supply chain without (arguably) belonging to it: •

Human resources recruit people to staff supply chain positions and consequently needs to be fully informed about the requirements of process-oriented positions. Human resources also provide training and education programs related to supply chain knowledge and skill areas.

•

Information technology supports the development of supply chain information systems, including performance measurement systems.

•

Finance validates cost savings from supply chain activities and identifies the impact of supply chain initiatives on corporate performance indicators such as return on investment (ROI). Finance also assesses the impact of inventory improvements on cash flow and working capital requirements.

•

Engineering contributes by evaluating technical capabilities during supplier site visits and by interacting with supply managers during product development.

•

Marketing develops accurate and timely demand requirements and explains end-customer requirements with supply chain planning groups.

•

Accounting provides accurate data to support internal and external cost analysis.

•

Legal performs timely and effective reviews of the supply chain contracts and assess the risks and impacts of supply chain strategies.

Leadership and Management The literature of organisational development includes a great deal of theorising about the differences between leadership and management; current training programs for managers often include a leadership component. While it is easy to generate controversy about subjects as complex as management and leadership, few would dispute the need in supply chain activities for both great managers and inspiring leaders. Managers perform the roles on the organisational chart: They develop objectives in line with strategies and run their departments by hiring the right people for the jobs, communicating responsibilities clearly, solving problems, coaching their people on how to handle difficult situations, and promoting the needs of their people to manage up the corporate ladder. __________________________________________________________________________________ 40 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED In a supply chain situation, managers must all know how to cross functional boundaries and interact with other managers and staff outside their departments. Managing in the supply chain takes teamwork skills that may not have been emphasised, or even recognised, in traditional, functionally organised firms. Leadership, whether it is inborn or teachable, exists outside the organisational chart and is not always present in a manager, even a good one. There are employees and managers with leadership abilities on the shop floor and in executive suites. You find out who they are in moments of crisis. They are the ones who suddenly know what needs to be done and who naturally attract followers to solve the problem. Leaders may be terrible managers- but they are likely to have the gift of assigning management to someone else and inspiring great accomplishments from that person. It would be an understatement to say that supply chains require leadership, both in moments of stress and for the long term. Supply chains are dynamic, and the longer they get, the riskier they are. Companies with great supply chains will have great leaders at or near the top. These leaders will have a vision that drives them to mould their organisation and its partners into an effective unit to bring great products to the end customers in uniquely appropriate, efficient ways and they will inspire effective management and innovative leadership all along the chain. What is continuous improvement and where does it come from? Continuous improvement is also called continuous process improvement (CPI), it's a central concept in total quality management (TQM), which is "a management approach to long-term success through customer satisfaction ... based on the participation of all members of an organisation in improving processes, goods, services, and the culture in which they work" (APlCS Dictionary, 12th edition). Besides being part of TQM, continuous process improvement has been adopted in other systems of business transformation. It can be defined in several ways, but all emphasise the same points. The APICS Dictionary, 12th edition, defines continuous process improvement as "a never-ending effort to expose and eliminate root causes of problems: small-step improvement as opposed to big-step improvement." The key words in the definition are process, never-ending, root causes, and small-step improvement.

ProcessOriented

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Total Quality

Ending

Small

Implementation

Root

ADVANCED

• Process The primary aim of continuous improvement is to bring more value to the customer, but it does not focus directly on the goods produced for customers. Instead, it looks for ways to improve the processes that result in customer value, and it approaches process improvement from a holistic perspective. CPI does not begin by looking for people to blame or replace; it does not focus first on budgets; it is not solely a management system; and it is not just a training needs assessment. But it may be about any or all of those things and more, because all of them are involved in a process-in a system. Continuous improvement is about the whole process, not about one of its contributing parts. That is why it fits so well with supply chain thinking, which also emphasises the search for ways to improve the functioning of a whole system. • Never-ending The search for perfection (and that is the way TQM defines its goal) has no endpoint, only successive approximations inching toward the final goal. The idea is to keep raising the bar, setting ever-higher standards. But that is not the only implication of "never-ending." Because the environment in which a firm does business constantly changes, the priorities for improvement must change as well. Sometimes the goal itself becomes irrelevant. There is no stable state in business, only never-ending change, hence, the need for continuous improvement. • Root causes Quality initiatives always include an analysis phase that specifies all the steps in a process and pinpoints the trouble spots. When practiced as intended, continuous improvement does not begin an initiative with a bias about causes or solutions; scepticism about quick judgments is built into the continuous improvement process. • Small-step improvement Continuous improvement is evolutionary, not revolutionary. It may set very high goals and may eventually create dramatic change, but it does so incrementally. "Kaisen," which is cross-referenced with continuous process improvement in the 12th edition of the APICS Dictionary, is defined as "the Japanese term for continuing improvement involving everyone-managers and workers. In manufacturing, kaizen relates to finding and eliminating waste in machinery, labour, or production methods." __________________________________________________________________________________ 42 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Total quality management is truly an international philosophy. Its basic ideas, including continuous, small-step process improvement, were taken to Japan after World War II by the U.S. quality expert W. Edwards Deming. Along with continuous improvement, quality emphasises customer focus and employee involvement. Everyone in a Japanese firm (if it is kaizen-oriented) participates in the improvement process. Top management leads, but the employees implement. It is not possible to change a process without involving all those who contribute to it at every level-designers and directors of the process and those who perform process activities. Japanese manufacturers adopted Deming's quality principles so successfully that U.S. companies eventually began to take notice and follow suit. What is the purpose of continuous process improvement? A variety of continuous process improvement approaches have evolved since Deming's time, and we will look at the major types later in this section. Because of this variety, and because of the numerous specific applications of each in enterprises around the globe, pinpointing a single purpose for continuous process improvement is difficult. For example, lean aims to eliminate waste; the goal of Just-in-Time (JIT) is to eliminate queues of material in production; and six sigma's central purpose is to reduce variability in production processes. Moreover, the concept of continuous process improvement has been increasingly applied in service environments as well as in manufacturing, where it began. Amid all this variety, however, some themes remain constant. In fact, they are implied in the definition of continuous process improvement explained in the preceding paragraphs: Its purpose is the continuous improvement of the processes involved in producing goods or delivering services. Common purposes of continuous process improvement are: • To continuously refine the processes of manufacturing or service, not simply to focus on the quality of the goods or services produced; • To incorporate improvement considerations into the processes themselves, not merely to subject processes to periodic reviews and audits; • To define achievable goals and develop quantitative measures to chart progress toward reaching those goals; •

To make the workplace more humane by involving everyone in the assessment and improvement of the processes they oversee, manage, or carry out;

• To increase productivity; • To improve worker satisfaction by improving workplace safety, eliminating unnecessarily strenuous or stressful work, making performance assessments more rational, and enhancing the quality of jobs and career options; • To train employees to identify waste (wasted resources, wasted motion, wasted time, etc.) and participate in eliminating the waste.

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ADVANCED In summary, continuous improvement is part of a quality approach to change that involves taking small steps toward perfection, meeting customer needs, constantly analysing and improving business processes, and involving employees as well as managers and executives in all change initiatives. A continuous improvement Model There are many models to guide the application of continuous process improvement to business systems. The one we are using here builds upon other supply management concepts, such as benchmarking and change management. We have divided the application of continuous improvement into the following stages. • Process analysis The initial step in continuous improvement requires taking a hard look at your supply chains (internal and external) to identify processes needing improvement. This assumes that those initiating the quality improvement initiative can see from end to end of supply chain processes rather than being limited to focusing on local activities. Analysis of a specific process requires breaking the process down into each constituent step from beginning to end across functions and partners. Once the current process has been mapped-with a flowchart, for example-the map can be used to redesign the process by removing, combining, or adding steps. Again, continuous improvement is supposed to begin without bias by simply documenting the process on a factual basis. TQM provides analytical tools to aid in fact gathering, and we will look at some of them presently. • Process assessment The questions to answer during assessment are "How are we doing?" and "How much do we want to improve?" Assessing the current state of a process and determining the goal of the improvement initiative can be accomplished by using another organisation's performance as a "benchmark." In previous sections you have looked at various KPIs such as the SCOR® metrics that provide a basis for assessing current performance and determining an appropriate endpoint for the improvement process. Benchmarks can be set with reference to the KPI "score" of a competitor or of a superior performer worldwide. In addition to benchmarks that set a specific performance goal, such as reducing cycle time by a set percentage, there are process benchmarks that describe the qualities that make up process excellence. As an example, we will look at the Oliver Wight supply chain checklist, which is provided by the Oliver Wight consulting group. • Project planning

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ADVANCED Designing a road map or blueprint is implicit in the idea of progressing toward a benchmark. If you are going to advance in small steps, you need to identify what those steps will be so you can check them off one at a time as you approach the benchmark. You need to identify a project leader who will drive the initiative through to its conclusion. Develop realistic schedules for development and reviews; assign accountability and responsibilities; identify needed resources; create a budget and get it approved; obtain specific commitments from all stakeholders to be certain that the project is understood and supplied. Continuous improvement implies road maps, it also implies flexibility. Tracking progress through the scheduled development and review steps may lead to rethinking the goal and perhaps moving the benchmark. Sometimes you start down one road only to encounter a roadblock, a shortcut, or an intersecting path that leads to a better solution that was not marked on the original map. Even the improvement process itself is subject to improvement. • Implementation and change management After the team has identified a problem, selected a benchmark, and devised a series of steps to reach it, they can involve other supply chain partners who are stakeholders in the process. The hard work may have only begun at that point. Implementing process improvement ideas can send shock waves through the firm and rattle the supply chain if the change is not managed carefully. It takes strong leadership and committed participation from employees who understand the potential benefits for the customer and are confident in their ability to play their roles successfully. After looking at aspects of the continuous improvement process in more detail, we will review the major features of three methodologies that support a continuous improvement approach to supply chain management. These methodologies include six sigma, lust-in-Time, and lean supply chain management (an extension of lean production methods into a full -scale assault on all forms of waste in supply chain processes). Reasons for adopting continuous improvement The reasons for taking a continuous improvement approach to supply chain management can be boiled down to the following: • SCM is process oriented. Supply chain management is itself process-oriented. The basic units of the supply chain are not products or services that emerge from the chain; they are the linked processes that flow along the chain among functions and partners. • Supply chains are dynamic. A supply chain constantly expands, contracts, and incorporates new stakeholders and new products. A constantly changing system requires continuous process improvement and reengineering. • Supply chains evolve. __________________________________________________________________________________ 45 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Supply chains have evolved from functional isolation, to cross-functional cooperation, to global networks linked by electronic communications and enterprise software. As supply chains evolve across new frontiers of organisation, scope, and technological complexity, they are in constant need of process improvement. • Continuous improvement can reduce the costs of poor quality. Although continuous improvement programs, or total quality management initiatives of any sort, require an investment of resources, they should be presented to management as methods of reducing the costs of poor quality, for a net gain on the investment. That is, quality may be expensive, but the costs of poor quality are often greater. The APICS Dictionary, 12th edition, defines the cost of poor quality as follows: Costs associated with providing poor quality products or services [in] four categories: (1) Internal failure costs ... associated with defects found before the customer receives the product or service; (2) External failure costs ... associated with defects found after the customer receives the product or service; (3) Appraisal costs... incurred to determine the degree of conformance to quality requirements; and (4) Prevention costs ... incurred to keep failure and appraisal costs to a minimum.

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ADVANCED

Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

The essential requirement for successful supply chain management is process oriented organisations

An ability to view the supply chain as a series of linked processes rather than a series of isolated activities joined by arm’s length transactions

Continuous improvement is revolutionary, not evolutionary. It may set very high goals and may eventually create dramatic change and it must do so immediately

The search for perfection has no end point, only successive approximations inching toward the final goal

Supply chains have evolved from functional isolation, to crossfunctional cooperation, to global networks linked by electronic communications and enterprise software

True

False

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ADVANCED

CHAPTER 4 - CORPORATE STRATEGY (336739 Demonstrate an understanding of the key concepts and elements of strategic supply chain management)

PURPOSE: This chapter will enable learners to demonstrate and understanding of the key concepts and elements of strategic supply chain management.

LEARNING OBJECTIVES: Learners will be able to:  Analyse the concept of strategy and the process of developing corporate strategy.  Manage change processes directed towards achieving corporate strategy.  Analyse the contribution of strategic supply chain management to corporate strategy.  Evaluate concepts underlying strategic supply chain management.  Assess the idea of the global supply market as a source of competitive advantage.  Distinguish and assess various models of supply chain structures and relationships. Demonstrate an understanding of the key elements in developing strategies to optimise operational supply In its definition of strategy, the APICS Dictionary, 12th edition, tells us that "the strategy of an enterprise identifies how a company will function in its environment. The strategy specifies how to satisfy customers, how to grow the business, how to compete in its environment, how to manage the organisation and develop capabilities within the business, and how to achieve financial objectives." How hard can that be? Goals of corporate strategy Let us begin parsing that definition with the part about satisfying customers. The main point to keep in mind is this: Whatever strategy the corporation adopts to satisfy customers, grow, compete, organise itself, and make money, the supply chain has to operate to further those goals. To give a simple example, if customers are clamouring for deeply discounted prices on durable, high-volume goods with stable demand, a supply chain strategy that invests heavily in speedy delivery is very likely to be wasting the corporation's money. __________________________________________________________________________________ 48 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED (However, with supply chains every decision takes place within a matrix of decisions, so you can never say never about any individual strategy. Speedy delivery might somehow fit in with a successful overall approach. But the focus of investment seems likely to be off the mark in the example.) A supporting point to keep in mind is this: Unless a supply chain is vertically integrated within one company, it will contain a number of independent organisations, each with its own goals, processes, operations, technology, and strategy. So, when we refer to the necessity of aligning supply chain strategy with corporate strategy, we have to be specific about which corporation's strategy we mean. In general, the reference is to the strategies of a channel master or nucleus firm. Traditionally, that is the manufacturer of a product-the company that sits right at the centre of the chain (or network) with suppliers in tiers on one side and customers on the other. But the dominant firm, with the dominant strategy, may instead be a large retailer, in which case the strategies of the supplier manufacturers have to align not only with their own corporate goals but with their customer's corporate and supply chain strategies. The suppliers of suppliers also have strategies to be brought into alignment. Finally, the strategies, once aligned, have to do two things: serve the end customers' needs and be profitable for the chain as a whole and each company individually. Strategy: customer focus and alignment When it comes to supply chains, it is what is good for the customer that counts-not what is good for the nucleus company or even what seems to be good for the supply chain itself. Supply chain management ought to be all about giving the final customer the right product at the right time and place for the right price. It is not necessarily about the most advanced product or service, nor is it always about the lowest price, the fastest time, or the most convenient place. It is about the balance of quality, price, and availability (timing and place) that is just right for the supply chain's customer. Is determining what's right in all those measures easy? Well, no, of course it is not. And achieving all those values would not be easy, either, even if they were completely obvious, which they seldom are. Only two things are obvious. First, serving the end-user customer is the primary driver of supply chain decisions. Secondly, the organisations in the supply chain have to make a profit and stay in business to serve the customer. Design engineers or, better yet, design teams from across the network-design products that are right for the end customer and can be sold profitably. Market research looks for the true, and not always obvious, needs in potential consumers that the supply chain can be engineered to satisfy profitably. Logistics strategy begins with data about customer demands for availability-of materials, components, service, or finished products, depending upon the customer and then it looks for ways to move products in a cost-effective way with acceptable risk. Decisions are never just about product features or just about price or just about speedy delivery. They are about the right features at the right price on the right schedule. DOS __________________________________________________________________________________ 49 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED was not a great operating system; it was just the right operating system for the time and the market. As we saw in the previous section; there are other stakeholders who also have to be brought along for the ride. In fact, "customer" is a complex concept in relation to supply chains, because there are multiple customers with different stakes in the process. When we talk about customer focus, we mean the end user, the consumer of the product. But only the retailer actually sees the end user and has a direct relationship with that person or entity. Everyone else in the supply chain has a more immediate customer just downstream to our left in the supply chain diagram. If the supply chain is completely aligned in its focus on the end customer, then, at least in theory, serving the customer just to an organisation's downstream side would automatically serve the end user and also be in the supplying organisation's best interest as well as the interest of investors. Moreover, within each supply chain partner there are internal "customers" whose needs also must be aligned with corporate and supply chain strategies. Each manager must understand his or her role in making the supply chain profitable, and staff, too, must be rewarded, motivated, and trained in alignment with the needs of the supply chain end customer. The society at large and the government that sometimes codifies social value in its laws and regulations must also be served. Ultimately, what is good for the supply chain is good for the customer, within the limits set by those other stakeholders. But achieving that happy alignment of all strategies along the chain requires strong leadership, constant attention, and, perhaps, a little magic. 5 Strategies to develop expertise in managing Supply Chain Strategy 1: Adopt a demand-driven planning and business operating model based on realtime demand insights and demand shaping. The right prediction and contingency planning tools will ensure a complete view and an effective response to risks such as suppliers going out of business, political upheaval, and natural calamities affecting manufacturing. Companies can then adjust pricing and promotions strategies to shape demand, move additional product quickly, drive revenue growth, or further expand margins for a high-demand product with limited market supply. The key is to have the foresight to leverage opportunities and mitigate challenging events so that your business not only survives but succeeds. An agile demand-driven supply chain requires end-to-end visibility across the business from buyers and the market to supply. Strategy 2: Focus on total cost of ownership (TCO), not price. One benefit of strategic sourcing is that it shifts the focus from looking only at the purchase price to understanding the total cost of owning or consuming a product or service. For __________________________________________________________________________________ 50 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED significant spend areas, procurement teams at best-in-class companies are abandoning the outmoded practice of receiving multiple bids and selecting a supplier simply on price. Instead, they consider many other factors that affect the total cost of ownership. This makes good sense when you consider that acquisition costs account for only 25 to 40 percent of the total cost for most products and services. The balance (and majority) of the total comprises operating, training, maintenance, warehousing, environmental, quality, and transportation costs as well as the cost to salvage the product’s value later on. Identifying the total cost of ownership requires looking at the entire process of procuring and consuming the product or service, something that can only happen with cooperation and input from both the buyer and the seller. Best-in-class organizations do not stop there, however. They also ask suppliers and internal stakeholders the following important question: “How can we work together to reduce the total cost of ownership?” Strategy 3: Understand the value and risks of technology. Information technology should not be used to replace broken links in the supply chain. Processes that complement a company’s Supply Chain Management (SCM) strategy must be designed first. The right technology infrastructure can then support the strategy. Managers may be tempted to eliminate the critical human element and rely only on software to manage the supply chain. But software cannot possibly understand a company’s strategic plan, or intelligently adjust the supply chain when it fails to match customers’ needs. In SCM, there is no substitute for knowledgeable, hands-on managers; technology can help provide data to make good decisions. Strategy 4: Optimize product designs and product management for supply, manufacturing, and sustainability to accelerate profitable innovation. Innovation is crucial for being one step ahead of the competition. But innovation doesn’t exist in a vacuum. To be successful, products must be manufactured at the right cost, place, and time. Decisions made in the early cycles of product development can make or break the product. Designs must be optimized for supply, manufacturability, and supply chain operations. All true costs to deliver must be accurately captured and analysed to maintain balance across the endto-end business. In addition, product innovation and competitive advantage increasingly stem from the selection and management of suppliers and technologies. If a company can manage the information, people, processes, and decisions regarding a product throughout its lifecycle, it can achieve strong results and market leadership. There is no better way to achieve this than with seamless and clear collaboration processes across the end-to-end supply chain—from demand, the market, and customers back to manufacturing and suppliers. The ability to orchestrate this conversation across the end-to-end business and use demand-driven insights has never been more in reach. Oracle’s cloud __________________________________________________________________________________ 51 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED collaboration tools for supply chains help product designers innovate solutions that customers are demanding. Strategy 5: Align your supply chain with business goals by integrating sales and operations planning with corporate business planning. Although sales and operations planning processes provide coordination among sales, manufacturing, and distribution, there still are disconnects and gaps among finance, strategy, and operations in many companies. One way to bridge these gaps is with integrated business planning that involves people, process, and technology elements of the business. This process integrates financial strategic budgeting and forecasting systems with operations planning and allows smart trade-off decisions to be made for the business. The resulting marriage of end-to-end processes ensures revenue goals and budgets developed in finance are validated against a detailed, bottom-up operating plan and responsively executed. Concurrently, the strategy reconciles the operating plan against financial goals. True integrated business planning, which is made possible with cloud technology, connects sales and operations planning processes with corporate business planning and enables companies to achieve the right balance of supply and demand, aligned with strategic business goals. It provides real-time visibility to all the key dimensions for success, such as demand, supply, product, risk, and performance, across the organization and throughout the extended supply chain. Conclusion As supply chains have moved from a cost focus to a customer focus and now currently to a strategic focus, the need to think strategically about the supply chain has never been more important. The success of a strategy is only as good as the company’s ability to fully and properly execute it. A great supply chain strategy, linked with operational excellence, can provide success for not only the company in question but also its partners and customers. References: Dittmann, J.P. (2012). “Skills and Competencies that Supply Chain Professionals will Need”. Retrieved from http://www.scmr.com, accessed 30/08/2017. Engel, B. (2011). “10 Best Practices You Should be Doing Now”. Retrieved from http://www.supplychainquarterly.com, accessed 30/08/2017. Oliver, K., Shorten, D., Engel, H. (2004). “Supply Chain Strategy: Back to Basics”. Retrieved from https://www.strategy-business.com, accessed 30/08/2017.

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ADVANCED Slade, S. (2017). “6 Strategies for Better Supply Chain Mnagement in the Current Economy”. Retrieved from https://blogs.oracle.com/scm/5-strategies-for-better-supply-chainmanagement-in-the-current-economy, accessed 30/08/2017. United Parcel Service. (2005). Retrieved from https://www.upsscs.com/solutions/white_papers/wp_supply_chain.pdf, accesed 30/08/2017. Strategy: forecast-driven enterprise One of the traditional problems with meeting customers' availability requirements arises from the difficulty of knowing what those requirements will be from day to day, month to month, quarter to quarter, and so on. If a manufacturer could be guaranteed that its wholesale or retail customers were going to need 1,000 SKUs (stock keeping units) every Wednesday afternoon, getting products to customers at the right time and place would be a matter of simple calculation based upon lead times for production and delivery. In turn, the manufacturer would look at the bill of material, determine the lead time for each, and submit schedules to its suppliers. Unfortunately, it is difficult to predict even the most stable demand-say, for a product like diapers. There is some variability in demand for diapers, even though they are not subject to seasonal style changes or rapid peaks and valleys in response to outside influences affecting ability to pay. That is why Procter & Gamble cooperates with Wal-Mart to plan for demand and replenishment of diapers. The chain of demand (to coin a phrase) begins at the far retail end of the supply chain and works its way back toward the source of raw materials used in making the product. And the traditional way of attempting to satisfy this demand is to forecast it. Forecasting works along the chain like this: • The retailer forecasts demand from young parents. • The wholesaler forecasts demand from all its retailers. • The manufacturer forecasts demand from the distributors. • The component suppliers forecast demand from manufacturers. • The raw materials suppliers forecast demand from the component manufacturers. (Somewhere way upstream at the source of the diaper chain, assuming old-fashioned cloth diapers, is somebody growing cotton and hedging risk with futures contracts.) How well does this work? Let us say you do not want to be placing large bets on the accuracy of all those forecasts. Here is what happens: • Those young parents vary their diaper-buying patterns in fairly small increments due to factors nobody fully understands. Perhaps they just go to different stores for a change, shop on Tuesday instead of Thursday, or buy more at one time because the diapers are on sale __________________________________________________________________________________ 53 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED (and nobody mentioned the retailer's promotion plans upstream to all those companies affected by the variability in demand), or flu season affects volume needs. At any rate, demand never quite meets the forecast. Therefore, the retailer pads each order with a little extra "safety stock" to put in the storeroom. (According to the APICS Dictionary, 12th edition, safety stock is "in general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply [or,] in the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short-term changes in the backlog.") • The distributor forecasts demand based on past orders from its retailers. Now, those demand patterns have a wider variability than the demand pattern at the retailer's checkout counters. Why - because of that safety stock. Sometimes the safety stock accumulates because demand is less than the forecast and this means that the retailer's next order is for less than its forecast-or perhaps it doesn't have to order at the usual time at all, because it has a glut of diapers which it probably sells off in a promotion. The upshot of all this is that the small variations in end-user demand are magnified at the distributor. • Up the chain, the manufacturer of those diapers looks at the demand pattern from the retailer and makes its own forecasts, which show an even wider swing in variability. • And (you get the picture) so it goes up the chain with ever-wider swings in variability until it hits that cotton farm. This pattern of variability is called the bullwhip effect, and it affects all manner of supply chains that are based on serial forecasting by each independent division or firm that touches the product as it travels from raw material to finished retail item. If you imagine snapping a bullwhip and watching the ripples widen as they move toward your hand, you can picture the trend line of the supply chain's bullwhip effect. Exhibit 1-13 provides a different sort of graphic representation of the bullwhip effect. The snakelike ripples are not graphed, but the increasing distortion in demand patterns is described as it moves up the chain from the retail customer toward the raw material supply.

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ADVANCED Exhibit Bullwhip Effect Strategy: demand-driven enterprise The bullwhip effect is driven by demand forecasts; the solution is to substitute actual information for the forecasts-which are always wrong. This is not necessarily a simple matter, either, but supply chain professionals have evolved techniques for letting actual orders-not forecasts-drive production and distribution. It is called "make-to-order" instead of "make-to-stock" (which could be called "make-to-forecast"). When a supply chain works in response to forecasts, it is called a "push" chain. The APICS Dictionary, 12th edition, gives the synonymous term "push system" three related meanings: 1) In production, the production of items at times required by a given schedule planned in advance. 2) In material control, the issuing of material according to a given schedule or issuing material to a job order at its start time. 3) In distribution, a system for replenishing field warehouse inventories where replenishment decision-making is centralised, usually at the manufacturing site or central supply facility. Everything in a push system is, in a manner of speaking, pushed downstream from one point to the next according to schedules based on the forecasts. The supplier delivers components in the amounts determined by the schedule to inventory, where they await use in manufacturing. The plant turns them into finished products and pushes the products to the distribution centre or the retailer, where they await an order from downstream. At that point, the product is not being pushed by the schedule; it is being pulled by demand. The APICS Dictionary, 12th edition, provides three meanings for the term "pull system" to parallel the three meanings provided for push system: 1) In production, the production of items only as demanded for use or to replace those taken for use. 2) In material control, the withdrawal of inventory as demanded by the using operations. Material is not issued until a signal comes from the user. 3) In distribution, a system for replenishing field warehouse inventories where replenishment decisions are made at the field warehouse itself, not at the central warehouse or plant. In the demand-driven chain, no product is produced until an order comes in – moving the "push/pull frontier," as it is called, back up the chain at least to the plant. Instead of producing to the forecast and sending finished products to inventory, the production process does not begin until information comes in based on sales. There is, in other words, no fixed production schedule in a strictly demand-driven supply chain.

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ADVANCED Product is turned out only in response to an actual order, "on demand," in other words. Note however that on the supplier side of the plant forecasts still determine delivery of raw material. The art of forecasting remains crucial, even in a demand-driven chain. The challenge in changing from forecast-driven to demand-driven, from push to pull is reducing inventory without also lowering customer satisfaction. When a demand-driven system is set up and managed properly, it can actually enhance customer service while reducing costs, but stock-outs are a risk. As always with supply chains, the decision to switch to a demand-pull process trades one type of risk for another. In the forecast-push process, the risk is related to the build-up of inventory all along the chain. Not only does inventory cost money while it sits in a retail stockroom, distribution centre, or preproduction storage area; it runs the risk of becoming obsolete or irrelevant for a number of reasons. In a world of rapid innovation, inventory obsolescence is a very real threat. Cisco Systems, for years an exemplar of successful and innovative supply chain management, had to dispose of US$2.25 billion worth of useless inventory when the dot-com bubble burst at the beginning of this millennium. All those season close-out sales you see in clothing and department stores are a way of clearing out the overstock. Bookstore remainder tables which are much less in evidence than they were a decade or two in the past are a sign of inventory overhang caused by failed forecasting. Magazine distributors used to destroy huge quantities of monthly magazines 12 times a year when they came back from retail outlets. Those are the results of producing to forecasts no one trusts and purposely overstocking to be sure of meeting unexpectedly high demand. The risk in the build-to-order model, on the other hand, is that orders will begin to come in above capacity and all along the chain there will be expensive activity to run the plant overtime, buy more and faster transportation, or sweet-talk customers into waiting for their orders to be filled or substituting a different product. Running short of stock is also a risk in the forecastdriven chain. Forecasts can be wrong in either direction. That is why the safety stock builds up at each point where orders come in. Building a demand-driven enterprise can require significant changes in all supply chain processes. The following lists some major considerations: • Access to real demand data along the chain (visibility) The first requirement is to replace the forecasts with real data. The only supply chain partner with access to these data first hand, is the retailer and retailers in the past have been no more willing to share business data than any other firms. The other partners lack "visibility"- one of the main supply chain principles promoted by APICS. They simply cannot see what is going on with the end customer. But visibility is a necessity for building a pull system, and pioneers like Wal-Mart have led the way in that regard. __________________________________________________________________________________ 56 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED With point-of-sale scanning or radio frequency identification (RFID), a retailer can alert its suppliers to customer activity instantaneously. Instead of producing to the monthly forecast, manufacturers with that kind of immediate signal from the front lines can plan one day's production runs at the end of the preceding day. They produce just enough to replace the sold items. • Trust and collaboration among supply chain partners Collaboration is implied in the sharing of information. But more is at stake than simply sharing sales information. Partners may have to invest in new technology and develop new systems to be able to use the real-time data. With orders going out on a very different schedule (in fact, not on a schedule) all processes will have to be altered - warehousing storage no longer needed, packaging, shipping, and planning will all be handled differently in the new system. In return for receiving real-time data that allow reduction of inventory, suppliers and distributors have to agree to change their processes in whatever ways may be necessary to make the new system function without disrupting customer service. • Agility Because the inventory buffers leave the supply chain, the trade partners need to develop agility-the ability to respond to the variability in the flow of orders based on sales. The plant, for example, may have to undergo considerable change if it· has to produce several different kinds of products under the new circumstances. When building to forecast, a plant can run a larger volume of each product to send to inventory. But when building to order, the plant may have to produce several different types of products in a day. There will be no room for long changeover times between runs of different products; therefore, equipment, processes, work centre layouts, staffing, or siting-or all these things- may have to change to create the capacity required to handle the new system. To return to the simple model of the lemonade stand, make-to-forecast might mean that Mom mixes a batch of lemonade just before the stand opens based on the number of customers from the previous day. (That would be a "naïve forecast," as you will see in Module 2.) If the forecast is wrong-say, the weather turns bad midway through "business hours"- there will be leftover lemonade, which most likely will not be problematic unless the operators drink too much of it and spoil their appetites. The other possibility is that demand will overwhelm supply and perhaps Mom has gone to pick up big sister at soccer practice and customers go away thirsty. With forecasts being so unreliable, the lemonade stand proprietors might decide to switch to a make-to-order schedule. After each sale, they could call in to the kitchen to update the lemonade manufacturer, who would probably want to keep a few glasses ahead. Inventory could be made much smaller, if not eliminated. The drinks might be a bit fresher. There would be a trade-off in cost, however, because more trips from kitchen to stand would be required. (Transportation and warehousing always have to be balanced.) __________________________________________________________________________________ 57 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Raw materials-lemons, sugar, water-would still be purchased on forecasts, since running to the corner store for more lemons would be wasteful of time and money. The sisters might also decide to move part of production closer to the customer by adding sugar to taste. But "postponement" is another topic. Strategy: number of supply chains When we are drawing pictures of supply chain models, it is customary to assume that one chain connects each partner to the next. In fact, one firm can have more than one supply chain, depending upon the number and type of products that are passing along the chain and other variables. For a product with a complex bill of material with many parts that combine into many components to make the final product, a manufacturer may be bringing in materials from many suppliers, and these materials might range from low-priced commodities to fragile or sophisticated materials that require special shipping and handling. Suppliers might range from small specialised firms to raw materials giants larger than the manufacturer. Some are key accounts; some might be occasional buyers. The finished products may be sold through several very different channels- ecommerce, printed catalogues, commercial, and retail. These variables may combine in different ways, each suggesting its own type of supply chain strategy. We will consider some effective and ineffective alignments of supply chain types and product variables. Innovative products contrast to functional products on every dimension. They have unpredictable demand, relatively short life cycles (three months for seasonal clothing), and high contribution margins of 20 to 60 %. They may have millions of variants in each category, an average stock out rate from 10 to 40 %, and end-of-season markdowns in the range of 10 to 25 % of regular price. The margin of error on forecasts for innovative products is high - 40 to 100 %-but the lead time to make them to order may be as low as one day and generally is no more than two weeks. The supply chain for innovative products should emphasise market responsiveness rather than physical efficiency, with indicators such as the following: • Excess buffer capacity and significant buffer (or safety) stock of parts or finished items • Aggressive reduction of lead times • Suppliers chosen for speed, flexibility, and quality (rather than cost) • Modular design that postpones differentiation as long as possible In "What Is the Right Supply Chain for Your Product?" Marshall L. Fisher distinguished two types of products that call for different supply chain strategies: functional and innovative. They differ as follows: Functional products, that change little from year to year, have longer life cycles (perhaps more than two years), relatively low contribution margins, and little variety. Because demand for them is stable, they are fairly easy to forecast, with a margin of error in the 10 % range, very few stock outs, and no end-of-season markdowns. __________________________________________________________________________________ 58 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The appropriate supply chain for these products should emphasise predictability and low cost with performance indicators such as the following: • High average utilisation rate in manufacturing • Minimal inventory with high inventory turns • Short lead time (consistent with low cost) • Suppliers chosen for cost and quality • Product design that strives for maximum performance and minimal cost. Make-to-order functional products, for example, replacement parts for customised equipmentusually have long lead times (six months to a year). The key performance indicators for each supply chain differ because of the product characteristics. Aggressively reducing lead times, for example, is appropriate for innovative products but would be irrelevant for functional products that can be manufactured and delivered on predictable schedules in high volumes. Inventory reduction makes good sense as a performance indicator for supply chains if the product is functional but not if it is innovative. Because margins are low on functional products (those markets tend to be very competitive), cost reduction in the supply chain is essential. Innovative products, on the other hand, with their high margins and unpredictable demand, justify extra expense for holding costs. (Fisher also proposes, however, that manufacturers of innovative products can look for other solutions to the problem of unpredictable demand, such as aggressively reducing lead times and producing products to order rather than for inventory.) The same class of product, the author argues, can be either innovative or functional. Automobiles fit that description, with a low-priced, no-frills car like a base model Chevrolet Cobalt or Hyundai Excel representing the functional end of the spectrum and a Porsche representing the other end. Similarly, coffee can be functional-as anyone who has worked in an office knows, in which case it should be available quickly at a low price with perhaps cream and sugar as options. At a high-end coffee shop, on the other hand, patrons are willing to endure longer lead times and pay more money for their coffee, but they want variety in return. The idea that the same type of product can be either functional or innovative implies that one company might have more than one supply chain. And that is the contention of Jonathan Byrnes, a professor at MIT. Writing in the Harvard Business School's Working Knowledge, Byrnes asserts that one supply chain is not enough; two, three, or more would be preferable. "One size fits all" supply chains may have been sufficient in the past, he believes, when that was the competitive norm, but new information technology makes it possible to have multiple, dynamic chains that can accommodate different product and information flows. Byrnes breaks products into three categories: staples, seasonal products, and fashion. Much like Fisher's functional products, staples (white underwear is Fisher's example) have steady, year-round demand and low margins. __________________________________________________________________________________ 59 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED He advises stocking them only in retail outlets in small quantities and transporting them in truckload quantities. (A full truck is more cost effective for the shipper than a partially loaded vehicle.) Fashion products are like Fisher's innovative items with unpredictable demand. Sara, the Spanish clothing manufacturer mentioned earlier, has two supply chains, one for staples and the other for fashion clothing. To get the fastest response time, Sara uses European suppliers for the fashion items. But for the more predictable demand items, it uses eastern European suppliers that have poor response time (not a concern and lower cost. In addition to varying the supply chain by product type, Fisher recommends several other variables to consider-store type and time in season or product cycle. Demand varies considerably over the life cycle of many products. The same item might have infrequent demand at first, more stable demand in its maturity phase, and falling demand at the end of its life cycle. With more than one supply chain, the nucleus firm can move its products from one chain to the other in response to changing variables, such as type of channel or life-cycle stage. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

When it comes to supply chains it is what is good for the nucleus company that counts, not what is good for the customer

The bullwhip effect is driven by demand forecasts; the solution is to substitute actual information for the forecasts which are always wrong

In the demand-driven chain the product is produced before an order comes in

Agility is the ability to respond to the variability in the flow of orders based on sales

Innovative products have unpredictable demand, relatively short life cycles (three months for seasonal clothing), and high contribution margins of 20 to 60 %.

True

False

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ADVANCED

CHAPTER 5 - VALUE AND ETHICS IN BUSINESS

(US: 335800 - APPLY PROFESSIONAL VALUES AND ETHICS IN THE OPERATIONAL ENVIRONMENT)

PURPOSE: The individual learners should develop an increased understanding of their own belief system and how it relates to the organisational code of conduct as well as the implications of inappropriate ethical conduct in the operational environment. LEARNING OBJECTIVES - Learners will be able to: • Analyse issues relating to professional and ethical conduct. • Evaluate an ethical code of conduct as it applies to the operational environment. • Apply professional ethics in practical situations. A Basic Understanding Values and ethics in simple words mean principle or code of conduct that govern transactions; in this case business transaction. These ethics are meant to analyse problems that come up in day to day course of business operations. Apart from this it also applies to individuals who work in organisations, their conduct and to the organisations as a whole. We live in an era of cut throat competition and competition breeds enmity. This enmity reflects in business operations, code of conduct. Business houses with deeper pockets crush small operators and markets are monopolised. In such a scenario, certain standards are required to govern how organisations go about their business operations, these standards are called ethics. Business ethics is a wider term that includes many other sub ethics that are relevant to the respective field. For example, there is marketing ethics for marketing, ethics in HR for Human __________________________________________________________________________________ 61 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED resource department and the like. Business ethics in itself is a part of applied ethics; the latter takes care of ethical questions in the technical, social, legal, and business ethics. Origin of Business Ethics When we trace the origin of business ethics we start with a period where profit maximisation was seen as the only purpose of existence for a business. There was no consideration whatsoever for non-economic values, be it the people who worked with organisations or the society that allowed the business to flourish. It was only in late 1980’s and 1990’s that both intelligentsia and the academics as well as the corporate began to show interest in the same. Nowadays almost all organisations lay due emphasis on their responsibilities towards the society and the nature and they call it by different names like corporate social responsibility, corporate governance, or social responsibility charter. In India Maruti Suzuki, for example, owned the responsibility of maintain a large number of parks and ensuring greenery. Hindustan Unilever similarly started the e-shakti initiative for women in rural villages. Globally also many corporations have bred philanthropists who have contributed compassion, love for poor and unprivileged. Bill gates of Microsoft and Warren Buffet of Berkshire Hathaway are known for their philanthropic contributions across globe. Many organisations, for example, IBM as part of their corporate social responsibility have taken up the initiative of going green, towards contributing to environmental protection. It is not that business did not function before the advent of business ethics; but there is a regulation of kinds now that ensures business and organisations contribute to the society and its wellbeing. Nowadays business ethics determines the fundamental purpose of existence of a company in many organisations. There is an ensuing battle between various groups, for example between those who consider profit or shareholder wealth maximisation as the main aim of the company and those who consider value creation as main purpose of the organisation. The former argues that if an organisations main objective is to increase the shareholders wealth, then considering the rights or interests of any other group is unethical. The latter similarly argues that profit maximisation cannot be at the expense of the environment and other groups in the society that contribute to the wellbeing of the business. Nevertheless, business ethics continues to a debatable topic. Many argue that lots of organisations use it to seek competitive advantage and creating a fair image in the eyes of consumers and other stakeholders. There are advantages also like transparency and accountability. Importance of Ethics Most of us would agree that it is ethics in practice that makes sense; just having it carefully drafted and redrafted in books may not serve the purpose. Of course, all of us want businesses to be fair, clean, and beneficial to the society. __________________________________________________________________________________ 62 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED For that to happen, organisations need to abide by ethics or rule of law, engage themselves in fair practices and competition; all of which will benefit the consumer, the society and organisation. Primarily it is the individual, the consumer, the employee or the human social unit of the society who benefits from ethics. In addition, ethics is important because of the following: 1.

Satisfying Basic Human Needs: Being fair, honest, and ethical is one the basic human needs. Every employee desire to be such himself and to work for an organisation that is fair and ethical in its practices.

Creating Credibility: An organisation that is believed to be driven by moral values is respected in the society even by those who may have no information about the working and the businesses or an organisation. Infosys, for example is perceived as an organisation for good corporate governance and social responsibility initiatives. This perception is held far and wide even by those who do not even know what business the organisation is into.

Uniting People and Leadership: An organisation driven by values is revered by its employees also. They are the common thread that brings the employees and the decision makers on a common platform. This goes a long way in aligning behaviours within the organisation towards achievement of one common goal or mission.

Improving Decision Making: A man’s destiny is the sum-total of all the decisions that he/she takes in course of his life. The same holds true for organisations. Decisions are driven by values. For example, an organisation that does not value competition will be fierce in its operations aiming to wipe out its competitors and establish a monopoly in the market.

Long Term Gains: Organisations guided by ethics and values are profitable in the long run, though in the short run they may seem to lose money. Tata Group, one of the largest business conglomerates in India was seen on the verge of decline at the beginning of 1990’s, which soon turned out to be otherwise. The same company’s Tata NANO car was predicted as a failure and failed to do well but the same is picking up fast now.

Securing the Society: Often ethics succeeds law in safeguarding the society. The law machinery is often found acting as a mute spectator, unable to save the society and the environment. Technology, for example is growing at such a fast pace that the by the time law produces a regulation we have a newer technology with new threats replacing the older one. Lawyers and public interest litigations may not help a great deal, but ethics can.

Ethics tries to create a sense of right and wrong in the organisations and often when the law fails, it is the ethics that may stop organisations from harming the society or environment. Sources of Business Ethics Ethics in general refers to a system of good and bad, moral, and immoral, fair, and unfair. It is a code of conduct that is supposed to align behaviours within an organisation and the social __________________________________________________________________________________ 63 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED framework. But the question that remains is, where and when did business ethics come into being? Primarily ethics in business is affected by three sources - culture, religion, and laws of the state. It is for this reason we do not have uniform or completely similar standards across the globe. These three factors exert influences to varying degrees on humans which ultimately get reflected in the ethics of the organisation. For example, ethics followed by Infosys are different than those followed by Reliance Industries or by Tata group for that matter. Again, ethical procedures vary across geographic boundaries. Religion It is one of the oldest foundations of ethical standards. Religion wields varying influences across various sects of people. It is believed that ethics is a manifestation of the divine and so it draws a line between the good and the bad in the society. Depending upon the degree of religious influence we have different sects of people; we have sects, those who are referred to as orthodox or fundamentalists and those who are called as moderates. Needless to mention, religion exerts itself to a greater degree among the orthodox and to lesser extent in case of moderates. Fundamentally however all the religions operate on the principle of reciprocity towards one’s fellow beings! Culture Culture is a pattern of behaviours and values that are transferred from one generation to another, those that are considered as ideal or within the acceptable limits. No wonder therefore that it is the culture that predominantly determines what is wrong and what is right. It is the culture that defines certain behaviour as acceptable and others as unacceptable. Human civilisation in fact has passed through various cultures, wherein the moral code was redrafted depending upon the epoch that was. What was immoral or unacceptable in certain culture became acceptable later on and vice versa. During the early years of human development where ones who were the strongest were the ones who survived! Violence, hostility, and ferocity were thus the acceptable. Approximately 10,000 year ago when human civilisation entered the settlement phase, hard work, patience, and peace were seen as virtues and the earlier ones were considered otherwise. These values are still in practice by the managers of today! Still further, when human civilisation witnessed the industrial revolution, the ethics of agrarian economy was replaced by the law pertaining to technology, property rights etc. Ever since a tussle has ensued between the values of the agrarian and the industrial economy! Law Laws are procedures and code of conduct that are laid down by the legal system of the state. They are meant to guide human behaviour within the social fabric. The major problem with the law is that all the ethical expectations cannot be covered by the law and specially with ever changing outer environment the law keeps on changing but often fails to keep pace. In business, __________________________________________________________________________________ 64 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED complying with the rule of law is taken as ethical behaviour, but organisations often break laws by evading taxes, compromising on quality, service norms etc. Ethics in Sales and Marketing Markets present a clash of interest between various players. There is competition for resources, customers, and price etc., which breeds ground for activities that may not get ethical sanctions. A certain code of conduct, policies and practices called ethics are required to manage markets and marketing. Marketing is the heart of all businesses and all other functions depend upon the same for keeping the business moving. It is one business function that is most interactive with markets. In fact, markets are meant to sell, and they exist only when they sell! In such a scenario there are bound to be multiple players and a clash is inevitable. Such clash leads to malpractices like hoarding, price competitions, brand wars and use of unfair tactics, which is precisely where marketing ethics come into play. Simply put, ethics means principle or values by which marketing ought to be conducted in the market place. Logically also when there are huge number of transactions involved, a certain code or guiding principles are required to ensure that operations and industry competitiveness is fair and beneficial to the end user. There are different philosophies or schools of thought for ethics in marketing, one is the political philosophy and the other is the transaction focused. Whereas one school of thought says that all marketing efforts should be focused on maximising the shareholder value and that this is the only marketing ethics; the other believes that that marketing and market is equally responsible to consumers, other stake holders and the shareholders. The tactic of targeting targeted segments, creating needs that were inexistent till now, transparency about the source of labour and environmental risks, transparency about the use of source and the ingredients, appropriate labelling, mentioning associated health risks, advertising jurisprudence and not making false promises fall within the ambit of marketing ethics. Lots of marketing and promotion was carried out for goods and services that were not a need till yesterday and only a luxury. Today cell phones have become a need and a status symbol! These are issues that are being discussed in marketing ethics nowadays. Marketing ethics is in its budding stage only considering that it came into being only in late 1990s. Like other ethical disciplines, marketing ethics is also looked up from various perspectives. There is the perspective of virtue, expediency, and other perspectives. But like other ethics there is also the difficulty of deciding the agency responsible for ethical practice. Since there is not one single agency responsible for ethics this gives the independence to an individual or to any marketing agency to act on its own and be ethical!

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ADVANCED Marketing ethics unlike other business ethics is not only restricted to the field of marketing alone. It influences many aspects of our life and especially in developing perceptions in the minds of people and creating identities, classes, and sections in the society. The visual channels of communication used for marketing sometimes lead to closure of knowledge, opinions, ideas, and beliefs. It creates prejudices in the mind of people. Ethics and Production Ethics in production is a subset of business ethic that is meant to ensure that the production function or activities are not damaging to the consumer or the society. Like other ethics there is a certain code of conduct or standards to be followed, however ensuring that the ethics are complied with is often difficult. One of the most important characteristics of the business today is that there is a great degree of interdependence between various business functions. Production cannot happen without marketing and sales and vice versa. In order to survive in the competitive sphere, organisations must try to reduce the costs, involved in production processes. This cost efficiency is sometimes achieved at the cost of quality. Poor processes and technology are used to keep the cost down, this is especially true for small players who cannot afford economies of scale. Having said this there are also examples of industry giants that compromised on certain production processes, cola companies make up for a good example. All the production functions are governed by production ethics but there are certain that are severely harmful or deleterious which need to be monitored continuously. The following are worth mentioning: 1.

There are ethical problems arising out of use of new technologies that are deleterious to health, safety, and environment. Technological advancements like genetically modified food, radiations from mobile phones, medical equipment etc. are less problems are more of dilemmas.

Defective services and products or products those are innately deleterious like alcohol, tobacco, fast motor vehicles, warfare, chemical manufacturing etc.

Animal testing and their rights or use of economically or socially deprived people for testing or experimentation is another area of production ethics.

Ethics of transactions between the organisation and the environment that lead to pollution, global warming, increase in water toxicity and diminishing natural resources.

Dilemma of Ethics in Production There are certain processes involved in the production of goods and a slight error in the same can degrade the quality severely. In certain products the danger is greater i.e. a slight error can reduce the quality and increase the danger associated with consumption or usage of the same exponentially. The dilemma therefore lies in defining the degree of permissibility, which in turn __________________________________________________________________________________ 66 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED depends on a number of factors. Bhopal gas tragedy is one example where the poisonous gas got leaked out due to negligence on the part of the management. Usually many manufactures are involved in the production of same good. They may use similar or dissimilar technologies for the same. Setting a standard in case of dissimilar technologies is often very difficult. There are many other factors that contribute to the dilemma, for example, the involvement of the workforce, the working conditions, the raw material used etc. Social perceptions also create an impasse sometimes. For example, the use of some fertiliser by cola companies in India recently created a national debate. The same cold drinks which were consumed till yesterday became noxious today because of a change in the social perception that the drinks are not fit for consumption. International Business Ethics International business ethics emerged quite late globally compared to the business ethics that came up in 1970’s. It was only in late 1990’s that the international business ethics came to the fore especially so after the economic developments that occurred on a global scale. In 1990’s many businesses from the developing countries expanded their operations and became multinational. The transactions between businesses and the governments increased as a result, which gave rise to many practical issues. Culture and its relativity were one factor more prominent than the others. Other ethical issues in the context of international business are generally dealt with the laws of the land; although all of them fall within the ambit of international business ethics. Globalisation diminished the barriers between countries on the globe and also called for universalisation of values for trade to occur smoothly. Universal values were perceived to control the behaviour in the commercial space. This lead to ethical issues in the international business perspective, those that were unknown till date. Other theoretical issues arise from the diversity of business ethical traditions in various countries across the globe. In addition, comparisons made on the basis of corruption rankings of a certain state or on the basis of gross domestic product of a certain economy also lead to ethical issues in the international arena. Since religion brings in a wholly different perspective to the way we look upon things; the comparison of ethical traditions from the perspective of the latter also gives birth to ethical problems. For example, trade in Christian dominated countries is different from the trade in Islamic countries. Again, depending upon how strong or profound the impact of the religion is business practices are influenced proportionally. In the international business arena, ethical problems also arise out mere international business transactions. Fair trade movement, transfer pricing, bioprospecting and bio-piracy are examples of transactions that fall within the ambit of international business ethics. Similarly issues like child labour and cultural imperialism are controversial enough to call upon the attention of international business ethics. __________________________________________________________________________________ 67 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Yet another arena for strong requirement of ethics would be when multinationals bargain to take advantage of international differences; For example, when rich nations outsource their services to poor and developing nations at cheaper cost. Western nations were up till recently outsourcing many of services to third world nations where they could hire workforce for the cheapest prices. This led to a severe competition between developing nations with each one offering cheaper labour than the other. Dumping is yet another way by which large companies are trying to kill the domestic players. Foreign players often sell goods and services at a cheaper price making it hard for the small players to survive the competition. Consumer durables and FMCG are biggest examples of such practices. The bigger threat here is the resulting monopoly which places the customer in a losing position. The international trade commission began for its search of its antidumping laws from the year 2009. All these are ways in which business at the international level can lead to ethical dilemmas. In absence of international business ethics, it may become almost impossible to regulate business and create winning situations for people in the market place. Myths of Business Ethics Practically business ethics at the workplace connotes an alignment between what the organisation values and how to go about it. It means that all the “day-to-day” operations, or activities carried out by employees are in tandem with the organisational policies without any deviations. There are however lots of myths that surround business ethics and their relevance and effectiveness. Many management thinkers and philosophers believe that business ethics alters people’s values. They cease to be what they are, which comes in way of realisation of their full potential. Instead business ethics should be about managing values and conflict resolution. Conflict management is what they stress the most upon. There is a continuous tension between individual and organisational ethics. Many organisations believe that most of their human resources are ethical already and need not be trained upon. When such an ethical dilemma arises, it arises because there is a clash of principles that differ in their result priorities. Again, there ethics to counter that are equally reasonable! So, what do you choose? One more myth that surrounds business ethics is that it is well managed and the prerogative of philosophers and theologians. They say that there is no such term as business ethics that can decide how organisations go about their day to day activities. Most of this may be attributed to lack of participation of business leaders in ethical decision-making process and their interest in the same. Business ethics is also criticised as being nothing new. It is believed to something that only avows what is good and which is logical and known to everyone. But when we look at the same from the perspective of stakeholders, the society and employees who work at the bottom of __________________________________________________________________________________ 68 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED the pyramid, it safeguards the interests of all these groups. Organisations cannot function in a programmed manner ensuring there is no breach of a certain code in the absence of ethics and values. Business ethics in the context of corporations is recent, but it is fairly old if we talk of general business transactions. Cicero wrote about business ethics in his book ‘On Duties’. It looks recent because of the corporate social responsibility movement that started in early 1970’s. Yet another myth that surrounds business ethics is that business ethics cannot be managed which is totally wrong. In reality business ethics is managed or exercised indirectly in some way. Organisations priorities can also be reflective of the ethics followed in the organisations. For example, a sales-driven organisation is bound to be aggressive naturally, whereas one that is into the business of hospitality is bound to be different. Certain other sections of people in management believe that business ethics and social responsibility are the same. They are not! In fact, corporate social responsibility is only a small part of it. Corporate social responsibility concerns itself with managing business dealings and the interface with the society; it does not deal with ethics at the workplace. However, both fall under the continuum of business ethics. Difficulties in Ethical Decision Making Decision making involves a great degree of value clarity, ethical decision making involves more! Unlike certain financial, inventory and production decisions, ethical decisions cannot be coded into digital machines. They require critical thinking and evaluation. What makes ethical decision making so difficult? Why cannot ethical decisions be programmed like other decisions? What leads to dilemmas in ethical decision making? In the coming paragraphs we try to answer all these questions. We also try to understand basic difficulties involved in ethical decision making. An organisation is an amalgamation of various individuals and there is a conflict of interest at the personal level between these members, each one is concerned about his benefits and neutral or opposing to the benefits or good of others. This conflict of interest leads to situations that are morally challenging to the manager who wants to be moral and righteous to his own conscience and serve the interests of the organisation. Here the dilemma arises on deciding upon the course of action. In the second case a conflict arises when there is a distinction to be made about facts and values. This implies a situation where a manager confronts ‘what is’ and weighs the same against ‘what ought to be’. For example, an organisation may spend lots of resources upon developing, researching, or upgrading a certain product and service, which gets reflected in the final price of the latter. This increase in price may be looked upon as exploitative by the end users! __________________________________________________________________________________ 69 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED Yet another difficulty arises in cases when there is a fine line dividing the good from the bad or the evil and in situations when there is a difference of opinion on what is morally permissible and what is not. Undoubtedly, in our society the good and the evil exist side by side. Example: Nestle infant formula lead to many deaths in Kenya because the formula was prepared in contaminated water. The same formula proved lifesaving in other countries. The challenge lies in minimising the evil and trying to arrive upon a consensus. In an era of uncertainty, it is almost impossible to predict the outcomes of decision making. One of the principles of ethical decision making assumes that the outcome of a decision is known and that the decision that results in greatest good for greater number of people is the best. Practically, anticipating the exact outcome of a course of action is impossible. This uncertainty is at the root of all difficulties in ethical decision making. Lastly, we may say that ethical stand points of organisation and their critics are opposite and based on an entirely different set of reasons; here the ethical arguments made to justify intentions are by and large incompatible. For example, an environment protection foundation may criticise the operations of an organisation on grounds of the latter polluting the environment. The organisation may justify itself by saying that it is adding more value to the society and to individual lives, making it more comfortable by its products and services. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

Values and ethics in simple words mean principle or code of conduct that govern transactions

Primarily it is the individual, the consumer, the consumer, the employee, or the human social unit of the society who benefits from ethics

Ethics in production is a subset of business ethic that is meant to ensure that the production function or activities are not damaging to the consumer or the society

There is a continuous tension between individual and organisational ethics

An organisation is an amalgamation of various individuals and there is no conflict of interest at the personal level between these members, none are concerned about their personal benefits

True

False

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ADVANCED

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ADVANCED CHAPTER 6 - SUPPLY CHAIN MANAGEMENT (336709: Evaluate the influences of key components in a supply chain) PURPOSE: This Chapter will enable learners to evaluate the relationship and influences of the key components in a supply chain. LEARNING OBJECTIVE: A learner will be able to: • Evaluate key influences on a supply chain environment. • Analyse and implement stakeholder relationships within the supply chain. • Obtain and analyse information on the supply chain. • Apply improvements to the supply chain. Introduction New Market Realities In the last two decades, managers have witnessed a period of change unparalleled in the history of the world in terms of advances in technology, globalisation of markets, and stabilisation of political economies. With the increasing number of world-class domestic and foreign competitors, organisations have had to improve their internal and external processes rapidly in order to stay competitive. In the 1960s-1970s, companies began to develop detailed market strategies focused on creating and capturing customer loyalty. Organisations also realised that strong engineering, design, and manufacturing functions were necessary to support these market requirements. Design engineers had to be able to translate customer needs into product and service specifications, which then had to be produced at a high level of quality and at a reasonable cost. As the demand for new products escalated in the 1980s, manufacturing organisations were required to become increasingly flexible and responsive to modify existing products and processes or to develop new ones in order to meet ever-changing customer needs. In the 1990s, as internal manufacturing capabilities improved, managers realised that material and service inputs from suppliers had a major impact on their organisations' ability to meet customer needs. This led to an increased focus on the supply base and the organisation's sourcing strategy. Managers also realised that producing a quality product was not enough. Getting the products to customers when, where, how, and in the quantity that they wanted, in a cost-effective manner, constituted an entirely new type of challenge. More recently, the "Logistics Renaissance" was also born, spawning a whole set of time-reducing information technologies and logistics networks aimed at meeting these challenges. The rules of business have changed. In today's environment, new products are launched, and businesses are born every day. Customers are increasingly difficult to keep and costly to replace. Companies face intense competition from traditional powerhouses and new players __________________________________________________________________________________ 72 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED and must continue to find new revenue opportunities and increase efficiencies. The effects of September 11, 2001 have made the global market environment even more volatile, with added security concerns for global travel and logistics. Today more than ever, businesses depend on strategic relations with their customers and suppliers to create value systems that will provide a competitive edge in the market. In effect, there is a new network economy emerging where companies trade with suppliers and customers over the Internet in real time. The virtual corporation is now a reality, with companies outsourcing a wide range of functions including design, manufacturing, distribution, and others so that they can focus on their core competencies. However, ensuring a seamless, consistent customer experience requires real-time automation of inter-organisational business processes that span across trading partners. Traditional business practices, such as e-mail, faxes, and voice mail introduce delays and often require data to be re-entered multiple times. Hence, the need for dynamic business-to-business (B2B) integration that can automate business processes that encompass a diverse range of packaged and legacy applications and systems within the corporation and among supply chain member organisations. The ability to develop these B2B relationships and realise their potential in the shortest possible time is critical to the long-term success of any modern business. Indeed, no business can afford not to efficiently automate business processes with trading partners. Businesses are continually forging closer relationships with their customers. Customers expect to be informed from contact to completion of transaction, 365 days a year, 7 days a week, 24 hours a day. Rather than adding the costly human resources that would traditionally be required to maintain such a level of service, customers now interact directly with company information systems via automated e-mail systems, self-service Web sites, and information portals. Companies are empowering their customers to help themselves to their information. Customers not only expect their interaction to be real time, but also to be personalised, with information that represents their specific history with the company. In order to meet these demands, businesses must be able to integrate their information systems and applications with those of their suppliers and customers reliably, securely, and in a timely manner. Not surprisingly, this has led to a tremendous growth in B2B integration as companies look for ways to automate and accelerate their business processes and become ebusinesses, responding to customer demands immediately and making changes as market opportunities shift. E-business integration significantly improves organisational performance by supporting the key principles of business success: 

Faster to market with new products and services



Better service

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ADVANCED 

Better sales process



Lower operational costs



Lower production costs



Lower inventory costs

However, e-business also adds a significant amount of complexity (e.g., security, reliability, fault tolerance, government regulations, etc.) not to mention the money and time required to integrate an organisation's business applications. Companies are undertaking significant restructuring initiatives to be able to function in the new era of electronic commerce. Presented with a deluge of information on "dot-cams," servers, B2B requirements, and online customer and supplier linkages, many executives are now struggling to develop a comprehensive strategy for this new market environment. The need to create a new system of managing supply chains has become even more apparent since the events of September 11, 2001. In response to the terrorist attacks, organisations have imposed a number of measures, including deep discounting to sustain profitability (i.e., the automotive industry), significant downsizing of the workforce, changes in leadership, and even appeals to the federal government to restrict international competition (textiles). The impact on many organisations has been predictable: there are fewer people around to take on an increasing workload, significant cost pressures, high inventory levels, plant closings, and increasing conflicts between customers and suppliers. In some industries, such as telecommunications, companies are using the term "deferred commitments" to reflect the fact that they are not willing to purchase agreed-upon forecasted quantities from their suppliers. In response to these events, some organisations have reverted to the traditional adversarial approach to managing supply chain relationships. On the other hand, the impact of 9/11 has forced many managers to confront an important message: the old model of managing supply chains is broken and simply does not work. In fact, the recent downturn in the economy has, more than ever, reinforced the need to improve performance across the entire supply chain. In industries such as automotive, electronics, transportation, industrial equipment, and many others-senior executives realise that raising prices is no longer an option, and neither is the possibility of dramatically increasing sales in a flat economy. This leaves only one option: reducing costs across the supply chain. In addition, there is tremendous growth in new markets and emerging economies. These regions will plug into the global economy and will add new dimensions and complexity to supply chains. A case in point is the automotive industry. Automotive giants like Toyota are moving production to these countries. Trade flow increases will stress supply chains even more, in terms of transportation services and warehousing services. The fluctuations of cargo movement, freight costs, warehousing costs and production costs will result in less time to plan logistics processes. __________________________________________________________________________________ 74 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Outsourcing remains a mainstay of OEMs. And 3PLs are assuming more of their customers’ workload and responsibilities. Increasing expertise is needed to handle these tasks and deliver the expected service level, which is increasing all the time. Customers are also demanding high service levels consistently. Companies which use supply chain strategies are more likely to build shareholders’ value. WalMart used supply chain to become a low-cost leader’ Dell uses supply chain to deliver reliably and JIT; Apple refined its products to be able to innovate repeatedly and rapidly. Supply Chain vs. Logistics Management What managers experiencing today we choose to describe as the supply chain revolution and a related logistical renaissance. These two massive shifts in expectation and practice concerning the performance of business operations are highly interrelated, but they are significantly different aspects of contemporary strategic thinking. Supply Chain (sometimes called the value chain or demand chain) Management consists of firms collaborating to leverage strategic positioning and to improve operating efficiency. For each firm involved, the supply chain relationship reflects strategic choice. A supply chain strategy is a channel arrangement based on acknowledged dependency and relationship management. Supply chain operations require managerial processes that span across functional areas within individual firms and link trading partners and customers across organisational boundaries. Supply Chain Management is defined as the integration of activities along the supply chain linking customer orders, distribution orders, inventory ordering, and placement of manufacturing orders, cash flows and ultimately supplier orders. Logistics, in contrast to supply chain management, is the work required to move and position inventory throughout a supply chain. As such, logistics is a subset of and occurs within the broader framework of a supply chain. Logistics is the process that creates value by timing and positioning inventory; it is the combination of a firm’s order management, inventory, transportation, warehousing, materials handling, and packaging as integrated throughout a facility network. Integrated logistics serves to link and synchronise the overall supply chain as a continuous process and is essential for effective supply chain connectivity. While the purpose of logistical work has remained essentially the same over the decades, the way the work is performed continues to radically change. Logistics management, as defined by The Council of Logistics Management, refers to the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and related information from point of origin to the point of consumption for the purpose of conforming to customer requirements. Logistics is defined by the Council of Logistics Management (CLM) as" . . . the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements." Another author defines logistics as "the __________________________________________________________________________________ 75 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED design and operation of the physical, managerial, and informational systems needed to allow goods to overcome time and space." Logistics entails the planning and control of all factors that will have an impact on getting the correct product where it needs to go, on time, and at the optimum cost. Superior logistical performance is a primary area in which organisations participating in an integrated SCM initiative can make significant improvements. Logistical management is vital not only to manufacturing and assembly industries but also to retailing, transport, and other distribution or service-oriented industries. Owing to intensive competition in global markets, logistical management is considered an important source of competitive advantage. A study done by CLM found that "world-class firms are more apt to exploit logistics as a core competency than their less advanced competitors." This logic can certainly be extended to inter-organisational supply chains. The CLM study identified what the best-of-the-best logistics firms do to achieve world-class status. Key focus areas include: 

Positioning concerning the selection of strategic and structural approaches to guide logistics operations



Integration of internal achievement of logistical operating excellence and boundaryspanning development of solid supply chain relationships



The firm's agility with respect to relevancy, accommodation, and flexibility.



Measurement of internal and external performance

Integrated SCM will only increase the importance of logistics activities. SCM allows supply chain members to optimise logistical performance at the interorganisational level. At its limit, this means integrated management of the movement of materials from the raw materials supplier across the chain to the end customer. This represents a major departure from current logistics practices of many companies, often characterised by independent efforts with limited coordination between organisations. Logistics professionals will continue to be challenged to manage the movement of products across the supply chain in a timely and cost-effective manner that meets customers' service requirements. Meeting this challenge requires a logistics strategy that encompasses the entire supply chain. This overall strategy will be the primary driver for the specific logistics strategy within each of the supply chain member organisations. Distribution networks, transportation modes, carrier management, inventory management, warehousing, order processing, and all other related activities need to be addressed. The scope of the logistics strategy is now the entire supply chain (not just each individual unit in the chain). It will no longer be necessary or desirable for each supply chain member organisation to manage its logistics activities independently. Roles of Supply Chain Management in an Organisation The activities to be managed that make up supply chain management vary from firm to firm, depending on a firm's particular organisational structure, management's honest differences of __________________________________________________________________________________ 76 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED opinion about what constitutes logistics, and the importance of individual activities to its operations. Follow along the supply chain as shown in the below Figure and note the important activities that take place. Once again, according to the Council of Logistics Management, the below Figure organises these components, or activities, as to where they are most likely to take place in the supply channel. The list is further divided into key and support activities, along with some of the decisions associated with each activity.

The Immediate Supply Chain for an Individual Organisation Key Activities Customer service standards Cooperate with marketing to: a. Determine customer needs and wants for logistics customer service b. Determine customer response to service c. Set customer service levels Transportation a. Mode and transport service selection b. Freight consolidation c. Carrier routing d. Vehicle scheduling __________________________________________________________________________________ 77 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED e. Equipment selection f. Claims processing g. Rate auditing Inventory management a. Raw materials and finished goods stocking policies b. Short-term sales forecasting c. Product mix at stocking points d. Number, size, and location of stocking points e. Just-in-time, push, and pull strategies Information flows and order processing a. Sales order-inventory interface procedures b. Order information transmittal methods c. Ordering rules Support Activities Warehousing a. Space determination b. Stock layout and dock design c. Warehouse configuration d. Stock placement Materials handling a. Equipment selection b. Equipment replacement policies c. Order-picking procedures d. Stock storage and retrieval Purchasing a. Supply source selection b. Purchase timing c. Purchase quantities Protective packaging Design for __________________________________________________________________________________ 78 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED a. Handling b. Storage c. Protection from loss and damage Cooperate with production/operations to a. Specify aggregate quantities b. Sequence and time production output Information maintenance a. Information collection, storage, and manipulation b. Data analysis c. Control procedures Supply Chain

 Possible Activities in an Organisation’s Immediate Supply Chain Key and support activities are separated because certain activities will generally take place in every logistics channel, whereas others will take place, depending on the circumstances, within a particular firm. The key activities are on the "critical" loop, as shown in the Figure. They either contribute most to the total cost of logistics or are essential to the effective coordination and completion of the logistics task. Customer service standards set the level of output and degree of readiness to which the logistics system must respond. Logistics costs increase in proportion to the level of customer service provided, such that setting the standards for service also affects the logistics costs to __________________________________________________________________________________ 79 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED support that level of service. Setting very high service requirements can force logistics costs to exceedingly high levels. Transportation and inventories are the primary cost-absorbing logistics activities. Experience has shown that each will represent one-half to two-thirds of total logistics costs. It is transportation that adds place value to products and services, whereas inventories add time value.

Transportation is essential because no modern firm can operate without providing for the movement of its raw materials and/or finished products. This essential nature is underscored by the financial strains placed on many firms by so-called national disasters, such as a national railroad strike or independent truckers' refusal to move goods because of rate disputes. In these circumstances, markets cannot be served, and products back up in the logistics pipeline to deteriorate or become obsolete.

The Critical Customer Service Loop Inventories are essential to logistics management because it is usually not possible or practical to provide instant production or sure delivery times to customers. They serve as buffers between supply and demand, so that needed product availability may be maintained for customers while providing flexibility for production and logistics to seek more efficient methods for manufacturing and distributing the products. Order processing is the final key activity. Its costs usually are minor compared to transportation or inventory maintenance costs. Nevertheless, order processing is an important element in the total time that it takes for a customer to receive goods or services. It also is the activity that triggers product movement and service delivery. Support activities, although they may be as critical as the key activities in any particular circumstance, are considered here as contributing to the logistics mission. In addition, one or more of the support activities may not be a part of the logistics activity mix for every firm. For example, products such as finished automobiles or commodities such as coal, iron, or gravel __________________________________________________________________________________ 80 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED that do not need the weather and security protection of warehousing will not require the warehousing activity, even though inventories are maintained. However, warehousing and materials handling are typically conducted wherever products are temporarily halted in their movement to the marketplace. Protective packaging is a support activity of transportation and inventory, as well as of warehousing and materials handling because it contributes to the efficiency with which these other activities are carried out. Purchasing and product scheduling often may be considered more a concern of production than of logistics. However, they also affect the overall logistics effort and specifically the efficiency of transportation and inventory management. Finally, information maintenance supports all other logistics activities in that it provides the needed information for planning and control. The Strategic Importance of Supply Chain Management The key objective of supply chain management is to provide customer satisfaction by having the correct product in the correct place at the correct time. Competition worldwide is increasing. Creating customer satisfaction is important to most companies. The concept of satisfaction has multiple dimensions. These dimensions contribute to a feeling of overall satisfaction and are made up of considerations of: Cost – what customers receive for what they paid for? Convenience – the effort expended to achieve the purchase Confidence in the support services both included and promised In an age of global markets, supplies and competition, the ability to satisfy and retain customer loyalty is no longer a simple marketing proposition. Back office operations are vital. Firms currently strive to increase competitiveness by providing customisation, value for money, quality, and service. Customisation of the service component may for instance include speed to market or responsiveness to customer enquiries. Consider Amason.com, which provides books selected from the Internet store delivered to your door (within a stated time period). The marketing proposition is simple and based on convenience. The same product could be purchased from a bookshop. If the back-office operation of Amazon either takes six weeks to deliver the book once ordered, or fails to meet a promised delivery date, then the probability is that the customer would be dissatisfied. The same applies to FedEx with its delivery next day before 10am promise. Speed is becoming an important aspect of service provision. McDonald’s controls its supplies along the entire length of its supply chain from meat purchasing and paper cups to 28,000 franchise outlets worldwide. For major companies operating in global markets, the stakes are high. Managing the supply chain offers the capability to create and reach markets before competitors and achieve competitive advantage by providing increased customer satisfaction through delivering the right product at the right time at greater value for money as a result of reduced overall cost. __________________________________________________________________________________ 81 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED The purpose of operations is to support business strategy while the purpose of supply chain management is to support the operations strategy. Generalised Supply Chain Model The general concept of an integrated supply chain is typically illustrated by a line diagram that links participating firms into a coordinated competitive unit. Within the model, one can see the supply chain comprises external suppliers (from 1st tiered suppliers onwards), internal customers (procurement, warehousing, manufacturing, transporting), distribution network (distributors, retailers) and end-users. These intermediaries play different role depending on their location within the supply chain, whether they be in the upstream or downstream of the supply chain. Often, in developing countries, intermediaries add costs rather than value to the supply chain. Case in point is India. In developed countries where organised retail works very closely with the farmers, thereby eliminating supply chain intermediaries, the food value chain in India is characterised by numerous intermediaries. Food products have to physically move between multiple agents, before they reach the food processor or retailer. Handling of product at multiple levels by multiple entities not only results in higher levels of wastage but also adds to the cost of the product. Cost escalations of from 40% - 60% is common in the food chain because of non-value-added costs. In the case of steel, the supply chain is functional integration of a number of value-added services provided by many intermediaries, starting from the steel producer to the finished product. These intermediaries are involved in the processing of large quantities of a wide range of steel products. An example is a service centre which buys or contracts the material from steel brokers. It processes steel products to different dimensions and modify the chemical composition in accordance with varied customer requirements. Service centres have slitters, levellers, saws, shears, burning units, plasma tables, grinders, and cut-to-length lines - all the specialised equipment needed for efficient pre-production processing. There are also intermediaries who are providing precision processing to close tolerances, quality monitoring and inspection, and statistical quality control. In the pharmaceutical industry, the intermediaries include industry suppliers of fine and specialty chemicals, lab equipment, R&D research, pharmacy stores, retail chains, supermarkets, mail order companies, hospitals, clinics, homes for elderly.

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ADVANCED

Relationship Management Information, product, service, financial, and knowledge flows Supplier Network

M M A A T T E E R R II A A L L S S

Integrated Enterprise Procurement

E E N N D D Distributive Network

Market Distribution

Manufacturing

C C O O N N S S U U M M E E R R S S

Capacity, information, core competencies, capital, and human resource constraints

Generalised Supply Chain Model The current phase of Supply Chain Integration (Phase 3) evolved from the following phases: Phase 1: Optimisation of individual functions Phase 2: Optimisation of cost and quality between individual organisations Phase 3: Management of entire supply chains with synchronised goals and involved managers As long as humans have traded goods, supply chains have existed. The real issue is whether companies will choose to manage their supply chains or abdicate this responsibility to other entities. For thousands of years, businesses have depended on Adam Smith's "invisible hand" to optimise supply chains. From the silkworm farmer in China to the cloth merchant in Venice, __________________________________________________________________________________ 83 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED each element of the supply chain tried to optimise his individual gain by negotiating with direct suppliers to keep his costs down, and with individual customers to maximise his income. Today, we have countless examples of how managing the multiple links of a supply chain can improve performance by significant amounts. The principles of the new model are threefold: The only entity that puts money into a supply chain is the end customer. Until the end customer decides to buy a product, the rest of us are shuffling his money back and forth among supply chain members. The only solution that is stable over the long term is one in which every element of the supply chain, from raw material to end customer, profits from the business. It is short-sighted for businesses to believe they can solve their cost problems by punishing suppliers and customers. Shifting costs and problems without solving root causes is inherently unstable and unsuccessful over the long term. The best supply chains will solve problems, implement the best solutions, and share the benefits among their members. Supply chain management is about economic value-added. SCM is not just about cost. It is about the total content of a final product or service, including quality, technology, delivery, and after-sales service. If we cannot manage the total content, we will be unable to meet the needs of our customers. To achieve these goals, supply chain management strategy should be an inherent part of any corporate strategy; just as product strategy, marketing strategy, and financial strategies are elements. The context of an integrated supply chain is multi-firm relationship management within a framework characterised by capacity limitations, information, core competencies, capital, and human resource constraints. Within this context, supply chain structure and strategy results from efforts to operationally link an enterprise with customers as well as the supporting distributive and supplier networks to gain competitive advantage. Business operations are therefore integrated from initial material purchase to delivery of products and services to end customers. Value results from the synergy among firms comprising the supply chain with respect to five critical flows (see bidirectional arrow at the top of Figure). 

Information



Product



Service



Financial



Knowledge

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ADVANCED Logistics is the primary conduit of product and service flow within a supply chain arrangement. Each firm engaged in a supply chain is involved in performing logistics. Such logistical activity may or may not be integrated within that firm and within overall supply chain performance. Achievement of logistical integration is the main focus and desire for organisations to achieve competitive advantage in the market place in which the organisation is competing. The generalised supply chain arrangement illustrated in the Figure, logically and logistically links a firm and its distributive and supplier networks, to end customers. The message conveyed in the figure is that the integrated value-creation process must be managed from material procurement to end-customer product/service delivery. The integrated supply chain perspective shifts traditional channel arrangements from loosely linked groups of independent businesses that buy and sell inventory to each other toward a managerially coordinated initiative to increase market impact, overall efficiency, continuous improvement, and competitiveness. In practice, many complexities serve to cloud the simplicity of illustrating supply chain as directional line diagrams. For example, many individual firms simultaneously participate in multiple and competitive supply chains. To the degree that a supply chain becomes the basic unit of competition, firms participating in multiple arrangements may confront loyalty issues related to confidentially and potentially conflict of interest. Another factor that serves to add complexity to understanding supply chain structure is the high degree of mobility and change observable in typical arrangements. It is interesting to observe the fluidity of supply chains as firms enter and exit without any apparent loss of essential connectivity. For example, a firm and /or service supplier may be actively engaged in a supply chain structure during selected times, such as a peak selling season, and not during the balance of a year. SCOR Model Managers responsible for supply chain process improvement planning, implementation, and measurement received a much-needed framework to guide their efforts in November 1996 when the then 69-member Supply chain Council introduced its Supply Chain Operations Reference Model (SCOR). Member companies, including such diverse industry leaders as Dow Chemical, Merck, Texas Instruments, Compaq, and Federal Express, worked together for over six months to develop the model. Specifically, they defined common supply chain management processes, matched these processes against "best practice" examples, and benchmarked performance data as well as optimal software applications. The result was a tool for measuring both supply chain performance and the effectiveness of supply chain re-engineering, as well as testing and planning for future process improvements. This model was tested both in a mock supply chain situation and internally at Rockwell Semiconductor Systems with highly positive results. __________________________________________________________________________________ 85 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED At the core of the SCOR model is a four-level pyramid that guides supply chain members on the road to integrative process improvement. Level One consists of a broad definition of the four key supply chain process types (i.e., plan, source, make, and deliver) and is the point at which supply chain competitive objectives are established. Level Two defines the 26, core supply chain process categories established by the Supply Chain Council with which supply chain partners can jointly present their ideal or actual operational structure. Level Three provides partners with information useful in planning and setting goals for supply chain process improvement. Level Four focuses on implementation of supply chain process improvement efforts. The major benefit of SCOR is that it gives inter-organisational supply chain partners a basis for integration by providing them, often for the first time, with something tangible to talk about and work with. The framework helped to break down functional silos and allowed people to look at real issues and practices holding back supply chain management improvements. It gave people the chance to look at the supply chain with company-wide needs in mind. Supply Chain: Making the Vision a Reality In the past 20 years, academics and practitioners alike have been focusing intensely on supply chain management. Academics have laboured to properly define Supply Chain Management, explain how it differs from traditional logistics management and encourage practitioners to implement supply chain practices to improve customer service, lower logistics costs, and build sustainable competitive advantage. Despite all the attention being paid to Supply Chain Management and the various initiatives pursued, few examples exist of truly seamless, integrated supply chain management. In truth, Supply Chain Management remains more of a pipe dream than a reality. Practitioners, in their attempts to realise the stated benefits of Supply Chain Management, have launched a number of initiatives including: 

Efficient Consumer Response (ECR)



Vendor-Managed Inventory (VMI)



Collaborative Planning, Forecasting, and Replenishment (CPFR)

Not all of the Supply Chain Management initiatives gain benefits to organisations. In fact, many organisations still carry large inventory of goods trapped in the supply chain due to intense competition. From corporate- and organisation-wide perspective, there are a wide variety of different supply chain strategies targeting at achieving concrete results: Market Saturation Driven: Focusing on generating high profit margins through strong brands and ubiquitous marketing and distribution. __________________________________________________________________________________ 86 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Operationally Agile: Configuring assets and operations to react nimbly to emerging consumer trends along lines of product category or geographic region. Freshness Oriented: Concentrating on earning a premium by providing the consumer with product that is fresher than competitive offerings. Consumer Customisation: Using mass customisation to build and maintain close relationships with end consumers through direct sales. Logistics Optimiser: Emphasising a balance of supply chain efficiency and effectiveness. Trade Focused: Prioritising “low price, best value” for the consumer (as with the logistics optimiser strategy but focusing less on brand than on dedicated service to trade customers).

Scope of Supply Chain and Goals It is important to understand the key characteristics that distinguish Supply Chain Management from traditional Logistics Management. Supply Chain Management is an initiative focuses on managing the entire process as products are transformed from raw materials into finished goods delivered to the ultimate customer. Supply chain management is primarily concerned with three flows: 

Product



Information



Money

The scope of supply chain is extremely broad, involving multiple firms performing business functions. These functions include not only logistics, transportation, and warehousing, but also sourcing and procurement, manufacturing, materials handling, forecasting, order processing, inventory management, and customer service. Supply chain management requires the integration of departments / functional areas within organisations such as marketing and sales, production, accounting, purchasing, and logistics. And importantly, it requires integration and coordination among trading partners, accomplished through information sharing. The need for coordination and information sharing underscores the importance of strong relationships among supply chain partners. The broad goal of supply chain management is to affect a seamless flow of products from cradle to grave with the fewest resources and the highest customer service possible. By working together, firms in a supply chain should be able to decrease costs of transportation, ordering, inventory, and storage and handling across the entire supply chain while improving the quality of service for each customer. The four major goals of Supply Chain Management are: 

Waste reduction

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ADVANCED 

Time compression



Flexible response



Unit cost reduction

Achievement of these goals should lead to increased customer satisfaction, customer retention, and revenue growth. Without effective collaboration, the flow of material and information will be disrupted or inhibited. For this reason, it is helpful to have a systematic approach to defining and conducting collaboration. Barriers to Effective Supply Chain Relationships Several impediments to supply chain collaboration including: 

Widespread resistance to change



The required time investment



Lack of trust



Poor communication



Continued presence of functional silos

Understand these barriers and developing the collaborative mind set needed to overcome them are the first steps toward achieving true integrated Supply Chain Management. Lack of Trust For the better part of the last century, most firms have maintained an arm’s length relationship with their suppliers and customers. In addition, many firms are found to engage in various questionable business practices in their relationships with trading partners. Where these negative behaviours occurred, there were significantly lower levels of trust and commitment. Given this heritage, it is not surprising that initiatives to establish collaborative relationships across the supply chain will be met with scepticism and distrust. Little Understanding of, or Commitment to Supply Chain Management Principles Most managers are somewhat comfortable dealing with relationships in their own function, say logistics or purchasing. But they become less comfortable when the relationship involves other functions in the company. Any they are least comfortable when it comes to dealing with external organisations in their supply chain. The inter-organisational comfort levels increase as managers begin to understand the importance of integrated activity and commit to working for the betterment of the whole supply chain as opposed to just their particular part. Firms will never achieve true collaborative behaviour if they cannot overcome their fear of losing autonomy and /or sharing sensitive information. This barrier to the adoption of Supply Chain Management initiatives is especially troubling because management time is a precious commodity. Faced with what they perceive __________________________________________________________________________________ 88 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED to be a time-consuming effort, few managers will make the effort to understand the new collaborative approach, its benefits, and its implementation requirements. Fear of Relinquishing Control Most managers want to be evaluated on actions that are completely under their control. Understandably, no one wants to be held accountable for results that are partially the responsibility of others, be they inside or outside of the organisation. Because many supply chain initiatives demand joint efforts and close cooperation, it is easy for supply chain managers to feel at the mercy of another company or individual as they work to achieve a certain level of supply chain performance. For example, take an initiative to reduce total cycle time for processing an order. This activity is not completely controlled by any one company of manager. For many, this is a major barrier to embracing the collaborative approach. Different Goals and Objectives The goals of the various partners may differ significantly – not for any sinister reason but simply because they face different competitive situations, different financial circumstances, and different environment as defined by company size, ownership, and culture. If the overall supply chain goals are not universally accepted, the likelihood of agreeing on joint supply chain initiative is slim. Inadequate Information Systems Most firms do not possess the information systems to gather all of the information required to integrate the processes and systems of all the supply chain participants. In fact, many companies still struggle with using and comprehending all the traditional data they gather on their own logistics performance. Imposing an entirely new set of information requirements that spans company boundaries may be beyond the capacity of the existing systems. Efforts to build consensus around a set of information and performance measures must be consistently supported by the highest levels of management for any measure of supply chain collaboration to succeed. Firms also must invest significantly financial resources in information systems to support the new supply chain information requirements. A Short-Term “Wall Street” Focus on Outcomes The fact that top management in major public corporations must pay so much attention to Wall Street, and, as a consequence, to short-term performance, is a huge barrier to successful supply chain initiatives. The reason: The effort associated with these initiatives typically requires considerable time and involves significant investment in resources. If top management is constantly besieged by Wall Street and stockholders, it may have scant opportunity to invest the time and effort necessary for true supply chain integration. It is easy for trade press to tout the benefits of integrated supply chains and collaborative behaviour. However, a management __________________________________________________________________________________ 89 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED under siege may not have the luxury of waiting for the benefits of integrated behaviour to occur. Involvement in Too Many Supply Chains Involvement in multiple supply chains, both horizontally and vertically, poses another major hurdle to supply chain management. The problem revolves around competition and competitive actions. Many manufacturing companies sell their products to multiple retail customers that compete directly with each other. The retailers, for their part, sell products from multiple manufacturers in direct competition with each other. Firms need to be able to figure out how to keep their initiatives in each supply chain unique and mutually beneficially without giving away competitive information to participants in their other supply chains. This is a daunting task. In fact, it may mean that the only way to implement Supply Chain Management successfully is to work with just a few supply chains and, in the remaining situations, simply conduct transactions in an arm’s length manner. This may explain why most success stories only involve two large trading partners. Typically, these relationships do not extend beyond one tier, either upstream or downstream. How to Overcome the Barriers Identifying the major barriers to supply chain management success is only the first step. Because Supply Chain Management represents a significantly different business model and style of management, firms need to drastically change their philosophies and strategies to make it happen. The actions described below will help organisations make the necessary changes and overcome the barriers to Supply Chain Management. Develop a New Breed of Manager Because of the long history of arm’s length relationships, the new collaboration required by Supply Chain Management will not be embraced quickly or easily. And if it is not fully supported by top management, it will not be embraced at all. Company leaders must visibly support the new approach and drive a collaborative culture down through the organisation to all levels of operating management. If organisations are going to ask their people to share information with other companies, make sacrifices for the sake of the supply chain, develop stronger relationships, and change their current logistics practices, top management must lead the way. Through their words and actions, the leaders need to demonstrate that Supply Chain Management is a worthy goal whose implementation will improve company performance in the long run. Build Relationship-Management Skills Relationship management is one critical skill required of the new breed of manager. A strong relationship with trading partners is a core requirement of successful Supply Chain Management program. Such relationships may significantly increase the likelihood that Supply Chain Management initiatives will be successfully implemented. __________________________________________________________________________________ 90 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The best way to develop a relationship-management capability is through intensive training and education. Top management needs to recognise the importance of forging strong relationships with trading partners and demonstrate that commitment by supporting these training efforts. Establish Inter-organisational Teams Using inter-organisation teams to develop and implement supply chain initiatives is an effective way to overcome many of the Supply Chain Management barriers. Top-level executives should set the example by participating on collaborative teams with their counterparts from partnering organisations. Inter-organisational units can work together on joint training programs to foster an understanding of the integrated SCM concept and to show how each function area fits within the larger supply chain scheme. Training should also demonstrate how collaboration produces optimal results for all. The most effective approach to overcoming the barrier of conflicting goals and objectives, for example, is to involve supply chain members in a process of open dialogue for setting joint goals and resolving any conflicts that may arise. Consensus building is mandatory. If supply chain members cannot agree on common objectives and performance levels, there is little hope that the supply chain will deliver any kind of competitive advantage. Forming joint teams of individuals from different disciplines and management levels will facilitate the sharing of ideas regarding conflicting goals. In the end, it may be necessary for top management of the partnering companies to sit down and iron out differences in philosophy, culture, and orientation to achieve the desired performance levels. Create New Performance Measures Evaluation and performance measures must be carefully aligned to the overall supply chain goals and linked directly to the reward system. If this does not happen, individuals likely will start working at cross-purposes to the supply chain objectives. These measures can be part of a "gain-sharing bonus scheme" in which employee bonuses are tied to improvements realised across the supply chain. As a means of controlling the measures, top management needs to reassure line managers that supply chain performance is a joint effort-and only through this joint activity can optimal results be achieved. The challenge is to craft individual reward and recognition processes that are closely linked to supply chain performance measures. This can be difficult because it often requires people to sub-optimise their functional performance in order to benefit the entire supply chain. To illustrate, an individual charged with planning transportation loads to retail customers would normally seek to build full truckloads to reduce overall transportation costs. However, in the context of the overall supply chain, it may be more effective to ship smaller loads more frequently to minimise expensive retail inventories and maximise product availability. That changes the transportation load planner's evaluation and reward system. This __________________________________________________________________________________ 91 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED individual's performance now must be measured on criteria that go beyond simply achieving the lowest transportation costs. Invest in Information Technology SCM is the management of a system incorporating multiple companies performing a wide variety of functions. Coordination and cooperation among these entities are crucial, which makes communication and information exchange a vital component of successful SCM. The ability to exchange more information at an increased speed brings a host of benefits to the supply chain-significantly reduced order cycle times being one of them. Companies can realise faster information exchange by investing in the state-of-the-art information and communication technologies now available. To address the technology challenge, it is essential to have a champion in the information systems (IS) department. This should be someone who understands the relevance of supply chain information requirements and who can work effectively with functional managers to develop and incorporate the cross-organisational informational requirements. To assure system compatibility across the partnering organisations, it is advisable to bring together several IS managers from the different supply chain member companies to develop common data formats and performance measures. It is encouraging to note the emergence of enterprise resource planning (ERP) systems and Web-based information solutions that can make supply chain information sharing a reality. One study by Forrester estimated that by the end of 2001 more than 70 % of companies were sharing demand, inventory, and order-status information with their trading partners. With the increasing ability to share these types of information, companies will be able to create systems for tracking and sharing performance metrics that relate to overall supply chain outcomes. Develop a Long-Term Focus in Boardrooms and on Wall Street Today's businesses are managed largely with a short-term perspective. Yet SCM requires shortterm sacrifices so that the entire supply chain can benefit in the long run. As is the case with individual managers, most companies continue to be evaluated from a short-term, quantitative perspective. For SCM to succeed, however, organisations must foster an environment where the long-term implications of supply chain initiatives are considered and rewarded. The only way to correct the short-term focus of most corporations may be a public relations campaign directed at different stakeholders to explain SCM's benefits and the necessity of investing now for the future. A growing body of evidence suggests that those companies with world-class supply chains significantly outperform the rest of the pack. This may be the best message to stockholders and Wall Street as you stall to build the collaborative supply chain relationships necessary for success. Engage in More Practical and Applied Research To this point, we have focused mainly on what practitioners can do to overcome the barriers to successful SCM. This last suggestion, however, applies equally to the academic community. __________________________________________________________________________________ 92 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Theory development is important for any discipline or business function. But theory development is an iterative process that requires researchers to test propositions and adjust theory based on repeated empirical research. While academic researchers recently have conducted more practical studies of SCM implementations, more are needed. Managers need evidence demonstrating how supply chain initiatives can improve organisation-wide performance. This evidence can be used to support efforts to train managers, overcome resistance, and obtain the necessary resources. Solid evidence of SCM's value can also help buy more time from Wall Street. In addition to the applied research, the academic community can play a positive role in the advancement of supply chain management. Their main challenge here is to bridge the gap between SCM theory and practice through research that makes a solid connection between supply chain performance and business success. That link will help practitioners get the support to implement their supply chain initiatives. The Future of Supply Chains Collaborative Chains Replenishment programs are designed to streamline the flow of goods within the distribution channel. There are several specific techniques for collaborative replenishment, all of which build on the common denominator of rapidly replenishing inventory according to actual sales experience. The intent is to reduce reliance on forecasting when and where inventory will need to be positioned to meet consumer or end-user demand and instead allow suppliers to respond to demand on a just-in-time basis. Effective collaborative replenishment programs require extensive cooperation and information sharing among distribution channel participants. Specific techniques for automatic replenishment include quick response, continuous replenishment, vendor managed inventory, and profile replenishment. Quick Response QR is a cooperative effort between retailers and suppliers to improve inventory velocity while providing merchandise supply closely matched to consumer buying patterns. QR is implemented by monitoring retail sales for specific products and sharing information across the supply chain to guarantee that the right product assortment will be available when and where it is required. For example, instead of operating on 15- to 30-day order cycles, a QR arrangement can replenish retail inventories in 6 or fewer days. Continuous information exchange regarding availability and delivery reduces uncertainty for the total supply chain and creates the opportunity for maximum flexibility. With fast, dependable order response, inventory can be committed as required, resulting in increased turnover and improved availability. Continuous Replenishment __________________________________________________________________________________ 93 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED CR and VMI are modifications of QR that eliminate the need for replenishment orders. The goal is to establish a supply chain arrangement so flexible and efficient that retail inventory is continuously replenished. The distinguishing factor between CR and VMI is who takes responsibility for setting target inventory levels and making restocking decisions. In CR, the retailer makes the decisions. In VMI, the supplier assumes more responsibility and actually manages inventory for the retailer. By receiving daily transmission of retail sales or warehouse shipments, the supplier assumes responsibility for replenishing retail inventory in the required quantities, colours, sizes, and styles. The supplier commits to keeping the retailer in stock and to maintaining inventory velocity. In some situations, replenishment involves cross-docking or Direct Store Delivery (DSD) designed to eliminate the need for warehousing between the factory and retail store. Functional to Process Integration One of the oldest and potentially most productive trends is the continued migration from functional to process integration. While the work of logistics itself has remained relatively the same over the past decade and will continue to remain the same during the next 10 years, what has and will continue to change rapidly is how we view work. As pockets of power and control developed within organisations, the traditional notion of a department became synonymous with being departed from the rest of the organisation. While departments may remain the preferred method of managing work, the reality is that processoriented, self-directed work teams are increasingly the solution for significant breakthroughs in efficiency. Managers realise that functional excellence is only important in terms of the contribution functions make to the processes they serve. In terms of organisation structure, the concept of functional departments is as obsolete as punch cards are to information technology. The validity of trading costs among functional areas to benefit total cost is beyond question. Information technology extensions such as ERP are starting to support more sophisticated costing approaches, lessening the difficulty of measuring across functions. While there has been substantial progress, major opportunities to shift to the process focus remain. First, while purchasing, production, logistics, and marketing functions have each been integrated within their individual processes, there has been less progress integrating between these areas. This divide is recognised by most managers. Further integration across a firm's major functional boundaries is the first step toward additional process integration. Second, there must be substantial advancement of process integration with external supply chain partners, particularly with service providers. This requires more consistency in the definition, execution, and measurement of supply chain processes to establish common language and expectations. Third, most employees will do what they are measured on and what they are paid to do. The challenge is to convert metric and reward structures from department related budgets to coordinated process-related incentives. The reality and potential of meaningful metrics based on one plan, which in turn is based on one forecast, will increasingly become reality. There has __________________________________________________________________________________ 94 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED been substantial progress in this area, but more opportunities remain as additional cost information and accuracy will lead to more refined processes with reduced duplication. Vertical to Virtual Integration Historically, firms have tried to reduce supply chain conflict by owning consecutive levels in the business process. Henry Ford's original business strategy is a legendary attempt at using ownership to achieve vertical supply chain integration. Ford's dream was full ownership and management of the entire value-creation process in order to reduce waste and increase relevancy. Ford's rubber plantations, ships, and foundries converted raw iron ore to a finished car in 7 days. The problem with vertical integration is that it requires tremendous capital investment and an incredibly complex organisation structure. Re-creating Henry Ford's vertical supply chain is infeasible today. Firms, therefore, must harness the expertise and synergy of external supply chain partners to achieve success. Virtually integrating operations with material and service suppliers to form a seamless flow of internal and external work overcomes the financial barriers of vertical ownership while retaining many of the benefits. While many manufacturing and retail firms have traditionally worked with third-party logistics providers to handle physical movements of products, there is a growing trend to outsource knowledge processes as well. Staff and process design activities are being outsourced to consultants. Information design, collection, maintenance, and analysis are outsourced to information integrators. Knowledge specialisation will increasingly become an activity considered for outsourcing by the virtual enterprise. The benefits of outsourcing such competency to focus on core business requirements will continue to drive firms from vertical to virtual integration. While most firms have taken initial steps toward virtually integrating their supply chains, relatively few firms have achieved full-scale implementation. To move to virtual integration, three shifts must occur. First, managers who interface with material and service suppliers must learn how to manage assets and activities that they do not directly control and cannot directly see but whose performance they can and must monitor to ensure success. These suppliers represent a firm's extended family and will contribute as much to the future success or failure of the supply chain as any internal department. A firm's management strategy must reflect the recognition that a supply chain is only as strong as its weakest supplier link. Second, supply chain partners must have a common vision of the total value creation process as well as shared responsibility for achieving it. Firms must carefully identify and select partners with complementary visions, strategies, and operational capabilities. Partners must interface their operations in ways that reduce duplication, redundancy, and dwell time while maintaining synchronisation. Additionally, firms must spread the risks and rewards of collaboration to solidify goal attainment. Evolving the structures to facilitate virtual integration is neither easy nor quick. __________________________________________________________________________________ 95 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Finally, firms must extend management practices beyond suppliers to include suppliers' suppliers. Suppliers' views on resource needs and constraints, threats, opportunities, and weaknesses must be considered when setting goals, objectives, and action plans as they play increasingly vital and irreplaceable roles in creating end-customer value. Highly Customisable Starr (1966) was probably the first to introduce the concept of modularisation. It implies a product design whereby the product is assembled from a set of standardised constituent units. Different assembly combinations from a given set of standardised units give rise to different end products and variations. In essence, modular design marries flexibility with standardisation. It provides opportunities for exploiting economies of scales from a product design perspective. An example is Dell computers. Dell’s products are highly customisable. Item

No of Options

Processor

Monitor

Memory

Network Card

Speaker

Keyboard

Mouse

Graphic Options

PSU

Number of Options for Optiflex 380DT The number of options available = 604,000. Postponement When the idea of postponement was introduced by Alderson (1950), the concept of postponement was based on one company’s perspective. The idea of postponement was defined as differentiating the product as a later date until the customer order was received. The concept was eventually expanded by Bucklin (1965) and Sinn & Bowersox (1988). Independently, in the 1960s, modularisation was introduced by Starr (1965) which eventually led to customisation. By this time, the postponement concept had developed into form, time, and place postponement. The concept was restricted to just one entity i.e. the manufacturer. __________________________________________________________________________________ 96 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED In the 1990s, the idea of merging mass customisation with postponement became a reality. In this model, more entities within the supply chain were involved unlike the earlier postponement model whereby only the manufacturer was involved (Hoek et al 1998). Suppliers, transporters, manufacturers, wholesalers, distribution centers and resellers collaborate to ensure the timely delivery of products to end users. Sinn & Bowersox (1988) has developed 5 types of postponement: 

Labelling



Packaging



Assembling



Manufacturing



Time

Labeling (final stage)

Low level of customization

Packaging

Assembly

Manufacturing (initial stage)

High degree of customization

The warehouse plays the role of customising products, at a complex level when products are manufactured, less complex when assembly is required and the least complex when labelling is needed. Labelling An example is canning. For companies which sell canned products to other companies, cans are labelled. One reason is the uncertainty in allocating the proportion of the materials for each label at the point of canning. There is no difference in the quality of the product under the labels. These companies postpone their labelling operation when they receive orders and just before the goods are distributed. Packaging An example is the use of different packaging from a bulk of materials. Such materials include polyolefin or detergent or consumer goods such as baby diapers. In some countries, diapers are sold in smaller packs due to weak purchasing power. Assembling When companies have product variants, assembling postponement is an ideal way of achieving it. Customisation should not delay delivery if modularisation is used. Many electronic products fall into this category. Manufacturing __________________________________________________________________________________ 97 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Products are manufactured until customer orders are received. Time Finished products are shipped to a central DC, closer than the manufacturing plant. The aim is to respond quickly to customers’ requirements. With the emergence of e-commerce, virtual inventory is independent of the physical location of the inventories at the time the orders are placed. Amason.com works with vendors to keep the books, which are kept at warehouses which are often located in cities and near to airport. Working with parcel delivers and vendors, books are drop-shipped to end users.

Top 10 Future Trends in Supply Chain and Logistics From the first assembly lines to today’s advanced robotic solutions, the supply chain process is constantly evolving. The latest trends in supply chain and logistics focus on smart, tech-driven management to reduce operating expenses and increase efficiency. The importance of trends in supply chain and logistics for modern-day businesses Originated with the military to supply troops with weapons and other goods needed for combat, logistics later evolved into a business concept. This was mainly prompted by the growing demands and complexity of the supply chain process, including transportation of large quantities of goods to distant locations, in line with the globalization of trade. The logistics and supply chain aspect are vital for any business in terms of supply of quality raw materials, efficient manufacturing process, as well as tracking, transport and storage of the finished goods. Companies implementing well-designed supply chain practices can meet consumer needs in a more expeditious and timely manner. This strengthens customer relationships and loyalty, translating into revenue boost and acquisition of new customers through positive word of mouth. Hence, let’s investigate some key trends expected to affect the shape and development of supply chain practices in the future. Supply chain digitization Digitization is the process of using the latest tech solutions together with other physical and digital assets to redesign logistics practices. This way, they can adjust better to the fast-paced, highly competitive, omni-channel business environment.

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ADVANCED Digitization improves the speed, dynamics and resiliency of the supply chain operations, leading to greater customer responsiveness and ultimately higher revenue. By embracing digitalization, companies can experience real value, increased revenue and market valuation. In order to reap the full benefits of digitalization, companies must fundamentally redesign their supply chain strategy. It’s not enough to just embellish it with digital technology. In the field of digitization, the Internet of Things (IoT) holds a prominent place as a highly transformative technological solution in the logistics sphere. IoT refers to a system of interrelated computing devices allowing transfer of data over networks without human input. It helps companies monitor inventory, manage warehouse stock, optimize fleet routes, and reduce dead mileage. Artificial Intelligence Advanced AI solutions have numerous applications in the supply chain, especially the warehousing segment. This includes use of gesture recognition solutions instead of keyboards and mice in the procurement process. It also includes autonomous vehicles (self-driving cars), designed to navigate without human input. The concept of robotics and automation is also widely implemented in the supply chain. The latest generations of robots are easier to program, more flexible and affordable. Their role is to assist workers with repetitive and physically challenging tasks. Stronger collaboration in the supply chain process Solid procurement practices and stronger relationships with suppliers should be considered a priority in the supply chain process. For instance, the procurement department can utilize the business data on suppliers to enhance supply chain decisions, such as supplier evaluation and recommendations of the best business partners. Also, effective cooperation can help assess risks in the supply chain based on global industrial and political trends as a way to prevent or mitigate danger of stock shortages. Meanwhile, collaboration in the supply chain can streamline internal processes and reduce overutilization of resources spent on administrative and other time-consuming tasks. As a bonus, it can help generate referrals from satisfied business partners and bring your more business. More focus on risk management and supply chain resiliency __________________________________________________________________________________ 99 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED There’s no doubt that companies must seriously consider supply chain risk management as a way to prepare for undesirable events. The increasing outsourcing practices, off-shoring, product versatility, supply chain security and substantial interdependence throughout the supply chain further accentuate the importance of dealing with risks in the supply chain. Still, no matter how sound the plan is, it can’t prevent things from happening. This is where supply chain resiliency comes into the picture. It’s a real measure of the ability of a company to withstand disruptive events. Steps to make the supply chain more flexible and resilient include visibility throughout the supply chain so disruptions can be detected on time, close cooperation with suppliers and distributors so alternative supply routes can be found, and a good incident response plan to provide a course of action when disruption occurs. Knowledge work will go global Nearly half of the work in the modern supply chain is knowledge work. This type of work includes complex analytics, planning and procurement processing. As businesses go global, the knowledge work in the supply chain should go global as well. This will allow companies headquartered in one country to perform logistics operations, have procurement centers or do analytics in different parts of the world. 1. Circular supply chain The term “linear supply chain” refers to the conventional concept where goods flow linearly (from raw material to finished product). Modern logistics practices focus on the circular supply chain concept, involving the use of previously used products as raw materials. The reuse of products and materials is known as reverse logistics, and it is a novel, innovative approach. It helps companies reduce administrative and transportation costs, achieve higher sustainability, better customer service and loyalty, create value and conserve resources. Used products can be kept in circulation through good cooperation between companies and their suppliers and customers. Wearable devices Wearable technology refers to devices designed to be worn by people. Combined with cloud technology, wearable devices help employees access and input data in real time. Through proper data collection and analysis, wearable technology allows companies to maintain control of their inventories. They can also stay up-to-date with product demand. __________________________________________________________________________________ 100 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Warehouse managers can use wearables for fast, accurate collection of inventory data, keeping track of manufactured, stored and distributed products. Wearables can also monitor vital signs so health problems (exhaustion, heart attacks) among the warehouse workers can be prevented. Use of Softwares in the supply chain Use of the software-as-a-service model in supply chain technologies and logistics management is gaining popularity, hand in hand with the rise of cloud computing. This is mostly due to the safety and security of SaaS and the convenience of being able to use only the services you need on pay-per-use basis. They allows companies to avoid high fixed costs of continuous system maintenance, upgrades and infrastructure-related costs. Enhanced supply chain visibility Proper analysis of supply chain data can significantly improve business forecasting and decision making. It can also optimize the use of resources involved in inventory management, storage and transport. Supply chain visibility gives insight into what’s happening at each point of the supply chain. It’s extremely important for the efficiency of the entire supply chain process, including procurement, manufacturing, transport and delivery. One of the benefits of improved chain visibility is real-time inventory management. It involves use of mobile point-of-sale systems and sensors, and takes inventory management to a whole new level. For instance, instead of paying for purchased goods in a store, people can just take the desired items, and get charged for the goods on their cards automatically. Furthermore, real-time inventory management allows the goods to be replaced as they are consumed. Customer segmentation: To address customer needs in the best possible way, companies should segment them into groups. These groups can be based on what triggers customer purchasing decisions, as opposed to a broad generalization. By implementing a more direct-to-consumer business model and adapting their supply chain strategy to each customer and product, companies can significantly increase their revenue. __________________________________________________________________________________ 101 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Courtesy: https://www.aacb.com/why-a-a/

Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

After the initial wave of excitement about e-business, many companies are recognising that, beneath the Web, there must still be a physical distribution and sourcing structure

The impact of 9/11, has forced many managers, to confront an important message: the old model of managing supply chains is broken and simply does not work. In fact, the recent downturn in the economy has, more than ever, reinforced the need to improve performance across the entire supply chain

Supply Chain Management consists of firms collaborating to leverage strategic positioning and to improve operating efficiency

Logistics Management is an initiative focusing on managing the entire process as products are transformed from raw materials into finished goods delivered to the ultimate customer

Effective collaborative replenishment programmes require extensive cooperation and information sharing among distribution channel participants

Quick Response is a cooperative effort between retailers and suppliers to improve inventory velocity while providing merchandise supply close matched to consumer buying patterns

True

False

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ADVANCED 7

The key objective of supply chain management is to provide customer satisfaction by having the correct product in the correct place at the correct time

The fact that top management in major public corporations must pay so much attention to Wall Street and, as a consequence, to short-term performance. It is not a barrier to successful supply chain initiatives

One of the oldest and potentially most productive trends is the continued migration from functional to process integration

The idea of postponement was defined as differentiating the product as a later until the customer order was received

CHAPTER 7 - WAREHOUSING – AN INTEGRATED SUPPLY CHAIN COMPONENT (US:336704 Prepare products for transportation; manage the return of goods and warehousing) PURPOSE:

This chapter will enable learners to prepare products for transportation; manage the return of goods and warehousing. LEARNING OBJECTIVE: Learner will be able to:   

Manage warehousing. Manage the return of goods. Prepare products for transportation.

Introduction In the context of supply chain management, logistics exists to move and position inventory to achieve desired time, place, and possession benefits at the lowest total cost. Inventory has limited value until it is positioned at the right time and at the right location to support ownership transfer or value-added creation. If a firm does not consistently satisfy time and place requirements, it has nothing to sell. For a supply chain to realise the maximum strategic benefit of logistics, the full range of functional work must be integrated. Decisions in one functional area will impact cost of all others. It is this interrelation of functions that challenges the successful implementation of integrated logistical management. Figure below provides a visual representation of the interrelated nature of the five areas of logistical work:    

Order processing Inventory Transportation Warehousing

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ADVANCED  Materials handling  Packaging  Facility network. As described below, work related to these functional areas combines to create the capabilities needed to achieve logistical value. The relations between warehousing and other functional areas are depicted in the Figure below.

Relationship between Warehousing and Other Functions The first three functional areas of logistics in the supply chain – order processing, inventory, and transportation – can be engineered into a variety of different operational arrangements. Each arrangement has the potential to contribute to a specified level of customer service with an associated total cost. In essence, these functions combine to create a system solution for integrated supply chain. The fourth functionality of logistics – warehousing, materials handling, and packaging – also represents an integral part of a logistics operating solution. Warehousing, materials handling, and packaging are an integral part of other logistics areas. For example, inventory typically needs to be warehoused at selected times during the logistics process. Transportation vehicles require materials handling for efficient loading and unloading. Finally, the individual products are most efficiently handled when packaged together into shipping cartons or other unit loads. When distribution facilities are required in a supply chain system, a firm can choose between the services of a warehouse specialist or operating their own facility. The decision is broader than simply selecting a facility to store inventory since many value-adding activities may be performed during the time products are warehoused. Examples of such activities are sorting, sequencing, order selection, transportation consolidation, and, in some cases, product modification and assembly. Within the warehouse, materials handling is an important activity. Products must be received, moved, stored, sorted, and assembled to meet customer order requirements. The direct labour and capital invested in materials handling equipment is a significant element of total supply chain /logistics cost. When performed in an inferior manner, materials handling can result in substantial product damage. It stands to reason that the fewer the times a product is handled, the less the potential exists for product damage and the overall efficiency of the warehouse is increased. A variety of __________________________________________________________________________________ 104 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED mechanised and automated devices exist to assist materials handling. In essence, each warehouse and its materials handling capability represent a mini system within the overall logistical process. To facilitate handling efficiency, products in the form of cans, bottles, or boxes are typically combined into larger units. This larger unit, typically called the master carton, provides two important features. First, it serves to protect the product during the logistical process. Second, the master carton facilitates ease of handling, by creating one large package rather than a multitude of small, individual products. For efficient handling and transport, master cartons are typically consolidated into larger unit loads. The most common units for master carton consolidation are pallets, slip sheets, and various types of containers. When effectively integrated into an enterprise's logistical operations, warehousing, materials handling, and packaging facilitate the speed and overall ease of product flow throughout the logistical system. In fact, several firms have engineered devices to move broad product assortments from manufacturing plants directly to retail stores without intermediate handling. Warehouse Strategy and Functionality Warehousing incorporates many different aspects of supply chain operations. Due to the interaction, warehousing does not fit the neat classification schemes used when discussing order management, inventory, or transportation. A warehouse is typically viewed as a place to hold or store inventory. However, in contemporary supply chain systems, warehouse functionality can be more properly viewed as inventory mixing. This chapter provides a foundation for understanding the value of warehousing contributes to supply chain of organisation. The discussion is relevant for all types of warehouses ranging from distribution centers, consolidation terminals, break-bulk facilities, and cross-docks. The objective is to introduce general managerial responsibilities related to warehousing. While effective logistics systems should not be designed to hold inventory for extended times, there are occasions when inventory storage is justified on the basis of cost and service. Strategic Warehousing Storage has always been an important aspect of economic development. In the pre-industrial era, storage was performed by individual households forced to function as self-sufficient economic units. Consumers performed warehousing and accepted the attendant risks. As transportation capability developed, it became possible to engage in specialisation. Product storage shifted from households to retailers, wholesalers, and manufacturers. Warehouses stored inventory in the supply chain pipeline, serving to coordinate product supply and consumer demand. Because the value of strategic storage was not well understood, warehouses were often considered "necessary evils" that added cost to the distribution process. __________________________________________________________________________________ 105 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The concept that middlemen simply increase cost follows from that belief. The need to deliver product assortments was limited. Labour productivity, materials handling efficiency, and inventory turnover were not major concerns during this early era. Because labour was relatively inexpensive, human resources were used freely. Little consideration was given to efficiency in space utilisation, work methods, or materials handling. Despite such shortcomings, these initial warehouses provided a necessary bridge between production and marketing. Following World War II, managerial attention shifted toward strategic storage. Management began to question the need for vast warehouse networks. In the distributive industries such as wholesaling and retailing, it was traditionally considered best practice to dedicate a warehouse containing a full assortment of inventory to every sales territory. As forecasting and production scheduling techniques improved, management questioned such risky inventory deployment. Production planning became more dependable as disruptions and time delays during manufacturing decreased. Seasonal production and consumption still required warehousing, but overall need for storage to support stable manufacturing and consumption patterns was reduced. Changing requirements in retailing more than offset any reduction in warehousing obtained as a result of these manufacturing improvements. Retail stores faced with the challenge of providing consumers an increasing assortment of products, found it more difficult to maintain purchasing and transportation economics when buying from suppliers. The cost of transporting small shipments made direct ordering prohibitive. This created an opportunity to establish strategically located warehouses to provide timely and economical inventory replenishment for retailers. Progressive wholesalers and integrated retailers developed state-of-the-art warehouse systems to logistically support retail replenishment. Thus, the focus on warehousing shifted from passive storage to strategic assortment that leads to strategic supply chain management providing the organisation with competitive advantage in the competition. Improvements in retail warehousing efficiency soon were adopted by manufacturing. For manufacturers, strategic warehousing offered a way to reduce holding or dwell time of materials and parts. Warehousing became integral to Just-in-Time (JIT) and stockless production strategies. While the basic notion of JIT is to reduce work-in-process inventory, such manufacturing strategies need dependable logistics. Achieving such logistical support across the U.S. geography requires strategically located warehouses. Utilising centralised parts inventory at a central warehouse reduces the need for inventory at each assembly plant. Products can be purchased and shipped to the strategically located central warehouse, taking advantage of consolidated transportation. At the warehouse, products are sorted, sequenced, and shipped to specific manufacturing plants as needed. Where fully integrated, sortation and sequencing facilities become a vital extension of manufacturing. __________________________________________________________________________________ 106 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED On the outbound side of manufacturing, warehouses can be used to create product assortments for customer shipment. The capability to receive mixed product shipments offers customers two specific advantages. First, logistical cost is reduced because an assortment of products can be delivered while taking advantage of consolidated transportation. Second, inventory of slow-moving products can be reduced because of the capability to receive smaller quantities as part of a consolidated shipment. Manufacturers that provide assorted product shipments can achieve a competitive advantage. An important charge in warehousing is maximum flexibility. Such flexibility can often be achieved through information technology. Technology-based applications have influenced almost every area of warehouse operation and created new and better ways to perform storage and handling. Flexibility is also an essential part of being able to respond to expanding customer demand in terms of product assortments and the way shipments are delivered and presented. Information technology facilitates this flexibility by allowing warehouse operators to quickly react to changing customer requirements. Warehouse Functionality Benefits realised from strategic warehousing are classified on the basis of cost and service. No warehouse functionality should be included in a supply chain system unless it is fully justified on some combination of cost and service basis. Ideally a warehouse will simultaneously provide economic and service benefits and an improved supply chain management. Economic Benefits Economic benefits of warehousing occur when overall logistics costs are reduced. For example, if adding a warehouse in a supply chain system reduces overall transportation cost by an amount greater than required investment and operational cost, then total cost will be reduced. When total cost reductions are achievable, the warehouse is economically justified. Five basic economic benefits are: 

Consolidation and break-bulk



Assortment



Postponement



Stockpiling

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ADVANCED

Consolidation and Break-Bulk Arrangement Consolidation and Break-Bulk The economic benefits of consolidation and break-bulk are to reduce transportation cost by using warehouse capability to increase shipment economies of scale. In consolidation, the warehouse receives materials from a number of sources, which are combined into a large single shipment to a specific destination, such as a customer. The benefits are the realisation of the lowest possible freight rate, timely and controlled delivery, and reduced congestion at a customer's receiving dock. The warehouse enables both the inbound movement from origin and the outbound movement to destination to be consolidated into a larger shipment, which generally incurs lower transportation charges and often quicker delivery. A break-bulk operator receives a single large shipment and arranges for delivery to multiple destinations. Economy of scale is achieved by transporting the larger consolidated shipment. The break-bulk warehouse or terminal sorts or splits out individual orders and arranges local delivery. Both consolidation and break-bulk arrangements use warehouse capacity to improve transportation efficiency. Many logistical arrangements involve both consolidation and breakbulk. Assortment The basic benefit of assortment is to reconfigure freight as it flows from origin to destination. Three types of assortments: 

cross-docking,

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ADVANCED 

mixing, and



assembly

which are widely used in logistical systems. The objective of cross-docking is to combine inventory from multiple origins into an assortment for a specific customer. Retailers make extensive use of cross-dock operations to replenish fast-moving store inventories. Precise on-time performance from each manufacturer is required. As product is received and unloaded at the facility, it is sorted by store destination. In most instances, the retailer has communicated precise volume requirements of each product for each store. The manufacturers, in turn, may have sorted, loaded, and labelled the appropriate quantity for each store. Product is then literally moved across the dock from the delivery into a truck destined for the appropriate store location. Once trucks are loaded with mixed product from multiple manufacturers, they are released for transport to the retail destination. Mixing achieves an end result similar to cross-docking. However, mixing is usually performed at an intermediate location between shipment origin and destination. In a typical mixing operation, carloads or truckloads of products are shipped from origin to mixing warehouses. The shipments are planned to minimise inbound transportation cost. Upon arrival at the mixing warehouse, shipments are unloaded and sorted into the combination desired by each customer. In-transit mixing has been traditionally supported by special transportation rates that provide incentives to facilitate the process. During the mixing process, inbound products can be combined with those regularly stored at the warehouse. Warehouses that perform in-transit mixing have the net effect of reducing overall product storage in a logistical system while achieving customer-specific assortments and minimising transportation cost. The objective of assembly is to support manufacturing operations. Products and components are assembled from a variety of second-tier suppliers by a warehouse located in close proximity to the manufacturing plant. While manufacturing organisations have traditionally performed assembly, it is becoming common to utilise value-added services of a lead or tier 1 supplier to sort, sequence, and deliver components when needed in manufacturing. Similar to cross-docking and mixing, assembly serves to achieve a process-grouping of inventory, at a precise time and location. The Figure illustrates these three assortment applications. Processing /Postponement Warehouses can also postpone commitment to final product configuration by completing final packaging, labelling, and light manufacturing. For example, vegetables can be processed and canned in Brights at the processing plants. Bright’s are cans without labels. Holding inventory as __________________________________________________________________________________ 109 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Brights means that product is not committed to specific customers or carton configuration during processing. Once a specific customer order is received, the warehouse can complete labelling and finalise packaging. Postponement provides two economic benefits: 

Risk is minimised because customised packaging is not performed in anticipation of customer orders or to accommodate a forecast.



Total inventory can be reduced by using inventory of the base product to support multiple customers' labelling and package requirements.

The combination of reduced risk and lower inventory can result in reduced total cost to service even if packaging performed at the warehouse is more expensive per unit than if it were completed during manufacturing.

Stockpiling The direct economic benefit of stockpiling is to accommodate seasonal production or demand. For example, lawn furniture and toys are typically produced year-round but are sold only during a very short marketing period. In contrast, agricultural products are harvested at specific times, with subsequent consumption occurring throughout the year. Both situations require inventory stockpiling to support marketing efforts. Stockpiling provides an inventory buffer, which allows production efficiencies within the constraints imposed by material sources and consumers. Service Benefits Warehouse service can provide benefits through enhanced revenue generation. When a warehouse is primarily justified on service, the supporting rationale is that sales can be increased, in part, by such logistical performance. It is typically difficult to quantify service return-on-investment because it is difficult to measure.

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ADVANCED

Assortment Arrangements For example, establishing a warehouse to service a specific market may increase cost but should also increase market sales, revenue, and potentially gross margin. Warehouses can provide service as a result of spot stocking, full line stocking, product support, and market presence. Reverse Logistics Warehousing plays a key role in performing reverse logistics. Most of the physical work related to product recall, reclamation, and disposal of overstock and damaged inventory is performed at warehouses. Many firms are generating significant cash flow from refurbishment, recycling, and disposal of damaged and defective product Reverse logistics is concerned with controlled and regular inventory. Controlled inventory consists of hazardous materials and product recalls that have potential consumer health or environmental considerations. The reclamation of controlled inventory must be performed under strict operating scrutiny that prevents possible redistribution or improper disposal. As one might expect, varied governmental agencies, such as the Consumer Product Safety Commission, Department of Transportation (DOT), the Environmental Protection Agency (EP A), Food and Drug Administration (FDA), and the Occupational Safety and Health Administration (OSHA), are directly involved in disposal of controlled inventory. Less attention has traditionally focused on reclamation of regular inventory. In 1997 the disposition of unsalable product was estimated to cost companies $4 billion. The food industry alone was estimated to have unsalable inventory approaching $2.6 billion and growing at a rate approaching 20 % per year. __________________________________________________________________________________ 111 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The product involved in such reclamation is typically damaged or aged beyond the recommended sell-by date. While some unsalable product results from warehouse damage, most is returned from retail or even from the consumer. While reclamation is difficult for regular inventory, it is far more challenging for controlled inventory. In both return situations, product flow lacks the orderly process characteristic of outbound movement. Reverse movement typically consists of non-uniform individual packages and cartons as contrasted to outbound movement of cases and pallet loads. Packages are often broken, and product is not packaged correctly. Return products typically require significant manual sortation and inspection to determine appropriate disposal. However, the opportunity to recover cost by reimbursement and recycling is significant. Spot Stocking Spot stocking is typically used to support market distribution. Manufacturers of highly seasonal products often spot stock. Rather than maintaining inventory in a warehouse year-round, or shipping to customers direct from manufacturing plants, responsiveness in peak selling periods can be enhanced through temporary inventory positioning in strategic markets. Under this concept, select inventory is positioned or spot stocked in a local market warehouse in anticipation of responding to customer need during the critical sales period. Utilising warehouse facilities for spot stocking allows inventories to be placed in a variety of markets adjacent to key customers just prior to a maximum period of seasonal sales. For example, agricultural fertiliser companies sometimes spot stock near farmers in anticipation of the growing season. After the growing season, such spot stocking would likely be reduced. Full Line Stocking The traditional use of warehouses by manufacturers, wholesalers, and retailers is to stock product inventory combinations in anticipation of customer orders. Typical retailers and wholesalers provide assortments representing multiple products from different manufacturers. In effect, these warehouses can provide one-stop shopping capability for goods from multiple manufacturers. The difference between stock spotting and full line stocking is the degree and duration of warehouse utilisation. A firm following a spot stocking strategy would temporarily warehouse a narrow product assortment in a large number of warehouses for a limited time period. The full line stocking warehouse is more often restricted to a few strategic locations and operates yearround. Full line stocking warehouses improve service by reducing the number of suppliers that a customer must deal with. The combined assortments also make economical larger shipments possible. Production Support The economics of manufacturing may justify warehousing an inventory of specific parts and components. Production support warehouses stock inventory to support manufacturing __________________________________________________________________________________ 112 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED operations. Safety stocks on items purchased from outside vendors may be justified because of long lead times, potential supply discontinuity, and significant variations in usage rates. In such situations the most effective supply practice may be the establishment of a production support warehouse containing an inventory of processed materials, components, and subassemblies. This service benefit of warehousing is closely related to assembly assortment discussed under economic benefits. The primary difference between production support warehousing and assortment assembly is the size and purpose of the warehouse. In production support warehousing, average inventory is higher, and turnover is lower. Market Presence While benefits of market presence may not be as obvious as other service benefits, it is often cited by executives as a major advantage of local warehouses. The underlying belief is that a local warehouse can respond faster to customer needs than can a more distant warehouse. It is anticipated that local warehouse presence will increase market share and potentially profitability. While the market presence factor is a frequently discussed strategy, little solid research exists to confirm or refute its existence. In addition, more reliable transportation and technologybased order processing are closing the response time gap regardless of distance. Unless a warehouse is economically, or service justified it is unlikely that local market presence will favourably influence operational results. Warehouse Operations Once a warehouse mission is determined, managerial attention focuses on establishing the operation. A typical warehouse contains materials, parts, and finished goods on the move. Warehouse operations consist of break-bulk, storage, and assembly procedures. The objective is to efficiently receive inventory, possibly store it until required by the market, assemble it into complete orders, and initiate movement to customer. This emphasis on product flow renders a modern warehouse as a mixing facility. As such, a great deal of managerial attention concerns how to perform storage to facilitate efficient materials handling. The first consideration focuses on movement continuity and scale economies throughout the warehouse. Movement continuity means that it is better for a material handler with a piece of handling equipment to perform longer moves than to undertake a number of short handlings to accomplish the same overall move. Exchanging the product between handlers or moving it from one piece of equipment to another wastes time and increases the potential for product damage. Thus, as a general rule, longer warehouse movements are preferred. Goods, once in motion, should be continuously moved until arrival at their final destination. Scale economies justify moving the largest quantities or loads possible. Instead of moving individual cases, handling procedures should be designed to move cases grouped on pallets, slip sheets, or containers. The overall objective of materials handling is to eventually sort inbound __________________________________________________________________________________ 113 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED shipments into unique customer assortments. The three primary handling activities are receiving, in-storage handling, and shipping. Receiving Merchandise and materials typically arrive at warehouses in large quantity shipments. The first handling activity is unloading. At most warehouses unloading get performed mechanically, using a combination of a lift truck and manual processes. When freight is floor stacked on the transport vehicle, the typical procedure is to manually place products on pallets or to use a conveyor. When inbound product has been unitised on pallets or containers, lift trucks can be used to facilitate receiving. A primary benefit of receiving unitised loads is the ability to turn inbound transportation equipment more rapidly. Receiving is usually the unloading of a relatively high volume of similar product.

In-Storage Handling In-storage handling consists of movements within the warehouse. Following receipt and movement to a staging location, product must be moved within the facility for storage or order selection. Finally, when an order is processed it is necessary to select the required products and move them to a shipping area. These two types of in-storage handling are typically referred to as transfer and selection. There are at least two and sometimes three transfer movements in a typical warehouse. The merchandise is initially moved from the receiving area to a storage location. This movement is typically handled by a lift truck when pallets or slip sheets are used or by other mechanical means for other types of unit loads. A second internal movement may be required prior to order assembly depending upon warehouse operating procedures. When unit loads have to be broken down for order selection, they are usually transferred from storage to an order selection or picking area. When products are large or bulky, such as appliances, this intermediate movement to a picking area may not be necessary. Such product is often selected from the storage area and moved directly to the shipping staging area. The shipping staging area is the area adjacent to the shipping dock. In order selection warehouses, the assembled customer order is transferred from the selection area to the shipping staging area. Characteristically, in-storage handling involves lower volume movements than receiving but still relatively similar products.

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ADVANCED Order selection is one of the major activities within warehouses. The selection process requires that materials, parts, and products be grouped to facilitate order assembly. It is typical for one area of a warehouse to be designed as a selection or picking area to assemble orders. For each order, the combination of products must be selected and packaged to meet specific customer order requirements. The typical selection process is coordinated by a warehouse management system. Shipping Shipping consists of order verification and transportation equipment loading. Similar to receiving, firms may use conveyors or unit load materials handling equipment such as lift trucks to move products from the staging area into the transportation vehicle. Relative to receiving, warehouse shipping must accommodate relatively low-volume movements of a mixture of product, thus reducing the potential for economies of scale. Shipping unit loads is becoming increasingly popular because considerable time can be saved in vehicle loading. A unit load consists of unitised or palletised product. To facilitate this loading and subsequent unloading upon delivery, many customers are requesting that suppliers provide mixed combinations of product within a unit. The alternative is to floor stack cases in the transportation vehicle. Shipment content verification is typically required when product changes ownership. Verification may be limited to a simple carton count or a piece-by-piece check for proper brand, size, and in some cases serial number to assure shipment accuracy. Storage The second consideration is that warehouse utilisation should position products based upon individual characteristics. The most important product variables to consider in a storage plan are product volume, weight, and storage requirements. Product volume or velocity is the major factor driving warehouse layout. High volume product should be positioned in the warehouse to minimise movement distance. For example, highvelocity products should be positioned near doors, primary aisles, and at lower levels in storage racks. Such positioning minimises warehouse handling and reduces the need for frequent lifting. Conversely, products with low volume should be assigned locations more distant from primary aisles or higher up in storage racks. The Figure illustrates a storage plan based on product movement.

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ADVANCED

Storage Plan based on Product Movement Similarly, the storage plan should take into consideration product weight and special characteristics. Relatively heavy items should be assigned storage locations low to the ground to minimise lifting. Bulky or low-density product requires cubic space. Floor space along outside walls is ideal for such items. On the other hand, smaller items may require storage shelves, bins, or drawers. The integrated storage plan must consider individual product characteristics. A typical warehouse is engaged in a combination of active and extended product storage alternatives. Warehouses that directly serve customers typically focus on active short-term storage. In contrast, warehouses use extended storage for speculative, seasonal, or obsolete inventory. When controlling and measuring warehouse operations it is important to differentiate between the relative requirements and performance capabilities of active and extended storage. Active Storage Regardless of inventory velocity, most goods must be stored for at least a short time. Storage for basic inventory replenishment is referred to as active storage. Active storage must provide sufficient inventory to meet the periodic demands of the service area. The need for active storage is usually related to the capability to achieve transportation or handling economies of scale. For active storage, materials handling processes and technologies need to focus on quick movement and flexibility with relatively minimal consideration for extended and dense storage. The active storage concept includes flow-through distribution, which uses warehouses for consolidation and assortment while maintaining minimal or no inventory in storage. The __________________________________________________________________________________ 116 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED resulting need for reduced inventory favours flow-through and cross-docking techniques that emphasise movement and de-emphasise storage. Flow-through distribution is most appropriate for high-volume, fast-moving products where quantities are reasonably predictable. While flow-through distribution places minimal demands on storage requirements, it does require that product be quickly unloaded, de-unitised, grouped and sequenced into customer assortments, and reloaded into transportation equipment. As a result, the materials handling emphasis is or accurate information-directed quick movement. Extended Storage This is a somewhat misleading term, refers to inventory in excess of that required for normal replenishment of customer stocks. In some special situations, storage may be required for several months prior to customer shipment. Extended storage uses materials handling processes and technologies that focus on maximum space utilisation with minimal need for quick access. A warehouse may be used for extended storage for several other reasons. Some products, such as seasonal items, require storage to await demand or to spread supply across time. Other reasons for extended storage include erratic demand items, product conditioning, speculative purchases, and discounts. Product conditioning sometimes requires extended storage, such as to ripen bananas. Food warehouses typically have ripening rooms to hold products until they reach peak quality. Storage may also be necessary for extended quality checks. Warehouses may also store goods on an extended basis when goods are purchased on a speculative basis. The magnitude of speculative buying depends upon the specific materials and industries involved, but it is very common in marketing of commodities and seasonal items. For example, if a price increase for an item is expected, it is common for a firm to buy ahead at the current price and warehouse the product for later use. In this case, the discount or savings has to be traded off against extended storage and inventory carrying cost. Commodities such as grains, oil, and cardboard are often stored for speculative reasons. The warehouse may also be used to realise special discounts. Early purchase discounts may justify extended storage. The purchasing manager may be able to realise a substantial price reduction during a specific period of the year. Under such conditions the warehouse is expected to hold inventory in excess of active storage. Manufacturers of fertiliser, toys, and lawn furniture often attempt to shift the warehousing burden to customers by offering off-season warehouse storage allowances. Warehouse Ownership Classification Warehouses are typically classified based on ownership. A private warehouse is operated by the enterprise that owns the merchandise handled and stored in the facility. A public warehouse, in contrast, is operated as an independent business offering a range of for-hire __________________________________________________________________________________ 117 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED services, such as storage, handling, and transportation. Public warehouse operators generally offer a menu of relatively standardised services to customers. Contract warehousing, which is a customised extension of public warehousing, combines the benefits of private and for-hire warehousing. Contract warehousing is a long-term business arrangement that provides unique or tailored logistics services for a limited number of customers. The client and the integrated service supplier typically share the risks associated with the operation. The important differences between contract and public warehouse operators are the anticipated length of the relationship, degree of exclusive or tailored services, and shared incorporation of benefits and risks. Private A private warehouse is typically operated by the firm owning the product. The building, however, may be owned or leased. The decision concerning ownership or lease is essentially financial. Sometimes it is not possible to find a warehouse for lease that fits specialised logistical requirements; for example, the physical nature of an available building may not be conducive for efficient materials handling, such as buildings with inappropriate storage racks or with dock well or pillar constraints. The only suitable course of action may then be to design and arrange for construction. The major benefits of private warehousing are control, flexibility, cost, and a range of intangibles. Private warehouses offer substantial control since management has authority to prioritise activities. Such control should facilitate integration of warehouse operations with the balance of a firm's logistics operations. Private warehouses generally offer more flexibility since operating policies and procedures can be adjusted to meet specific customer and product requirements. Firms with highly specialised customers or products are often motivated to own and operate warehouses. Private warehousing is usually considered less costly than public warehousing because private facilities are not operated for a profit even though they may be required to make some contribution to the firm to ensure competitiveness. As a result, both the fixed and variable cost components of a private warehouse may be lower than for-hire counterparts. Finally, private warehousing may offer intangible benefits. A private warehouse, with the firm's name on its sign, may stimulate customer perceptions of responsiveness and stability. This perception may provide marketing advantage over competitors. Nonetheless, the use of private warehousing is declining due to an increasing interest in reducing logistics assets since warehouse facilities account for a substantial portion of those assets. Also, the perceived cost benefit of private warehousing is potentially offset by a public warehouse's ability to gain economies of scale based on leveraging the combined throughput of multiple clients. __________________________________________________________________________________ 118 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Public Public warehouses are used extensively in logistical systems. Almost any combination of services can be arranged on a for-hire basis for either short or long term. Public warehouses have traditionally been classified based on operational specialisation such as (1) general merchandise, (2) refrigerated, (3) special commodity, (4) bonded, and (5) household goods and furniture. General merchandise warehouses are designed to handle package products such as electronics, paper, food, small appliances, and household supplies. Refrigerated warehouses typically offer frozen or chilled capacity designed to protect food, medical, photographic, and chemical products requiring special temperatures. Special commodity warehouses are designed to handle bulk material or items requiring special handling considerations, such as tires or clothing. Bonded warehouses are licensed by the government to store goods prior to payment of taxes or import/export duties. They exert tight control over movements in and out of the facility since documents must accompany each move. Finally, household goods or furniture warehouses specialise in handling and storing large, bulky items such as appliances and furniture. Of course, many public warehouses offer a combination of services. Public warehouses provide flexibility and shared services benefits. They have the potential to offer operating and management expertise since warehousing is their core business. From a financial perspective, public warehousing may be able to achieve lower operating cost than private facilities. Such variable cost differential may result from lower pay scales, better productivity, shared resources, and economy of scale. Public warehouses typically do not require capital investment on the part of customers. When management performance is judged according to return on investment, the use of public warehousing can be an attractive alternative. Public warehousing offers flexibility concerning size and number of warehouses, thus allowing users to respond to supplier, customer, and seasonal demands. In comparison, private warehouses are relatively fixed and difficult to change because buildings have to be constructed, expanded, or sold. Public warehousing can also have the potential to share scale economies since the combined requirements of users can be leveraged. Such leverage spreads fixed costs and may justify investment in state-of-the-art handling equipment. A public warehouse may also leverage transportation by providing combined customer delivery consolidation. For example, rather than requiring both supplier A and supplier B to deliver to a retail store from its own warehouse, a public warehouse serving both clients could arrange combined delivery, thus providing reduced transportation cost for the customer. Below summarises the types of services and capabilities characteristic of many public warehouse operators: 

Cross dock/trans-loading

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ADVANCED 

Customer returns



Customisation /postponement



Home or catalogue delivery



In-transit merge

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Inventory control

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Kan Ban

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Kitting

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Labelling/pre-ticketing

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Lot control

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Manufacturing support

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Order fulfilment

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Put-away/Pick/pack

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Pool distribution

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Repair/refurbish

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Returnable container management

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Reverse logistics

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Sequencing/metering

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Specialty packaging

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Store support/direct store delivery (DSD)

A great many firms utilise public warehouses for market distribution because of the variable cost, scalability, range of services, and flexibility. In a variety of situations, public warehouse facilities and services can be designed and performed to meet exact operational requirements. A public warehouse will charge clients a basic fee for handling and storage. In the case of handling, the charge is assessed on the cases or pounds moved. For storage, the charge is assessed on the cases or weight in storage over a designated time period. Special or value-added services are typically priced on a negotiated basis. Contract Contract warehousing combines characteristics of private and public operations. A long-term contractual relationship will typically result in lower total cost than a public warehouse. At the same time, contract warehouse operations can provide benefits of expertise, flexibility, scalability, and economies of scale by sharing management, labour, equipment, and information resources with multiple clients. __________________________________________________________________________________ 120 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Contract warehouses typically offer a range of logistical services such as transportation management, inventory control, order processing, customer service, and return merchandise processing. There are contract warehouse operators, typically called ISPs, who are capable of assuming total logistics responsibility for an enterprise. For example, Kraft Foods has increasingly utilised contract warehousing as a replacement for private and public frozen and dry grocery facilities. Since the late 1990s, Kraft has used AmeriCold Logistics, which is an integrated warehousing and distribution service organisation to perform storage, handling, and distribution services. The arrangement has multiple benefits for both parties. The long-term contractual arrangement allows Kraft to expand its distribution network without incurring the time or cost of building expansion. Kraft is assured that there will always be space for new products, so its distribution network is protected. AmeriCold does not have to be concerned with selling space for the Kraft warehouses – it can focus on providing service. Moreover, the longer Kraft utilises AmeriCold's services, the better the contract warehousing firm's capability to understand business needs and provide customised services. As would be expected, many firms utilise a combination of private, public, and contract facilities. Full warehouse utilisation throughout a year is rare. As a managerial guideline, a typical warehouse will be fully utilised between 75 and 85 % of the time; so, from 15 to 25 % of the time, space needed to satisfy peak requirements will not be used. In such situations an attractive strategy may be the use of private or contract warehouses to cover the 75 % requirement while using public facilities to accommodate peak demand. The Figure illustrates this concept.

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ADVANCED Combined Private and Public Warehouse Facilities Developing a warehouse strategy requires answers to two questions. The first is how many warehouses should be established. The second question focuses on which warehouse ownership types should be used in specific markets. For many firms, the answer is a combination of warehouse alternatives, differentiated by customer and product. Specifically, some customer groups may be served best from a private warehouse, while public or contract warehouses may be appropriate for others. This warehouse segmentation is increasingly popular as key customers are requiring more customised and focused services and capabilities. Warehouse Planning Initial decisions related to warehousing are planning based. The basic concept that warehouses provide as an enclosure for material storage and handling requires detailed analysis before the size, type, and shape of the facility can be determined. This section reviews planning issues that establish the character of the warehouse, which in turn determines attainable handling efficiency. Site Selection The first task is to identify both the general and then the specific warehouse location. The general area concerns the broad geography where an active warehouse makes sense from a service, economic, and strategic perspective. The general question focuses on the broader geographic area as illustrated by the need to place a warehouse in the Midwest, which generally implies having a facility in Illinois, Indiana, or Wisconsin. There are a number of techniques that can assist in determining the best combination of general warehouse areas. Once the combinations of broad areas are determined, a specific building site must be identified. Typical areas in a community for locating warehouses are the commercial zone, outlying areas served primarily by motor truck only, and the central or downtown area. Drivers in site selection are service availability and cost. Land cost is the most important factor. A warehouse need not be located in a major industrial area. In many cities, warehouses are among industrial plants and in areas zoned for light or heavy industry. Most warehouses can operate legally under the restrictions placed upon general commercial property. Beyond procurement cost, setup, and operating expenses such as rail sidings, utility hook-ups, taxes, insurance rates, and highway access require evaluation. The cost of such services typically varies extensively between sites.

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ADVANCED For example, a food-distribution firm recently rejected what otherwise appeared to be a totally satisfactory warehouse site because of projected insurance rates. The site was located near the end of a water main. During most of the day, adequate water pressure was available to handle operational and emergency requirements. However, a water problem was possible during two short periods each day. From 6:30 A.M. to 8:30 A.M. and from 5:00 P.M. to 7:00 P.M. the overall demand for water along the line was so great that a sufficient pressure was not available to handle emergencies. Because of this deficiency, abnormally high insurance rates were required, and the site was rejected. Several other requirements must be satisfied before a site is purchased. The site must offer adequate room for expansion. Necessary utilities must be available. The soil must be capable of supporting the structure. The site must be sufficiently high to afford proper water drainage. Additional requirements may be situationally necessary, depending upon the structure to be constructed. For these reasons and others, the final selection of the sight must be preceded by extensive analysis. Warehouse design must consider product movement characteristics. Three factors to be determined during the design process are the number of floors to include in the facility, a cube utilisation plan, and product flow. The ideal warehouse design is a one-floor building that eliminates the need to move product vertically. The use of vertical handling devices, such as elevators and conveyors, to move product from one floor to the next requires time, energy, and typically creates handling bottlenecks. In other words, while it is not always possible, particularly in central business districts where land is restricted or expensive, as a general rule warehouses should be designed as one-floor operations to facilitate materials handling. Warehouse design should maximise cubic utilisation. Most warehouses are designed with 20- to 30-foot clear ceilings, although modem automated and high-rise facilities effectively use heights over 100 feet. Maximum effective warehouse height is limited by the safe lifting capabilities of materials handling equipment, such as lift trucks, rack design, and fire safety regulations imposed by sprinkler systems. Warehouse design should facilitate continuous straight product flow through the building. This is true whether the product is moving into storage or is being cross docked. In general, this means that product should be received at one end of a building, stored as necessary in the middle, and shipped from the other end. The Figure below illustrates straightline product flow that facilitates velocity while minimising congestion and redundant handling.

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ADVANCED

Basic Warehouse Design Product-Mix Analysis Another independent area of quantitative analysis is detailed study of products to be distributed through the warehouse. The design and operation of a warehouse are related directly to the product mix. Each product should be analysed in terms of annual sales, demand, weight, cube, and packaging. It is also desirable to determine the total size, cube, and weight of the average order to be processed through the warehouse. These data provide necessary information for determining warehouse space, design and layout, materials handling equipment, operating procedures, and controls. Future Expansion Because warehouses are increasingly important in contemporary logistical networks, their future expansion should be considered during the initial planning phase. Well-managed organisations often establish 5- to 10-year expansion plans. Potential expansion may justify purchase or option of a site three to five times larger than required to support initial construction. Building design should accommodate future expansion without seriously affecting on-going operations. Some walls may be constructed of semi-permanent materials to allow quick __________________________________________________________________________________ 124 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED removal. Floor areas, designed to support heavy movements, can be extended during initial construction to facilitate expansion. Materials Handling Considerations A material handling system is the basic driver of warehouse design. As noted previously, product movement and assortment are the main functions of a warehouse. Consequently, the warehouse is viewed as a structure designed to facilitate efficient product flow. It is important to stress that the materials handling system must be selected early in the warehouse development process Layout The layout or storage plan of a warehouse should be planned to facilitate product flow. The layout and the material handling system are integral. In addition, special attention must be given to location, number, and design of receiving and loading docks. It is difficult to generalise warehouse layouts since they are usually customised to accommodate specific handling requirements. If pallets are utilised, an early step is to determine the appropriate size. A pallet of nonstandard size may be desirable for specialised products. However, whenever possible, a standard size pallet should be used throughout a warehouse. The most common pallet sizes are 40 x 48 inches and 32 x 40 inches. In general, the larger the pallet load, the lower the movement cost per pound or package over a given distance. One lift truck operator can move a large load in the same time and with the same effort required to move a smaller load. Analysis of product cases and stacking patterns will determine the size of pallet best suited to the operation. Regardless of the size finally selected, management should adopt one pallet size for the overall warehouse. The second step in planning warehouse layout involves pallet positioning. The most common practice in positioning pallets is 90 degree, or square, placement. Square positioning is widely used because of layout ease. Square placement means that the pallet is positioned perpendicular to the aisle. The Figure below illustrates this method of positioning. 900 or Square Placement

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ADVANCED

Basic Method of Pallet Placement Finally, the handling equipment must be integrated to finalise layout. The path and tempo of product flow depend upon the materials handling system. To illustrate the relationship between materials handling and layout, two systems and their respective layouts are illustrated. These examples represent two of many possible layouts. Layout A, illustrated in the Figure below, illustrates a materials-handling system and layout utilising lift trucks for inbound and inventory transfer movements and tow tractors with trailer for order selection. This scenario assumes that products can be palletised. This layout is greatly simplified because offices, special areas, and other details are omitted. The floor plan of layout A is approximately square. The advocates of square design feel that it provides the best framework for overall operating efficiency. As indicated earlier in this chapter, products should be positioned in a specific area of the warehouse for order selection. Such is the case in layout A. This area is labelled the selection, or picking, area. Its primary purpose is to minimise the distance order pickers must travel when assembling an order. The selection area is supported by a storage area. When products are received, they are palletised and moved to the storage area. The selection area is replenished from storage as required.

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ADVANCED Within the selection area, products are positioned according to weight, bulk, and replenishment velocity to minimise outbound movement. Customer orders are assembled by an order selector using a tow tractor pulling trailers through the selection area. The arrows in layout A indicate product selection flow.

Layouts A and B Layout B illustrates a materials-handling system utilising lift trucks to move product inbound and for transfer movements. A continuous towline is used for order selection. The floor plan in layout B is rectangular. In a system using a continuous-movement towline, the compact selection area is replaced by order selection directly from storage. Products are moved from receiving areas into storage positions adjacent to the towline. The orders are then selected directly from storage and loaded onto carts, which are propelled around the warehouse by the towline. Merchandise is stored or positioned to minimise inbound movement. The weakness of the fixed towline is that it facilitates selection of all products at an equal speed and frequency and does not consider special needs of high-velocity products. __________________________________________________________________________________ 127 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The arrows in layout B indicate major product movements. The line in the centre of the layout illustrates the path of the towline. As indicated, both layouts A and B are greatly simplified. The purpose is to illustrate the extremely different approaches managers have developed to reconcile the relationship between materials handling and warehouse layout. Sizing Several techniques are available to help estimate warehouse size. Each method begins with a projection of the total volume expected to move through the warehouse during a given period. The projection is used to estimate base and safety stocks for each product to be stocked in the warehouse. Some techniques consider both normal and peak utilisation rates. Failure to consider utilisation rates can result in overbuilding, with corresponding increase in cost. It is important to note, however, that a major complaint of warehouse managers is underestimation of warehouse size requirements. A good rule of thumb is to allow 10 % additional space to account for increased volume, new products, and new business opportunities. Initiating Warehouse Planning To initiate warehouse operations, management must plan and perform initial stocking, personnel staffing, and work procedures, as well as implement a Warehouse Management System (WMS) and outbound distribution operations. Although this focuses on the warehouse start-up process, many of these activities are relevant for on-going warehouse operations as well. Stocking The ideal initial stocking procedure is to receive and stock all inventory items prior to initiating operations. Individual products to be distributed through the warehouse and the quantities of each inventory SKU are determined during warehouse planning. The challenge in initial stocking is to schedule and sequence product arrival. Time required to initially stock a warehouse depends upon the number and quantity of products. In most situations the initial stocking process will require 2 to 4 weeks for completion. In a storage area, full pallet loads of product are assigned to predetermined positions. Two common methods of slot assignment are variable and fixed. A variable-slot placement system, also called dynamic slotting, allows the warehouse location to be changed each time a new shipment arrives. The goal of variable slotting is efficient utilisation of warehouse space. A fixed-slot system assigns product to a permanent location in the warehouse. The product is stocked at this location as long as it sustains volume. As volume increases or decreases, the product location may be reassigned. The advantage of fixed slotting is that warehouse operations personnel become familiar with the location of specific product, making them more efficient. However, newer WMS and RF capabilities have substantially increased location recording accuracy. __________________________________________________________________________________ 128 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Regardless of which slotting system is employed, each inbound product must be assigned an initial location. Training A major concern in logistical operations over the past several decades has been labour productivity. The basic nature of raw materials, parts, and finished goods flowing through and between a vast network of facilities makes logistics labour-intensive. In fact, warehousing is the single largest consumer of logistics labour. Hiring and training qualified personnel to operate a warehouse is a challenge. Regardless of how efficient the proposed warehouse system is in theory; in practice it will only be as good as its operating personnel. Part of the challenge is to attract competent, productive workers to a warehouse environment. Because warehousing is demanding physical work completed at times and in locations that are less than ideal, it becomes particularly difficult to attract workers in periods of relatively full employment. Compounding this challenge in warehouse start-up as well as on-going operations is the need to find operating personnel who can pass necessary aptitude and drug tests. Newer materials handling equipment requires the ability to interface with computers and the discipline to follow specific directions. The drug tests are required to reduce the liability for personal injury or damage while operating materials handling equipment. Once hired, personnel then must be properly trained to ensure desired system results. The full workforce should be available for test operations prior to the arrival of merchandise. Personnel hired for specific assignments should be fully trained to perform job requirements and to understand the role of their contribution to total system performance. After orientation, all employees should be given specific training. Personnel hired to operate a warehouse may be grouped in the following categories: administrators, supervisors, selectors, equipment operators, labourers, material handlers, and support workers such as maintenance. Prior to actual operations it is desirable to simulate the work that each group performs. Such simulation provides hands-on experience doing work without the risk of creating operational problems. When initial warehouse stocking begins, the workforce receives actual experience in merchandise handling. Normally, the manufacturer supplying the basic materials handling system and equipment provides instruction regarding operations under both simulated and initial stocking conditions. Once the initial inventory is on hand, it is good practice to simulate fulfilling customer orders. Simulated orders can be selected and loaded into delivery trucks, and the merchandise may then be treated as a new arrival and transferred back into stock. Warehouse Management Systems __________________________________________________________________________________ 129 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The development of work procedures goes hand in hand with training warehouse personnel. Most firms implement a WMS to standardise work procedure and encourage best practice. It is management's responsibility to see that all personnel understand and use these procedures. In a mechanised warehouse, approximately 65 % of personnel are employed in some facet of order selection. The two basic methods of order picking are individual and area selection, also known as batch selection. Using individual selection, one employee completes a customer's total order. This system is not widely used. Its primary application occurs when a large number of small orders are selected for repack or consolidated shipment, such as e-commerce fulfilment. Under the more commonly used area selection system each employee is assigned responsibility for a specific portion of the warehouse. To complete a customer's order, several different selectors are required. Because each employee has a thorough knowledge of a specific selection area; less time is required to locate items. Work procedures are also important for receiving and shipping. Established procedures for receiving and ensuring product entry into inventory records are critical. If pallets are used, the merchandise must be stacked in appropriate patterns to ensure maximum load stability and consistent case counts. Personnel working in shipping must have knowledge of trailer loading practices. In specific types of operations, particularly when merchandise changes ownership, items must be checked during loading. Work procedures are not restricted to floor personnel. Procedures must be established for administration and maintenance. Replenishment of warehouse inventory can cause operational problems if proper ordering procedures are lacking. Normally, there is limited interaction between buyers and warehouse personnel although such communication is improving with integrated supply chain management organisations. Buyers tend to purchase in quantities that afford the best price, and little attention is given to pallet compatible quantities or available warehouse space Ideally buyers should coordinate with warehouse personnel before commissioning large orders or introducing new products. The experience of some companies has forced management to require buyers to predetermine warehouse space assignment prior to ordering. Another potential problem is the quantity of cases ordered. The goal is to purchase in pallet-multiple quantities. For example, if a product is ideally stacked on pallets in a 50-case pattern, the buyer should order in multiples of 50. If an order is placed for 120 cases, upon arrival the cases will fill two pallets plus 20 on a third pallet. The extra 20 cases will require the warehouse cubic space typically used for a pallet of 50 and will require the same amount of materials handling capacity to move. Security In a broad sense, security in a warehouse involves protection against merchandise pilferage and deterioration. Each form of security requires management attention. Pilferage Protection __________________________________________________________________________________ 130 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED In warehouse operations it is necessary to protect against theft by employees and thieves as well as from riots and civil disturbances. Typical security procedures used throughout a business should be strictly enforced at each warehouse. Security begins at the fence. As standard procedure, only authorised personnel should be permitted into the facility and surrounding grounds. Entry to the warehouse yard should be controlled through a single gate. Without exception, no private automobile, regardless of management rank or customer status, should be allowed to enter the yard or park adjacent to the warehouse. To illustrate the importance of security guidelines, the following experience may be helpful. A firm adopted the rule that no private vehicles would be permitted in the warehouse yard. Exceptions were made for two office employees with special needs. One night after work, one of these employees discovered a bundle taped under one fender of his car. Subsequent checking revealed that the car was literally a loaded delivery truck. The matter was promptly reported to security, who informed the employee not to alter any packages taped to the car and to continue parking inside the yard. Over the next several days, the situation was fully uncovered, with the ultimate arrest and conviction of seven warehouse employees who confessed to stealing thousands of dollars’ worth of company merchandise. The firm would have been far better off had it provided transportation for the two special-needs employees from the regular parking lots to their work locations. Shortages are always a major concern in warehouse operations. Many are honest mistakes that occur during order selection and shipment, but the purpose of security is to restrict theft from all angles. The majority of thefts occur during normal working hours. Inventory control and order processing systems help protect merchandise from being carried out of the warehouse unless accompanied by a computer release document. If samples are authorised for salesperson use, such merchandise should be maintained in a separate inventory. Not all pilferage occurs on an individual basis. Organised efforts between warehouse personnel and carrier truck drivers can result in deliberate over-picking, or high-for-low-value product substitution occurring in order to move unauthorised merchandise out of the warehouse. Employee work assignment rotation, total case counts, and occasional complete line-item checks can reduce vulnerability to such collaboration. A final concern is the increased incidence of hijacking over-the-road trailer loads from yards or while in transit. Hijacking is a major logistical concern. Over-the-road hijack prevention is primarily a law-enforcement matter, but in-yard theft can be eliminated by tight security provisions. Such over-the-road theft is a significant problem in developing countries. One beverage company manager reported that he budgeted to lose one truck a week due to theft for his South American operation. He instructed his drivers to simply turn over the keys and walk away rather than risk their life. Product Deterioration __________________________________________________________________________________ 131 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Within the warehouse, a number of factors can reduce a product or material to non-saleable status. The most obvious form of product deterioration is damage from careless materials handling. For example, when pallets of merchandise are stacked in great heights, a marked change in humidity or temperature can cause packages supporting the stack to collapse. The warehouse environment must be carefully controlled and measured to provide proper product protection. Of major concern is warehouse employee carelessness. In this respect, the lift truck may well be management's worst enemy. Regardless of how often lift truck operators are warned against carrying overloads, some still attempt such shortcuts when not properly supervised. In one situation, a stack of four pallets was dropped off a lift truck at the receiving dock of a food warehouse. Standard procedure was to move two pallets per load. The dollar cost of the damaged merchandise exceeded the average daily profit of two retail supermarkets. Product deterioration from careless handling within the warehouse is a form of loss that cannot be insured against or offset with compensating revenue. Another major form of deterioration is incompatibility of products stored or transported together. For example, care must be taken when storing or shipping chocolate to make sure that it does not absorb odours from products it is being transported with, such as household chemicals. Most shipments from distribution warehouses to customers are completed by truck. When private trucking is utilised, a managerial concern is to schedule shipments to achieve efficient transportation. Computer-assisted load planning and equipment routing techniques are very useful for organising transportation requirements. Safety and Maintenance Accident prevention is a concern of warehouse management. A comprehensive safety program requires constant examination of work procedures and equipment to locate and take corrective action to eliminate unsafe conditions before accidents result. Accidents occur when workers become careless or are exposed to mechanical or physical hazards. The floors of a warehouse may cause accidents if not properly cleaned. During normal operation, rubber and glass deposits collect on aisles and, from time to time, broken cases will result in product seepage onto the floor. Proper cleaning procedures can reduce the accident risk of such hazards. Environmental safety has become a major concern of government, such as OSHA, and cannot be neglected by management. A preventive maintenance program is necessary for materials handling equipment. Unlike production machines, movement equipment is not stationary, so it is more difficult to properly maintain. A preventive maintenance program scheduling periodic checks of all handling equipment should be applied in every warehouse. __________________________________________________________________________________ 132 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

Warehouse Management Trends Modern customers demand a seamless shopping experience with faster order delivery and shorter lead times. This mounting pressure to fill orders faster has urged warehouse managers to reinvent their warehouse management practices in order to optimize the picking, packing and shipping processes. It seems like technology is proving to be the most cost-effective and swift way to increase the efficiency of warehouse functions. As we progress into 2020, warehouse management technologies will grow leaps and bounds. Let’s look at some of the trends that will define warehouse management and logistics in 2020. Trend #1: WMS will be Upgraded The warehouse management system will get an update with new software capabilities added to it. Machine learning, for example, helps the system to sense and adapt to shipper behavior and react quickly to changing demands in the warehouse with minimum human intervention. For instance, if a picking process is ongoing and suddenly the demand shifts to a batch of difficultto-pick items, then the WMS can shift allocation accordingly. Clint Reiser, research analyst at ARC Advisory Group, says the ‘use of waveless fulfillment or intelligent batch-picking has penetrated the ecommerce industry.’ Sellers are using warehouse control systems and automation for batch-picking tasks. Such systems allow sellers to add in rush orders quickly during a wave of other orders. Trend #2: Last Mile Deliveries in the Warehouse

Image courtesy: rumtoast.com Last mile delivery refers to moving items from the transportation hub to the customer’s doorstep. Usually, 3PL companies are accorded this task. But the new trend is gradually replacing 3PL companies. Companies now want to complete last mile deliveries themselves to speed up the delivery process for higher customer satisfaction. __________________________________________________________________________________ 133 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Usually, companies have 2 options to complete their last-mile deliveries Insourcing: this means using your own staff and vehicles to deliver orders to nearby customers. Employees may receive an additional payment to complete deliveries. 

Outsourcing: this refers to hiring third-party delivery services to deliver products to customers.

Amazon has taken the challenge of completing last mile deliveries themselves with the launch of its new last mile delivery program. Under this program, drivers will now be able to access Amazon’s delivery technology. They will receive hands-on training and discounts to certain assets and services of the company. This also includes privileges for vehicle leasing and insurance. In short, Amazon has empowered drivers to start their own delivery business. Trend #3: Warehouses to Adopt Voice Technology

Image courtesy: freepik.com Voice technology can be an effective way to make warehouse management more affordable and efficient. By integrating voice technology, warehouse operators will able to interact with the help of an internet connection and headset. They can give voice commands to the system and even get updates on each task such as picking orders, receiving products or updating stock. Voice technology will also be a more accurate technique since it will eliminate the need for penpaper instructions, successfully reducing the probability of manual The use of voice technology has grown almost 5.7% from 2008, voice technology is slowly gaining momentum in the ecommerce space. As order volumes are increasing two-fold, and delivery windows are getting shorter, warehouses are finding new uses of current voicetechnology like Alexa. For sure ecommerce shipping companies will lead the race. It will be integrating its shipping software with Amazon’s Alexa devices, making it easy for warehouse managers to manage orders, print shipping labels, and handle order fulfilment tasks. This is a huge innovation with a keyboard and barcode scanner. Instead of interrupting the packing process by turning to a computer and selecting a shipping service, you can give voice commands to Alexa act. Trend #4: Use of Drones and Warehouse Robots to Supplement Manual Labour

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ADVANCED

Image courtesy: fotolia.com Amazon, the ecommerce giant, is using drones for inventory management and for speeding up the picking and packing processes. Drones could be an excellent solution for reaching inventory kept at the back of the warehouse, that would eventually save time which a warehouse worker would need to find those items manually. Also, inventory is stored in huge aisles, and high up in the storage. This makes it difficult rather dangerous for warehouse operators to get a hold of those items. Drones is becoming an increasingly popular technology to be accepted inside the warehouse and distribution centers. There are other kinds of automated robots too that warehouses across the United States are adopting to improve warehouse efficiency, save time and effort and reduce manual errors by automating simple tasks. 1. Inventory Robots– these kinds of robots simplify daily inventory counting. Some advanced robots can scan inventory up to 30 feet away with the help of RFID scanners. Now warehouse managers do not have to worry about conducting inventory counts; they can always be updated with data on their inventory status. 2. Driverless Forklifts- Forklifts are necessary equipment that allow warehouse workers to access and move heavy equipment with minimal effort. Forklifts can pick up and place entire pallets, drive them to the next spot without manual work. They can even sense obstacles in their path, as a result safely depositing inventory to the next location. 3. Goods to person robots- these robots can carry carts and bins, taking inventory to waiting warehouse staff at the last stages of shipping. There are also climbing robots that can traverse heights or work in narrow aisles to get a hold of inventory. Trend #5: Machine-to-Machine Technology takes over Warehouse Functions

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ADVANCED

Image courtesy: pixisoft.com Machine-to-Machine Technology(M2M) is when different machines or devices exchange information and perform functions on their own. A warehouse management system with M2M technology can connect and receive data from various instruments such as assembly lines, packing equipment, conveyors, etc. These systems control the series of events and monitor the stages of production. Machine- to- machine technology maintains greater quality control as it constantly checks the proper functioning of the machines in the warehouse. M2M systems can be of various types depending on the industry or vertical where it is being used. For example, if a distribution company uses them, they will focus on connecting equipment responsible for order fulfillment. In the warehouse, M2M can positively impact the bottom line. These systems collect and exchange information ranging from product sourcing to fulfilment and provide actionable insights to help make better decisions and oversee operations. The accuracy in information facilitates demand forecasting, helping managers to predict appropriate delivery times for customers. Trend #6: Blockchain becomes Part of Supply Chain

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ADVANCED Investopedia explains Blockchain as, “a distributed database of digital information which cannot be tampered. Though the information is accessible to the public, it cannot be changed. The original information remains untouched, leaving a permanent and public information trail, or chain of transactions.” Since blockchain is a distributed information model, data security is increased as information about every transaction is stored in all the computers on the network. Blockchain can come in handy in the supply chain in the following ways   

Recording the movement of inventory and equipment Information sharing with suppliers and vendors Tracking shipments and purchase orders Ensuring goods are connected to barcodes and serial numbers.

Walmart and IBM have partnered together to create a transparent food supply chain with the help of IBM’s blockchain network, the two companies have joined hands in creating a system that enhances food traceability, meaning they will be able to identify affected foods during a food scare within minutes, and not days. TradeLens was launched to help modernize the world’s supply chain ecosystems. Many of the processes for transporting and trading goods are costly, in part, due to manual and paper-based systems. Replacing these peer-to-peer and often unreliable information exchanges, the platform enables participants to digitally connect, share information and collaborate across the shipping supply chain ecosystem. Rapid adoption of TradeLens across the global shipping supply chain continues as Hapag-Lloyd and Singapore-based Ocean Network Express (ONE) Pte. Ltd announced they will join the blockchain-enabled digital shipping platform, jointly developed by A.P. Moller - Maersk (MAERSKb.CO) and IBM (NYSE: IBM). TradeLens blockchain-enabled digital shipping platform continues expansion with addition of major ocean carriers Hapag-Lloyd and Ocean Network Express Trend #7: Mobile Technology Ensures Accuracy in Warehouse

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ADVANCED Mobile technology has become an inseparable part of our lives, but the technology and its various forms have diverse uses inside the warehouse.  Smartphones and Tablets: they make entering and receiving information very easy. If your warehouse management system is connected to these devices, you can simply push information like picklists, or shipping labels to warehouse operators quickly, anytime and from anywhere. 

Barcode Scanners and Other Handheld Devices: the most common mobile device in the warehouse is probably the barcode scanner that is an essential tool for scanning inventory and maintaining an accurate inventory count.

There are plenty of other handheld portable devices fortified with RFID scanning, cameras, touchscreen that make the work of warehouse staff easy and efficient. The Warehouse is taking a front seat with new technological innovations disrupting traditional warehouse tasks. It has become an all-around enterprise system that integrates with different pieces of equipment, gives data insights and provides flexibility to managers to streamline processes and optimize warehouse management functions. Conclusion The role of warehouse is more than a temporary storage. It offers both protection and preservation of inventory in the supply chain. Hence, its role as a custodian is not to be underestimated. Along with this role is its value-added role of time and place utilities. While many activities of the warehouse are mainly receiving, storage and issuing, information is crucial in the management of warehouses. WMS is one system which interfaces the physical activities with the inventory. Real-time and on-line information is necessary to make this inventory visible to all entities in the supply chain. The role of warehouse is incomplete without the inclusion of material handling equipment and systems. These MATERIAL HANDLING EQUIPMENT operates as part of the entire warehouse system which snugs appropriately into the layout of the warehouse. Operating the modern warehouse without MATERIAL HANDLING EQUIPMENT would be unthinkable. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

True

False

Inventory has limited value until it is positioned at the right time and at the right location to support ownership transfer or value-added creation. If a firm does not consistently satisfy time and place requirements it has nothing to sell

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ADVANCED 2

Economic benefits or warehousing occur when overall logistics costs are reduced

The traditional use of warehouses by manufacturers, wholesalers and retailers is to stock product inventory combinations in anticipation of customer orders

Shipping consists of order verification and transportation equipment loading

A private warehouse is typically operated by the firm owning the product. The building, however, may be owned or leased

A public warehouse is typically operated by the firm owning the product. The building, however, may be owned or leased

Contract warehousing combined characteristics of private and public operations. A long-term contractual relationship will typically result in lower total cost than a public warehouse

The layout or storage plan of a warehouse should not be planned to facilitate product flow

The role of warehouse is incomplete without the inclusion of material handling equipment and systems

Within the warehouse, a number of factors can reduce a product or material to non-saleable status. The most obvious form of product deterioration is damage from careless materials handling

The role of warehouse is more than a temporary storage. It offers both protection and preservation of inventory in the supply chain. Hence, its role as a custodian is not to be underestimated. Along with this role is its value-added role of time and place utilities.

CHAPTER 8 - INVENTORY – A CRITICAL SUPPLY CHAIN COMPONENT US: 336709 Evaluate the influences of Key Components in a Supply Chain PURPOSE: This chapter will enable learners to evaluate the relationship and influences of the key components in a supply chain.

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ADVANCED LEARNING OBJECTIVES: Learners will be able to:  Evaluate key influences on a supply chain environment.  Analyse and implement stakeholder relationships within the supply chain.  Obtain and analyse information on the supply chain.  Apply improvements to the supply chain. Supply Chain Management – The Eight Components: Simple bread and butter with which we eat each day, actually gets to us through several processes. In this instance, bread begins its journey with the farmer who sows the seeds and sells the wheat to the businessman, who in turn sells it to the baker who bakes the bread. This is a description of supply chain management in a nutshell. In other words, supply chain management is a network of those businesses that are interconnected with each other in either the manufacturing of products, or delivering services, that are required by consumers. It is very important for businesses to ensure two things for their supply chain to be effective, one is the supply chain should be cost effective and second it should deliver the results on time. We began with the description of supply chain management of bread. It is a very simple one. There are many complicated supply chain management processes that differ with the size of the business as well as the complexity of the chain and the number of products involved at each step. Thus, supply chain management begins at the origin of the product or service and ends at the delivery and consumption of the same by the end user. There are a million things which we use or consume in our everyday lives, and supply chain management weaves through it all, creating a harmonious and efficient environment. Any break in this chain can result in disruption of the system with a domino like effect. Supply chain management is made up of a few components that are very important as well as critical to the system. We shall discuss each of the components in brief. 1. Planning This is one of the most important stages. Before the beginning of the entire supply chain, it is essential to finalise the strategies and put them into place. Checking the demand for the product or service, checking the viability, costing, profit, and manpower etc., are vital. Without a proper plan or strategy in place, it will be well-nigh impossible for the business to achieve effective and long term benefits. Therefore, enough time has to be devoted to this phase. Only after the finalisation of the plans and consideration of all pros and cons, can one proceed further. Every business needs a plan or blueprint or a roadmap based on which the strategies are made. Planning helps to identify the demand and supply trends in the market and this, in turn, helps to create a successful supply chain management system. 2. Information The world today is dominated by a continuous flow of information. In order to be successful, it is essential that a business stays abreast with all the latest information about the various aspects of its production. The market trends of supply and demand for a particular product can __________________________________________________________________________________ 140 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED be best understood if the information is properly and timely disseminated through the many levels of the business. Information is crucial in a knowledge-based world economy, and ignorance about any aspect of business may actually spell doom for the prospects of the business. 3. Source Suppliers play a very crucial role in supply chain management systems. Products and services sold to the end user are created with the help of different sets of raw materials. It is therefore necessary that suitable quality raw materials are procured at cost effective rates. If a supplier is unable to supply on time, and within the stipulated budget, the business is bound to suffer losses and gain a negative reputation. It is crucial that a company procures good quality resources so it can create good quality products and maintain its reputation in the market. This necessitates a strong role for suppliers in the supply chain management system. 4. Inventory For a highly effective supply chain management system it is essential that an inventory is kept and thoroughly maintained. An inventory means the ready list of items, raw materials and other essentials required for the product or service. This list has to be regularly updated to demarcate available stock and required stock. Inventory management is critical to the function of supply chain management, because without proper inventory management the production, as well as sale of the product, is not possible. Businesses have now started to pay more attention to this component simply because of its impact on the supply chain. 5. Production Production is one among the most important aspects of this system. It is only possible when all the other components of the supply chain are in tandem with each other. For the process of production to start it is essential that proper planning and supply of goods, as well as the inventory, are well maintained. The production of goods is followed by testing, packaging and the final preparation for delivery of the finished product. 6. Location Any business, that wants to survive as well as flourish, needs a location which is profitable for the business. Take for example, a carbonated drink factory is set up in an area where water supply is scarce. Water is a basic necessity of such business. The lack of water could hamper the production as well as affect the goodwill of the company. A business cannot survive if it has to share an already scarce raw material with the community. Hence, a suitable location, which is well connected, and very close to the source of essential resources for production is vital to a business’ prosperity. The requirement and availability of manpower must also be considered while setting up a business unit. 7. Transportation __________________________________________________________________________________ 141 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Transportation is vital in terms of carrying raw materials to the manufacturing unit and delivering the final product to the market. At each stage, timely transportation of goods is mandatory to sustain a smooth business process. Any business which pays attention to this component, and takes good care of it, will benefit from the production and transportation of its goods on time. It is essential that a company works towards a safe and secure transportation process. Be it inhouse or a third-party vendor, the transportation management system must ensure zero damage and minimal loss in transit. A well-managed logistics system along with flawless invoicing are the two pillars of secure transportation. 8. Return of goods Among the various components that create a strong supply chain is the facility for the return of faulty/malfunctioning goods, along with a highly responsive consumer grievance redress unit. No one is infallible. Even a machine may malfunction once in a million times if not more. As a part of a strong business process, one may expect the return of goods under various circumstances. Even the best quality control processes may have unavoidable momentary lapses. In the case of such lapses, inevitably followed by consumer complaints, a business must, instinctively, recall the product/s and issue an apology. This not only creates a good customer bonding, but also maintains goodwill in the long run. The eight components discussed here are interdependent and ensure a smooth supply chain management system. It ensures the success and reputation of a business. A business must focus on all these components in order to create a flawless supply chain. Businesses that have a strong supply chain management system in place always put great emphasis on all the components listed, and ensure that management, as well as the teams at various levels, play by the rules. Profit is the bottom line and to make sure that the business achieves it, it is essential that the supply chain does not have any gaps. Any snag should be dealt with immediately and the weak links repaired or removed. Demand and supply are two of the most important aspects of a business. For any business to be successful, trends, with respect to demand and supply, need to be studied carefully while implementing an effective plan of execution. A supply chain management system is required not just for the timely manufacture of goods; it is also a very critical system for ensuring that consumer requirements are met effectively. References Ballou, R.H., 2007. Business Logistics/supply Chain Management: Planning, Organizing, and Controlling the Supply Chain. Pearson Education India. Christopher, M., 2016. Logistics & Supply Chain Management. Pearson UK. Lambert, D.M. & Cooper, M.C., 2000. Issues in Supply Chain Management. Industrial Marketing Management, 29(1), pp.65-83. __________________________________________________________________________________ 142 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Tan, K.C., 2001. A framework of supply chain management literature. European Journal of Purchasing & Supply Management, 7(1), pp.39-48. INVENTORY – A CRITICAL SUPPLY CHAIN COMPONENT The inventory requirements of a firm are directly linked to the facility network and the desired level of customer service. Theoretically, a firm could stock every item sold in every facility dedicated to servicing each customer. Few business operations can afford such a luxurious inventory commitment because the risk and total cost are prohibitive. The objective in inventory strategy is to achieve desired customer service with the minimum inventory commitment. Excessive inventories may compensate for deficiencies in basic design of a supply chain system but will ultimately result in higher-than-necessary total logistics cost. Supply chain strategies should be designed to maintain the lowest possible financial investment in inventory. The basic goal is to achieve maximum inventory turn while satisfying service commitments. A sound inventory strategy is based on a combination of five aspects of selective deployment:     

Core customer segmentation Product profitability Transportation integration Time-based performance Competitive performance

Every enterprise that sells to a variety of different customers confronts uneven opportunity. Some customers are highly profitable and have outstanding growth potential; others do not. The profitability of a customer's business depends upon the products purchased, volume, price, value-added services required, and supplemental activities necessary to develop and maintain an on-going relationship. Because highly profitable customers constitute the core market of every enterprise, inventory strategies need to focus on them. The key to effective logistical segmentation rests in the inventory priorities dedicated to support core customers. Most enterprises experience a substantial variance in the volume and profitability across product lines. If no restrictions are applied, a firm may find that less than 20 % of all products marketed account for more than 80 % of total profit. While the so-called 80/20 rule or Pareto principle is common in business, management must avoid such outcomes by implementing inventory strategies based on fine-line product classification. __________________________________________________________________________________ 143 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED A realistic assessment of the incremental value-added by stocking low-profit or low-volume products is essential to avoiding excessive cost. For obvious reasons, an enterprise wants to offer high availability and consistent delivery of its most profitable products. High-level support of less profitable items, however, may be necessary to provide full-line service to core customers. The trap to avoid is high service performance on less profitable items that are typically purchased by fringe or non-core customers. Therefore, product line profitability must be considered when developing a selective inventory policy. The product stocking plan at a specific facility has a direct impact upon transportation performance. Most transportation rates are based on the volume and size of specific shipments. Thus, it may be sound strategy to stock a sufficient range or assortment of products at a warehouse to be able to arrange consolidated shipments. The corresponding savings in transportation may more than offset the increased cost of holding the inventory. A firm's degree of commitment to deliver products rapidly to meet a customer's inventory requirement is a major competitive factor. If products and materials can be delivered quickly, it may not be necessary for customers to maintain large inventories. Likewise, if retail stores can be replenished rapidly, less safety stock is required. The alternative to stockpiling and holding safety stock is to receive exact and timely inventory replenishment. While such time-based programs reduce customer inventory to absolute minimums, the savings must be balanced against other supply chain costs incurred as a result of the time-sensitive logistical process. Finally, inventory strategies cannot be created in a competitive vacuum. A firm is typically more desirable to do business with, than competitors, if it can promise and perform rapid and consistent delivery. Therefore, it may be necessary to position inventory in a specific warehouse to gain competitive advantage even if such commitment increases total cost. Selective inventory deployment policies may be essential to gain a customer service advantage or to neutralise a strength that a competitor currently enjoys. Inventory Flow The operational management of logistics is concerned with movement and storage of materials and finished products. Logistical operations start with the initial shipment of a material or component part from a supplier and are finalised when a manufactured or processed product is delivered to a customer. __________________________________________________________________________________ 144 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED From the initial purchase of a material or component, the logistics process adds value by moving inventory when and where needed. Providing all goes well, materials and components gain value at each step of their transformation into finished inventory. In other words, an individual part has greater value after it is incorporated into a machine than it had as a part. Likewise, the machine has greater value once it is delivered to a customer. To support manufacturing, work-in-process inventory must be properly positioned. The cost of each component and its movement becomes part of the value-added process. The Figure below illustrates the function of inventory in an organisation supply chain and /or value chain process to meet business objectives.

Inventory – A Critical Supply Chain Integration Component Inventory management is concerned with information required to implement the supply chain plan. Using combination of human resources and information technology, inventory is deployed and then managed to satisfy planned requirements. The work of inventory management is to make sure that the overall supply chain system has appropriate resources to perform as planned. Inventory decisions are high risk and high impact for supply chain management. Inventory committed to support future sales drives a number of anticipatory supply chain activities. Without a proper inventory assortment lost sales and customer dissatisfaction may occur. Likewise, inventory planning is critical to manufacturing. Material or component shortages can __________________________________________________________________________________ 145 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED shut down a manufacturing line or force modification of a production schedule, which creates added cost and potential finished goods shortages. Just as shortages can disrupt planned marketing and manufacturing operations, inventory overstocks also create operating problems. Overstocks increase cost and reduce profitability as a result of added warehousing, working capital, insurance, taxes, and obsolescence. Management of inventory resources requires an understanding of the principles, cost, impact, and dynamics. Inventory Functionality and Principles Inventory policy formation requires understanding the role of inventory in a manufacturing and logistics environment. To understand the importance of inventory decisions, consider the magnitude of assets committed by a typical enterprise. The Table presents sales, net profit, and inventory investment for select consumer and industrial goods manufacturers and merchandisers. The table illustrates the significant percentage of assets that are inventory related. Because inventory is a significant cost centre, the reduction of a firm's inventory commitment by a few percentage points can result in dramatic profit improvement. Attention to inventory management has significantly decreased inventory required to support Gross Domestic Product (GDP). These reductions have been achieved during a period when new product proliferation has been widespread. The Figure illustrates overall performance in inventory to sales ratio. Inventory management is risky, and risk varies depending upon a firm's position in the distribution channel. The typical measures of inventory commitment are time duration, depth, and width of commitment.

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ADVANCED Selected Data for Consumer and Industrial Goods Manufacturers and Merchandisers (US$ Millions) For a manufacturer, inventory risk is long term. The manufacturer's inventory commitment starts with raw material and component parts, includes work-in-process, and ends with finished goods. In addition, finished goods are often positioned in warehouses in anticipation of customer demand. In some situations, manufacturers are required to consign inventory to customer facilities. In effect, this practice shifts all inventory risk to the manufacturer. Although a manufacturer typically has a narrower product line than a retailer or wholesaler, the manufacturer's inventory commitment is deep and of long duration. A wholesaler purchases large quantities from manufacturers and sells smaller quantities to retailers. The economic justification of a wholesaler is the capability to provide retail customers with assorted merchandise from different manufacturers in specific quantities. When products are seasonal, the wholesaler may be required to take an inventory position far in advance of the selling season, thus increasing depth and duration of risk. One of the greatest challenges of wholesaling is product-line expansion to the point where the width of inventory risk approaches that of the retailer while depth and duration of risk remain characteristic of traditional wholesaling. In recent years, retail clientele has also forced a substantial increase in depth and duration by shifting inventory responsibility back to wholesalers. For a retailer, inventory management is about buying and selling velocity. The retailer purchases a wide variety of products and assumes a substantial risk in the marketing process. Retailer inventory risk can be viewed as wide but not deep. Due to the high cost of store location, retailers place prime emphasis on inventory turnover and direct product profitability. Inventory turnover is a measure of inventory velocity and is calculated as the ratio of annual sales divided by average inventory. Although retailers assume a position of risk on a variety of products, their position on anyone product is not deep. Risk is spread across more than 30,000 stock keeping units (SKUs) in a typical supermarket. A discount store offering general merchandise and food often exceeds 25,000 SKUs. A full-line department store may have as many as 50,000 SKUs. Faced with this width of inventory, retailers attempt to reduce risk by pressing manufacturers and wholesalers to assume greater and greater inventory responsibility. Pushing inventory back up the channel has resulted in retailer demand for fast delivery of mixed-product shipments from wholesalers and manufacturers. Specialty retailers, in contrast to mass merchandisers, normally experience less width of inventory risk as a result of handling narrower assortments; however, they must assume greater risk with respect to depth and duration of inventory holding.

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ADVANCED

Inventories to Sales Ratio If a business plans to operate at more than one level of the distribution channel, it must be prepared to assume related inventory risk. For example, the food chain that operates a regional warehouse assumes risk related to the wholesaler operation over and above the normal retail operations. To the extent that an enterprise becomes vertically integrated, inventory must be managed at all levels of the supply chain. Inventory Functionality From an inventory perspective, the ideal situation would be a response capability to manufacture products to customer specification. At various points in early chapters, the practicality of becoming fully response-based has been discussed in terms of the total costs and timeliness of customer support. While a zero-inventory manufacturing/ distribution system is typically not attainable, it is important to remember that each dollar invested in inventory is a trade-off with an alternative use of assets that may provide a better return. Inventory is a major asset that should provide return for the capital invested. The return on inventory investments is the marginal profit on sales that would not occur without inventory. Accounting experts have long recognised that measuring the true cost and benefits of inventory on the corporate profit-and-loss is difficult. Lack of measurement sophistication makes it difficult to evaluate the trade-offs among service levels, operating efficiencies, and inventory levels. While aggregate inventory levels have decreased, many enterprises still carry an average inventory that exceeds their basic requirements. This generalisation can be understood better through a review of the four prime functions of inventory. Below summarises inventory functionality: Geographical Specialisation __________________________________________________________________________________ 148 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Allows geographical positioning across multiple manufacturing and distributive units of an enterprise and inventory maintained at different locations and stages of the value-creation process allows specialisation. Decoupling Allows economy of scale within a single facility and permits each process to operate at maximum efficiency rather than having the speed of the entire process constrained by the slowest. Supply /Demand Balancing Accommodates elapsed time, between inventory availability, (manufacturing, growing, or extraction) and consumption. Buffering Uncertainty Accommodates uncertainty related to demand in excess of forecast or unexpected delays in order receipt and order processing on delivery and is typically referred to as safety stock. The above four functions require inventory investment to achieve managerial operating objectives. While lean logistics has made significant progress in reducing overall supply chain inventory, inventory properly deployed can create value and reduce total cost. Given a specific manufacturing/ marketing strategy, inventories planned and committed to operations can only be reduced to a level consistent with performing the four inventory functions. All inventories exceeding the minimum level are excess commitments. At the minimum level, inventory invested to achieve geographical specialisation and decoupling can only be modified by changes in facility location and operational processes of the enterprise. The minimum level of inventory required to balance supply and demand depends on the difficult task of estimating seasonal requirements. With accumulated experience over a number of seasonal periods, the inventory required to achieve marginal sales during periods of high demand can be projected fairly well. A seasonal inventory plan can be formulated based upon this experience. Inventories committed to safety stocks represent the greatest potential for improved logistical performance. These commitments are operational in nature and can be adjusted rapidly in the event of an error or policy change. A variety of techniques are available to assist management in planning safety stock commitments. The focus in the balance of this chapter is on a thorough analysis of safety stock relationships and policy formulation. Inventory-Related Definitions When formulating inventory management policy, specific inventory relationships must be considered. A firm must use these relationships to determine the optimum inventory policy with respect to when and how much to order. The inventory policy essentially determines inventory performance. The two key indicators of inventory performance are service level and average inventory. __________________________________________________________________________________ 149 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Inventory policy consists of guidelines concerning what to purchase or manufacture, when to act, and in what quantity. It also includes decisions regarding geographical inventory positioning. For example, some firms may decide to postpone inventory positioning by maintaining stock at the plant. Other firms may use a more speculative policy by electing to position more products in local markets or regional warehouses to have product closer to the market. The development of sound inventory policy is the most difficult issue within overall inventory management. A second aspect of policy concerns inventory management practice. One approach is to independently manage inventory at each stocking facility. At the other extreme is central inventory management of all stocking locations. Centralised inventory management requires effective communication and coordination. The increased availability of affordable information technology and integrated planning systems are allowing more firms to move toward centralised inventory planning. Service Level The service level is the performance target specified by management. It defines inventory performance objectives. Service level is often measured in terms of an order cycle time, case fill rate, line fill rate, order fill rate, or any combination of these. The performance cycle is the elapsed time between the release of a purchase order by a buyer and the receipt of the corresponding shipment. A case fill rate defines the % of cases or units ordered that are shipped as requested. For example, a 95 % case fill rate indicates that, on average, 95 cases out of 100 are filled from available stock. The remaining 5 cases are backordered or deleted. The line fill rate is the % of order lines filled completely. Order fill is the % of customer orders filled completely. Inventory management is a major element of logistical strategy that must be integrated to meet service objectives. While one strategy to achieve high service levels, is to increase inventory, other alternative approaches are the use of fast transportation and collaboration with customers and service providers to reduce uncertainty.

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ADVANCED

Inventory Cycle for Typical Product Average Inventory Average inventory consists of the materials, components, work-in-process, and finished product typically stocked in the logistical system. From a policy viewpoint target inventory levels must be planned for each facility. The Figure illustrates the performance cycles for one item at one warehouse location. At the maximum, the facility has in stock and during the normal performance cycle $70,000 and a minimum of $30,000. The difference between these two levels, $40,000 ($70,000 - $30,000), is the order quantity resulting in a cycle inventory of $20,000. Cycle inventory or base stock (also called lot size stock) is the portion of average inventory that results from replenishment. At the beginning of a performance cycle, stock level is at a maximum. Customers deplete inventory until the stock level reaches its minimum. Prior to the stock level reaching the minimum, a replenishment order is initiated so that inventory will arrive before an out-of-stock occurs. The replenishment order must be initiated when the available inventory is less than or equal to forecasted demand during the performance cycle time. The amount ordered for replenishment is termed the order quantity. Given this basic order formulation, average cycle inventory or base stock equals one half order quantities. The majority of inventory in the typical supply chain system is typically safety stock. Safety stock is maintained in a logistical system to protect against demand and performance cycle uncertainty. Safety stock inventory is used only at the end of replenishment cycles when uncertainty has caused higher than expected demand or longer than expected performance cycle times. Thus, the average inventory focus of logistical management is one-half order quantity plus safety stock. Average Inventory over Multiple Performance Cycles In initial policy formulation, it is necessary to determine how much inventory to order at a specified time. For purposes of illustration, assume the replenishment performance cycle is a constant 10 days and daily sales rate is 10 units per day. Also assume the replenishment order quantity is 200 units. __________________________________________________________________________________ 151 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

Inventory Relationship Constant Sales and Performance Cycle The above diagram illustrates these relationships. This type of chart is referred to as a sawtooth diagram because of the series of right triangles. Since complete certainty exists with respect to usage and performance cycle, orders are scheduled to arrive just as the last unit is sold. Thus, no safety stock is necessary. Since the rate of sale in the example is 10 units per day and it takes 10 days to complete inventory replenishment, a sound reorder policy might be to order 200 units every 20 days. Given these conditions, terminology related to policy formulation can be identified. First, the reorder point is specified as 100 units on hand. The reorder point defines when a replenishment order is initiated. In this example, whenever the quantity on hand drops below 100, an additional order for 200 units is placed. The result of this policy is that daily inventory level ranges from a maximum of 200 to a minimum of zero over the performance cycle. Second, average inventory is 100 units, since stock on hand exceeds 100 units one-half of the time, or for 10 days, and is less than 100 units one-half of the time. In fact, average inventory is equal to one-half the 200-unit order quantity. Third, assuming a work year of 240 days, 12 purchases will be required during the year. Therefore, over a period of 1 year, 200 units will be purchased 12 times for a total of 2400 units. Sales are expected to equal 10 units per/day over 240 days for a total of 2400 units. As discussed above, average inventory is 100 units. Thus, inventory turns will be 24 (2400 total sales/100 units of average inventory). In time, the sheer boredom of such routine operations would lead management to ask some questions concerning the arrangement. What would happen if orders were placed more frequently than once every 20 days? Why not order 100 units every 10 days? Why order as frequently as every 20 days? Why not reorder 600 units once every 60 days? Assuming that the inventory performance cycle remains a constant 10 days, what would be the impact of each of these alternative ordering policies on reorder point, average base inventory, and inventory turnover? The policy of ordering a smaller volume of 100 units every 10 days means that two orders would always be outstanding. Thus, the reorder point would remain 100 units on hand or on order to service average daily sales of 10 units over the 20-day inventory cycle. However, __________________________________________________________________________________ 152 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED average inventory on hand would drop to 50 units, and inventory turnover would increase to 48 times per year. The policy of ordering 600 units every 60 days would result in an average base inventory of 300 units and a turnover of approximately eight times per year. These alternative ordering policies are illustrated in the below diagram.

Alternative Order Quantity and Average Inventory The figure illustrates that average inventory is a function of the reorder quantity. Smaller replenishment order quantities do result in lower average inventory, but there are other factors such as performance cycle uncertainty, purchasing discounts, and transportation economies that are important when determining order quantity. An exact order quantity policy can be determined by balancing the cost of ordering and the cost of maintaining average inventory. The Economic Order Quantity (EOQ) model provides a specific quantity balancing of these two critical cost components. By determining the EOQ and dividing it into annual demand, the frequency and size of replenishment orders minimising the total cost of cycle inventory is identified. Prior to reviewing EOQ, it is necessary to identify costs typically associated with ordering and maintaining inventory. Inventory Carrying Cost Inventory carrying cost is the expense associated with maintaining inventory. Inventory expense is calculated by multiplying annual inventory carrying cost % by average inventory value. Standard accounting practice is to value inventory at purchase or standard manufacturing cost rather than at selling price. Assuming an annual inventory carrying cost percentage of 20 %, the annual inventory expense for an enterprise with $1 million in average inventory would be $200,000 (20% x $1,000,000). While the calculation of inventory carrying expense is basic, determining the appropriate carrying cost % is less obvious. Determining carrying cost % requires assignment of inventory-related costs. Financial accounts relevant to inventory carrying cost % are capital, insurance, obsolescence, storage, and taxes. __________________________________________________________________________________ 153 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED While cost of capital is typically a standard assessment, expense related to insurance, obsolescence, storage, and taxes varies depending on the specific attributes of individual products. Capital Cost The appropriate charge to place on capital invested in inventory varies widely. Review of a variety of enterprises indicates that assessments range from the prime interest rate to as high as 25 %. The logic for using the prime interest rate or a specified rate pegged to the prime rate is that cash to replace capital invested in inventory can be obtained in the money markets at that rate. Higher managerially specified capital costs are based on expected or target return on investment for all funds available to an enterprise. This target rate is often termed a hurdle rate. Any funds invested in inventory lose their earning power, restrict capital availability, and limit other investment. For example, if a firm expects a 20 % before-tax return on invested capital, similar logic suggests that capital tied up in inventory should be assessed or charged the same 20 %. Confusion often results from the fact that senior management frequently does not establish a clear-cut capital cost policy. For logistical planning, the cost of capital must be thought out clearly since the final rate of assessment will have a significant impact on system design and performance. Taxes Taxing authorities typically assess inventory held in warehouses. The tax rate and means of assessment vary by location. The tax expense is usually a direct levy based on inventory level on a specific day of the year or average inventory level over a period of time. Insurance Insurance cost is an expense based upon estimated risk or loss over time. Loss risk depends on the product and the facility storing the product. For example, high-value products that are easily stolen and hazardous products result in high insurance cost. Insurance cost is also impacted by facility characteristics such as security cameras and sprinkler systems that might help reduce risk. Obsolescence Obsolescence cost results from deterioration of product during storage. A prime example of obsolescence is product that ages beyond recommended sale date, such as food and pharmaceuticals. Obsolescence also includes financial loss when a product becomes obsolete in terms of fashion or model design.

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ADVANCED Obsolescence costs are typically estimated based on past experience concerning markdowns, donations, or quantity destroyed. This expense is the % of average inventory value declared obsolete each year. Storage Storage cost is facility expense related to product holding rather than product handling. Storage cost must be allocated on the requirements of specific products since it is not related directly to inventory value. In public or contract warehouses, storage charges are billed on an individual basis. With privately owned facilities, the total annual depreciated expense of the warehouse must be calculated in terms of a standard measure such as cost per day per square or cubic foot. The cost of total annual occupancy for a given product can then be assigned by multiplying the average daily physical space occupied by the standard cost factor for the year. This figure can then be divided by the total number of units of merchandise processed through the facility to determine average storage cost per merchandise unit. The table illustrates the components of annual inventory carrying cost and typical range of component costs. It should be clear that the final carrying cost % used by a firm is determined by managerial policy. Decisions regarding inventory carrying cost level are important because carrying cost is traded off against other logistics cost components in system design and operating decisions.

Inventory Carrying Cost Components Planning Inventory and Inventory Management Practices Key parameters and procedures, namely, when to order, how much to order, and inventory control, guide inventory planning. The “when to order” is determined by the demand and performance average and variation - the “how much to order” is determined by the order quantity. Inventory control determines the process for monitoring inventory status. Determining When to Order __________________________________________________________________________________ 155 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED As discussed earlier, the reorder point defines when a replenishment shipment should be initiated. A reorder point can be specified in terms of units or days' supply. This discussion focuses on determining reorder points under conditions of demand and performance cycle certainty. The basic reorder point formula is: R=D x T, where R

= Reorder point in units;

= Average daily demand in units; and

= Average performance cycle length in days.

To illustrate this calculation, assume demand of 20 units/day and a 10-day performance cycle. In this case, R

=DxT

= 20 units/day x 10 days = 200 units. An alternative form is to define reorder point in terms of days of supply. For the above example, the days of “supply reorder” point is 10 days. The use of reorder point formulations implies that the replenishment shipment will arrive as scheduled. When uncertainty exists in demand or performance cycle length, safety stock is required. When safety stock is necessary to accommodate uncertainty, the reorder point formula is: R

= D x T + SS,

where R

= Reorder point in units;

= Average daily demand in units;

T SS

= Average performance cycle length in days; and = Safety stock in units.

Determining How Much to Order Lot sizing balances inventory carrying cost with the cost of ordering. The key to understanding the relationship is to remember that average inventory is equal to one-half the order quantity. Therefore, the greater the order quantity, the larger the average inventory and consequently, the greater the annual carrying cost. __________________________________________________________________________________ 156 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED However, the larger the order quantity, the fewer orders required per planning period and, consequently, the lower the total ordering cost. Lot quantity formulations identify the precise quantities at which the annual combined total inventory carrying, and ordering cost is lowest for a given sales volume. The Figure below illustrates the basic relationships. The point at which the sum of ordering and carrying cost is minimised represents the lowest total cost. Simply stated, the objectives are to identify the ordering quantity that minimises the total inventory carrying and ordering cost. Economic Order Quantity The EOQ is the replenishment practice that minimises the combined inventory carrying and ordering cost. Identification of such a quantity assumes that demand and costs are relatively stable throughout the year. Since EOQ is calculated on an individual product basis, the basic formulation does not consider the impact of joint ordering of products. The most efficient method for calculating EOQ is mathematical. Earlier in this chapter a policy dilemma regarding whether to order 100, 200, or 600 units was discussed. The answer can be found by calculating the applicable EOQ for the situation.

Economic Order Quantity Factors for Determining EOQ __________________________________________________________________________________ 157 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Annual demand volume

2400 units

Unit value at cost

$5.00

Inventory carrying cost %

20% annually

Ordering cost

$19.00 per order

To make the appropriate calculations, the standard formulation for EOQ is: EOQ = 2CoD CiU where EOQ

= Economic order quantity;

= Cost per order;

= Annual inventory carrying cost;

= Annual sales volume, units; and

= Cost per unit.

EOQ

2 x 19 x 2400 0.20 x 5.00

91,200

= 302 (round to 300) Total ordering cost would amount to $152 (2400/300 x $19.00), and inventory carrying cost to $150 [300/2 x (5 x .20)], thus, after rounding to allow ordering in multiples of 100 units, annual reordering and inventory carrying cost have been equated. To benefit from the most economical purchase arrangement, orders should be placed in the quantity of 300 units rather than 100, 200, or 600. Thus, over the year, eight orders would be placed, and average base inventory would be 150 units. The impact of ordering in quantities of 300 rather than 200 can be observed. An EOQ of 300 implies that additional inventory in the form of base stock has been introduced into the system. Average inventory has been increased from 100 to ISO units on hand. While the EOQ model determines the optimal replenishment quantity, it does require some rather stringent assumptions. The major assumptions of the simple EOQ model are: __________________________________________________________________________________ 158 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 

All demand is satisfied



Rate of demand is continuous, constant, and known



Replenishment performance cycle time is constant and known



There is a constant price of product that is independent of order quantity or time



There is an infinite planning horizon



There is no interaction between multiple items of inventory



No inventory is in transit



No limit is placed on capital availability.

The constraints imposed by some of these assumptions can be overcome through computational extensions; however, the EOQ concept illustrates the importance of the tradeoffs associated with inventory carrying and replenishment ordering cost. Relationships involving the inventory performance cycle, inventory cost, and economic order formulations are useful for guiding inventory planning. First, the EOQ is found at the point where annualised order cost and inventory carrying cost are equal. Second, average base inventory equals one-half order quantity. Third, the value of the inventory unit, all other things being equal, will have a direct relationship with replenishment order frequency. In effect, the higher the product value, the more frequently it will be ordered. Safety Stock Role of Safety Stock No matter how hard a firm tries to meet customers’ requirements in terms of quantity and delivery, there are forces at work which will result in the firm falling short. Besides customers’ demands, other forces at play include shipping delay, quality issues, discrepancies at inbound area, pilferage amongst others. While excess stock is a major concern, here, we will focus on the shortages, i.e. when demand exceeds quantity on hand.

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ADVANCED Safety stocks can be referred to stocks that would be used if there is an unusual peak demand. This definition implies that during normal demand, safety stocks will be dormant, waiting to be used when demand surges. Implicit in this definition is that this will be a permanent layer of stocks, adding to the increased inventory costs.

Service Level In the above Figure, customer service is defined as number of orders which can be satisfied out of the total demands for a specified period. A large increase in meeting demands will result in a small increment in service level. Supply chain managers often have to weigh the balance of increasing service level versus the increase in inventory level. In spite of such attempts, shortages are common. There are two types of shortages: Out-of-stock Situation This is planned. An example is when there is no demand, the stock is set to zero; or, the stock may be zero until a customer demands it. Stock-out Situation This is unplanned, and any zero stock is undesirable. This condition can heighten customer dissatisfaction. In order to minimise stock-outs, organisations do consider safety stocks as an option. The choice of safety stocks will depend on: 

Company’s customer service philosophy



Customer service level e.g. no of stock-outs per period

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ADVANCED 

Stock investment



Cost of stock-out versus cost of non-stock-out.

Shortages in organisations are emotional issues. As every shortage is monitored, therefore if supply chain managers do not differentiate the types of inventory which created the shortages, the blame game can be pretty nasty. In supply chains, it is more cost effective if Class C parts are bought in bulk to offset shortage costs, leaving the organisation to focus on Class A and B items. Safety Stock Techniques There are generally three methods of computing safety stocks: Statistical Method The level is computed using statistics, based on the historical demand. It uses deviation of forecast and actual demand. Safety stock = S + σ * √LT Where S = service level, σ = standard deviation, LT = lead-time Fixed Method The level is fixed, ignoring the usage rate. Time Method The level is determined by looking at the future demand of items. Safety Stocks & PLC For industrial products, the PLS is relatively long and therefore, safety stocks are less of an issue than FMCG or electronic product with shorter PLC. How should supply chain managers handle this?

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ADVANCED

Managing SS During PLC Product Classification Inventory control is the managerial procedure for implementing an inventory policy. The accountability aspect of control measures units on hand at a specific location and tracks additions and deletions. Accountability and tracking can be performed on a manual or computerised basis. An integrated inventory management strategy defines the policies and process used to determine where to place inventory, when to initiate replenishment shipments, and how much to allocate. The strategy development process employs three steps to classify products and markets, define segment strategies, and operationalise policies and parameters. The objective of product/market classification is to focus and refine inventory management efforts. Product/market classification, which is also called fine-line or ABC classification, groups products, markets, or customers with similar characteristics to facilitate inventory management. __________________________________________________________________________________ 162 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The classification process recognises that not all products and markets have the same characteristics or degree of importance. Sound inventory management requires that classification be consistent with enterprise strategy and service objectives. Classification can be based on a variety of measures. The most common are sales, profit contribution, inventory value, usage rate, and nature of the item. The typical classification process sequences products or markets so that entries with similar characteristics are grouped together. Table 3-3 illustrates product classification using sales. P ro d uc t Id e n ti fi c a ti o n 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

A nnua l S a le s (in 0 0 0 s) 4 5 ,0 0 0 3 5 ,0 0 0 2 5 ,0 0 0 1 5 ,0 0 0 8 ,0 0 0 5 ,0 0 0 4 ,0 0 0 3 ,0 0 0 2 ,0 0 0 1 ,0 0 0 1 ,0 0 0 1 ,0 0 0 1 ,0 0 0 750 750 750 500 500 500 250 $ 1 5 0 ,0 0 0

P e rc e nt T o ta l S a le s 3 0 .0 2 3 .3 1 6 .7 1 0 .0 5 .3 3 .3 2 .7 2 .0 1 .3 0 .7 0 .7 0 .7 0 .7 0 .5 0 .5 0 .5 0 .3 0 .3 0 .3 0 .2

A c c u m u l a te d S a le s (% ) P r o d u c ts ( % ) 3 0 .0 5 5 3 .3 10 7 0 .0 15 8 0 .0 20 8 5 .3 25 8 8 .6 30 9 1 .3 35 9 3 .3 40 9 4 .6 45 9 5 .3 50 9 6 .0 55 9 6 .7 60 9 7 .4 65 9 7 .9 70 9 8 .4 75 9 8 .9 80 9 9 .2 85 9 9 .5 90 9 9 .8 95 1 0 0 .0 100

C l a s s i fi c a ti o n C a te g o r y A A A A B B B B B B C C C C C C C C C C

The products are classified in descending order by sales volume so that the high-volume products are listed first, followed by slower movers. Classification by sales volume is one of the oldest methods used to establish selective policies or strategies. For most marketing or logistics applications, a small percentage of the entities account for a large percentage of the volume. This operationalisation is often called the 80/20 rule or Pareto's law. The 80/20 rule, which is based on widespread observations, states that for a typical enterprise 80 % of the sales volume is typically accounted for by 20 % of the products. A corollary to the rule is that 80 % of enterprise sales are accounted for by 20 % of the customers. The reverse perspective of the rule would state that the remaining 20 % of sales are obtained from 80 % of the products, customers, etc. In general terms, the 80/20 rule implies that a majority of sales results from a relatively few products or customers. __________________________________________________________________________________ 163 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Product Classification (Sales) – ABC Classification Once items are classified or grouped, it is common to label each category with a character or description. High-volume, fast-moving products are often described as "A" items. The moderate volume items are termed the "B" items, and the low-volume or slow movers are known as "Cs." These character labels indicate why this process is often termed ABC analysis. While fine-line classification often uses three categories, some firms use four or five categories to further refine classifications. Grouping of similar products facilitates management efforts to establish focused inventory strategies for specific product segments. For example, high-volume or fastmoving products are typically targeted for higher service levels. This often requires that fast-moving items have relatively more safety stock. Conversely, to reduce overall inventory levels, slower-moving items may be allowed relatively less safety stock, resulting in lower service levels. In special situations, classification systems may be based on multiple factors. For example, item gross margin and importance to customers can be weighted to develop a combined index instead of simply using sales volume. The weighted rank would then group items that have similar profitability and importance characteristics. The inventory policy, including safety stock levels, is then established using the weighted rank. Lead-time Issues of Inventory Superior cost, quality, delivery, and technological performance do not guarantee success for a supply chain. Organisations must also be able to compete on the basis of time. This does not mean that cost, quality, delivery, and technology considerations are no longer important; they are critically important. However, individual organisations and supply chains must be competitive in these areas and be able to get their products and services to their customers faster than the competition. Increasingly, organisations are realising that they are competing on the basis of time. In fact, reducing the time required to provide the end customer with products or services is one of the major forces leading organisations to participate in supply chain management initiatives. Adopting an integrated supply chain management approach provides the means to make significant reductions in the cycle time required to move materials among supply chain members and to the end customer. Several authors have shown time to be a highly effective area in which to focus overall improvement efforts within an organisation. The opportunity for improvement appears to be even greater in an inter-organisational supply chain environment. This time-sensitive environment presents new challenges and opportunities for the individual organisations and their supply chains. This section introduces the concept of cycle time, presents common causes of "long" cycle times, discusses an approach for making cycle time improvements, and presents several critical success factors that should be considered as part of the cycle time reduction initiatives. __________________________________________________________________________________ 164 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Cycle Time Overview Cycle time is the total elapsed time required to complete a business process. All too often only a small percentage (e.g., three to five %) of the total elapsed time required to complete a process has anything to do with "real work.” The rest of the time is typically devoted to a wide range of counterproductive, time-consuming activities and events. Identifying, improving, and/or eliminating these time-consuming activities represent one of the major SCM opportunity areas. However, cycle time reduction is not just about completing a process quickly (i.e., speed for the sake of speed); it is concerned with completing the given process effectively. By focusing on key processes, supply chain member organisations can significantly improve cycle time performance, improvements that can provide a source of competitive advantage for the supply chain. Causes of Long Cycle Times A number of causes of long process cycle times can be found in a supply chain environment. In examining supply chain processes, typically one or more of the following causes will be present. 12 Several common causes of long process cycle times and key issues that should be addressed when these situations are encountered include, but are not limited to, the following: Waiting In many multi-step processes, significantly more time is devoted to waiting between processed steps than is spent in all of the processing steps combined! Where are the longest waits occurring in the process? What are the causes of these delays? What actions can be taken to reduce or eliminate the time spent waiting? Does the organisation or supply chain need additional capacity in terms of facilities, equipment, or personnel? Non-Value-Added Activities The key processes found in many supply chains have existed for many years. When examining supply chain processes, it is worthwhile to determine the value that is being added by the overall process and individual process activities. It is common to find processes or activities within a process that were essential at one time, but that now add little or no value. Is this process necessary? Do all activities in the process add value? Activities that do not add value should be eliminated. If the process activity is adding value, is it being conducted in the best possible way given current practices and available technologies? For example, does the organisation conduct quality inspections of purchased materials upon receipt, or does it utilise high-performing suppliers that certify that the materials they ship meet all specifications? Serial versus Parallel Operations Many supply chain process activities, are conducted serially (i.e., first complete activity 1, and then complete activity 2, and so on through activity N). Are there opportunities in the process for activities to take place in a parallel (i.e., simultaneous) manner as opposed to the currently used serial or sequential fashion? __________________________________________________________________________________ 165 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED For example, within a manufacturing organisation in the supply chain, are new products and the processes that will be used to manufacture these products developed concurrently, or is the product designed and then thrown "over the wall" to the manufacturing group? Are the manufacturing organisation's key supplier and customer partners in the supply chain involved early in the new-product development process? Repeating Process Activities A significant cause of poor supply chain cycle time performance has to repeat process steps due to product or service quality problems. There are few situations that can increase product cycle times (in terms of both average cycle times and variability) more than this condition. Are parts of the process repeated owing to an inability to get it right the first time? What are the causes of these problems? What actions are necessary to resolve these problems? Batching Batching occurs when some quantity of materials or orders is accumulated at one step in the process or organisation in the supply chain before it is released to the next process step or supply chain member organisation. What is the rationale for batching? Make certain that the rationale is economic rather than "that's how we have always done it." For example, a firm might wish to take advantage of lower transportation rates by batching orders to create larger shipment quantities. In such circumstances, however, the firm should periodically revisit the economics of the situation to ensure that the savings associated with the batch approach are worth the additional time required. Excessive Controls How much time is spent and potentially wasted following the rules and regulations governing processes within and among supply chain member organisations? A common internal example of this situation is seen in purchase order (PO) processing. How many signatures are needed for a PO? How many of these signatures are merely being "rubber stamped"? We do not mean to imply that all controls should be abandoned. However, organisations would be well served to periodically review the controls it uses to govern both internal and external supply chain processes and determine if the level of control provided is worth the associated cost. A periodic cost/benefit analysis for intra-organisational and inter-organisational controls as they apply to the supply chain is likely to be time well spent. Many organisations discover that their rules and regulations serve only to increase their response time to internal and external customers, and that many of these control mechanisms are more of a burden than a benefit. Lack of Synchronisation in Materials Movement Are materials being moved across the supply chain in the most effective manner? Are product movements across the supply chain managed so as to ensure that the right quantity of the right product is getting to the right location at the right time? Or are materials arriving at the customer's location too early, causing additional storage and materials handling activities, or __________________________________________________________________________________ 166 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED too late, disrupting the customer's operations and in so doing damaging the supplier's reputation? Ambiguous Goals and Objectives Do all supply chain member organisations clearly understand the overall supply chain goals and objectives? Do all supply chain members understand what their organisation must contribute for the overall supply chain to be successful? Poorly Designed Procedures and Forms Do the procedures and forms associated with a specific process lead to the efficient completion of the process? Or do they significantly increase the time required to complete the process by creating more work while adding little value? Outdated Technology Are the supply chain member organisations making the best use of available technology? How is key information communicated across the supply chain? For example, are purchase orders transmitted from the buying organisation to the supplying organisation by fax, EDI, the Internet, or are they mailed? Are warehousing operations within the supply chain utilising a high level of automation or are they primarily manual operations? Lack of Information The cycle time for supply chain decision making is often lengthy owing to the time needed to gain access to the information required to make decisions. It should be recognised that the required information may originate within the decision-maker's organisation or in one or more of the other supply chain member organisations. Do decision makers have the information they need, when they need it, and in the desired format? How much time is being spent identifying, collecting, and manipulating the information required to make a decision versus making the actual decision? Poor Communication Intra-organisational and inter-organisational communications are critical to overall supply chain performance. Have the necessary lines of communication been established across the supply chain member organisations? Do managers within supply chain organisations know whom to contact in other functional areas within their own organisation, as well as in the other supply chain organisations, if there are problems? A list of key contacts in different organisations across the chain is a very simple but valuable problem-solving resource. Limited Coordination Coordinating supply chain processes is another important factor in determining supply chain performance. Do all parties involved in a given process have a clear understanding of their respective roles and associated responsibilities? Are the inter-organisational processes effectively coordinated? Are there formal rules of engagement to ensure that the desired level of coordination is maintained? __________________________________________________________________________________ 167 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

Limited Cooperation Are all supply chain member organisations truly committed to the supply chain management initiative? If not, it is time to re-evaluate the membership of those organisations that lack the required level of commitment. Cycle time and overall supply chain performance hinges on the cooperative efforts of the member organisations. Do all organisations have the appropriate cooperative philosophy? Lack of/Ineffective Training Proper training reduces the time for people to become proficient in their jobs and also can lead to on-going improvements. Have all people involved in supply chain processes and activities received adequate training for their specific jobs? Are there on-going training opportunities for employees that focus on supply chain performance improvement in general and cycle time reduction in specific? Lead-time issues can lead to problems in supply chains. One of these effects is the bull whip effect. Case Studies – Lead-time Many companies have spent enormous amounts of money to decrease the lead times within their organisations, only to discover that their customers never saw much benefit because of long shipping times. These same companies are now concentrating intensively on the logistics systems that link them to their customers. Since logistics systems often interface directly with the customer, they can have considerable impact on overall customer satisfaction. Consider the experience of Ford Motor Company, which had to radically re-engineer their entire system of delivering vehicles to dealerships. Why was this necessary? Quite simply, customer expectations exceeded the performance of Ford's old logistics system. Ford dealers would often complain that consumers were "spoiled" by their experience with package delivery companies such as Federal Express, which allowed them to track packages. Dealers, however, could not tell customers when a vehicle would arrive at a dealership! Until recently, once a vehicle left Ford's factory, a dealer did not know where it was until it arrived at the lot. Many consumers, unwilling to wait to find out whether the car they wanted was on its way, simply went elsewhere for a car.'6 In February 2000, however, Ford struck a deal with UPS. Under the agreement, UPS uses its advanced logistics capabilities to track Ford's vehicle shipments, so that dealers can find the exact location of a particular vehicle by logging onto the UPS website. The system is a major improvement in the way Ford does business. In studying the existing supply chain processes and attempting to reduce cycle time, organisations (such as Ford) may realise that the entire logistics system has major flaws. In such cases, the entire supply chain may need to be re-designed or "re-engineered”.

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ADVANCED Changes in government regulations and policies also may create the need for changes in supply chain strategy. In Europe, for example, the deregulation of European Community (EC) economic, financial, and operational barriers have meant that companies have to rethink their logistics strategies. The single market environment allows greater flexibility in supplier sourcing and customer deliveries. Many companies are re-engineering and rationalising their logistical networks to take advantage of the reduction in, or elimination of, numerous artificial barriers that previously affected logistics decisions. In addition to regulations, organisations must recognise the cultural differences found in many countries where they do business. One group of logistics researchers notes that. "Seemingly small cultural differences among Asian countries are only an indication of the complexity of the task of managing logistics within the region." Performance standards may vary from region to region or by organisation. Therefore, global supply chains require a detailed understanding of a foreign supply chain partners' capabilities as well as regional performance standards and regional infrastructure. Managers attempting to create global supply chains must be sensitive to specific local conditions and modify their strategies accordingly. As organisations embark on various initiatives to manage supply chains, they need to recognise that these efforts provide an opportunity to do much more than merely align their current logistical processes with those of their supply chain partners. SCM provides a platform to make significant improvements in logistical performance across the supply chain. These improvements may be the result of changes in roles of the supply chain member organisations. Organisations that ignore this re-engineering opportunity will likely make only incremental improvements. There is urgent need for logistics to re-engineer such that "new approaches to business partnerships, dramatic innovations in technology, and reinvented supply chain strategies all result in new logistical expectations, none of which are attainable through mild-mannered, incremental tweaks to an existing process." Whirlpool and Hewlett-Packard are among those companies that have successfully re-engineered their logistics functions. At Whirlpool, the reengineering process relies on computer systems and third-party partners that enable the company to fill orders within 24 hours. The Hewlett-Packard re-engineering process takes the form of an improved delivery strategy, which was formulated and prototyped to meet the needs of the company. The Council of Logistics Management suggests that companies consider the following issues when working to improve their supply chains: 

Help customers become more knowledgeable about logistics.



Eliminate any logistics activities that do not add customer value.

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ADVANCED 

Remove the barriers among the members of the supply chain to improve customer focus, make better and faster decisions, improve supply chain efficiency, and achieve sustainability.



Manage partnerships with third parties.

Organisations are recognising that their current logistical processes and practices may not be the best approach within the context of an inter-organisational supply chain. Although organisations recognise the danger of functional or departmental sub-optimisation within the context of a single organisation, this logic must now be applied to the supply chain to avoid "sub-optimising" performance at the organisational level. This means that the level of analysis for the re-engineering effort is the entire supply chain, and it is this larger system that the member organisations must attempt to optimise. Although internal corporate process improvements can lead to significant performance gains, managers and academicians alike have realised that reengineering must extend beyond the organisation to include other members of the supply chain. This outward-focused approach to re-engineering not only aligns corporate actions with the customer's desire for on-time provision of goods and services, but in most cases can also significantly improve profitability. One study, for example, found that supply chain re-engineering can boost profits by 150 % to 250 % and can reduce order cycle time by up to 70 %. Supply chain process improvements also may significantly reduce the cost of doing business for supply chain members, particularly in the areas of administration, inventory control, warehouse management, and transportation. Grocery industry managers, for example, believed they could cut $30 billion – 10 % of total operating budgets – via supply chain re-engineering. Firms such as Dow Chemical, SC Johnson Wax, National Semiconductor, Merle Norman, Levi Strauss, and Xerox are but a few of the growing list of organisations to reap the vast benefits of total supply chain re-engineering. The main obstacles keeping others from realising similar benefits are top management's limited understanding of the process, a general resistance to change, the persistence of rigid department-based organisational structures, and lack of a customer perspective. The cost of not re-engineering can be high. For example, Compaq Computer estimated that it lost between $500 million and $1 billion in sales in the first 10 months of 1994 because its products were not available when and where customers wanted them. Bullwhip Effect One of the main challenges in supply chains is dealing with variability, which seems to occur if one does not monitor and control it. It is a known fact that for all metrics, they vary around an average value. If the variations swing wildly, then supply chain managers need to manage these and minimise them as the greater the variability the more difficult and expensive is to run the chain. __________________________________________________________________________________ 170 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED Supply chains are vulnerable to variables because of the sequence and interdependence of activities across the entire supply chains. A delay, no matter how small, will cascade down the chain and creating havoc in inbound, storage, production and finally shipment and delivery. So far, we have covered inventory which is used to cope with variability. Inventory acts as buffer, line balancer and protection against supply variability. Even with inventory, variability is manifested in many forms. These include but not limited to the following: 

Quality issues



Delivery issues



Forecasting issues



Demand issues

The flow of inventory is often down the chain, from suppliers to end users. Supply variability is this case is amplified down the chain. Demand variability can also be amplified up the chain. Demand variability increases as one move up the supply chain away from the retail customer. This observation holds across most industries. The result is increased cost and poorer service. Sources of variability can be demand variability, quality problems, strikes, plant shutdowns and many others. Variability with time delays in the transmission of information up the chain and time delays in the manufacturing and shipment down the chain create the bullwhip effect. Supplier

Supplier

Manufacturer

Wholesaler

Demand for raw materials

Distributor

Retailer

Demand for finished goods

Bullwhip Effect The above Figure demonstrates that a small variation in demand at the retailer causes this variation to be amplified up the supply chain. A small change in finished goods is experienced quite differently at the supplier’s end. There is a big swing for raw materials. Some of the causes of bullwhip effect are: 

Overreaction to backlogs



Neglecting to order in an attempt to reduce inventory

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ADVANCED 

No communication up and down the supply chain



No co-ordination up and down the supply chain



Delay in information and material flows



Order batching



Shortage gaming



Demand forecast (adding another layer of buffer to the demand estimates)



Some of the strategies to minimise the bullwhip effect are:

Order Batching Using EDI, to capture real demand. Random peak demand is countered by more frequent small orders. And smaller orders have smaller variance. When a downstream entity orders more often, it will not see a reduction in its own demand variance. This is not critical. What is more critical is that the upstream entity sees a reduction in demand variance. Demand Signalling Lack of demand visibility can be addressed by either EDI or ePOS. Another method is the use of VMI. There is only one point of control of inventory demand and hence demand variability can be minimised. Shortage Gaming Unrestricted ordering is not allowed. Entities can reserve a fixed quantity per year and then specify ordering quantities per order, as long as the total quantity at the end of the year is equal to the reserved quantity. For this system to work, information must be shared with all upstream partners in the supply chain. Delivery Synchronisation There ought to be agreement at the start of the lead-time and quantity. Fluctuating Prices Often, when there is speculation, material prices will swing upwards. Contracts need to be negotiated upfront in order to stabilise the supply chains without the purchasing department constantly haggling prices. The end result could see a speculative build-up of inventory in the supply chain. Speculations have the characteristics of feeding itself. Retailers in attempts to secure inventory will increase demand further fuelling the virtual accumulation of inventory. Conclusion The flow of inventory in supply chains is critical to the efficiency of supply chains. While inventory is an important component, it carries risks in terms of costs. Costs is revealed in many forms such as capital costs, carrying costs, obsolescence costs, transportation costs, delayed costs, and shortage costs. __________________________________________________________________________________ 172 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED On one hand, inventory is kept as supply is subject to variability and demand can be erratic. The challenge is therefore to maintain a balance between supply and demand. Keeping too much stocks while is comforting decreases the efficiency of supply chains. Having a low inventory can be devastating to customer service level. Firms attempt to address the bullwhip effect by different strategies via EDI, JIT delivery and others including safety stocks. However, safety stocks are not a perfect answer either. While it provides protection when there is peak demand, they are a permanent feature if supply chain managers do not take steps to monitor and control them. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

Pareto principle is commonly known in business as the 60/40 rule

Inventory management is concerned with information required to implement the supply chain plan. Using combination of human resources and information technology, inventory is deployed and then managed to satisfy planned requirements

A firm is typically more desirable to do business with than competitors if it can promise and perform rapid and consistent delivery

The typical measures of inventory commitment are time duration, depth, and width of commitment

The service level is the performance target specified by management. It defined inventory performance objectives

Out-of-stock situation – this is unplanned and any zero-stock undesirable. This condition can heighten customer dissatisfaction

Stock-out situation – this is planned. An example is when there is demand, the stock is set to zero, or the stock may be zero until the customer demands it

Batching occurs when some quantity of materials or orders is accumulated at one step in the process or organisation in the supply chain before it is released to the next process step or supply chain member organisation

The Bullwhip Effect states that a small variation in demand at the retailer causes this variation to be amplified up the supply chain. A small change in finished goods is experienced quite differently at the supplier’s end

Inventory costs are revealed in many forms such as capital costs, carrying

True

False

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ADVANCED costs, obsolescence costs, transportation costs, delayed costs, and shortage costs CHAPTER 9 - INFORMATION TECHNOLOGY IN SUPPLY CHAINS (US: 336708 Facilitate processes to ensure the integration of supply chain information) PURPOSE: This chapter will enable learners to facilitate processes to ensure the integration of supply chain information. LEARNING OBJECTIVES: Learner will be able to:   

Analyse on information parameters that impact on the effectiveness of the supply chain. Facilitate processes for effective decision-making regarding supply chain information systems. Analyse the effectiveness and make recommendations to improve supply chain information systems.

Introduction Information Technology (I.T.) is always regarded as an enabler of effective supply chain management. Supply chain management is about the flow of products and information between organisations and these organisations can be suppliers, customers, producers, and logistics service providers, among others. In order to ensure effective supply chain management process, these organisations have to share information and use the available information to work collaboratively together to acquire, purchase, convert/manufacture, assemble, and distribute goods and services, from supplier to the ultimate end customers. The ability to obtain reliable and timely information to assist in supply chain management process can become a competitive advantage for company who can do it better than its competitors. Supply Chain management is becoming more complex every year. The greatest influences come from the rapid globalization of all supply chains. Globalized supply chain networks are impacted by potential risk in delays and confusions. This forces analytics managers to put more attention to planning and to include contingency planning and management. These and other new challenges create pressure on the adoption of new technologies to ensure the best performance, leading to high customer satisfaction levels. Transformation challenges in Supply Chain Technology Industry. Supply chain challenges in technology are transforming the way business is conducted, also it will continue to evolve well into the future. There are several new technology and emerging transformations in supply chain management. __________________________________________________________________________________ 174 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED What is a supply chain? The answer to what is a supply chain is most the flow of a product from the procurement of raw materials to the delivery of the final product. These are the top 15 supply chain business intelligence technology issues and supply chain challenges for consideration in the future: 1: Analytics and Analysis The gathering of analytics and supply chain analysis of the data will continue to be of extreme importance. The information you acquire through supply chain analysis can improve your products and services, as well as your operations, hiring practices, marketing campaigns and much more. The analysis of your supply chain analytics is essential to improving these aspects, as well as your supply chain marketing. Consider using analytics for both internal and external evaluation, use analytics to monitor your vendors, personnel and job performance, also supply chain analytics will to streamline the entire operations from the purchasing of raw materials to the delivery of your final product. 2: Supply Chain Optimization Apps The use of apps is yet another way supply chain technology is transforming business practices. Many of the best supply chain apps provide you with the ability to access real-time information to prevent delays and the loss of potentially millions of dollars annually. Businesses of all sizes are reaping the benefits because people at every level of the supply chain can see the existing state of products every step of the way. Whether a driver who is waiting for a shipping container at the port of entry, everyone always has the visibility and transparency of products. 3: Artificial Intelligence (AI) AI supply chain trends can be used in any number of ways for complete supply chain optimization. You can capitalize on artificial intelligence by using it to automate processes and procedures. The benefits of doing so are to eliminate human error, create efficiency and to save money by eliminating the need for human labour. AI technology can find patterns, better predict purchasing demands, eliminate redundancies and optimize inventory levels. The supply chain will benefit from improved purchasing practices and lower inventory levels, as well as improved supply chain marketing effectiveness. 4: Blockchain Roles in Supply Chain Optimization Blockchain is one of the best supply chain tools available today. It is one of the best ways to protect data and information from being manipulated or edited. You are better protected from hackers and corporate espionage by using blockchain-driven networks and devices. This type of decentralized methodology also requires that all users within the network agree to any updates adding yet another layer of protection. Blockchain, as a supply chain technology, allows you to securely manage everything in one place from invoices and payments to contracts and tracking. 5: Business Events When we think about trends in supply chain design and management technologies and methodologies, business events and systems events are gaining traction in the supply chain __________________________________________________________________________________ 175 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED world. A business event is essentially any action that influences the direction of the business. This could be a highly common event such as the purchase of a product. However, it could also be more significant such as the credit limit of a customer being exceeded. These events will directly influence the assets, equity or liability of a business account. It is possible that an event can be an internal event that occurs within the company or an external event that occurs between two outside sources. 6: Content and SEO For Supply Chain Companies Digital trends in technology are impacting the supply chain. Supply chain content is essential to customer acquisition and retention. It is estimated that the content industry will be worth $300 billion by 20202, according to marketingmag.com. The best content is original content rather than to republish a post or article that has already been featured elsewhere. It does not matter the area within the supply chain in which your business takes place. Content is essential to the success of any business today. Be sure your budget is large enough and that you carefully consider whether you outsource your content or if you hire someone to write permanently on staff. 7: Conversational Commerce Conversational commerce takes the conversation between a business and a customer or vendor to a new level. You can automate conversations and responses to allow your employees to spend more time on other aspects of their jobs. These conversations are developed through established rules and artificial intelligence. You will be able to provide faster responses to questions, as well as to be able to respond to all comments and questions without having to prioritize the level of urgency. You can currently use this type of conversational commerce in a variety of platforms such as Alexa, Telegram, SMS, Line, WeChat and more. 8: End Users Are Top Priority Whether you use supply chain software or alternative supply chain tools, all applications must be able to benefit the end user in some way. The end user is the ultimate driver of all business decisions, and they will continue to hold the power for the foreseeable future. Make sure that all of the applications, software and other tools that can be accessed by the end user is the right price and easy to use. It is also important to ensure that all pages and applications load quickly and provide all services in one place to reduce unnecessary steps for maximum customer satisfaction. 9: Internet of Things (IoT) When we explore future information technology trends in supply chain we can’t ignore the internet of things. IoT has yet to infiltrate the supply chain from beginning to end; however, IoT is used in a number of ways throughout the supply chain process. Airplanes use IoT through sensors to provide real-time data as a way to improve supply chain efficiency. You can also use it throughout manufacturing and logistics processes, demand management, preventative __________________________________________________________________________________ 176 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED maintenance and sourcing applications. And, you can minimize downtime, analyze customer behavior and react far more proactively to customer demands. 10: Information That Informs Logistic Decisions The knowledge you acquire from data gathering is imperative to long-term sustainability. Supply chain analysis of such information will provide you with the opportunity to adapt and modify practices quickly and easily. You will be able to create efficiency and entirely unique supply chain practices to differentiate your business from competitors. This differentiation, when implemented properly, will provide you with a distinct competitive advantage to ensure you are using the right supply chain methodologies that are ideal for your business. The more you know about your supply chain and your supply chain practices the better off your operations and customer satisfaction levels will be in the end. 11: Robotic Processes Automation (RPA) The overall goal of using RPA throughout the supply chain is to create value for various B2B initiatives. Despite the term robotic being used in the name, robotic processes automation is actually the use of software rather than an actual robot. The software allows various manual processes and tasks to be automated. The results of using such software often lead to fewer errors, faster completion times and a reduction in costs. RPA also prevents the need for a highly expensive and timely system integration projects or customized application developments. 12: Supply Chain Security Security in the supply chain remains a critical component to a successful business. According to a recent Bloomberg report, Chinese spies had secretly installed microchips onto various technologies from companies such as Amazon and Apple. Security measures for these types of attacks can be made by carefully selecting your business partners, as well as to implement a rigid quality control process. Implement traffic monitoring. Only use secure and trusted platforms of communication. Use end-to-end encryption. You might also use tracking chips in products and materials to prevent theft, as well as to use drones to scout routes in dangerous regions of the world. 13: Supply Chain Software When thinking about information technology trends in supply chain management, software supply chain trends are frequently changing from a one-time purchase to a subscription-based service. While you have to pay a monthly or annual fee to use the software, it is often less expensive and pricing is determined based on the number of users and features you wish to access. This type of software is highly advantageous in that you only pay for what you need, and it is easy to upgrade or downgrade at any time. Learn about some of the best supply chain and logistics software that companies should demo. 14: Virtual Reality (VR) and Augmented Reality (AR) VR and AR are taking workplace productivity to new heights. Augmented reality allows people to free up their hands to better multitask, and it allows businesses to see the way in which a __________________________________________________________________________________ 177 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED product or material might be used in a realistic setting before the actual implementation. Both AR and VR will be used to create mixed realities that create efficiency and save money. And, they will be used in both smart devices and head-mounted displays alike. 15: Wage Raises Wage raises are reluctantly being pushed as the need for qualified supply chain professionals continues to increase due to the explosive growth in e-commerce. Supply chain management practices must shift to higher wages to eliminate these existing challenges. A significant driver shortage remains in effect, and it is expected that this shortage will continue until wages increase. The same is true of labour shortages in warehouses. As wages increase the demand for labour will decrease. What is today’s main challenges within the supply chain? Increased costs: A report by eye for transport (EFT) shows that every supplier across the chain is expecting increased expenditure. A higher financial outlay across a supply chain is deemed to be one of the two top challenges. Keeping costs low with maintaining high quality is a difficult balancing act. Meeting customer expectations in a digital economy (including omni-channel support): The second key challenge identified in the EFT report is managing customer expectations, especially via omni-channel support. Multiple channel communication is now a customer requirement that must be supported. This also includes channel shifts to a more personalized, direct to customer model. Risk management: Visibility issues across an extended and complex supply chain increase the risk of accidental or malicious incidents. The challenge in protecting the chain against cyberattacks is complicated, as hyper-connectivity and data driven chains become the norm. Data generated and used by the supply chain is at risk of exposure and manipulation. Data protection also comes under the umbrella of various regulations. Streamlining and optimizing the chain: This is a vital requirement for chain efficiency and reduced failure points, as the chain becomes more complex across multiple partners. Streamlining leads to shorter lead times and reduced inventory costs. Innovative technological solutions, such as automation and AI advanced analytics can provide support in tackling these challenges. Here are five major trends that can help supply chains move to a Supply Chain 4.0 model. Meeting the challenges with 5 technology trends Industry 4.0 has forced a rethink in the design of supply chains. New technologies provide the tools to evolve our supply chain models alongside the requirements. Predicated on IoT, automation, and robotics, Industry 4.0 is transforming our supply chains. Gartner Inc., predicts that by 2023, 50% of large global companies will be using AI, advanced analytics, and IoT in their supply chain operations in order to: __________________________________________________________________________________ 178 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED •

Improve transparency in information flows

•

Reduce friction

•

Reduce costs in transactions

• Enable companies to better analyze data, predict requirements, and optimize inventory levels Goals of supply chain information technology Information is the key to an effective supply chain management process and in order to leverage on the available information, there is a generic process to follow – collect, access, and analyse. In short, in order to utilise information, we need to gather information, gain access to information, and use the available information for analysis to assist process improvement. Hence, the supply chain management goals in these areas are: 

Collect information on each product from production to delivery or purchase point, and provide complete visibility for all parties involved



Access any data in the system from a single-point-of contact



Analyse, plan activities, and make trade-offs based on information from the entire supply chain

Overall, the fundamental goal is to use I.T. in the supply chain to link information from the point of production seamlessly with the point of delivery or purchase. The main point here is to have an information trail that follows the product’s physical movement. An effective information flow from the beginning of supply chain to the end customer will allow planning, tracking, and estimating lead times based on actual data. In a matured information system of supply chain, all relevant stakeholders that are interested to know about the supply chain should be able to access to the information. From the below diagram information and products flow from the supplier to the manufacturer, internally through the manufacturer’s distribution system, and then on to the retailers. When retailer places orders with the suppliers, retailers need to know the status of its orders and the suppliers need to be able to anticipate an incoming order from the manufacturer. This means that both stakeholders here such as retailers and suppliers need to access to data that reside in other companies’ information systems. This may span across different functions and geographic locations.

Information flow Suppliers

Manufacturers Inter-organization

Warehouses

Inter-organization

Retailers

Inter-organization

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Product flow

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ADVANCED

Material and Information Flow The value of supply chain information is really the ability to take proactive action against some undesirable outcomes. The availability of information at the right time regarding the status of products and material is the basis on which intelligent supply chain decisions can be made. Here, we are not just interested in tracking products across the supply chain but rather to take proactive action on exception management to avert or prevent delay in a delivery that will affect production schedules, the appropriate system need to be notified so they can make the proper adjustments by either delaying the schedules or seeking alternative sources. This goal requires the standardisation of product identification e.g. bar coding across companies and industries. For example, a courier company needs to have a tracking system that provides on-going information on the whereabouts of any package handled by the company and makes this information available internally as well as to customers. In many companies, information systems tend to be standalone and not properly integrated. For example, customer service will work with one system, finance will work with another, and the manufacturing and distribution systems are completely separately. Occasionally, there may be a transfer of critical information that needs to be shared across a few function areas within a company, but if the information transfer is not done on a timely basis, then the systems will never have exactly the same data. For example, the customer service representative receiving an order may not be able to provide shipping status information to customer inquiring it; and the factory may not be able to find out how many orders are still outstanding. Hence, reliable information on a timely basis needs to be shared across all key stakeholders and they should be readily accessible using the same set of data through any interface device. Related to this is the important goal of having a single-point-of-contact for all of the available information, so that information provided to a customer or required internally can be accessed in one stop and be the same, regardless of the mode of inquiry. After collecting and accessing the data, there is a need to analyse the data so that it will be useful to the company for subsequent strategy formulation and execution. The information system must be utilised to find the most efficient ways to produce, assemble, warehouse, and distribute products – in other words, the best way to operate the supply chain. This means that there is a requirement to for different level of decision making – operation decision relating to how to fulfil a customer order; tactical decision relating to which warehouse to stock with what product, or what production plan for the next three months, strategic decision about where to facilitate this, and systems need to be flexible enough to accommodate changes in supply chain strategies. Information Technology Infrastructure The information technology infrastructure is a critical success factor in any system implementation. I.T. infrastructure consists of the following components: __________________________________________________________________________________ 180 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 

Interface



Communications



Databases



System architecture

Interface Device Interface devices consist of personal computers, terminals, Internet devices, bar-code scanners, and personal digital assistants (PDAs) are some of the common interface devices. The presentation of the data and information is also important and there are current two prevalent standards: Wintel standard, which is the Windows interface on Intel-based computers and the other, is the web browser and Java standards. Automatic data capture interfaces, such as bar-code readers and radio frequency (RF) tags, are also becoming standardised and commonly used. In supply chain management, product tracking is critical, and there are a few standard ways to do this. The first is to include barcoded information on all products and record the transactions. In addition, equipment that records point-of-sale information is extremely important, especially if these data are accessible by the supplier, as in vendor managed systems. RF tags on items can be used to locate the items, especially in huge storage facility. Communications Just having interface devices is of no use unless there is communication between these devices. Hence, interface devices need to be connected in some means such as an internal system like LAN, intranet, or external network like the Internet. Communications can be done in two ways: wireless communications, and single-point-ofcontact for communications – like phone and email. Advanced communications capabilities allow many applications like e-mail, electronic data exchange (EDI), groupware; and location tracking using global positioning system (GPS) and wireless communications. Databases Data need to be stored and archived properly in an organised manner in a database. Data include transaction information, status information, general information, etc. Some types of databases are described below: a. Relational databases - These databases allow the storage of related data in such a way that standardised reporting and querying of related data is facilitated. For example, Structured Query Language (SQL) is designed only for relational databases. Relational databases may be centralised, or they may be distributed across a network of personal or minicomputer rather than mainframe or servers. __________________________________________________________________________________ 181 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED b. Object databases - These can hold not only numeric and character data but more sophisticated objects such as pictures or graphic structures. Object databases are used to store different kinds of information in a way that relates them to database operations. c. Data warehouses - These databases combine data from other system databases to allow query by sophisticated analysis tools. Data warehouses usually involve enterprise data and hold extremely large amounts of data. d. Datamarts - Datamarts are smaller versions of data warehouses, and usually store a smaller set of data and are more departmental in scope. Generic System Architecture System architecture is about how various components like databases, interface devices, and communications are configured. Most current system design involves client/server structure. Examples of servers include database servers that allow Structured Query Language (SQL) requests from users, transaction processing monitors, directory/security servers, and communications servers. The Internet is a form of client/server where the local PC browser processes the HTML (hypertext mark-up language) pages and Java applets (i.e. small applications) that are retrieved from servers – from all over the world. The client/server model is now evolving towards a webcentric model where the client is a web browser connected to a web server. The power of the client/server concept is in distributing functions among specialist servers that perform them efficiently; it is also easier to add new modules and functions. The disadvantage is the added complexity of navigating between these servers and making sure that data are processed correctly and updated across the network.

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ADVANCED The applications that reside between the server and the client are collectively called middleware, literally the slash (/) in the term client/server. These are typically tools that facilitate communication between different system architectures, communication protocols, hardware architectures, and so forth. The parts of an application that reside on a server, client, or as middleware depend on specific implementations. This is part of the 3-tiered architecture model now favoured by many client/server designers. Middleware can be important in the implementation of supply chain system since, in many cases, the information for the planning tool exists in a number of locations and forms across the company. The appropriate middleware can be used to collect the data and format it in a way that can be used by various planning tools. The system architecture of the future will need to support a high level of flexibility and frequent changes in the way supply chains and other business processes are run. This requires highly configurable systems that can be easily transformed in response to changed processes and business requirements. The systems also need to be highly inter-operable, so they can interact and support internal and external communications Typical Supply Chain System Architecture The Figure below shows a typical supply chain system architecture, which consists of a number of supply chain systems integrated together to support enterprise-wide business requirements. A few common systems that may be put on the system architecture are product database system, ERP, warehouse management system, logistics compliance tool, supply chain visibility system, among others. From the system architecture, one can also know how systems

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ADVANCED ‘communicate’ with each other and what information is shared among the systems for supply chain management. Supply Chain System Architecture The Role of Information Systems and Technology in SCM Supply chain management is concerned about the flow of products and information between the supply chain member organisations. In order to achieve seamless information sharing for achieving effective supply chain management process, the use of Information Technology and related systems is important. As mentioned before, I.T. is viewed as an enabler to SCM and some companies are using I.T. as a competitive tool to help their companies to improve SCM processes. Through a wider acceptance and understanding of I.T. as an enabler and competitive tool in the SCM industry, over the years, many standard business processes, and functions such as customer order processing, inventory management, and purchasing were altered through the use of computer technology. Hence, it is not difficult to realise that I.T. has indeed reshaped the traditional model of SCM and through I.T.; companies’ internal processes are better integrated than before. The importance of information in an integrated SCM environment About two decades years ago before the advent of information technology and Internet, most of information flows between functional areas within a company and between other companies are conducted in paper-based formats. What it means here is that most organisations sharing information based on the exchange of paper documents and equivalent means. This method was slow, unreliable, and subject to errors due to manual efforts involved in creating the paper documents. Businesses that were conducted in this manner were considered costly and less effective. This method of business process impeded a firm’s effectiveness in being able to design, develop, procure, manufacture, and distribute their products. Moreover, this paper-based process also discouraged inter-organisational ventures due to the lack of effective information system to drive business processes. Over the years, companies have come to realise the importance of information and the technologies that make this information available within an organisation as well as with other organisations. In a nutshell, the information systems and the technologies utilised in these systems represent one of the fundamental elements that ‘link’ the organisations of a supply chain into a unified and coordinated system. In the current competitive environment, the appropriate usage of information and information technology can be a survival factor to any company and key determinant to the success of any supply chain initiative. Information must be accurate and timely otherwise it has no value or very little value to an organisation. Distorted information in any supply chain can lead to tremendous inefficiencies such as excessive inventory, poor customer service, lost sales, poor production schedule, __________________________________________________________________________________ 184 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED underutilised production capacity or over stretched in production capacity, ineffective distribution plan and poor transportation management, among others. These are potential results of poor information quality that passed from one end of supply chain to the other. This is also called as the ‘bullwhip effect’, which is touted among the supply chain professionals in the industry. The ‘bullwhip effect’ phenomenon was widely researched by then Procter & Gamble (P&G) on one of their popular products, Pampers disposable diapers. The investigation throughout their entire supply chain from customers (infants) back to distributors and retailers and found that there was a fairly high degree of variability in the demand patterns along the whole supply chain. Four main causes of this phenomenon were identified: 

Demand forecast updating



Order batching



Price fluctuations



Rationing within the supply chain

This phenomenon is certainly not only manifested in P&G but also to other companies as well. An industry study had projected that there could be saving in billions of dollars if order information sharing process can be better streamlined across the supply chain that a grocery industry.

Product Desc Part # Quantity

New PO PO change PO cancel

Customer Service Officer SAP/OMS

Ship Confirm New SO SO change SO cancel

Customer EDI/XML Fax/Phone Info flow M aterial flow

Goods Receipt (GR)

Product DB

Product DB System Product Mgt Data Classification Data

Compliance System Compliance Exp validation result System

ASN PO

ASN Factory

ASN

Pick List (DO)

International Boundary W arehouse/W MS Receive/Pick/ Pack/Ship

Good Issue (GI)

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ADVANCED

Inter-organisational Information Systems Owing to the importance of integrated supply chain management, many companies are recognising the importance of establishing and developing an interorganisational information system (IOIS). In short, IOIS can be regarded as an integrated data processing and data communication system utilised by two or more separate organisations. These organisations must have a computer-based electronic link that automates some element of work, such as order processing, order-status monitoring, inventory-level checking, and shipment tracking information or minimally, transaction transfer, which would have been done manually previously. Information and Physical Flow in Supply Chain Among the various advantages of developing an IOIS for the supply chain are: 

Cost reduction



Productivity improvements



Product/market strategy

The implementation of IOIS is challenging. Firstly, there is need to develop a common language in terms of planning, format, and priority across several vastly different systems. Secondly, information-sharing requirements can be more than what a manufacturer and its distributor’s need to process orders in a consistent way. Thirdly, all relevant information must be circulated to all organisations between the supply chain’s point of origin and its point of consumption and this includes inbound transportation, manufacturing, warehousing, inventory management, outbound transportation, sales, marketing, forecasts, and customer-service information. E-commerce in Supply Chains Concept of e-Commerce Electronic commerce (e-commerce) refers to the replacement of physical processes with electronic ones and the creation of new models for collaboration with customers and suppliers. E-commerce applies to the interaction between different companies as well as to the interaction of individuals with companies.

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ADVANCED Examples are purchasing over the Internet, EDI, e-mail, etc. e-commerce System The acceptance of Internet standards has accelerated the adoption of e-commerce, especially between individual buyers and companies but also between companies. The initial use of the Internet for marketing materials has expanded to allow user status and tracking inquiries and product purchases. The usage of e-commerce provides the many advantages: 

Companies have a global presence and customer has global choices.



Companies can improve competitiveness and quality of service by allowing access to their services any place, any time.



Companies can monitor customers’ preferences electronically.



Companies can analyse the interest in various products based on the number of hits and requests for information.



Companies can collect detailed information about clients’ choices, which enables mass customisation and personalised products. An example is the purchase of PCs over the web, such as forms of publishing and software distribution.



The roles of the intermediary and traditional retailer or service provider are reduced or eliminated entirely in a process called disintermediation. This process reduces costs and adds alternative purchasing options.



Substantial cost savings and substantial price reductions related to the reduction of transaction costs can be realised. Companies that provide purchasing and support through the web can save significant personnel costs.



E-commerce allows the creation of virtual companies that distribute only through the web, thus reducing costs. Amason.com and other net vendors can afford to sell for a lower price because they do not need to maintain retail stores and, in many cases, warehouse space.



The playing field is levelled for small companies which lack significant resources to invest in infrastructure and marketing.

The are some difficulties associated with e-commerce, most importantly security issues associated with the transfer of private and financial information over public communications lines and the ability of unauthorised users to access servers and other computers connected to the Internet. Other issues include the slow development of the required infrastructure and cheap, easy-to-use devices to make e-commerce more accessible.

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ADVANCED There are basically 4 levels of e-commerce: a.

One-way Communication

These include e-mail, FTP, and browsing. This level has only one-way communication because the other party does not need to respond, as in the case of e-mail file transfer or web browsing, or at least does not need to respond in real time. b.

Database Access

At this level, the user of e-commerce is accessing a database for personal or tailored information by entering data through data-entry forms. In addition, the user can make personalised requests and orders, such as status inquiries and purchases over the Internet. The database access level also includes searches in company knowledge bases access level also includes searches in company knowledge bases for vendor catalogues, among others. Individual purchases can be made on the Internet using credit cards. Business purchasing is typically more complex because there are restrictions concerning who can order and what configurations are acceptable. c.

Data Exchange

This level applies mainly to business-to-business transactions and requires computers on both ends to exchange information typically using electronic data interchange (EDI). EDI is a set of standards for different transactions between trading partners which has been set by the American National Standards Institute (ANSI) and by the International Standard Organisation (ISO) in its Electronic Data Interchange for Administration, Commerce and Transport (EDIFACT) standard. Data exchange allows trading partners to ship electronic transactions instead of paper when performing purchasing, shipping, and other transactions. The time and money involved in implementing an EDI system implies that EDI becomes more economical as the number of trading partners with access to the system increases. d.

Sharing Processes

The final level which is still in development will occur when different entities share processes, not just data, electronically. For this to happen, standards need to be agreed upon for applications to communicate with each other and for companies to share processes. One example for this level of e-commerce is the value chain initiative (VCI) whose goal is ‘to deliver a dynamic data stream that connects trading partners around the world from the largest to the smallest with real-time data.’ The main idea of VCI is to enable the single-point-ofcontact concept through the Internet and to evolve the enterprise system of the future. For instance, if a user places an order the warehouse management system will be notified by the order system. This system will trigger a fleet-management system that will take care of allocating transportation or, in case the order cannot be filled, issue instructions to a manufacturing system on how to build the product. The manufacturing system will allocate the resources for the job, locate the raw material, and so on. __________________________________________________________________________________ 188 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED A more concrete example is Collaborative Planning, Forecasting and Replenishment (CPFR), a web-based standard that enhances vendor managed inventory and continuous replenishment by incorporating joint forecasting. With CPFR, parties exchange electronically a series of written comments and supporting data, which includes past sales trends, scheduled promotions, and forecasts. This allows the participants to coordinate joint forecasts by concentrating on differences in forecast numbers and work towards a better figure. Level # 1 2 3 4

Description One-way com m unication Database access Data exchange Sharing processes

Example E-m ail, FTP, browsing Inquiries, form s, purchases, tracking EDI, clearinghouse CPFR, business com m unities, VCI

Summary of e-commerce Levels Electronic Data Interchange (EDI) EDI is an old technology and some companies and government organisations are still using it today. EDI refers to a computer-to-computer exchange of business documents in a standard format. EDI describes both the capability and practice of communicating information between two organisations electronically instead of the traditional forms of mail, courier, or fax. EDI is also being used to link supply chain organisations together in terms of order processing, production planning, inventory management, accounting, and transportation management.

T ra d itio n a l m e th o d o f in fo rm a tio n e x c h a n g e b e tw e e n tra d in g p a rtn e rs

S o u rc e : In tro d u c tio n to E le c tro n ic D a ta In te rc h a n g e (E D I) b y C H A N , S iu -c h e u n g C h a rle s

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ADVANCED EDI allows the members of supply chain to reduce paperwork and share information on invoices, orders, payments, inquiries, and scheduling among all channel members. Traditional Method of Information Exchange between Trading Partners The Benefits of EDI 

Quick access to information



Better customer service



Reduced paperwork



Better communications



Increased productivity



Improved tracing and expediting



Cost efficiency



Competitive advantage



Improved billing

EDI improves productivity through faster information transmission as well as reduced information entry redundancy. Accuracy is improved by reducing the number of times an individual is involved in data entry. The use of EDI results in reduced costs on the following: 

Reduced labour and material cost associated with printing, mailing, and handling paperbased transactions



Reduced telephone and fax transmissions



Reduced clerical costs

EDI is also effective in counteracting the bullwhip effect. Through the use of EDI, supply chain partners can overcome the distortions and exaggerations in supply and demand information by using technology to facilitate real-time sharing of actual demand and supply information.

EDI format document

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EDI connectivity

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Source: Introduction to Electronic Data Interchange (EDI) by CHAN, Siu-cheung Charles

ADVANCED EDI Connectivity and Document Format There are numerous examples of how EDI has benefited supply chain members. For example, some consumer products manufacturers like Campbell’s Soup, Nabisco have implemented EDI to support their continuous replenishment program (CRP) with many of their customers. In these programs, also referred as vendor-managed inventory (VMI) systems, the downstream members of the supply chain, in this case the retailers become essentially passive in the information-sharing process. Through the CRP, the manufacturers gain access to demand and inventory information for each downstream supply chain site and make necessary modifications and forecasts for them. Bar Coding Since their invention in the early 1950s bar codes have accelerated the flow of products and information throughout the global business community. Coupled with the improvements in data accuracy that accompanies the adoption of bar code technology over keyboard data entry, bar code systems are critical elements in conducting business in today’s global economy. Bar code technology encompasses the symbologies that encode data to be optically read, the printing technologies that produce machine-readable symbols, the scanners and decoders that capture visual images of the symbologies and convert them to computer-compatible digital data, and the verifiers that validate symbol quality.

Barcode System

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ADVANCED

Barcode and Scanning Symbology There are many different bar code symbologies, or languages. Each symbology has its own rules for character (e.g. letter, number, punctuation) encodation, printing and decoding requirements, error checking, and other features. The various bar code symbologies differ both in the way they represent data and in the type of data they can encode: some only encode numbers; others encode numbers, letters, and a few punctuation characters; still others offer encodation of the 128-character, and even 256character, ASCII sets. The newest symbologies include options to encode multiple languages within the same symbol; allow user-defined encodation of special or additional data; and can even allow (through deliberate redundancies) reconstruction of data if the symbol is damaged. At the last count, there were about 225 known bar code symbologies but only a handful of these are in current use and fewer still are widely used. Bar coding is a form of keyless data entry facilitating automatic identification and data collection. Bar coding and related technologies have been around for many years and in the past, they are mainly used in manufacturing factories for shipping and receiving but they have been adopted in other enterprise areas such as warehousing, customer service functions, time and attendance, package delivery, and others.

Typical Linear Bar Code a) Data Matrix - a square symbology, of varying densities used extensively in part marking as a large number of characters can fit in a small space. b) PDF417 - can be printed at a variety of aspect ratios and densities. Used in transportation, manifests, and personal ID including state driver’s licenses

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ADVANCED

There are two types of 2D bar codes in current use: stacked codes and matrix codes. BAR CO DE STANDARDS L in e a r S y m b o lo g ie s A N S I/ A I M B C 1 - 1 9 9 5 , U S S - C o d e 3 9 A N S I/ A I M B C 2 - 1 9 9 5 , U S S - In t e r l e a v e d 2 -o f-5 A N S I/ A I M B C 3 - 1 9 9 5 , U S S - C o d a b a r A N S I/ A I M B C 4 - 1 9 9 5 , I S S - C o d e 1 2 8 A N S I/ A I M B C 5 - 1 9 9 5 , U S S - C o d e 9 3 A N S I/ A I M B C 1 2 - U S S - C h a n n e l C o d e U S S T e le p e n IT S - 9 3 i IT S - R e d u c e d S p a c e S y m b o lo g y (R S S ) IT S - P o s iC o d e C o m p o s ite S y m b o lo g ie s I T S - E A N .U C C C o m p o s i t e S y m b o l o g y IT S - A z te c M e s a s

Bar Code Standards

T w o D im e n s io n a l S y m b o lo g ie s M u lti-R o w S y m b o ls A N S I/ A I M B C 6 - 1 9 9 5 , U S S - C o d e 4 9 A N S I/ A I M B C 7 - 1 9 9 5 , U S S - C o d e 16K U S S C o d a b lo c k F U SS - PD F417 IT S - M ic ro P D F 4 1 7 IT S - S u p e rC o d e M a tr ix S y m b o ls D ot C ode A U SS - C ode O ne A N S I/ A I M B C 1 0 - IS S - M a x i C o d e A N S I/ A I M B C 1 1 - IS S - D a t a M a t r i x A N S I/ A I M B C 1 3 - IS S - A z t e c C o d e IT S - Q R C o d e

Radio Frequency Identification (RFID) Radio Frequency IDentification (RFID) makes use of radio frequency waves to capture data in small, lightweight electronic read/write storage devices called tags. Data is accessible through hand-held and fixed-mount readers in real time, using RF signals to transfer data to and from tags even in the absence of line-of-sight. With RFID technology, companies can get real-time

0 1 . 0 0 0 0 A 8 9 . 0 0 0 1 6F . 0 0 0 1 6 9 DCD

Header (8 bits)

EPC Manager (28 bits)

Object Class (24 bits)

Serial Number (36 bits)

EPC provides unique identifier for …. X companies, Y objects and Z serial #

Source: AutoID Center

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ADVANCED information on inventory. That means retailers and suppliers can respond quickly to shifts in demand, avoid spoilage, and prevent over- and under-stocking. Electronic Product Code A typical RFID set-up comprises a RFID tag that contains data about an item; an antenna used to transmit the RF signals between the reader and the RFID tag and a RF transceiver that generates the RF signals; a reader that receives RF transmissions from the RFID tag and passes the data to a host system for processing. RFID-based systems provide efficiency and accuracy similar to those of printed bar code systems, and offer additional benefits such as: 

RFID Supports Read/write Operation

RFID’s real-time characteristic enables efficient updating of information contained within the tag as an item moves from one point to another. For example, a tag on a delivery truck can contain the truck’s manifest, which can be updated easily as the driver adds and removes items.



RFID is not limited to contact operation

RFID tags can be read through non-metallic materials, and a reader does not have to touch a tag, making RFID ideal for cluttered, dirty, wet, and harsh environments. Unlike bar code scanners, RFID scanners can read tags through mud, dirt, paint, grease, wood, cement, plastic, water, and steam. 

RFID Tags Can Be Hidden

Because RFID is not limited to line-of-sight operation, you can embed tags under skin, inside clothes hems, and within the pages of a book, preserving the item’s usability and aesthetics. 

RFID Tags are very Secure

RFID tags are virtually impossible to counterfeit, because an unalterable permanent serial code prevents tampering. This guard against an unauthorised user changing data corresponding to a particular item. 

RFID tags are Read at a Faster Speed

The time it takes for an RFID reader to activate the tag and receive the associated information stored in the tag is approximately 40 % faster than scanning traditional printed bar codes. 

Multiple RFID labels can be read at one time, speeding up the data collection process

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ADVANCED A scanner can read each tag independently when mixed in a pile, distinguishing among multiple items based on each one’s unique identification number. Reader sends low level RF field and receives RF

transm issions from the RFID tag and passes the data to a host system for processing

Antenna transm its the RF signals between the reader and the RFID tag

RFID tag/transponder contains data

about an item . The lag can be active, passive or sem ipassive. The antenna of the tag transmits its content to the reader

Host Computer

Source: AutoID Center

RFID Components RFID can Enhance Competitiveness 

Lowering Costs

According to the US National Retail Security Survey, approximately US$5.8 billion worth of inventory was lost in 2001 due to administrative errors alone. RFID not only ensures accuracy of information, but also limits the amount of error-prone human interaction that is needed. With information that is updated in real-time, RFID can further reduce costs by allowing companies to decrease shrinkage. 

Increasing Revenue

With U.S. retailers losing approximately 3.8% of sales per year as a result of out-of-stock inventory, greater inventory control and increased product availability can have a major impact on increasing revenues. RFID tags allow companies to capture and track a variety of data on goods. This information aids in the development of accurate inventory forecasts. 

Decreasing Working Capital

Because of the speed and accuracy of RFID, orders can be filled in a shorter amount of time, allowing for quicker product availability. Reducing this order cycle time decreases the need for an abundance of safety stock. 

Reducing Fixed Capital

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ADVANCED With RFID, companies can better manage fixed capital by tracking assets such as totes and pallets. This reduces the need for replacement due to lost items and cuts back on the amount of redundant equipment that are underutilised. Additionally, by increasing the speed at which a forklift can perform a certain task, the same amount of work can be completed with fewer vehicles, further reducing the costs of these fixed assets. For example, Wal-Mart alone is expected to achieve a pre-tax cost savings of US$8.35 billion (equivalent to 5% of its total revenue) once RFID is being implemented across all their operations. Breakdown of their cost savings are as follows: US$6.7 Billion: Eliminating the need to have people scan bar codes on pallets and cases in the supply chain and on items in the store reduces labour costs by 15 %. US$600 Million: Even with its famously efficient supply chain, Wal-Mart suffers out-of-stocks. The company boosts its bottom line by using smart shelves to monitor on-shelf availability. US$575 Million: Knowing where products are at all times makes it harder for employees to steal goods from warehouses. Scanning products automatically reduces administrative error and vendor fraud. US$300 Million: Better tracking of the more than 1 billion pallets and cases that move through its distribution centres each year produces significant savings. US$180 Million: Improved visibility of what products are in the supply chain-in its own distribution centres and its suppliers’ warehouses-lets Wal-Mart reduce its inventory and the annual cost of carrying that inventory. Supply Chain Tracking Systems Visibility Information visibility within the supply chain is the process of sharing critical data required to manage the flow of products, services, and information in real time between suppliers and customers. If information is available but cannot be accessed by the supply chain partners whose are most able to react to a given situation (usually exception cases), the value of information degrades exponentially. Increasing information visibility between supply chain participants can help all parties reach their overall goal of increased customer value. Let us look at one area of information visibility – tracking of order, shipment, and inventory.

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ADVANCED End-to-end Supply Chain Visibility

Supply Chain Visibility

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ADVANCED

Examples of Shipment Status and Milestones Order Visibility Order visibility provides information for customer to know about their order status. For example, a customer places an order to the order desk (an entity which manages customer orders), the customer would like to know from time to time what is the status of his/her order such as whether the order has been processed, rejected or delay processing, etc. With the availability to provide order information (or visibility) to customers, customers can be apprised of their orders status on a timely basis. The Figure shows the order visibility information (of a legacy system) which for most cases include order number, customer reference number, tracking number, order manager’s contact information, billing information status, quotation, order receipt date, contract date, ship date, ship complete date, customer request date, etc. The order information is used on shipment visibility system for update shipment status against the order. At CSO: - (1) PO receipt date - (2) PO details - (3) PO acknowledge - (4) PO accept date - (5) Credit hold status

At Carrier:

Fr Carrier to Port (destination):

•

At factory: – (6) PO promise date

At Port (destination): - (21) Arrival at Port

•

Fr factory to Transit Centre: - (7) Ship from factory - (8) In transit - (9) Receipt in Transit Ctr

At Customs (destination):

•

Fr Transit Centre to Gateway (origin): - (10) Ship from Transit Ctr - (11) In transit - (12) Receipt in Gateway

At Warehouse (destination): - (24) Received in Warehouse

Fr Warehouse to end-customer:

•

Fr Gateway to Customs (origin): - (13) Ship from Gateway - (14) In transit - (15) Submit to Customs - (16) Clear Customs

(17) In transit (18) On board carrier (19) In transit (20) ASN

(22) Submit to Customs (23) Clear Customs

(25) Ship from WH (26) In transit (27) Proof of Delivery

Shipment Visibility When orders are processed (or acknowledged), distributor will try to fulfil the order by pulling out the inventory in the warehouse and later make a delivery against the purchase order (PO) __________________________________________________________________________________ 198 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED of the customer. The product (which was once the inventory) will be delivered from the warehouse to the customer. During the transportation phase, the product can be tracked through web-based tracking system so that customer is aware of the in-transit movement of the product. The tracking system can also serve as an exception management tool to alert supplier or distributor to take initiative-taking action if there is delay during the in-transit movement to the customer site. The 2 figures below show a typical screen of a shipment tracking system. The search key can be a tracking number, sales order number or purchase order number (or any other pre-defined search key suitable for the shipment tracking system). The result of the search will present the status of the shipment usual accompanied by time stamping which could also be utilised for ontime-delivery computation. Other shipment milestones are possible as well. Other possible shipment milestones that can be accommodated in a customised shipment tracking system include the following: 

Shipped from supply node



Received from carrier at factory dock



Received into warehouse (origin and destination)



Shipped from warehouse (origin and destination)



Proof of delivery at airport gateway at origin



On-board airplane / ship



Submit to customs broker (origin and destination)



Clear customs broker (origin and destination)

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ADVANCED 

Delivered to customer (destination)

Shipment Visibility through a ‘Track & Trace” System

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ADVANCED

Detail Shipment Milestones Visibility Inventory Visibility An accurate inventory visibility system allows companies to know the availability of their products and make replenishment as required so as not to result in lost sale or business. Having a good inventory system will allow companies to know the stock level of their products before committing to customer orders. They would be also to advise customers accordingly about the delivery lead-time of the orders to insure reliable customer service. The ability to achieve inventory visibility can be achieved through the use of warehouse management system (WMS). Warehouse Management System (WMS) WMS is a software program designed to direct the flow of materials both into and out of specific storage locations, in an ordered sequence, based upon a predetermined set of operational parameters. The WMS provides a formal structure by which the distribution centre’s operational activity is carried out by operators as directed by a precise set of instructions, which was created by the distribution centre management team. These __________________________________________________________________________________ 201 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED procedures typically are built around the following basic functionality normally included in the WMS. The figure below shows the system architecture of a typical WMS, which consists of database system, and the different modules within the WMS. Typical WMS Functionalities 

Inventory Control

Includes ‘Audit Trails’ such as who, what, when and where product was received, placed, and who moved product to location. ‘Query’ as part of this module will handle queries for any product by FIFO, lot, order number, etc. ‘Lead Time Calculation’ provides the ability to relate lead-time / average consumption, and stock purchasing. 

Storage Location Management

Includes ‘Random Put-Away Algorithms’ and integrates storage of product by velocity, Location Management, assign location by size, weight, status, storage by types. 

Quality Control

Interfacing includes ‘Quality Control Management’ to insure QC procedures are performed in accordance with management directive by SKU/Vendors, etc. ‘Quality Control Hold’ to prevent products from being released if problems arise. ‘Lot and Batch Tracking’ to track lot and batch product information by SKU/customer/etc. ‘Notification’ to issue reports to proper party should any anomaly occur. 

Order Selection

This includes ‘Batch Pick Plan’, ‘Query’ that permits access to the status of any product by FIFO, lot, order number, etc. at order placement. ‘Allocation’ that allows the ability to distinguish between inventory on-hand and inventory assigned to orders or not available for special purposes. 

Automatic Inventory Replenishment

This includes ‘Stock Replenishment’ that compares orders to inventory and automatically creates move reports and a product let down schedule. 

Receiving

Includes ‘Integrated Receiving’ that integrates with PO document and ASNs (Advance Shipping Notification), alerts receiving supervisor to incoming shipments for staffing purposes and prepares and permits blind and conventional receipts, routing internal documentation that issue warning notifications to purchasing departments regarding any discrepancies. ‘Instant routing’ generates unique routing assignments upon receipt of backordered product. 

Shipping

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ADVANCED Includes ‘Integrated Shipping’ to create internal shipping documentation, displays preferred and alternate routing instructions, notifies shipper of special handling requirements, and prepares and issues ASNs. 

Operator Productivity

Includes ‘Task Performance Records’ to keep track and record the performance by task and by operator. ‘Interleaving Tasks’ is used to improve and track fork truck efficiency by creating dual commands such as store and then retrieve. ‘Routing’ to create the most efficient routing in an order selection task, reduce aisle contention, etc. ‘Random Order Checking’ to generate random order checks to monitor operator performance. 

Report Generation

Includes ‘Management (Real Time Status Updates) such as staffing, time-to-complete, % to plan, inventory levels, % of storage system utilisation (by type), and location available for new receipts; ‘Departmental Performance Reports’ and ‘Supervisory Statistical Reports’ among others. WMS in a Supply Chain System The figure presented here shows how WMS works in a supply chain system. It also shows how information is shared between WMS and the suppliers’ systems and the client’s ERP system.

WMS Within an ERP System Benefits of Implementing a WMS Generally, the benefits of implementing a WMS can be associated to real-time inventory tracking and visibility using scanner technology, across the enterprise. Customer Service__________________________________________________________________________________ 203 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED related benefits include that all departments will have access to information to help make intelligent, initiative-taking decisions that will benefit customers, and to improve operational efficiency in terms of streamlining, optimising operations to improve bottom-line results. Other benefits can be as follow: 

Elimination of Physical Inventory



Elimination of Order Checking



Improves Operator Efficiency



Reduction in Staff



Order Turn Around Time



Improved Order Accuracy



Reduction in Inventory Reduced Backorders



Improved Customer Service



Improved Inventory Turns



Improved House Keeping



Improved Work Environment



Improved Supplier Relationships



Reduced Order Errors



Improved Quality Control

XML (and RosettaNet) XML or Extensible Mark-up Language is mark-up-language that was originally designed for web use. It has clear structured format such as HTML but with the possibility to implement own tags for your own needs. Its platform independence and the use of Internet as transport channel enable the wide use in different applications. XML allows the use of metadata (e.g. tag names) in documents that makes them more human readable this does not reduce the machine readability though. XML is only the starting point in e-Commerce standards such as RosettaNet. These define the format and structure of messages and the field data carried in these documents.

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ADVANCED XMK-based Rosetta Net Connectivity RosettaNet is consortium of Information Technology, Electronic Components and Semiconductor Manufacturers attempting to create a global industry-wide standard for B2B eCommerce. The standard specifies the use of XML and related technologies for Business Process Integration (BPI). <INVOICE> <SHIPFROM> . . . <ACCOUNT_NUMBER>B4324-103</ACCOUNT_NUMBER> . . . <NAME>TESRACSHIPPERS</NAME> . . . <ADDRESS>12StanfordRoad</ADDRESS> . . . <CITY>CHAMPAIGN</CITY> . . . <STATE>IL</STATE> . . . <ZIP>63102</ZIP> </SHIPFROM> <FREIGHT_CHARGEcurrency="US">157.48</TOTAL_AMOUNT> . . . <DETAILS> . . . . . <ITEM> . . . . . <DESCRIPTION>Tractor Parts</DESCRIPTION> . . . . . <SKU>123582345</SKU> . . . . . <QUANTITY>120</QUANTITY> . . . . . <PRICEcurrency="US">60.00</PRICE> . . . . . <DISCOUNTmeasurement="flat">10</DISCOUNT>

<breakfast_menu> <food> <name>BelgianWaffles</name> <price>$5.95</price> <description>twofamousBelgianWaffleswithplentyof real maple syrup</description> <calories>650</calories> </food> <food> <name>StrawberryBelgianWaffles</name> <price>$7.95</price> <description>light Belgianwafflescoveredwithstrawberriesandwhipped cream</description> <calories>900</calories> </food> <food> <name>Berry-BerryBelgianWaffles</name> <price>$8.95</price> <description>light Belgianwafflescoveredwithanassortment of freshberriesand whippedcream</description> <calories>900</calories> </food> </breakfast_menu>

Samples of XM-format documents PIPs Clusters: Cluster 0: RosettaNet Support Provides administrative functionality Cluster 1: Partner Product and Service Review Allows information collection, maintenance, and distribution for the development of trading-partner profiles and product-information subscriptions Cluster 2: Product Information Enables distribution and periodic update of product and detailed design information, including product change notices and product technical specifications Cluster 3: Order Management Supports full order management business area from price and delivery quoting through purchase order initiation, status reporting, and management. Order invoicing, payment and discrepancy notification also managed using this Cluster of processes Cluster 4: Inventory Management Enables inventory management, including collaboration, replenishment, price protection, reporting and allocation of constrained product __________________________________________________________________________________ 205 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Cluster 5: Marketing Information Management Enables communication of marketing information, including campaign plans, lead information and design registration Cluster 6: Service and Support Provides post-sales technical support, service warranty and asset management capabilities Cluster 7: Manufacturing Enables the exchange of design, configuration, process, quality, and

Source: R osettaN et

other manufacturing floor information to support the "Virtual Manufacturing" environment B2B Process Model What is E-Business for Supply Chain Management? The advent of Internet and World Wide Web (www) have revolutionised the way companies conduct business. Look at Dell, a company that has leveraged on these two technologies to conduct its business and make a BIG success out of it. Dell has successfully used the Internet to boost revenue and earnings. Firms that fully exploit the revenue enhancements and cost reduction opportunities offered by the Internet and optimally integrate e-business with existing channels are likely to be the big winners in the Internet age. Roles of E-Business in a Supply Chain

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ADVANCED Generally, E-business involves the execution of business transactions over the Internet. Companies conducting e-business perform some or all of the following activities over the Internet across the supply chain: 

Providing product and other information



Negotiating prices and contracts



Placing and receiving orders



Tracking orders



Paying and receiving payment

All the above activities have been conducted in the past using existing “channels” such as retail stores, sales people and catalogues. For example, Grainger has used catalogues to provide product information to customers. Companies have used the Internet in a variety of ways to enhance supply chain performance. Dell Computers uses the Internet to display all its product options to customers. Companies like Solectron and Ford have used the Internet to increase collaboration in product design. UPS and Federal Express have used the Internet to allow customers to track their packages. Impacts of E-Business of Supply Chain Performance Certainly, the e-business can be used as a platform for any firms to perform their business however firms need be aware of the impact both good and bad that come with using the platform. We shall attempt to illustrate some of the possible impacts in the following paragraphs. Revenue Impacts/Benefits of E-Business of Supply Chain 

Direct Sales to Customers

E-business allows firms to enhance revenues by direct sales to customers. Manufacturers and other members of the supply chain that do not have direct contact with customers in traditional retail channels can use the Internet to shrink the supply chain by bypassing retailers and selling direct to customers. For example, Dell Computer sells PCs online direct to customers. As a result, Dell can enjoy higher margins than traditional PC manufacturers that must share some margin with retailers. 

Flexibility

Conducting business on Internet allows companies the flexibility on price, product portfolio and promotions on their on-line product and other information. Anyone with Internet access can easily access to the most updated information readily on a 24x7 basis. This is of course on the basis that the companies ensure information is updated on a timely manner through database entry. 

Faster Time to Market

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ADVANCED Companies that ‘sell’ products on the Internet can shorten the lead time for them to market their products to the market i.e. faster time to market as a product can be ‘introduced’ as soon as a first unit is available. This is beneficial in industries with short product life cycles, where e-business provides an advantage over a ‘physical’ product information model.



Information Aggregation and Offering

Yahoo! is a prime example to illustrate the benefits of information aggregation and offering. What Yahoo! offers is really a platform for shoppers to access product information from a large number of retailers and enhance revenue revenues for all by attracting customer because they are likely to find the product they are looking. 

Improve Fulfilment

Through eliminating the ‘middle man’, Internet has become the platform for creating business hubs or portals to connect customers to a large number of related companies or companies that offer similar products and services. This has improved the shopping experience of shoppers and there is a fairly high degree of shopping fulfilment as a result of using this channel via the Internet. This is also called the ‘one-stop’ shop shopping and the hosting firm can receive revenues through commission fees and advertising. 

Price and Service Customisation

Negotiating prices and contracts with customers and suppliers on-line allows price and service customisation. By accommodating individual requests, product/service may be customised and priced accordingly. 

Global Access

E-business allows customers to place orders any time and any place. Customers need not have to visit the shop personally and need not have to visit the shop at certain time of the day. They can shop any time at their convenience. This means that companies, which setup e-business, can reach customers in any part of the world – an immediate access to global market. Cost Impacts/Benefits of E-Business of Supply Chain 

Facility Cost

E-businesses are able to centralise facilities because online sales allow the separation of order placement and order fulfilment. Site costs may decrease as direct customer-manufacturer contact and geographical centralisation eliminates or reduces retail sites. 

Processing Cost

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ADVANCED Internet is a vehicle to reach a large customer base for any online shops. If there is a large amount of customer participation, the processing cost will likely to decrease. Traditional businesses require employees to take orders from customers but in e-business, customers go to the online shop to place their orders without having to engage any sales executive to place orders on their behalf. From the business standpoint, there will be cost saving of the processing cost. 

Inventory Cost

Many e-businesses can centralise inventories because they do not have to carry inventory close to customer. As previously mentioned, through Internet, e-business can achieve geographical centralisation and reduce inventory level because of the economy of scale. The centralisation concept in here can reduce aggregated variability in the demand in the entire supply chain of industry. 

Transportation Cost

Physical centralisation increases the distance travelled by a customer order, while decreasing the distance by a replenishment order. Hence, e-business will tend to have higher transportation costs per unit. However, this downside can easily be replaced by other benefits through Internet. For example, the customers can download information readily for reference and enhance ‘one-stop-shop’ shopping experience. 

Improve Supply Chain Coordination

We learnt that supply chain management is about information flow and product flow. An ebusiness can easily share demand and other information (such as inventory) across the entire supply chain to reduce the detrimental effect of ‘bullwhip’. Information sharing can improve relationship between supply chain partners and promote trust among trading partners as well. Overall, there will be lower supply chain cost in view that participating supply chain members are better informed and make better supply chain planning and execution. Strategies of E-Business of Supply Chain (E-Marketplace, Exchanges, and Hubs) An e-marketplace (or exchange, or hub) is a mechanism for aggregating buyers and sellers. This is usually web-based and depends on building up a critical mass of participants so that there is a liquid market. The idea is that, since everything is automated, companies can save on transaction costs. Also, by getting access to a wide range of sellers, a company can procure at a significant discount to their usual practices. E-marketplaces can either be vertical (focus on a specific industry) or horizontal (focus on particular business processes). Vertical Hubs 

Covisint: automotive

Horizontal Hubs 

BidCom: project management

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ADVANCED



Altra Energy: energy



CarrierPoint: global logistics



E-Steel: steel



PlasticsNet: plastics

The Return logistics



SciQuest.com: life sciences



ChemConnect: chemicals

Exchange:

reverse

Vertical and Horizontal Hubs Auctions Internet exchanges create electronic markets and communities where firms can obtain information and buy and sell products. Not only do they act as on-line auctioneer, they may also inspect and approve (or certify) bidders or suppliers along various non-price factors. The mechanism for determining prices in many e-business settings is some form of auction. AuctionNet and BidFind list hundreds of web sites that run B2B auctions. Auctions can be forward (one seller, many buyers who bid the price up), reverse (one buyer, many sellers who bid the price down), or mixed (many buyers, many sellers, with dynamic pricing). Auctions can use English bidding (open bids, winner pays highest bid), Dutch bidding (sealed bids, winner pays second highest bid; FairMarket, ReverseAuction.com), or continuous trading double auctions (FastParts, LabX). When auctioning off multiple units (very common in B2B auctions), pricing can be either by the value of your bid (so different buyers pay different prices for the same product; Onsale, uBid) or by uniform pricing (so all buyers pay the price of the lowest qualifying bid; OpenIPO). A Buyer’s Auction

Seller’s Auction

Web Auction Using Auctions in Procurement

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ADVANCED Seller’s auctions were first set up for commodity goods such as metals, plastics, and lumber products, but this presented a greater challenge for manufactured goods, because contract terms are complicated: They involve quality issues, delivery dates, payment terms, repair policies, and inventory management, among others. Standard Procurement: Near the end of a long-term contract the buyer sends out RFQs to suppliers and new candidates. Sealed bids are submitted, often with different terms. Incumbents usually win because it is difficult to compare bids. This is inefficient because there is just one round of bidding. Procurement via Auctions: The auction market maker FreeMarkets (www.freemarkets.com) standardised the RFQ process and “commoditised custom products”. FreeMarkets screens suppliers on the basis of criteria such as finances, ISO certification, and equipment condition. The buyer chooses acceptable bidders by setting specifications such as $40 million in sales, new machines, and ISO 9000. Reverse auctions last 30 minutes. The buyer pays a subscription fee, but suppliers enter free. Importance: 35% of manufacturing costs goes into purchasing component parts, a $5 trillion market worldwide. Some results: 

United Technologies bought circuit boards from 8 suppliers in 1998. Instead of the expected $74M, they received bids from 29 suppliers and paid only $42M.



Keystone Building purchased office furniture that would have cost $12.9 million for $8.9 million.

Advantages

Disadvantages



Access to global markets



Reduces profits to suppliers



Allows suppliers easier entry and new markets



Contrary to integrated supply chain philosophy of long-term alliances and trust



Lowers costs for buyers

Advantages & Disadvantages of Web-based Seller System

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ADVANCED

Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

Information Technology (I.T.) is always regarded as an enabler of effective supply chain management

The availability of information at the right time regarding the status of products and material is the basis on which intelligent supply chain decisions can be made

System architecture is about how various components like databases, interface devices and communications are configured

Data Warehouses = These databases allow the storage of related data in such a way that standardised reporting and querying of related data is facilitated

Relational databases – there can hold, not only numeric and character data, but more sophisticated objects such as pictures or graphic structures

Object databases – there databases combine data from other system databases to allow query by sophisticated analysis tools. Data warehouses usually involve enterprise data and hold extremely large amounts of data

Information visibility within the supply chain is the process of sharing critical data required to manage the flow of products, services, and information in real time between suppliers and customers

The benefits of implementing a WMS can be associated to real-time inventory tracking and visibility using scanner technology across the enterprise

True

False

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ADVANCED 9

RosettaNet is a consortium of Information Technology, Electronic Components and Semi-conductor Manufacturers attempting to create a global industry-wide standard for B2B eCommerce. The standard specified the use of XML and related technologies for Business Process Integration (BPI)

An e-marketplace (or exchange, or hub) is a mechanism for aggregating buyers and sellers

CHAPTER 10 - STRATEGIC ALLIANCES IN SUPPLY CHAIN US:336719 Manage relationships between supply chain partners Purpose: This chapter will enable learners to manage the relationships with supply chain stakeholders in a professional and ethical manner to the benefit of the effectiveness of the total supply chain. LEARNING OBJECTIVE: The learner will be able to:    

Interpret the organisational strategy and identify the issues and focuses to be included in relationship management strategies. Analyse the relationship between supply chain partners and effective contract management. Build and maintain good customer relationships. Analyse ethical and professional issues relating to supplier and customer relations.

Introduction The success of an integrated supply chain management process is really about developing and maintaining a good trusting relationship between members in the supply chain. Without confidence for each other in a supply chain, there bound to be many issues that could potentially impede a successful supply chain initiative. In deploying the integrated supply chain, developing trust in your partners and projecting trustworthiness to your partners are critical components for success. Maintaining trusting relationship is a long-term goal, which needs to be maintained on an on-going basis. How does a special supply chain relationship come about? It usually started with a supply chain member that is willing to put forth the time and effort required to create a strong relationship.

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ADVANCED In such cases, firms may consider developing a special type of supply chain relationship in which confidential information is shared, assets are invested in joint projects, and significant joint improvements are developed continuously. These types of organisational relationship between supply chain members are sometimes called as ‘strategic alliances. Strategic alliances can deliver substantial benefits to organisations by improving efficiency and effectiveness through the elimination of waste and duplication in the supply chain. Outsourcing Relationship Progression Transaction logistics is a relationship built on a series of separate single events. Contract logistics is a specifically defined relationship that is contractually oriented and dependent on the supplier meeting the shipper’s defined performance goals. Strategic alliance is a planned on-going relationship where both parties have needs that the other can fulfil, and both firms share values, goals, and corporate strategies for mutual benefit.

Strategic Alliance

Contract Logistics

Transaction

Strategic alliance – a planned ongoing relationship where both parties have needs that the other can fulfill, and both firms share values, goals, and corporate strategies for mutual benefit. Contract logistics – a specifically defined relationship that is contractually oriented and dependent on the supplier meeting the shipper’s defined performance goals.

Transaction logistics – a relationship built on a series of separate single events.

Source: “Strike Up Logistics Alliances” Transportation & Distribution (Nov 1988): 38-42

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ADVANCED Outsourcing Relationship Progression The logistics relationship may be based on single events to long-term contractual arrangements to shared systems of a strategic alliance L o n g -te rm

C o n tra c tu a l S tr a te g ic A llia n c e C o n tr a c t L o g is tic s

T r a n s a c tio n a l

S in g le e v e n ts

T r a n s a c tio n

Logistics Partnership Logistics Partnership Decision Deciding whether to perform the logistics function in-house or to seek other arrangements is a balance of two factors: 

How critical logistics is to the success of the firm and



How competent the firm is in managing the logistics function?

High

S e e k a c o m p e te n t p a rtn e r

Low

company’s success

Importance of logistics to

The strategy to follow depends on the position in which the company finds itself.

O u ts o u rc e

Low

P e r f o r m lo g is t ic s a c tiv itie s in -h o u s e

B e a p a r tn e r s h ip le a d e r

H ig h

C o m p a n y ’s c o m p e te n c e in h a n d lin g lo g is tic s S o u r c e : B u s in e s s L o g is t ic s M a n a g e m e n t b y R o n a ld H . B a llo u p p 6 2 8

Logistics Partnership Decision Perform logistics activities in-house

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ADVANCED A company that has high customer service requirements, significant logistics costs as a proportion of total costs, and an efficient logistics operation administered by competent personnel will find little benefit to partnering or outsourcing logistics activities Outsource A company where logistics is not central to strategy and a high level of logistics competency is not supported within the firm, outsourcing the logistics activities to third-party providers may well lead to significant cost reductions and customer service improvements Seek a Competent Partner Where logistics is critical to strategy, but logistics management competency is low, finding a firm with which to partner may provide significant benefits. A strong partner may provide facilities located in existing and new markets, a transportation capability, and administrative expertise not available within the company. Be a Partnership Leader Where logistics is not especially critical to strategy but managed by capable personnel, managers may want to be aggressive by taking the lead in seeking partners to share the logistics system, thus reducing the company’s costs through increased volume and the economies of scale that result Strategic Alliance Strategic alliance is a close, long term, cooperative relationship between two or more participants who are willing to share information and risks, gain equally benefits, trust one another, and improve their performance for strategic planning. A formal relationship, short of a merger or acquisition, between two companies, formed for the purpose of gaining synergies because in some aspect the two companies complement each other. P r o d u c t a n d m a t e r ia l f lo w s

C u s to m e rs

I n f o r m a t io n a n d f in a n c ia l f lo w s

R e t a ile r s

R e la t io n s h ip m anagem ent

D is t r ib u t io n C e n tre s

T ie r S u p p lie rs

A s s e m b ly / M fg . 1 2

T ie r S u p p lie r s

S t r a t e g ic b u s in e s s u n it s

T ie r S u p p lie r s

S o u r c e : I n t r o d u c t io n t o S C M b y R o b e r t B . H a n d f ie ld e t a l p p 6 8

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ADVANCED Strategic alliances occur when two separate businesses join together to offer a broader set of skills or services to joint clients, to the mutual benefit of both companies. An alliance between companies that provide different, but complementary, services or products allows both companies to create an advantage over competitors by broadening the scope of their operations. The characteristics of strategic alliance are:  Trusting relationship  Long term goal  Complementary  Broader skills, products, and services  Impacting end results  Synergy  Competitive advantage  Win-Win  New value chains through collaboration The concerns of strategic alliance are:  Loss of control over the logistics channel  Fear of being ‘written out of the logistics picture’  Increased concern of logistics failures and no direct way to handle them for their customers  Adequate checks and balances may not be able to be identified to the satisfaction of the partner  There may simply not be enough trust to try such an arrangement  Partners may not be viewed as equals where one partner’s requirements may take precedence over another’s  Difficulty of identifying the economies to be achieved as compared with the partner’s current logistics cost. Conceptual Model of Alliance Development As developed by J.M. Schmits, R. Frankel, and D.J. Frayer, “ECR Alliances’ the conceptual model of alliance development can be depicted by the figure below which shows how organisations typically setup and develop supply chain alliances. There are three components that make up the model. Strategic Component Strategic component examines how strategic expectations and evaluations of alliance effectiveness evolve as an alliance progresses in the development stage. Process Component __________________________________________________________________________________ 217 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Process component outlines the stages of alliance development that show the required stage for formation, implementation, and maintenance of an alliance. Operational Component Operational component presents the operating standards for managing an alliance. S tra te g ic

P ro c e s s

O p e ra tio n a l

E s ta b lis h In itia l E x p e c ta tio n

N eed A w a re n e s s

E s ta b lis h S e a rc h C rite ria

E s ta b lis h S e c o n d a r y E x p e c ta tio n

S e a rc h

E s ta b lis h S e le c tio n C rite ria

D e te rm in e E x p e c te d E ffe c tiv e n e s s

S e le c tio n / D e c is io n

D e te rm in e J o in t O p e ra tin g S ta n d a rd s

E v a lu a te P e rc e iv e d E ffe c tiv e n e s s

Im p le m e n ta tio n / A d m in is tra tio n

E v a lu a te O p e ra tin g S ta n d a rd s

General Alliance Development Model A ssessm ent – At each horizontal stage, managers must consider both the strategic and operational s u s ta in , m o d if y , te rm in a te components and there are basically four levels.



Level 1 – This level is about alliance conceptualisation and it begins when a firm prefers a special arrangement through strategic alliance with a trust worthy partner over its current arrangement. This level involves a lot of joint planning to determine what the ‘ideal strategic alliance’ is all about.

S o u rc e : J .M . S c h m itz , R . F ra n k e l, a n d D .J . F ra y e r, “ E C R A llia n c e s : A B e s t P ra c tic e M o d e l,” J o in t In d u s try P ro je c t o n E ffic ie n t C o n s u m e r R e s p o n s e , 1 9 9 5 .

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Level 2 – This level is about alliance pursuance and it is at this level that a decision to form an alliance is finalised. The firm will establish operational and strategic criteria to select the strategic alliance partner.



Level 3 – This level is about alliance confirmation and this is the level for the firm to determine the strategic and operational expectations for the arrangement. Joint meetings are usually conducted between partners and through this kind of interaction, the relationship of partners become solidified.



Level 4 – This level is about alliance implementation and continuity. This level is more focused on performance assessment to determine whether an alliance will be sustained, modified, or get terminated. A conflict resolution process is required to put in place to manage conflicts.

Developing a Trusting Relationship Trust is a value that exhibits between two persons, which is difficult to quantify. When trust has developed, it acts as an extended arm of resource and capability that ones can depend upon in times of threats and needs from his/her friends, relatives, colleagues, etc. Hence, __________________________________________________________________________________ 218 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED developing trusting relationship is beneficial to individual because he/she can seek helps, supports, and advices, among others from his social circles. Like human beings, companies can also develop trusting relationship through interactions in business co-operations over time. In the current competitive marketplace, no one company can survive the keen competition in a run long without having to established partnership and alliances, the latter is a more closely knitted relationship. Trust is not something that simply happens. Trust is developed when a company’s performance history and the reliability of its supply chain linkages can be demonstrated. Trust is not easy to measure or identify. The elements of trust vary considerably depending on the situation. In the subsequent paragraphs, we describe type major types of trust and how they are developed and illustrate each type with a supply chain example. Reliability This type of trust is based on the ability to produce a consistent and predictable outcome over a period of time. Apart from this, one could also expect that being dependable is also mean that there is integrity and honesty of the other party and the party is consistently act on a set of moral codes or standards even in unusual situations. By applying pressure to get something done on the other party in a supply chain partnership is not going to achieve collaborative outcome because it is just not on a willingness and committed basis by both supply chain parties and the relationship is not going to last to produce the desired outcomes. For example, if a supply chain partner forces a supplier into a supply chain relationship, and then the supplier is less likely to act reliably. On the other hand, if a freight forwarder commits to deliver on time based on standard lead-time but repeatedly delivered longer than the prescribed time, the shipper who engages the freight forwarder will likely to look for a more reliable freight forwarder some time later. Competence Competence is about ability. When we say a person is competent, it means that the person is able to do something relatively well. This form of trust is different from the trust that developed due to reliability. The competence type of trust has three key areas: 

Functional competence – the ability to know, understand and find a solution to a specific area. For example, a buyer purchasing an electrical component from a supplier trusts that the supplier can answer any relevant question about the electrical component.



Interpersonal competence – the ability to work with others and the ability to listen, negotiate, communicate, make a presentation, reach an agreement with a group, and other related skills to deal with people on a day-to-day basis.

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ADVANCED 

Business sense competence – is about individual’s experience, wisdom, and common sense.

Affect-Based Trust (“Goodwill”) Affect-based trust can be broken down into two elements: 

Openness – this is about being open with other party on problem or information. For example, a supplier who provides information on internal costs or a buyer who provides information on future forecasts.



Benevolence – this is about the acknowledgement of duty by one party to protect the rights and interests of the other party. Alternatively, it can be described as faith or goodwill of others, which is produced through repeated personal interactions.

Vulnerability In supply chain situation, three types of vulnerabilities can arise. 

Adverse selection – this refers to the inability to evaluate accurately the quality of the assets the other partner brings to the relationship. For example, a buyer may not know exactly whether the supplier’s production system can meet his requirements.



Moral hazard – this refers to the inability to evaluate the assets committed when a relationship exists. For example, if a supplier based on a buyer’s request, increase its production capacity, and advised that he has done that. However, there is no means to ascertain that the supplier has indeed invested in the plant and increase the production capacity then a moral hazard exists. This will result in asymmetric investment by which one partner commits more to the relationship than other.

Loyalty Loyalty is about truthfulness and faithfulness. This only occurs after a period of time and produces reliable performance and one party develops a sense of loyal bonding with the other party. When this happens, it is the belief of one party that the other party will perform well in unusual situations, when it really counts. This relationship only happens through strong interpersonal bonds. For example, if there is a big order that comes just before the end of financial quarter and this order will make a different in your organisation financial statement, you may need your supplier to rush the material on overnight delivery and even work over weekends and holidays. In order to do this, the supplier may have to make some drastic changes in its production plan and also to hire more production operators and work longer hours. A supplier who can perform and deliver to such requirements does show loyalty to your company. Challenges to Strategic Alliance __________________________________________________________________________________ 220 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED In any supply chain structure, a number of risks exist that must be managed between participating companies. Some of these challenges relate to the issue of confidentiality, research and development, demanding service levels, mass customisation, and shared responsibility. Confidentiality For supply chain to work effectively in a partnership arrangement, both parties need to know more about one another than before. Sometime organisations need to share strategic level information (such as market intelligence, investments, business strategies, etc.) as well as operational level information (such as number of orders, forecasts, product pricing, seasonal promotion information, etc.). If there is an anticipated demand due to promotion strategy, all supply chain partners need to have advance notice in order to prepare their own organisations for the increase in demand. As companies become more and more dependent on their supply chain members, they will have to find new and innovative ways to manage the risks associated with sharing proprietary and sensitive information with supply chain members. Research and Development In the area of new product development, supply chain partners will have to share new product information. Suppliers will bring with them proprietary technologies to be used in their customer’s products, and customers may need to share new product specifications and requirements with their suppliers. Hence, with the increasing partnership between supply chain members, the control of information and new technologies sharing become increasingly important. Increased Service Level Requirements Companies must find innovative ways to improve customer service through process improvement. In order to meet the challenge of ever-increasing customer requirements, supply chain partners must work together to manage pre-transaction and post-transaction elements. Mass Customisation Mass customisation is always a preferred option for customers and this demand will be intensified in the future as customers’ demand increase. Though the aggregate demand forecasts may remain relatively stable, the number of different products will continue to increase resulting in a fragmented array of customer options. Moreover, the forecasts for the product mix demand at different locations, and volumes required will become increasingly difficult to develop and manage. Shared Responsibility

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ADVANCED As supply chain structures begin to evolve, increasing investments in information systems and technology will be required to integrate supply chain organisation. Such inter-organisation issues will continue to challenge supply chain managers. Third-party Logistics (3PL) Overview Partnership is defined as a tailored business relationship featuring mutual trust, openness, and shared risk and reward that yields strategic competitive advantage. Often the formula for success in logistics is the one that leads to partnership. According to a 1996 CLM study into the market positioning and development of the third-party logistics industry, partnerships with third parties add value for a growing number of companies. Fully 72 % of respondents used third-party logistics providers with outbound transportation as their most frequently outsourced service, followed by warehousing at just under 60 %. In the future, freight consolidation and distribution were the logistics activities thought most likely to be outsourced (by 22.1 % of respondents), followed by warehousing and inbound transportation and/or freight bill auditing/payments (18.2 % and 16.6 % of respondents, respectively). Outsourcing of logistics activities was considered to be extremely successful for the customers of 38 % of respondents. Another 52 % of respondents' customers considered outsourcing somewhat successful. Many firms engaged in international business also use external logistics service providers to handle most of their logistics needs. This clearly shows the need for these companies to establish a close relationship with their service providers. These partnerships reduce uncertainty and complexity in an ever-changing global environment and minimise risk while maintaining flexibility. Research by Daugherty, et al. on international third-party service provider’s shows that partnerships are extremely important for minimising problems associated with information flow that can easily damage the supplier-customer relationship. Third-party partnership provides the advantages of ownership without the associated burden, allowing organisations to take advantage of "best-in-class" expertise, achieve customer service improvement, respond to competition, and eliminate assets. However, according to Daugherty, "partnerships are not the way to go in all cases. They may not always be feasible or appropriate. Partnerships are complex relationships demanding corporate cultural compatibility, a strong perspective of mutuality, and symmetry between the two sides. To succeed, partnerships must include components that management controls and can put in place, like planning, joint operating controls, risk/reward sharing, trust/commitment, contract style, expanded scope, and financial investment. " As organisations adopt integrated SCM approaches, the role of third-party logistics service providers is likely to expand. This will be the case particularly for those third-party service __________________________________________________________________________________ 222 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED providers that function effectively as part of the overall supply chain team. Third-party service providers will increasingly be sought out for their SCM expertise. Relative to domestic supply chains, international supply chains often entail the following: 

Greater geographic distances and time differences;

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Multiple national markets;

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Multiple national operations locations; and

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Greater opportunities because of diversity of supply and demand conditions.

Additional costs are also associated with global supply chains. Major costs categories for a global supply chain include: 

Manufacturing costs – purchased materials, labour, equipment charge, and supplier's margin

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Movement costs – transportation cost, inventory in pipeline and safety stock cost, and duty

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Incentive costs and subsidies – taxes and subsidies

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Intangible costs – quality costs, product adaptation or performance costs, and coordination

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Overhead costs – total current landed costs

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Sensitivity to long-term costs – productivity and wage changes, exchange rate changes, product design, and core competence

Global supply chain performance improvement by leading organisations has involved the following: 

Rationalising supply chains by changing locations and transportation modes;

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Reducing the buffers of inventory and time between successive steps in the supply chain;

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Increasing the geographic and international scope of the supply chains; and

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Increasing the sophistication of the goods and services accessed through supply chains.

The 3PL market is currently going through a fundamental redefinition. An increase in the globalisation process, the role of I.T. and a series of acquisitions and mergers, are fast transforming the 3PL industry. The business models that supported “arm’s length” relations with customers are no longer attractive or desired. The new focus is on integrated logistics as “one-stop” solutions. There is also a significant migration from asset-based logistics to value-added and integrated contract logistics solutions. The emergence of the concept of a lead logistics provider (LLP) has brought about higher degree of specialisation within the 3PL market. The gradual transformation of 3PL players into a __________________________________________________________________________________ 223 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 4PL service provider is however just about taking shape and promises to be an exciting phase in the logistics services market globally. 5PL ( E-business ) 4PL ( Supply Chain Management ) 3PL ( Forwarding / Contract Logistics )

Management of all parties of the supply chain in conjunction with e-business Management of whole supply chain Management of complex service chains

2PL ( Asset-based Logistics )

Traditional transport and warehouse operations

1 PL ( Producer )

Own operating of logistics by producer

Source: http://www.hoyer-group.com/logistikE/html/3pl4pl.html

Levels of Logistics Outsourcing

3PL vs. 4PL Logistics: Best Definition, Explanation and Comparison Courtesy: By Steven Ciemcioch - Warehouse Anywhere. A 3PL company arranges freight carriers and warehousing by dealing directly with the service providers. A 4PL company, on the other hand, arranges the same services and more for a client but does so by employing companies such as 3PL companies, who use their vast network of carriers and warehousing providers.

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ADVANCED

We're laying down the law on the often confused — and sometimes debated — “PL” terminology. What is a 3PL, how does it differ from a 4PL, and which one is right for your company? It can be tough to decide whether you need a 3PL versus a 4PL logistics provider to optimize your supply chain. Making the wrong choice can cost millions of dollars and negatively impact your customer service levels — so you'll want to get it right. In this article, I'll share my best definitions, compare the differences between 3PL and 4PL, and explain how these solutions can support your unique supply chain strategy.

1PL, 2PL, 3PL, 4PL, 5PL Definitions

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ADVANCED

1PL - First-Party Logistics An enterprise that sends goods or products from one location to another is a 1PL. For example, a local farm that transports eggs directly to a grocery store for sale is a 1PL. 2PL - Second-Party Logistics An enterprise that owns assets such as vehicles or planes to transport products from one location to another is a 2PL. That same local farm might hire a 2PL to transport their eggs from the farm to the grocery store. 3PL - Third-Party Logistics In a 3PL model, an enterprise maintains management oversight, but outsources operations of transportation and logistics to a provider who may subcontract out some or all of the execution. Additional services may be performed such as crating, boxing and packaging to add value to the supply chain. In our farm-to-grocery store example, a 3PL may be responsible for packing the eggs in cartons in addition to moving the eggs from the farm to the grocery store. 4PL - Fourth-Party Logistics In a 4PL model, an enterprise outsources management of logistics activities as well as the execution across the supply chain. The 4PL provider typically offers more strategic insight and management over the enterprise's supply chain. A manufacturer will use a 4PL to essentially outsource its entire logistics operations. In this case, the 4PL may manage the communication with the farmer to produce more eggs as the grocery store's inventory decreases. 5PL - Fifth-Party Logistics A 5PL provider supplies innovative logistics solutions and develops an optimum supply chain network. 5PL providers seek to gain efficiencies and increased value from the beginning of the supply chain to the end through the use of technology like blockchain, __________________________________________________________________________________ 226 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED robotics, automation, Bluetooth beacons and Radio Frequency Identification (RFID) devices. As we progress through the spectrum of logistics models from 1PL to 5PL, it's clear that more and more of the logistics function is in the hands of the provider rather than the enterprise itself. The most common models now are 3PL and 4PL and we'll look at how each one can help solve supply chain challenges. What is a Third-Party Logistics Provider?

The term "third-party logistics provider," or 3PL, has been around since the 1970s. It simply means that a third party is involved in a company's logistics operations, in addition to the shipper/receiver and the carrier. A 3PL does not take ownership of (or title to) the products being shipped. This third party comes into play as an intermediary or manager between the other two parties. The first 3PLs were intermodal marketing companies that accepted loads from shippers and tendered them to railroads, becoming a third party in the contract between shippers and carriers, according to the Council of Supply Chain Management Professionals (CSCMP) glossary. Today, any company that offers some form of logistics services for hire is known as a 3PL. This includes facilitating the movement of parts and materials from suppliers to manufacturers, as well as finished products from manufacturers to distributors and retailers. A 3PL may or may not have its own assets, such as trucks and warehouses. In some cases, the role of 3PL and broker overlap, but typically a broker is used to engage trucking capacity for a specific shipment. A 3PL may act as a broker or use brokers to move clients' freight. Most 3PLs offer a bundle of integrated supply chain services, including:  Transportation __________________________________________________________________________________ 227 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 

Warehousing



Cross-docking

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Inventory management

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Packaging

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Freight forwarding

A 3PL can scale and customize services to meet customers' needs based on their strategic requirements to move, store, and fulfill products and materials. Companies turn to 3PLs when their supply chain becomes too complex to manage internally. For example, a company may grow through mergers and acquisitions, so a supply chain that was manageable at one time outgrows the in-house capability. The 3PL offers experience gained from working for multiple clients across many different industries. They also offer technology solutions — in some cases, proprietary tools — such as transportation and warehouse management systems beyond what the shipper could afford to invest in independently. Long-term relationships with carriers can result in better pricing and service during periods when capacity may come at a premium. The economy of scale can lower prices on everything from packing tape to ocean shipping rates. Advantages of 3PL A 3PL will offer innovative strategies to transform your supply chain into a cost-effective, responsive model. Consider what we're doing at Warehouse Anywhere as an example. In contrast to the traditional single distribution center (DC) model, we have pioneered and perfected forward-deployed inventory management. The common hub-and-spoke DC model is not able to keep up with the pace of business, with large inventories and infrequent truck service. We've developed the forward-deployed model for warehousing and distribution that uses a larger number of smaller locations to move products closer to the customer. This decentralized, hyper-connected model provides the responsiveness needed to meet customers' expectations for timely delivery. No matter if you're direct-to-consumer or in a service-level agreement situation, customers expect overnight delivery, or as close to it as possible. The Warehouse Anywhere system can optimize your inventory per location to ensure stock is on hand in areas of highest demand. You will save on transportation and logistics expenses while improving customer service. Disadvantages of 3PL While the 3PL model has been successful for decades, there are some things to consider. Perhaps the most significant caveat is the lack of direct oversight and control. After all, a 3PL is an outsourced service provider. That means some activities will take place outside of your __________________________________________________________________________________ 228 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED direct supervision. Ensuring quality control and customer service requires an extra level of diligence. If a 3PL fails to deliver on a customer's expectation, the customer will blame your company, not the 3PL. Another issue is the degree of dependency a 3PL can create. When you outsource a significant segment of your business, it can be difficult to switch providers or take the operations in-house if pricing or service levels no longer meet expectations. 3PL by Industry 3PLs for Medical Devices

For industries with complex supply chain requirements, 3PLs deliver solutions that turn challenges into competitive advantages. For the medical device industry, visibility and value-added delivery processes are top priorities. To meet regulatory requirements, devices must be tracked throughout every step of the process with a verifiable chain of custody. This capability requires complex technology solutions that can track inventory across multiple locations and carriers to ensure individual devices can be tracked and traced at a moment's notice. Medical device shippers rely on 3PLs for services that go well beyond dropping off boxes on the dock. Clients are looking for delivery to the end-user department, on-site inventorying, returns and repairs and other small but vital steps in serving customers. A 3PL can help a medical device company develop systems to optimize delivery from a distribution hub to individual locations. Rather than delivering half a dozen items in many shipments, the 3PL can develop the visibility to consolidate deliveries to reduce costs significantly. 3PLs can manage expedited shipments to fulfill just-in-time delivery for high-value items, such as knee implants. Greater visibility into inventories and reverse logistics improves ease of auditing, reducing the need for physical auditing. 3PLs for Field Services __________________________________________________________________________________ 229 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

Companies with extensive field service operations, no matter if they're strictly internal or offer services to clients, will benefit from 3PL partnerships. A field service environment is different than a manufacturing situation and requires unique solutions. Meeting service level agreement (SLA) expectation is crucial to customer satisfaction, and a well-managed forward deployment program can ensure standards are met or exceeded. To meet these high expectations, a 3PL can forward deploy commonly used items in smaller distribution hubs for rapid, lower cost response. The 3PL can develop a database of the most often ordered items and ensure inventory is managed to meet ongoing demand. Having the right part available when the service technician makes the initial call will contribute to a high level of customer satisfaction. The service tech can stop at the hub to pick up parts or place an order for expedited delivery to the job site. 3PLs for Retail

Thanks to the “Amazon effect,” customers have come to expect merchandise to be readily available online or in-store. After all, if you can receive practically anything from Amazon in two days or less, customers don't understand why they can't receive goods from other shippers in the same time frame. A 3PL can develop a strategy to improve supply chain discipline to better compete with Amazon on shipping times and fulfillment accuracy. __________________________________________________________________________________ 230 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED What is a Fourth-Party Logistics Provider?

A fourth-party logistics provider, or 4PL, represents a higher level of supply chain management for the customer. The 4PL gives its clients a “control tower” view of their supply chains, overseeing the mix of warehouses, shipping companies, freight forwarders and agents. The goal is to have the 4PL act as the single interface between all aspects of the supply chain and the client organization. Consulting firm Accenture originally copyrighted the term in the mid-1990s, but it has since fallen into generic use. In some cases, a 4PL may be established as a joint venture or long-term contract between a primary client and multiple partners, often to manage logistics for specific locations or lines of business. The structure of a 4PL can vary, as there may be a 4PL component within a larger 3PL relationship. A 4PL is a form of business process outsourcing, similar to contracting out human resources or financial functions. What's the Difference Between 3PL and 4PL Logistics?

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ADVANCED Typically, the 4PL does not own transportation or warehouse assets. Instead, it coordinates those aspects of the supply chain with vendors. The 4PL may coordinate activities of other 3PLs that handle various aspects of the supply chain. The 4PL functions at the integration and optimization level, while a 3PL may be more focused on day-to-day operations. A 4PL also may be known as a Lead Logistics Partner (LLP), according to the CSCMP. The primary advantage of a 4PL relationship is that it is a strategic relationship focused on providing the highest level of services for the best value, as opposed to a 3PL that may be more transaction focused. A 4PL provides a single point of contact for your supply chain. With a 3PL, there may be some aspects that you still have to manage. The 4PL should take over those processes for you, acting as the intermediary for 3PLs, carriers, warehouse vendors and other participants in your supply chain. The 4PL relationship simplifies and streamlines the logistics function using technology for greater visibility and imposing operational discipline across many partners and suppliers. The enterprise can focus on its core competencies and rely on the 4PL partner to manage the supply chain function for maximum value. Basically, the 4PL acts as the enterprise would if the supply chain functions were managed in-house. As companies transition their supply chain model to forward deployment or decentralized distribution, a 4PL partner can step in and manage that complexity. Retailers, in particular, are shifting toward a more nimble model to support e-commerce and omnichannel services. A 4PL can manage the multiplying number of resources that it takes to compete at that level. The days of the million-square-foot super regional DC may be over, as companies opt for shared warehouse space near major customer centers to speed up responsiveness. The 4PL can manage those relationships, as well as optimize the network to use parcel carriers or couriers to support e-commerce, rather than LTL or truckload services. Fourth-Party Logistics Advantages Choosing a 3PL vs. a 4PL can be a complicated decision that depends on the complexity of your supply chain and your company's strategic goals. A 3PL relationship works well when the organization has a solid, high-performance supply chain strategy in place and requires support to execute the plan. Working with a 3PL will typically require a high level of internal management commitment and oversight to ensure performance meets your standards. However, many day-to-day decisions are out of your hands as you count on the providers selected by the 3PL to meet your service commitments. An asset-based 3PL may focus too much on ensuring that its own assets are fully utilized at the expense of lower rates or better services from other providers. For smaller companies, a 3PL can provide an immediate level of scale that would otherwise be cost prohibitive.

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ADVANCED A non-asset based 4PL is agnostic in choosing suppliers, concentrating on finding the best combination of value and service. Typically, a 4PL will have integrated technology offerings that deliver a high level of visibility into the supply chain for tactical and strategic analysis. Of course, internal resources are still necessary to manage the 4PL performance, but it should be a higher level of oversight than a 3PL. Warehouse Anywhere has performed as both a 3PL and 4PL for our clients. Recently, we've seen great success in acting as a 4PL in managing forward-deployed inventories in a variety of vertical markets. We can localize your inventory in hundreds of U.S. cities in a very short period.

4PL by Industry

4PLs for Medical Devices

Did you know that sometimes surgeons order a medical device such as a knee replacement only after the patient has started the anesthesia process? Talk about just-in-time delivery. Surgeons may order several sizes of a product because they don't know precisely which one, they'll need at the start of the procedure. A 4PL can manage the complex chain of custody requirements and delivery schedules to meet physician's requirements and reduce inventory costs. For one medical-device manufacturer Warehouse Anywhere developed a network of inventory centers to service hospitals and surgery centers. We maintain their inventory, relieving field reps of that burden and eliminating consignment costs. Since we guarantee delivery of items up to one hour prior to surgery, physicians can preschedule surgeries as well. We handle all reverse logistics and restocking of unused items. __________________________________________________________________________________ 233 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED We found in many cases physicians typically ordered more than million dollars’ worth of devices in a year but used only about less than hundreds of dollars’ worth. The extra cost of shipping these items to and from the hospital and DC were excessive and consumed by the medical device company. Our solution helped eliminate inventory writeoff costs while improving service to the medical facilities. Now, this medical device company sees their supply chain as a competitive advantage rather than a cost center. 4PLs for Field Service

To serve field service and repair organizations a 4PL takes control of the supply chain including warehousing, fulfilment, transportation and technology.

The Warehouse Anywhere forward deployed 4PL model is perfect for field service businesses because we manage all the moving parts to meet your service expectations. The process begins with a detailed analysis of parts usage based on historical data and installed customer base to determine the individual parts, quantities and locations necessary to meet anticipated demands. The field techs don't have to function as warehouse operators anymore. Parts location and inventories are visible to all the techs in the region, reducing the need for trunk stock.

For one field service organization supporting retail and financial services technology, Warehouse Anywhere established a decentralized warehousing model, and developed a fulfillment system to provide parts in 30 minutes or less, meeting or exceeding service level

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ADVANCED agreements. Its real-time inventory tracking and visibility support full chain of custody, 24/7 inventory availability and ERP/IT integration. 4PLs for Retail/E-Commerce

The largest e-commerce companies, like Amazon, act as their own 4PLs by owning and managing the entire supply chain. Few other companies have the resources to match that, so they turn to 4PLs for strategic management. Over the years, many retailers have used 3PLs for transportation, warehousing and fulfilment. As e-commerce boomed, retailers often bolted on those capabilities to existing systems, creating parallel supply chains to meet in-store and online demand. As ecommerce logistics matures, it's become apparent that an omnichannel approach is a sustainable direction to support customers, regardless of the channel from which they purpose.

A 4PL offers the strategic vision to create a new supply chain network that efficiently manages the flow of product across all platforms. A single view of inventory gives the retailer the power to allocate inventory and meet customer demand regardless of the status or location of the inventory. Forward-deployed inventory can serve both physical locations and e-commerce fulfillment. For brick-and-mortar locations, the forward deployment supports same-day inventory replenishment as well as online order fulfillment from the same location. With smaller store footprints, there's no room “in the back” anymore. For a retail apparel customer, we forward deployed inventory within a five-mile radius of stores to replenish popular items within one hou 3PL vs. 4PL - What's Best for Your Company?

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ADVANCED If your company is dealing with an increasingly complex supply chain and struggling to meet customer expectation for faster response, then an innovative 3PL or 4PL may be the best solution for you.

In partnering with an innovative leader, your supply chain solutions can be optimized for maximum customer value with a competitive advantage. The most successful logistics partnerships seamlessly blend the flow of products and information flow, and that's where our technology truly enables supply chain excellence.

Whether you're direct-to-consumer or offering service-level agreements to business-tobusiness partners, you know that overnight delivery (or close to it) is what your customers expect. That's why Warehouse Anywhere is on a different level than other 3PL companies. If you are servicing a large national market, you can place fast-moving parts, materials or products in multiple fulfilment warehouse locations that are closest to your points of highest demand. This forward-deployed inventory model allows us to store your resources everywhere that you need them to be. In addition to a distribution or fulfilment service, you'll also have a layer of technology and expertise that a traditional 3PL warehouse doesn't have. You will save on your transportation and logistics while also achieving excellent customer service. Traditional 3PLs

In the past, third-party providers of transportation services have traditionally included an array of ‘middle men’ operating between carriers and shippers. The services provided by these intermediaries included several types of brokerage, forwarding, freight consolidation, warehousing, information processing services (including freight bill auditing and payment, tracking, EDI, transaction processing, MIS reporting, etc.), and fleet operations (vehicle leasing and management, container control, inter-modal trailer operations, etc.). Each of these intermediaries was a specialist in a part of the business that the average traffic manager did not have the time and resources to manage in-house. For example, custom brokering requires detailed knowledge of complex domestic and foreign regulations and was therefore readily contracted out. An area that has routinely been contracted out is freight-bill auditing. The sheer volume of tariffs and their complexity made it uneconomical to handle in-house. Specialist firms were typical more suited to developing the necessary software and continuously updating the various tariffs and contract rates. Other information processing services also were contracted out – particularly in conjunction with other functions; thus, many third parties (as well as carriers) provide tracing, reporting, and EDI as part of their services. __________________________________________________________________________________ 236 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Recent 3PL Developments The last several years have witnessed the birth of a new breed of contract logistics providers. Many of these new companies originated in sophisticated logistics departments of large shippers. These departments found a business opportunity in providing logistics services to other shippers, as well as to their own parent company. The new breed of third parties can be divided into two main categories – those who own transportation assets and those who do not. Some providers invest in assets that are used to serve their parent company and then sell the extra capacity in the market place. As these companies grow, they invest in more assets and continue to sell available capacity. The existing assets are augmented by the use of common carriers – including public warehousing, contract labour, etc.) Until the volume and stability of the freight under management justifies further investment in assets? Market Trends 3PLs can today look forward to increasing growth opportunities. The restructuring and integration of manufacturing and distribution activities within Europe will force companies to concentrate on core competences and to seek improved performance in their logistics chains, using 3PLs. To be successful, the 3PLs need to provide more value-added services beyond their basic services. They also need to be serious about being transnational and strengthen their services worldwide. The other major trend is for distributors and other shippers to form their own 3PLs. Companies who have built integrated warehousing and transportation infrastructure are jumping into the 3PL fray. Spiegel and J.C. Penney are good examples. In their bid to outsource entire logistics processes, customers are increasingly approaching 4PL players. Unlike a 3PL who’s traditional focus has been on the organisation and management of assets such as facilities, vehicles, and inventory, the 4PLs’ focus is towards the collection, coordination, and management of information; leaving asset management for the 3PLs. The concept of Lead Logistics Providers (LLP) is also catching up very fast with the customers. An LLP could be a 3PL service provider currently used by the client, who is designated to manage certain aspects of the client’s relationships with the other 3PL providers. 3PL Development There is a visible shift from a mere asset-ownership based business model, to a new business process model that seeks to meet the customer demands for integrated end-to-end logistics solutions. The shift of market focus from national market to trans-European market, (take Europe as an example), due to changes in the regulatory environment. The extension of European Union with the new accession states from Eastern & Central Europe further promises to make Europe __________________________________________________________________________________ 237 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED one of the largest integrated economic regions in the world opening up new opportunities for 3PL players within Europe. The increased trend towards, mergers & acquisitions and alliances, between various companies resulting in greater synergies among companies, thereby enabling greater transparency in pricing across the continent. There is an increasing preference among leading manufacturing companies towards the separation of their sales function from that of actual physical fulfilment. This leads to business process outsourcing, creating opportunities for logistics companies to act as Lead Logistics Providers (LLPs). Industries are realising the need for outsourcing the management of entire logistics process to a single entity for greater visibility and optimisation across the supply chain. This has led to the emergence of Lead Logistics Provider or 4PL players (to be discussed in subsequent sections). Increasingly 3PL players are pitching for LLP / 4PL services to their clients. Key Growth Drivers Global Sourcing and Selling With the opening up of the global market, several European Original Equipment Manufacturers (OEMs), in line with the trend in developed markets of North America, are looking at outsourced manufacturing opportunities from highly competitive global contract manufacturers. Globalisation has also translated into many selling opportunities for OEMs in finished products, including I.T., telecoms, electronics, automobiles, pharmaceuticals etc. worldwide, especially in emerging markets. As market barriers and import tariff levels are further brought down under the impact of WTO, the overall traded cargo volumes are likely to move up further, creating the need for new logistics pipelines. Supply Chain Management Requirements Shrinking product life cycles and a high rate of technological obsolescence has increased the pressure on supply chain management (SCM), with the new emphasis on supply chain agility and the need to reduce non-value adding costs. 3PLs have come forward to provide the logistics resources and skills needed, thereby reducing the overall costs. An external 3PL may also overcome internal organisational inertia that often impedes a company making its own logistics process improvements. Meeting increasingly dynamic and ever-changing customer orders, delivery schedules and service delivery quality - are generating new level of competitive pressures in several industries. Resorting to 3PL solutions or a lead logistics provider (LLP) is necessary both for survival and for maintaining the bottom line. __________________________________________________________________________________ 238 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED A 3PL can be viewed as the vehicle to bring down conventional logistics cost structures and induct improved process management through logistics information technology. Outsourcing is increasingly becoming an acceptable business model for a company to implement, develop and manage. Several 3PL companies have realised this as a fast-emerging business opportunity and have been focusing on building required professional and vertical domain competencies in areas like I.T., electronics, automobiles, pharmaceutical outsourcing, etc. Transportation, warehousing, and distribution services are traditionally managed like commodity service businesses. Margins in such asset-based basic services are declining and there is definitely more value to be realised in the value-added segments. Price is, and always has been, the key to sustaining bottom-line. Presently, revenues from basic services such as overland transportation constitute 50-80 per cent of the sales revenues of 3PL companies. Most 3PL providers, including some of the larger operators, are limited in their ability to offer economies of scale to improve their cost structures. Incremental growth in business volume does not necessarily have desirable impacts on reducing operating costs. The 3PL solutions now demand additional investments to bring about network expansion and organisational growth to be able to offer value-added solutions. For example, a firm that is going to provide an international 3PL service would look at business trends for the industry to be served, information technology needs, outsourcing, international sourcing, political stability of key countries and other factors that affect the growth of the 3PL market. This enables the potential 3PL to understand the market and define the service segments against which the firm will have to compete. Firms outsource logistics to 3PL to gain expertise and leverage. Customers want value from their 3PL in four main dimensions of value. 

Trust – this is the strongest value of dimension. Here firms are looking for reliable execution, objective assessment of execution, solid atmosphere of collaboration and solutions orientation.



Information – to keep customers in the loop in terms of accuracy, quality, timeliness, electronically integrated with customers’ MIS.



Capital Utilisation – 3PL provides leverage to attain reduction of fixed assets (building and equipment) and reduction of inventory.



Expense Control – customers are looking on 3PL to help them reduce of their supply chain costs, sharing of cost savings, and innovativeness.

Advantages of 3PL Outsourcing There are many advantages of outsourcing logistics operations to reliable 3PLs because of the following reasons. __________________________________________________________________________________ 239 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 

Cost Reduction – these costs can be labour, facility cost, system related cost, logistics cost, etc. Through engaging 3PLs for their services such costs can be reduced especially in the areas of inventory holding cost, warehousing, transportation, customs, and duties, etc.



Non-Core Business – if a company is a supplier of telecommunications product, it may not want to own a traffic department to manage its distribution, logistics, etc., as this is not a core business but rather a support function for its main business.



Leverage on 3PL’s Logistics Network – through business expansion, most 3PLs have offices and presence regionally and the bigger ones could have logistics network that span globally if not across a few regions.



Cut down Asset Investment – most 3PLs have assets such as facility, trucks, information systems that can be offered as part of the services to customers. From the customers’ standpoint these are non-core assets and there is no need to own them if 3PLs can provide such supports readily and cost effectively.



Improve Customer Service – nowadays 3PLs can provide value-added services like packaging, labelling, palletising, consolidation, deconsolidation, quality control, inspection, merge-in-transit, inventory management, etc.



Short Lead-time – in terms of customer delivery, by leveraging on 3PL’s extensive and excellent logistics infrastructure network, the lead-time for transportation and delivery can be improved.



Flexibility of Business Expansion and Reduction – owing to 3PL’s extensive and excellent logistics infrastructure network, customers can leverage on the 3PL’s capacity to expand their business in times of increasing demands fairly quickly as well as cutting their business with 3PL when demands are lower.

Disadvantages and Issues of 3PL Outsourcing Certainly, there are benefits to be reaped when companies outsource their logistics operations to 3PLs however there are disadvantages and issues in terms of 3PL outsourcing. 

Span of Control – although the market for contract logistics will continue to grow, the loss of control and service quality issues are the primary constraints to increased 3PL usage.



Basic Services – the offering of value-added services and information management may be the keys to differentiation, but 3PL revenues continue to be still largely generated by basic services.



Pricing – the price of services offered is an important issue in the choice of 3PL providers; lower cost is still the main driver for outsourcing.

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ADVANCED 

Limited Choices of 3PL – As users retain fewer 3PL providers, 3PL service offerings will need to expand directly or through alliances.



Confidential Information Sharing – due to close working relationship, information such as number of orders per period may have to share with 3PL in order to support the business from time to time.



System Integration – inadequate 3PL capabilities can result in strain relationship between 3PL and shipper if there is a need to integrate systems to allow information flow.



Disparate Expectations – 3PL and shipper can have different expectation in terms of service level requirements and measurements and such differences if not communicated properly can result in poor service by the 3PL.



Implementation Timeline – when 3PL and shipper forged a partnership, there is a time period for 3PL and shipper to involve in the implementation planning and execution. This period of time allows both 3PL and shipper to understand its operations regimes and sometime the implementation timeline can be relatively long especially if the scope of the agreement is more extensive.

3PL Service Offerings

Categorisation of Logistics Function In general, most 3PL service offerings include the following:  

Inbound Logistics – includes raw material warehousing, customs clearance, airfreight forwarding, sea-freight forwarding, and domestic transportation.

Source: A framework for evaluating 3 rd party logistics by Ganesh Vaidyanathan

Outbound Logistics – includes inventory management, cross docking (i.e. the direct flow of goods from the receiving process to the shipping process with the least additional

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ADVANCED handling and storage in between), sea freight forwarding, air freight forwarding, finished good warehousing, and domestic transportation. 

Reverse Logistics – includes spare parts delivery, repairs and rework, replacement, technical support, after sales customer services.

I.T. Systems provided by 3PL Nowadays most 3PL are capable of providing the following I.T. system related support and service to customers: 

Shipment and Inventory Tracking



Cross Dock Management



Inventory and Warehouse Management



Key Performance Indicators



Customer Relationship Management



Vendor / Supplier Management



Return Material Authorisation



Transportation Planning and Scheduling



Order Fulfilment



Supply Chain Design and Planning

Fourth Party Logistics (4PL) / Lead Logistics Provider (LLP) Fourth Party Logistics (4PL) is the evolution of supply chain outsourcing. The convergence of technology, the rapid acceleration of e-capabilities has heightened the need for an over-arching integrator for supply chain spanning activities. 4PL is the shared sourcing of supply chain spanning activity with a client and select teaming partner, under the direction of a 4PL integrator. The Fourth Party Logistics (4PL) provider is a supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organisation with those of complementary service providers to deliver a comprehensive supply chain solution. As conceptually illustrated and examined in the book, "Strategic Supply Chain Alignment" by John Gattorna, supply chain evolution has occurred, with organisations moving from insourcing to outsourcing to 4PL arrangements. According to Gattorna, "While outsourcing thirdparty logistics is now accepted business practice, Fourth Party Logistics is emerging as a breakthrough solution to modern supply chain challenges….to provide maximum overall benefit." Central to the 4PLs success is the "best of breed" approach to providing services to a client. The development of 4PL solutions leverages the capabilities of 3PLs, technology service providers, __________________________________________________________________________________ 242 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED and business process managers to provide the client organisation with greater cross-functional integration and broader operational autonomy. Two key distinctions make the concept of 4PL unique and set it apart from other supply chain outsourcing options available to the market today. First, a 4PL delivers a comprehensive supply chain solution, and secondly, a 4PL delivers value through the ability to impact the entire supply chain. The term "4PL" was actually coined by the consulting group Accenture. In fact, they also hold the trademark to the name 4PL. Accenture defines a 4PL in the following manner: "A 4PL is an integrator that assembles the resources, capabilities, and technology of its own organisation and other organisations to design build and run comprehensive supply chain solutions." The term 4PL is something that every organisation has their own interpretation of and ideas on what exactly a 4PL should offer. To add more complexity to the interpretation, the following groups of service providers actually provide "4PL type" services: 

Consultants



I.T. Service Providers



"E" Marketplaces



Financial institutions



Private Organisations



Logistics Service Providers (traditionally only known for 3PL activities)

A true 4PL organisation would then build a set of activities focused around a specific set of supply chain initiatives and goals, generally with the following attributes: 

4PL Common Services (invoice management, call centers, warehouse/distribution facilities.



Implementation Centre (the business process analysis/scoping, and development of all activities into an open systems framework)



Product/Skill Centres (supply chain engineering)



I.T. System Centre (the pure I.T. selection for design and implementation/connectivity)



4PL Back Office (administration, quality, finance, legal)

Sitting above these functions would be a Controlling Interface, monitored by the hired 4PL party. This group would manage all the "blocking & tackling issues" related to daily business. The Controlling Interface would provide the customer-facing visibility, control, KPI/Metrics management, reporting, daily problem solving, etc. Additionally, surrounding these activity sets would be the following: __________________________________________________________________________________ 243 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 

Knowledge Transfer



Business Development



Functional Support

So, to give you a visual field, picture a dartboard. From the centre outward, there would be a series of concentric circles. In the centre would be the 4PL. The next outer circle would be the strategic partners. The next outer circle would be the preferred service provider, following by the larges outward circle which covers the project partners. The Business Ethics of a 4PL would contain the following ethos: 

The 4PL organisation focuses on the customer supply chain



All 4PL organisation decisions are made towards managing the myriad of service providers, which are based on business rules.



All service providers are measured on a master single set of KPI's.

Lastly, a recap of 4PL Products, Services & Capabilities (visualise a triangle): 

Relationship: CRM



Know-How: Knowledge Management industry/supply chain



Consulting: Supply chain analysis/implementation



Visibility: Supply chain visibility, communication, and I.T. integration



Operational: Accounting/invoice management, Event monitoring / exception management, RFP/RFQ management/execution, Carrier/3PL management

reengineering,

Process

consulting

(3PL),

I.T.

Most companies do use 3PLs to leverage the capabilities of third-party logistics suppliers to improve the performance of their supply chain by outsourcing portions of its transportation and warehousing functions. This third-party management allows companies to focus on its core competencies, to provide a differentiated level of customer service, and to take advantage of greater operational flexibility. This type of management also provides companies with the opportunity to improve its financial position by reducing some operating and capital expenses. However, in practice, 3PLs lack the strategic expertise required to operate across the entire supply chain and the technologies to truly integrate the related supply chain processes. Although some 3PLs provide minor assembly and “kitting” operations, they still concentrate primarily on their core strengths such as transportation and warehousing. While third-party management provides solid one-time reductions, it does not deliver the continuous on-going savings and management that a 4PL can provide.

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ADVANCED It can be quite confusing to differentiate between 4PL, LLP and Logistics Integrator. Whilst the traditional focal point has been on the organisation of assets such as facilities, vehicles, and inventory, the shift for 4PL and Logistics Integrators is toward the collection, coordination, and management of information leaving asset management for the 3PLs. Under this business model, the fourth party would not have to be a third-party logistics company but could be a consulting firm, or an information technology company. In contrast, an LLP provider would be a 3PL service provider currently used by the client, who is designated to manage certain aspects of the client’s relationships with the other 3PL providers. 4PL providers become a partner to their clients and must continue to add value. Frequently, the process of implementing supply chain solutions involves changing culture within a company and has to be tackled in stages. A 4PL solution leverages the combined capabilities of both management consulting and thirdparty logistics providers. More importantly, the design, implementation and execution of a leading edge, client optimised, uniform technology plan that will meet the needs of the 4PL client is ensured by leveraging the technology capabilities of consultancies, technology providers and third-party logistics providers. A 4PL implements recommendations including business process realignment, systems integration of technology across the client organisations and service providers, and transition of operations to the 4PL delivery team. Careful attention is paid to organisational change, recognising that the "people" factor is a critical driver of success in the transition to the 4PL arrangement. The goal is to avoid the all too common, ineffective implementation of well-designed strategies and business processes that have limited the effectiveness of solutions and the delivery of projected results. A 4PL provider takes on operational responsibility for multiple supply chain functions and processes. The scope goes well beyond traditional third-party transportation management and warehouse operations to include manufacturing, procurement, supply chain I.T., demand forecasting, network management, customer service management, inventory management, and administration. While an organisation can outsource the entire range of its supply chain activities to a 4PL provider, a 4PL solution will more likely be a subset of critical path supply chain functions or processes. Companies offering 4PL, or lead logistics services, include Schneider Logistics, Exel, UPS Logistics and Ryder Logistics. More 3PLs are planning to enter the 4PL field. Consulting firms also are interested; the term 4PL was coined by Accenture several years ago when it was still Andersen Consulting, which considered trademarking or copyrighting the term but never did so. __________________________________________________________________________________ 245 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The 4PL provider needs to possess a comprehensive set of skills to effectively deliver a 4PL solution. The depth of skills and knowledge will be critical to the success of the arrangement. We have identified the following criteria to evaluate a 4PL provider: 

Adequate number of trained and competent supply chain professionals including management staff



Global capability / Regional capability, in terms of geographical presence, resources, and technology capability



Ability to manage multiple service providers

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Ability to provide transition of customer’s staff and other assets smoothly to the new 4PL organisation



Strong program management skill, people relationship and teaming skills



Ability to deliver of world class supply chain strategy formulation and business process redesign



Substantial experience in integrating supply chain technologies and outsourcing capabilities

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Understanding and management of organisational changes, issues, and challenges



Ability to anticipate and prepare customers for future supply chain developments, trends, and standards

Upon reviewing the above, it seems to appear a true 4PL providers must be totally selfgoverning and cannot own assets such as warehouses or vehicles. The 4PL provider has to manage the outcome of the supply chain by utilising the best and most appropriate resources available. Characteristics and Fundamentals of 4PL 

Neutrality



Branch specific know-how



Extensive I.T. competence



Management capacity



Task of designing, coordinating, and controlling supply networks



Delivering comprehensive supply chain solutions



Managing an integrated material and information flow



Taking over operative responsibility for the clients



Offering a portfolio of different service modules by coordinating with other service providers

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ADVANCED A 4PL role can vary depending on what it is required to perform according to the customer’s requirements. In general, the following are usually the requirements. Supply Chain Visibility This includes order visibility, shipment visibility and inventory visibility. 4PL may be required to deploy their own visibility systems or to integrate their systems to the customer’s internal systems so as to provide a comprehensive information visibility to customers. The 4PL will be required to capture critical milestones in the logistics and warehousing process from all 3PLs and carriers within a geographical region and match them with customer order feeds to enable real-time order status for customer. This will allow the customer to better manage the execution of customer deliveries within the geographical region as well as material shipments from global supply nodes. 4PL Logistics Processes 4PL may be required to oversee the management of logistics processes including inbound logistics material, outbound logistics material, reverse logistics material, etc. 4PL will be expected to manage most of these processes simultaneously and this multitasking management is what separates a 4PL from 3PL. 4PL is expected to manage their customer’s 3PLs and must be in a leadership position to drive performance and measure performance of all the 3PLs. 4PL may access to I.T. systems to assimilate micro metrics from each of the logistics process owners to assess the overall performance of the 3PLs for a particular region. The Freight payment and Auditing process is defined as the roles and responsibilities for preaudit and payment of all transportation and logistics invoices by the 4PL. The logistics contract management process is defined as where the 4PL is required to balance existing customer’s Contracts and the 4PL’s Logistics Provider network. Over time, 4PL will control and be responsible for all Carrier Contracts and the 4PL is responsible for carrier selection, 3PL selection, contract negotiation, performance monitoring and measurement, etc. The Reverse Logistics process is defined as the return of Material from an end destination based upon a Return Material Authorisation (RMA). This RMA process may be initiated by customer, 3PL, or Supplier that has been empowered to allow the return. As the authorisation is entered into a system database, this event triggers the appropriate system to alert the 4PL to manage the reverse logistics process. The Warehousing and Distribution process is defined as the activities pertaining to receiving, short-term storing, accounting, preparation, and shipment of Material. This function will be used as a means of consolidating multiple shipments from multiple sources and staging the material in preparation for delivery. The supply chain network optimisation is defined as the core group of logistics activities that the 4PL oversees as a regional or macro view. The network optimisation scope could include __________________________________________________________________________________ 247 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED shipment optimisation, shipment consolidation, regional/local geographic logistics loops (‘milk run’), merge-in-transit (MIT), and freight forwarders and customs broker management. The 4PL should demonstrate systems, procedures, and capabilities to initiate and manage a Vendor managed inventory (VMI) hub for inbound raw materials and components into the customer’s manufacturers or customer’s EMS. With VMI, the manufacturers or supplier is responsible for all decisions regarding product inventories. As a result, the control of the replenishment decision moves to the manufacturer to allow it to make inventory replenishment decision. VMI can allow a manufacturer to increase its profits for the entire supply chain by mitigating some of the effects of double marginalisation. 4PL is therefore required to manage a VMI program on behalf of its customer. Management Consultation As cited by Accenture in an article ‘Technology in the Next Generation of Supply Chain Outsourcing - Leveraging Capabilities of Fourth Party Logistics’ by James Douglas, et al, a 4PL solution leverages the combined capabilities of both management consulting and third-party logistics providers. More importantly, the design, implementation and execution of a leading edge, client optimised, uniform technology plan that will meet the needs of the 4PL client is ensured by leveraging the technology capabilities of consultancies, technology providers and third-party logistics providers. There are four levels of 4PL solutions – Reinvention, Transformation, Implementation, and Execution. Benefits of 4PL Concept 

Revenue Growth

Revenue growth will be driven by enhanced product quality, product availability and improve customer service. Experience has shown that customer service measures, such as stock outs and ship complete, can be improved by getting 4PL focusing on the entire supply chain and not just the efficiency associated with warehousing or lowest cost transportation. 

Reduction of Supply Chain Cost

Operating cost reduction can be driven through operational efficiencies, process enhancements and procurement savings. Savings will be achieved through the complete outsourcing of the supply chain function.

P r o fita b ility E n h a n c e m e n t

S h a r e h o ld e r V a lu e E n h a n c e m e n t

R e v e n u e E n h a n c e m e n t O p e r a tin g C o s t R e d u c tio n W o r k in g C a p ita l R e d u c tio n

I n v e s te d C a p ita l __________________________________________________________________________________ 248 R e d u c tio n ©Global Maritime Legal Solutions (GMLS) Version 1_2020 F ix e d C a p ita l R e d u c tio n

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ADVANCED Benefits of 4PL Concept 

Reduction in Working Capital Requirements

Working capital reductions can be realised through inventory reductions and reduced ‘order to cash’ cycle times. The initiative-taking use of technology to manage order and SKU movement throughout the pipeline will minimise the amount of inventory required, as well as increase item availability to reduce cycle times. 

Supply Chain related Capital Reduction

Fixed capital reductions will result from capital asset transfer and enhanced asset utilisation. The 4PL’s logistics service providers can take ownership of physical assets, thus freeing up assets. This will allow the client organisation to invest in its core competencies, i.e. research and design, product development, sales, and marketing – not in bricks and mortar – impacting the balance sheet and broad level change. 

Leveraging Technology in a 4PL Solution

As the management of information becomes increasingly critical, shippers need to develop a strategy for addressing information technology. To be truly effective, the I.T. strategy must encompass systems at all levels such as ERP, Decision Support System, Transactional, and Functional if it is to enhance supply chain performance. Recent advances in supply chain technology can provide a supply chain participant with a comprehensive real-time visibility of the entire supply chain. Technology has expanded to include product flow visibility, event management, and performance management, all of which enhance the corporation's competitive position. This technology provides real time information allowing a corporation to redirect product flow, if necessary, and forecasting inbound and outbound volumes. It also allows the user to quantify performance data and track performance accountability at all levels within the supply chain, while monitoring continuous performance improvement opportunities. According to Forrester Research, "... Virtual businesses can be supported by entire end-to-end supply chain systems that will be operated by virtual logistics outsourcer..." These new technologies will enable a 4PL to provide an integrated solution across its service providers, as well as the client and its supply chain partners. Models of 4PL As cited by Dow N. Bauknight and John R. Miller, there is no one single 4PL model for any companies. It all depends what does each company want their 4PL to do but the bottom line is for 4PL to reduce cost, provide one-stop-shop service, consultancy, and value-added services, among others. Below are some generic 4PL models. 

Synergy Plus

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ADVANCED A synergy plus operating model relies on a working relationship between the 4PL organisation and a 3PL. In this model, a 4PL and 3PL partner to market supply chain solutions which capitalise on the capabilities and market reach of both organisations. The 4PL could provide a broad range of services to the 3PL including technology, supply chain strategy skills, capability to go to market, and program management expertise. 

Solution Integrator

A 4PL can act as a solution integrator. In this operating model, the 4PL operates and manages a comprehensive supply chain solution for a single client. The solution integrator arrangement will encompass the resources, capabilities, and technology of the 4PL with complementary service providers to provide a comprehensive integrated supply chain solution that delivers value throughout, a single client organisation’s supply chain component. 

Industry Innovator

In this model, a 4PL organisation develops and runs a supply chain solution for multiple industry players with a focus on synchronisation and collaboration. The formation of industry solutions will provide the greatest benefits however it is complex and can challenge the most competent organisations. Challenges and Issues within 4PL Environment 

Enterprises do not outsource controlling tasks



Individual enterprises are not in the position to conduct comprehensive 4PL research



Lack of clear cost allocation in outsourcing projects



Slow reaction of logistics service providers on industrial requirements



Inadequate developed supply networks



4PL concepts and their benefits especially in their implementation phase are not well known



Fragmented implementation of 4PL concepts along supply chains



Insufficient definitions of interfaces between different processes



Insufficient definition of tasks and responsibilities

Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

True

False

The success of an integrated supply chain management process is really about keeping an arm’s length relationship between members in the supply chain

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ADVANCED 2

Transaction logistics is a specifically defined relationship that is contractually oriented and dependent on the supplier meeting the shipper’s defined performance goals

Contract logistics is a planned on-going relationship where both parties have needs that the other can fulfil and both firms share values, goals, and corporate strategies for mutual benefit

Strategic alliance is a relationship built on a series of separate single events

Strategic alliance is a close, long-term, cooperative relationship between two or more participants who are willing to share information and risks, gain equal benefits, trust one another, and improve their performance for strategic planning

The 3PL market is currently going through a fundamental redefinition. An increase in the globalisation process, the role of I.T. and a series of acquisitions and mergers are fast transforming the 3PL industry

An advantage of 3PL Outsourcing is Cost Reduction – these costs can be labour, facility cost, system relates cost, logistics cost etc. Through engaging 3PLs for their services such costs can be reduced especially in the areas of inventory holding cost, warehousing, transportation, customs, and duties

A disadvantage is the Span of Control – although the market for contract logistics will continue to grow that the loss of control and service quality issues are the primary constraints to increased 3PL usage

4PL is expected to manage their customers’ 3PLs and must be in a leadership position to drive performance and measure performance of all the 3PLs

To be truly effective the I.T. strategy must encompass systems at all levels such as ERP, Decision Support Systems, Transactional and Functional if it is to enhance supply chain performance

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ADVANCED

CHAPTER 11 - EFFICIENT TRANSPORT AND DISTRIBUTION STRATEGY US: 336712 Outline the philosophy of Supply Chain Management PURPOSE This chapter will enable learners to will demonstrate a clear understanding of the concepts of Supply Chain, Supply Chain Management, Supply Management, Procurement, Operations, Distribution and Logistics, The concepts and compare the philosophy of Supply Chain Management with traditional business models giving practical examples of the advantages and disadvantages of adhering to a Supply Chain Philosophy, The challenges facing organisations when they attempt to implement a Supply Chain Based business model and give __________________________________________________________________________________ 252 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED some recommendations on a possible change process that could lead organisations towards reaping the benefits of implementing the Supply Chain approach to work. LEARNING OBJECTIVES: Learners will be able to:  Interrogate the inter-relationship between the concept of Supply Chain Management and Demand, Acquisitions, Distribution and Logistics.  Map the Supply Chain and describe the benefits of applying the philosophy.  Identify areas within a supply chain that require improvements. Introduction: Role of Transportation to Supply Chain

The role of transportation in supply chain /logistics operations has changed dramatically over the last three decades. Prior to transportation deregulation, the purchase of transportation could be likened to buying a commodity such as coal or grain. There was very little difference between transportation suppliers in terms of product, service, or price. Transportation deregulation in 1980 introduced pricing flexibility and significantly increased the range of services transportation companies could provide customers. Today a wide range of transportation alternatives are available to support product or raw material supply chain. For example, supply chain managers may integrate private with for-hire transportation to reduce total logistics /supply chain costs. Many for-hire carriers offer a wide variety of value-added services such as product sortation, sequencing, and customised freight delivery and presentation. Technology has enhanced real time visibility of where freight is throughout the supply chain and when it will be delivered. Precise product delivery reduces inventory, storage, and materials handling. As such, the value of transportation has become greater than simply moving product from one location to another. Transportation and inventories are the primary cost-absorbing logistics activities. Transportation adds place value to products and services, whereas inventories add time value. Transportation is essential because no modern firm can operate without providing for the movement of its raw materials and /or finished products. This essential nature is underscored by the financial strains placed on many firms by so-called national disasters, such as a national railroad strike or independent truckers’ refusal to move goods because of rate disputes. In these circumstances, markets cannot be served, and products back up in the supply chain pipelines to deteriorate or become obsolete. Supply chain is about creating value – value for customers and suppliers of the firm, and value for the firm’s stakeholders. Value in supply chain is expressed in terms of time and place. Products and services have no value unless they are in the possession of the customers when (time) and where (place) they wish to consume them. __________________________________________________________________________________ 253 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED For example, concessions at a sport event have no value to customers if they are not available at the time and place that the event is occurring, or if inadequate inventories are maintained to meet the demand of the sport fans. Good supply chain management views each activity in the supply chain as contributing to the process of adding value. If little value can be added, it is questionable whether the activity should exist. However, value is added when customers are willing to pay more for a product or service than the cost to place it in their hands. Too many firms throughout the world, supply chain management has become an increasingly important value-adding process for a number of reasons and transportation is one of the key supply chain value-adding activities. Guidelines for Distribution Strategy Formulation /Re-engineering Many of the principles and concepts that guide logistics and supply chain planning are derived from the unique nature of logistics activities, especially transportation. Others are a result of general economic and market phenomena. All give insight as to what the supply chain strategy might be and set the stage for more detailed analysis. Several of these will now be outlined and illustrated. Total Cost Concept Central to the scope and design of the supply chain and logistics system is trade-off analysis, which, in turn, leads to the total cost concept. The cost trade-off is the recognition that cost patterns of various activities of the firm frequently display characteristics that put them in conflict with one another. This conflict is managed by balancing the activities so that they are collectively optimised. For example, the below Figure shows that when a transportation service is being selected, the direct cost of the transport service and the indirect cost effect on inventory levels in the logistics channel due to different delivery performance of carriers are said to be in cost conflict with each other. The best economic choice occurs at the point where the sum of both costs is lowest, as indicated by the dashed line in the figure below.

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ADVANCED

Cost Conflict between Transportation and Inventory Costs as a Function of Transportation Service Characteristics. Choosing a transportation service on the basis of either lowest rates or fastest service may not be the best method. Therefore, the basic problem in supply chain is one of cost-conflict management. Wherever there are substantial cost conflicts among activities, they should be managed in a coordinated manner. The network, as previously described, incorporates most of the potential cost conflicts relevant to supply chain and logistics. The total cost concept applies to more than the problem of selecting transportation service. Additional examples of logistics problems, where a trade-off of costs is indicated, are shown in the Figure. The Figure illustrates the problem of setting the customer service level. As customers receive a higher level of service, fewer of them are lost as a result of out-of-stock situations, slow and unreliable deliveries, and inaccurate order filling, expressed another way, the cost due to lost sales decreases with improved service. Counterbalancing the lost sales cost is the cost of maintaining the level of service. Improved service usually means that more must be paid for transportation, order processing, and inventories. The best trade-off occurs at a point below 100 % (perfect) customer service. The Figure shows the basic economic considerations in determining the number of stocking points in a logistics network. Where customers purchase in small quantities and stocking points are replenished in large quantities, the cost of transportation from the stocking points exceeds the inbound costs so that transportation costs decline when the number of stocking points is increased. However, as the number of stocking points increases, the inventory level for the entire network increases, and inventory costs rise. In addition, the customer service level is affected by this decision. The problem is one of balancing the combined inventory-transportation costs against the contribution to revenues from the customer service level provided. The Figure illustrates the problem of setting the safety stock level for inventories. Because safety stock increases the average level of inventories and also affects the customer service level through the availability of stock when an order is placed, the cost of lost sales declines. Increasing the average level of inventories will increase the inventory carrying cost. __________________________________________________________________________________ 255 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Transportation costs remain relatively unaffected. Again, a balance is sought between these opposing costs. Finally, the Figure shows the basic features of a multiple-product scheduling problem. Production costs are affected by the sequence in which the products are produced and the length of production runs. As the production sequence is changed, inventory costs will increase, because orders will not necessarily be received at the optimum time to replenish depleted stocks. The effect is to raise the average inventory level. The best production sequence and run length in which to produce the products are found where the combined production and inventory costs are minimised. These examples illustrate the total cost concept as applied to the internal problems of the firm and specifically to logistics problems. However, at times, decisions made by a firm in a channel of distribution affect the logistics costs of another firm. For example, the inventory policies of a buyer affect both the inventory costs of the shipper and the operating costs of the carrier. In this case, it is necessary to extend the boundaries of the system beyond either the logistics function or the firm, possibly to include several firms. Thus, the total cost equation would be expanded, and the scope of management decision-making would extend beyond the legal limits of the firm.

Some Additional Supply Chain and Logistics System Trade-offs __________________________________________________________________________________ 256 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The point is that the total cost, or alternately the total supply chain system, concept is a concept without clear boundaries. Although one might argue that in some way all activities of the entire economy are economically related to the supply chain problem of the firm, to attempt to assess all the various cost trade-offs that might relate to any decision problem is folly. It is left to the judgment of management to decide which factors to consider relevant and to include them in the analysis. This defines whether the total cost analysis will include only factors within the supply chain and logistics function as we have defined it or whether the analysis should be extended to include other factors under the control of the firm and even some beyond the immediate control of the firm. Differentiated Distribution Not all products should be provided the same level of customer service. This is a fundamental principle for logistics planning. Different customer service requirements, different product characteristics, and different sales levels among the multiple items that the typical firm distributes suggest that multiple distribution strategies should be provided within the product line. Managers have made use of this principle when they broadly classify their products into a limited number of groups such as high, medium, and low sales volume and then apply a different stocking level to each. To a lesser extent, the principle is also applied to inventory location. When a firm stocks all products at all warehouse locations, it may do so to simplify administration, but this strategy denies the inherent differences between products and their costs, and it leads to higher-than-necessary distribution costs. An improved strategy might be first to differentiate those products that should move through the warehouse from products that should be shipped directly to customers from plants, vendors, or other source points. Because the transportation rate structure encourages shipments in vehicle-load volumes, the products might first be divided according to shipment size. Those customers ordering in high-volume quantities would be served directly while all others would be served from warehouses. Of the sales volume remaining, the products should be differentiated by location. That is, the fast-moving items should be placed in the field warehouses with the most forward locations in the distribution channel. Medium-volume items should be placed in fewer regional locations. The slow-moving items should be located only at centralised stocking points such as plants. As a result, each stocking point may contain a different product mix. Differentiated distribution may be applied to factors other than volume. That is, separate distribution channels may be established for regular customer orders and back orders. The regular distribution channel might be to fill orders from warehouses. When an out-of-stock situation occurs, a backup distribution system may come into play that fills the order from secondary stocking points and uses premium transportation to overcome the disadvantage of increased delivery distances. __________________________________________________________________________________ 257 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Similarly, many other examples can be offered where multiple distribution channels give lower overall distribution costs than a single channel design. Mixed Strategy The concept of a mixed strategy is similar to that of differentiated distribution: A mixed distribution strategy will have lower costs than a pure, or single, strategy. Although single strategies may benefit from economies of scale and administrative simplicity, they are at an economic disadvantage when the product line varies substantially in terms of cube, weight, order size, sales volume, and customer service requirements. A mixed strategy allows an optimal strategy to be established for separate product groups. This often has lower costs than a single, global strategy that must be averaged across all product groups. Postponement The principle of postponement can be stated as: The time of shipment and the location of final product processing in the distribution of a product should be delayed until a customer order is received. The idea is to avoid shipping goods in anticipation of when demand will occur (time postponement) and to avoid creating the form of the final product in anticipation of that form (form postponement). There are broadly five types of postponement classification available to organisations that might be interested in applying the principle. Four types are form postponement (labelling, packaging, assembly, and manufacturing) and the other is time postponement. Some suggestions of postponement strategies are summarised in Table 6-1. Postponement is favoured when the following characteristics appear to be present: Technology and process characteristics: 

Feasible to decouple primary and postponed operations



Limited complexity of customising



Modular product design



Sourcing from multiple locations

Product characteristics: 

High commonality of modules



Specific formulation of products



Specific peripherals



High value density of products



Product cube and/or weight increases through customisation

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ADVANCED Market characteristics: 

Short product life cycles



High sales fluctuations



Short and reliable lead times



Price competition



Varied markets and customers

Consolidation

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ADVANCED Creating large shipments from small ones (consolidation) is a powerful economic force in strategic planning. It is a result of the substantial economies of scale that are present in the transport cost-rate structure. Managers can use this concept to improve strategy. For example, customer orders arriving at a warehouse might be combined with orders received at a later time period. This would increase the size of the average shipment, which, in turn, would lower average per-unit shipping costs. Potentially reduced customer service resulting from increased delivery time must be balanced with the cost benefits of order consolidation. In general, the concept of consolidation will be most useful in strategy formulation when quantities shipped are small. That is, the smaller the shipment size, the disproportionately greater will be the benefits of consolidation. Types of Firms Potentially Interested in Using the Postponement Principle Standardisation Variety exacts its price in the logistics channel. Proliferation of product variety can increase inventories and decrease shipment sizes. Just adding a new item to the product line that is similar to an existing one can increase the combined inventory levels of both items by 40 % or more, even though total demand does not increase. The key question in strategy formulation is how to provide the variety in the marketplace that customers desire without dramatically increasing logistics costs. The use of the concepts of standardisation and postponement in combination is often effective for this problem. Standardisation in production is created by interchangeable parts, modularising products, and labelling the same products under different brand names. This effectively controls the variety of parts, supplies, and materials that must be handled in the supply channel. The disadvantages of product variety are controlled in the distribution channel through postponement. For example, automakers create endless product variety without increasing inventories by adding or substituting options at the point of sale and creating multiple brands from the same basic components. Clothing manufacturers do not attempt to stock exact sizes that many customers require but alter standard sizes to fit. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

Transportation and inventories are the primary cost-absorbing logistics activities

Good supply chain management views each activity in the supply chain as contributing to the process of adding value. If little value can be added it is questionable whether the activity should exist

True

False

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ADVANCED 3

The cost trade-off is the recognition that cost patterns of various activities of the firm frequently display characteristics that put them in conflict with one another.

All products should be provided at the same level of customer service

As the number of stocking points increase, the inventory level for the entire network increases and inventory costs rise

It is important that each individual business unit considers costs at the exclusion of all other business units

A mixed strategy allows an optimal strategy to be established for separate product groups. This often has lower costs than a single global strategy that must be averaged across all product groups

Postponement can be described as: The time of shipment and the location of final product processing in the distribution of a product should be delayed until a customer order is received.

Consolidation is a powerful economic force in strategic planning. Creating large shipments from small ones.

Variety exacts its price in the logistics channel. Proliferation of product variety can increase inventories and decrease shipment sizes.

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ADVANCED

CHAPTER 12 - SUPPLY CHAIN PERFORMANCE MEASUREMENT, CONTROL AND STRATEGIC LOGISTICS PLAN US: 336710 Develop and implement supply chain performance management systems PURPOSE: This unit standard will enable learners to develop and implement supply chain performance management systems. People credited with this unit standard will be able to develop and implement appropriate performance management systems across the supply chain ensuring adequate integration and alignment of indicators and developing appropriate strategies to ensure that the required improvement actions can be taken optimise the performance of the supply chain. LEARNING OBJRCTIVES: Learners will be able to:  Define performance management.  Develop indicators for a supply chain performance management system.  Implement a supply chain performance management system. Introduction Supply chain related costs might exceed a bulk of the cost of doing business. For this reason, better management of the supply chain offers the potential for large savings, which can contribute to improved corporate profitability. In mature markets – in which large percentage of sales increases are difficult to achieve and corporate profitability is continuously being eroded by increasing costs and competition – it is necessary to look for ways to improve productivity. In many firms, supply chain has not been managed as an integrated system. Even in firms that have accepted the concept of integrated supply chain management, evidence suggests that the cost data required for successful implementation are not readily available. The accurate measurement and control of supply chain related costs offers significant potential for improving cash flow and return on assets.

Why is Performance Measurement Important?

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ADVANCED In order to accurately assess the performance of an existing supply chain and its related processes, one must have objective performance information. Ideally, this information should cover the full range of performance areas, including, but not limited to: 

Products and services offered Sales



Market share



Cost



Quality



Inventory holdings



Delivery



Cycle times



Assets utilised



Responsiveness



Customer service

Developing and maintaining a supply chain performance measurement system represents one of the more significant challenges faced in SCM initiatives. However, if supply chains are to be improved, decisions need to be based on objective performance information and will require sharing of this type of information with key supply chain members. Organisational willingness to share information with other supply chain members is a critical selection criterion for SCM membership. An organisation that is willing to receive information from other supply chain members but is reluctant to share information is a poor candidate for inclusion in an SCM initiative. Benchmarking analysis has been shown to be an effective means of determining the supply chain's performance relative to those of other organisations. Cook (1995) defines benchmarking as "the process of identifying, understanding, and adapting outstanding practices from within the same organisation or from other businesses to help improve performance. This involves a process of comparing practices and procedures to those of the 'best' to identify ways in which an organisation (or organisations) can make improvements. Thus, new standards and goals can be set which, in turn, will help better satisfy the customer's requirements for quality, cost, product and service." The steps typically found in the benchmarking process include: a. Identify and understand current processes. b. Form a benchmarking team. c. Determine what to benchmark. d. Identify benchmarking partners. __________________________________________________________________________________ 263 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED e. Collect data. f. Analyse data and identify performance gaps. g. Take actions to improve. h. Review results. Benchmarking provides a means to focus the supply chain management efforts on those areas most in need of improvement. Measurement is important, as it affects behaviour that impacts supply chain performance. As such, performance measurement provides the means by which a company can assess whether its supply chain has improved or degraded. There are several important factors why it is important to measure supply chain performance: Measurements are important to directly controlling behaviour and indirectly to performance. A few key measurements will go a long way toward keeping a company on track towards achieving its supply chain improvement objectives: 

Drive achievement toward business goals.



Provide focus on business strategies.



Align employees’ efforts toward objectives



Sustain improved business performance



Guide shifts in business direction.



Achieve balanced results across stakeholder groups.

Importance of Accurate Cost Data Back in the early days, the supply chain management concept did not exist, and only logistics was viewed as a fragmented and often uncoordinated set of activities spread throughout various organisational functions. However, many major corporations have since accepted the notion that a firm’s total logistics costs can be reduced, customer service improved, and interdepartmental conflicts substantially reduced by the coordination of logistics activities. The advent of information technology, operations research techniques, and the systems approach brought not only changes in transportation strategy, inventory control techniques, warehousing location policy, order processing systems, and logistics communication, but also the desire to manage the costs associated with these functions in an integrated format. Nowadays, accurate cost data are required for successful implementation of the integrated supply chain management concept using total cost analysis. They also are required for the management and control of logistics operations. Total Cost Analysis Concept __________________________________________________________________________________ 264 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Total cost analysis is one of the key concepts of managing supply chain functions. For a given level of customer satisfaction, the management is required to understand the need to maintain overall cost visibility rather than just focusing on individual cost element of individual activities. One of the shortcomings of non-integrative supply chain management about cost performance control is that attempt to reduce specific costs within the supply chain function may be less than optimal for the system as a whole, leading to greater total costs. Total supply chain costs do not respond to cost cutting techniques individually geared to warehouse, transportation, or inventory costs. Reductions in one cost invariably result in increases in one or more of the others. For example, aggregating all finished goods inventory into fewer distribution centres may minimise warehousing costs and increase inventory turnover, but it also may lead to increased transportation expense. The Figure below shows an analysis of this type of situation. Similarly, savings resulting from favourable purchase prices on large orders may be entirely offset by greater inventory carrying costs. Thus, to minimise total cost, management must understand the effect of trade-offs within the distribution function, and how various cost factors interact.

Figure: Total Cost Analysis of Centralised DC versus Decentralisation Cost Trade-offs It is also important to understand the concept of cost trade-offs when conduct total cost analysis for supply chain systems. Profit for the overall supply chain system can be enhanced if the cost trade-off is managed properly. For example, if the increase in inventory has a much greater impact on the customer service level and yields much better revenue over the cost of investment incurred to stock goods, or inventory carrying cost, then it is therefore a good trade-off to be made as there is a net benefit is doing so. If knowledgeable trade-offs are to be made, management must be able to account for the costs Annual savings from reduction in number of distribution centres $650,000.00 Savings in inventory carrying costs with higher turnover $600,000.00 Gross savings $1,250,000.00 __________________________________________________________________________________ 265 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 Less Increased distance $500,000.00 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE Premium transportation to maintain same service level $450,000.00 EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT Total cost increase $950,000.00 Net savings from distribution centre reduction

$300,000.00

ADVANCED of each component and to explain how changes in each cost contribute to total costs. Usually, most management is only concerned about their own functional costs or revenues; there is no total picture per se. Table: Cost Trade-off due to the Reduction of Distribution Centres Figure: Inventory Cost Trade-offs

What General Approaches are available to measure performance of Supply Chains? Traditionally, companies have tracked performance based largely on financial accounting principles. Financial accounting measures are certainly important in assessing whether or not operational changes are improving the financial health of an enterprise, but insufficient to measure supply chain performance for the following reasons: The measures tend to be historically oriented and not focused on providing a forward-looking perspective. The measures do not relate to important strategic, non-financial performance, like customer service/loyalty and product quality. The measures do not directly tie to operational effectiveness and efficiency. In response to some of these deficiencies in traditional accounting methods for measuring supply chain performance, a variety of measurement approaches have been developed, including the following: 

The Balanced Scorecard



The Supply Chain Council’s SCOR Model



The Logistics Scoreboard



Activity-Based Costing (ABC)



Economic Value Analysis (EVA)

The Balanced Scorecard The Balanced Scorecard recommends the use of executive information systems (EIS) that track a limited number of balanced metrics that are closely aligned to strategic objectives. The __________________________________________________________________________________ 266 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED approach was initially developed by Robert S. Kaplan and David P. Norton and was discussed in an article, titled “The Balanced Scorecard – Measures That Drive Performance,” published in the Harvard Business Review, January-February 1992. While not specifically developed for supply chain performance measurement, Balanced Scorecard principles provide excellent guidance to follow when doing it. The approach would recommend that a small number of balanced supply chain measures be tracked based on four perspectives: 

Financial perspective (e.g., cost of manufacturing and cost of warehousing)



Customer perspective (e.g., on-time delivery and order fill rate)



Internal business perspective (e.g., manufacturing adherence-to-plan and forecast errors)



Innovative and learning perspective (e.g. new product development cycle time)

The Supply Chain Council’s SCOR Model The SCOR, which stands for Supply Chain Operations Reference model was developed by Supply Chain Council (SCC). The SCC is an independent, not-for-profit, global corporation with membership open to all companies and organisations interested in applying and advancing state-of-art supply chain management systems and practices. The model defines common supply chain management process, matches them against “best practices. It provides companies with powerful tool in improving supply chain operations. It allows manufacturers, suppliers, distributors, and retailers with a framework to evaluate the effectiveness of their supply chain operations and to target and measure specific process operations The SCOR model was designed to enable companies to communicate, compare and learn from competitors and companies both within and outside of their industry. It not only measures supply chain performance but also effectiveness of supply chain reengineering. Further it has the ability to test and plan future process improvements. Process Reference Model Process reference model integrate the concepts of business process reengineering, benchmarking, and process measurement into a cross-functional framework. A Process Reference Model helps organisations capture the "as-is" state of a process with the objective to achieve the desired "to-be" future state. Further it allows organisation to quantify the operational performance, establish internal targets based on "best-in-class" results in similar companies.

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ADVANCED It describes standard management processes, exploring relationship among different processes. It defines standard metrics to measure process performance and management practices that produce the best-in-class performance. Finally, it characterises the management practices and software solutions that result in "bestin-class" performance. Process reference helps complex management process be captured in standard process reference model. This in turn helps organisation communicate unambiguously and measure, manage, tune and re-tune specific process. Figure: Process Reference Model

B u sin ess P rocess R een gin eerin g C apture the “asC apture the “asis” is” state of a process state of a process and derive the and derive the desired “to-be” desired “to-be” future state future state

B en ch m ark in g Q uantify the Q uantify the operational operational perform ance o f perform ance o f sim ilar sim ilar com panies and com panies and establish establish internal targets internal targets based on “best-inbased on “best-inclass” results class” results

B est P ractices A n alysis

P rocess R eferen ce M od el C apture the “as-is” state C apture the “as-is” state of a process and derive th e desired of a process and derive th e desired “to-be” future state “to-be” future state

C haracterize the C haracterize the m anagem ent m anagem ent practices and practices and softw are softw are solutions that solutions that result in”best-inresult in”best-inclass” class” perform ance perform ance

Q uantify the operational p erform ance Q uantify the operational p erform ance of sim ilar com panies and establish of sim ilar com panies and establish internal targets based on internal targets based on “best-in-class” results “best-in-class” results

C haracterize the m ana ge m ent C haracterize the m ana ge m ent practices and softw are solutions that practices and softw are solutions that result in “best-in-class” pe rform ance result in “best-in-class” pe rform ance

Scope of SCOR Processes The scope of SCOR processes, include the following: 

Plan – Demand/Supply Planning and Management

Balance resources with requirements and establish/communicate plans for the whole supply chain, including Return, and the execution processes of Source, Make, and Deliver. Management of business rules, supply chain performance, data collection, inventory, capital assets, transportation, planning configuration, and regulatory requirements and compliance. Align the supply chain unit plan with the financial plan. 

Source – Sourcing Stocked, Make-to-Order, and Engineer-to-Order Product

Schedule deliveries; receive, verify, and transfer product; and authorise supplier payments. __________________________________________________________________________________ 268 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Identify and select supply sources when not predetermined, as for engineer-to-order product. Manage business rules, assess supplier performance, and maintain data. Manage inventory, capital assets, incoming product, supplier network, import/export requirements, and supplier agreements. 

Make – Make-to-Stock, Make-to-Order, and Engineer-to-Order Production Execution

Schedule production activities, issue product, produce and test, package, stage product, and release product to deliver. Finalise engineering for engineer-to-order product. Manage rules, performance, data, in-process products (WIP), equipment and facilities, transportation, production network, and regulatory compliance for production. 

Deliver – Order, Warehouse, Transportation, and Installation Management for Stocked, Make-to-Order, and Engineer-to-Order Product

All order management steps from processing customer inquiries and quotes to routing shipments and selecting carriers. Warehouse management, from receiving and picking product, to load and ship product. Receive and verify product at customer site and install, if necessary. Invoicing customer. Manage Deliver business rules, performance, information, finished product inventories, capital assets, transportation, product life cycle, and import/export requirements. Deliver 

Return – Return of Raw Materials (to Supplier) and Receipt of Returns of Finished Goods (from Customer), including Defective Products, MRO Products, and Excess Products

All return defective product steps from authorising return; scheduling product return; receiving, verifying, and disposition of defective product; and return replacement or credit. Return MRO product steps from authorising and scheduling return, determining product condition, transferring product, verifying product condition, disposition, and request return authorisation. Return excess product steps including identifying excess inventory, scheduling shipment, receiving returns, approving request authorisation, receiving excess product return in Source, verifying excess, and recover and disposition of excess product. Manage Return business rules, performance, data collection, return inventory, capital assets, transportation, network configuration, and regulatory requirements and compliance.

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ADVANCED Figure: SCOR Model

Four Levels of SCOR Process Model 

Level 1 – provides definition of the Plan, Source, Make, and Deliver process types. This is the point where a company establishes its supply-chain competitive objectives.



Level 2 – defines 30 core process categories that are possible components of a supply chain. Organisations can configure their ideal or actual operations using these processes



Level 3 – provides the information required for successfully planning and setting goals for supply-chain improvements. This includes defining process element, setting target benchmarks, defining best practices, and system software capabilities to enable best practices.



Level 4 – focuses on implementation, i.e. putting specific supply-chain improvements into action. These are not defined within industry standard model, as implementation can be unique to each company.

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ADVANCED The 4 Levels of SCOR Model

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ADVANCED Applications and Benefits of Using the SCOR Model The SCOR-model can be used in all kinds of companies. In the beginning users tend to feel like their company is an exception, but in the end, they always discover that all companies have the same problems. The SCOR-model is generic enough to be used in all industries. 7% of the Fortune 1000 companies are Supply Chain Council (SCC) members and use SCOR on some level. This 7% of the companies accounts for 35% of the profits of fortune 1000 companies. The average profit margins of these companies are twice as high as the profit margins of non-SCC members. SCOR companies are thus in general more profitable than non-SCOR companies. Delivery Lead-Time Improvement Siemens medical, which is the winner of the SCC 2001 operational excellence award, is an exemplary SCOR-model user. Siemens medical had cut its delivery lead times from 22 weeks to two weeks; it had increased its delivery reliability by 65 % to 99.5%. This was achieved by using the SCOR-model, implementing more direct distribution systems, increasing the percentage of goods that are made to order and implementing the Kanban System. Supply Chain Process Improvement Avon as a company was striving to transform its supply chain using SCOR. Avon sells cosmetics directly to consumers with a network of agents. Avon’s aims were similar to most companies: better asset performance, reduced inventories, and improved forecasting. The objectives were to cut cycle times by over 50% and increase the perfect order rate to 90% from 62%. This was to be achieved by simplifying networks and processes and optimising the manufacturing locations of different products. Supply chain planning was centralised, suppliers started managing inventories, the supply base was rationalised, manufacturing facilities in eastern European countries, labelling and sleeving postponed, direct deliveries from two hubs. The SCOR- model was used to map the processes. Process owners were named for the SCORprocesses and a scorecard based on SCOR was used. The main benefits of using SCOR were increased common understanding, reduced problems in designing processes and forced integration between functions. SCOR is a key enabler for the process-based organisation. The Logistics Scoreboard Another approach to measuring supply chain performance was developed by Logistics Resources International Inc. (Atlanta, GA), a consulting firm specialising primarily in the logistical (i.e., warehousing and transportation) aspects of a supply chain. The company recommends the use of an integrated set of performance measures falling into the following general categories: 

Logistics financial performance measures (e.g., expenses and return on assets)



Logistics productivity measures (e.g., orders shipped per hour and transport container utilisation)

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ADVANCED 

Logistics quality measures (e.g., inventory accuracy and shipment damage)



Logistics cycle time measures (e.g., in transit time and order entry time)

In contrast to the other approaches discussed, The Logistics Scoreboard is prescriptive and actually recommends the use of a specific set of supply chain performance measures. These measures, however, are skewed toward logistics, having limited focus on measuring the production and procurement activities within a supply chain. Example 1 - Total Logistics Cost Reduction

Example 2 – Warehouse Cost Reduction

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ADVANCED Example 3 – Freight Cost Activity Based Costing

The Activity-Based Costing (ABC) approach was developed to overcome some of the shortcomings of traditional accounting methods in tying financial measures to operational performance. The method involves breaking down activities into individual tasks or cost drivers, while estimating the resources (i.e., time and costs) needed for each one. Costs are then allocated based on these cost drivers rather than on traditional cost-accounting methods, such as allocating overhead either equally or based on less-relevant cost drivers. This approach allows one to better assess the true productivity and costs of a supply chain process. For example, use of the ABC method can allow companies to assess the total cost of servicing a specific customer more accurately or the cost of marketing a specific product. ABC analysis does not replace traditional financial accounting but provides a better understanding of supply chain performance by looking at the same numbers in a different way. ABC methods are useful in conjunction with the measurement approaches already discussed as their use allows one to measure supply chain process/task productivity and costs more accurately by aligning the metrics closer to actual labour, material, and equipment usage. Economic Value-added One of the criticisms of traditional accounting is that it focuses on short-term financial results like profits and revenues, providing little insight into the success of an enterprise towards generating long term value to its shareholders – thus, relatively unrelated to the long-term prosperity of a company. __________________________________________________________________________________ 274 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED For example, a company can report many profitable quarters, while simultaneously disenfranchising its customer base by not applying adequate resources towards product quality or new product innovation. To correct this deficiency in traditional methods, some financial analysts advocate estimating a company’s return on capital or economic value-added. These are based on the premise that shareholder value is increased when a company earns more than its cost of capital. One such measure, EVA, developed by Stern, Stewart & Co., attempts to quantify value created by an enterprise, basing it on operating profits in excess of capital employed (through debt and equity financing). Some companies are starting to use measures like EVA within their executive evaluations. Similarly, these types of metrics can be used to measure an enterprise’s value-added contributions within a supply chain. However, while useful for assessing higher level executive contributions and long-term shareholder value, economic value-added metrics are less useful for measuring detailed supply chain performance. They can be used, however, as the supply chain metrics within an executive-level performance scorecard and can be included in the measures recommended as part of The Logistics Scoreboard approach. Selecting of Measurements While the approaches described above provide guidance for supply chain measurement, they provide less help in assessing specific metrics to be used. In this regard, a key driving principle, as espoused by the Balanced Scorecard, is that measures should be aligned to strategic objectives. Supply chain strategy, however, differs for every company and depends upon its current competencies and strategic direction. Companies, for example, can generally fall into the following developmental stages that will dictate the types of measures and the degrees to which they will need to focus: Functional Excellence – a stage in which a company needs to develop excellence within each of its operating units such as the manufacturing, customer service, or logistics departments. Metrics for a company in this stage will need to focus on individual functional departments. Enterprise-Wide Integration – a stage in which a company needs to develop excellence in its cross-functional processes rather than within its individual functional departments. Metrics for a company in this stage will need to focus on cross-functional processes. Extended Enterprise Integration – stage in which a company needs to develop excellence in inter-enterprise processes. Metrics for a company in this stage will focus on external and cross enterprise metrics. Historically most companies have focused their performance measurement on achieving functional excellence. With the advent of Supply Chain Management (SCM) principles aimed at integrating their supply chains, many have objectives to increase their degree of enterprise-wide integration and extended enterprise integration. In order to achieve these types of objectives, their performance measurement systems will need to align to them. Advice for these supply chain measurement systems falls into five areas that include: __________________________________________________________________________________ 275 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 

Function-based measures



Process-based measures



Cross-enterprise measures



Number of measures to be used



Alignment of executive to management level measures

A set of measures developed by a leading consumer products manufacturer is also discussed, providing an illustration of the type that might be selected. Possible Impacts of Function-Based Measures A major problem encountered with most performance measurement systems is that they are functionally focused. Within these systems, each functional area measures its performance in its own terms, with individuals evaluated based on their ability to meet objectives consistent with their department’s performance measures. Individuals working under these measurement systems tend to drive operations toward improving their own area’s performance, frequently at the expense of the performance of other functional areas. When each functional area sets its performance measures in isolation from those of others, it often leads to functional silos and conflicting organisational goals. The figure below depicts a typical set of function-based supply chain-related performance measures used by many manufacturers. These types of measures used in isolation of each other tend to create conflicting goals among functional areas as follows: Customer Service and Sales In these functional areas, employees are measured by their ability to maintain customer service levels. Measured in this context only, these employees tend to drive operations toward satisfying potentially smaller sized customer orders and carrying high levels of finished goods inventories by stocking inventories in multiple locations close to customers to shorten cycle times. Logistics In this functional area, employees are measured by transportation and warehousing costs, and inventory levels. Measured in this context only, Logistics personnel tend to keep inventories low and batch customer orders to ensure that trucks are shipped full and picking operations are minimised. On the inbound side, these employees will want to receive full truckloads at their warehouse docks to minimise receiving costs, usually at the expense of increased inventories. __________________________________________________________________________________ 276 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

Manufacturing In this functional area, employees are measured in terms of manufacturing productivity. Measured in this context only, they want to make longer production runs that result in higher levels of finished goods inventories. In a make-to-order manufacturing environment there will be a tendency to consolidate customer orders into longer production runs, making them less responsive to dynamic customer demands. Purchasing In this functional area, employees are typically measured by materials costs and supplier delivery performance. Measured in this context only, buyers will purchase in large quantities to get volume discounts and use more suppliers for each item to ensure a low price. This behaviour results in purchasing excess, potentially low quality, raw materials. CrossFunction ProcessBased Measures

Perfect Perfect Order Order Process Process

••Percent Percentof ofOrders OrdersFlawlessly FlawlesslyFilled Filled Purchasing Purchasing

Manufacturing Manufacturing

••Materials Materials Availability Availability

••Adherence Adherencetoto Schedule Schedule

••Materials Materials Quality Quality

•Product •Product Quality Quality •Product •Product Availability Availability

Logistics Logistics ••Warehouse Warehouse Picking Picking Accuracy Accuracy ••Inventory Inventory Accuracy Accuracy •On-time •On-time Shipment Shipment

Customer Customer Service/Sales Service/Sales ••Order OrderEntity Entity Accuracy Accuracy

FunctionBased Diagnostic Measures

••Invoice Invoice Accuracy Accuracy ••Payment Payment Accuracy Accuracy

••Damaged Damaged Shipments Shipments Source: Article on ‘What about Measuring Supply Chain Performance’ by Larry Lapide, AMR Research

Benefits of Cross-Functional, Process-Based Measures

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ADVANCED The abovementioned behaviours that use of only function-based measures could drive employees toward changing functional performance in entirely different directions. These types of measures alone have reinforced functional silos, reducing the effectiveness of many supply chains, and fostering arms-length transactions among departments, leading to processes that are slow to respond. In addition, performance improvement initiatives get focused on a single objective that frequently runs counter to increasing the efficiency of the total supply chain. For example, an initiative focused on reducing transportation costs focuses on filling up outbound trucks. While this seems benign, it may not be best from a total supply chain perspective when customer orders are held up to fill up a truck, or if customers are forced to order in greater quantities. Possible Supply Chain Measures Below are some possible supply chain measures by functional areas. Customer Service Measures 

Number of complaints per period of time



Respond to complaints within a period of time



Provide resolution on time



Customer loyalty index



Customer returns



Line item fill rate



Quantity fill rate



Order entry times



Accuracy of order entry



Backorder / stock-outs



Customer satisfaction



Order fill rate

Process, Cross-Functional Measures 

Schedule changes



% perfect orders



Planning process cycle time



Forecast accuracy



New product time-to-first make



New product time-to-market

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ADVANCED

Extended Enterprise Measures 

% of suppliers getting shared forecast



% of customers sharing forecasts



# of EDI transactions successfully completed



Supplier inventories



Total landed cost



Point of consumption product availability



% of demand/supply on VMI/CRP



Total supply chain inventory

Purchasing Related Measures 

Expediting orders from suppliers



Unit purchase costs



Purchasing cost per man-hour



Material acquisition costs



Supplier delivery performance



Number of complaints related to supplier



Quality of material/component



Material stock-outs



Material inventories

Manufacturing Related Measures 

Production cycle time



Manufacturing productivity



Bill-of-materials accuracy



Setup/Changeover costs



Plant space utilisation



% scrap/rework



Product quality



WIP inventories

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ADVANCED 

Line breakdowns



Warranty costs



Source-to-make cycle time



Compliance-to-schedule



Yields



Cost per unit produced



Setups/Changeovers



Routing accuracy



Production stoppages



Machine availability



Overtime usage



Master schedule stability



Plant utilisation

Logistics Related Measures 

Warehousing costs



Inventory obsolescence



Inventory carrying costs



On-time delivery



Standard lead time per shipment lane



Finished goods inventory days



Lines picked/hour



Pick accuracy



Transportation cost



Shipment accuracy



In-transit inventories



Premium freight charges



Warehouse space utilisation



Finished goods inventory turns



Documentation accuracy

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ADVANCED 

Damaged shipments



Inventory accuracy

Getting Started to use Performance Metrics There is no single one approach is the best approach for company to implement performance metrics to manage their supply chain process. Companies however can use the Balanced Scorecard, the SCOR Model; The Logistics Scoreboard, as the excellent guidance when developing a supply chain performance measurement system. Implementing supply chain performance measurement system cannot be rushed. It has to start with the top-level objectives from the corporate level first and roll it down to next levels. The following six phases for developing and using scorecards to manage performance: Collect, Create, Cultivate, Cascade, Connect and Confirm. Collect 

Obtain top-level objectives, measures, and targets.



Identify customers and key requirements.



Define core process chains.



Document high-level process flows.



Gather existing measurement data.



Plan the scorecard development session and agenda.



A snapshot of your customer-supplier process chain.



High-level flow charts of core processes.



Inputs and agenda for scorecard development session.

Create 

Review Scorecard development planning inputs.



Define key result areas.



Relate business objectives to key result areas.



Brainstorm potential measures.



Select the key indicators for your performance scorecard.



Define the key indicators.



Develop action plans for compiling and reviewing the key indicators.



Team objectives.

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ADVANCED 

Scorecard measures linked to corporate goals, business objectives, and customer requirements.



Action plans to develop measures.

Cultivate 

Gather, display, and analyse historical data.



Conduct performance reviews.



Determine appropriate targets.



Develop improvement action plans.



Strengthen horizontal and vertical linkages.



Shorter, more effective performance reviews.



Appropriate and challenging targets for scorecard measures.



Specific and measurable improvement actions.



Stronger scorecard links.

Cascade 

Determine scorecard measures for next level in the cascade.



Verify cascaded measures are at the appropriate levels.



Establish and affirm linkages and alignment.



Clarify targets.



Establish summary measures, as needed.



Refine steps for gathering, reporting, and reviewing results.



A balanced and linked set of scorecard measures.



Appropriate feedback measures for each level of accountability.

Connect 

Review your performance management process.



Develop an individual performance plan.



Conduct coaching sessions.



Provide evaluation summaries.



Review links and outcomes.



Individual contributions linked to scorecard outcomes and business results.



Indications of where the scorecard should be refined or adjusted.

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ADVANCED

Confirm 

Evaluate your scorecard.



Prioritise and act on improvements.



Identify and resolve measurement issues.



Establish a process to refine your scorecard continually.



Scorecard assessment.



Scorecard improvement strategies and plans.



Improved scorecards.

Strategic Logistics Plan Strategic logistics plan can be defined as a plan, method, or series of manoeuvres or stratagems for obtaining a specific goal or result. Strategy also has been defined as ‘a set of dynamic, integrated decisions you absolute must make in order to position your business in its complex environment. Thus, strategy represents the overall actions or approach to be taken to achieve the firm’s goals and objectives. Strategic logistics plan is a unified, comprehensive, and integrated planning process to achieve competitive advantage through increased value and customer service, which results in superior customer satisfaction, by anticipating future demand for logistics services and managing resources of the entire supply chain. This planning is done within the context of the overall corporate goals and plan. Importance of Planning It is importance to align all company employees’ understanding together so that any plan, action, that made are conformed to the corporate strategy. If logistics managers do not understand corporate strategy, they will not be able to make decisions that are in the best interest of the organisation. Even if logistics managers use the systems approach to make decisions and analyse trade-offs, they will still not be able to make the best decisions without a good understanding of the corporate strategy and the corresponding logistics strategy. Without this knowledge, logistics personnel will not know how to value various alternatives in making trade-offs. For example, if the goal is to achieve differentiation by offering fast, reliable deliveries, management would choose air freight over sea freight. If low cost is the primary objective, management might choose sea freight to deliver products to customers. Therefore, if logistics managers do not understand corporate strategy, they will be unable to make decisions that are consistently in the best interests of the company as a whole. __________________________________________________________________________________ 283 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Hence, a plan should be developed in order to execute strategy and monitor performance and progress. The Hierarchy of Planning There are many levels of planning within an organisation and each level of planning has different timeframe. There are basically three levels of planning: Strategic plan, Tactical plan, and Operating plan.

Figure: Characteristics of Planning Types

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ADVANCED

Type

Timeframe

Operational Day to day < 1 year

Focus

Level of Detail

Level of Integration

Efficiency

Heavy financial orientation

Functional

Tactical

1 to 5 years

Event

Somewhat finanically oriented.

Integrated-functional

Strategic

5 to 10 years or more

Competition, resources, stakeholders

Few financials, more goal oriented

Integrated-corporate and supply chain

The 3 Types of Planning 

Strategic Plan

Strategic plan has the longest time period as it considers an organisation’s objectives, overall service requirements, and how management intends to achieve the corporate vision. The plan is very general and usually includes projected revenues and expenses, lines of business, anticipated relative share of business within the market, and sales and profits from existing business lines compared with new lines of business. 

Tactical Plan

Tactical planning is an intermediate level plan, which generally lasts between one to five years into the future. Tactical plans are often more specific than strategic plans in terms of product lines and may be broken down to detailed quarterly revenues and expenses. Tactical plans usually include a capital expenditure plan that indicates how much the organisation will invest each year in new plant, equipment, and other capital expenditure items. Issues like building warehouses, purchasing transportation or material handling equipment, and other major expenditures to support the logistics infrastructure should be addressed as part of the capital expenditure plan. 

Operating Plan

Operating plan is the most detailed plan when compared with strategic and tactical plans. It can be on annual basis detailing things like revenues, expenses, and associated cash flows and activity by month for a one-year period. The detailed operating plan is prepared to guide the activities for the following year. With operating plan, other plans such as production scheduling and material purchasing can be developed. A firm can use this plan to anticipate its logistics needs from warehouse space to shipping. This allows logistics to anticipate its labour needs and to negotiate contracts with 3rd party providers.

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ADVANCED Corporate Strategic Planning Process The major steps in the corporate strategic planning process are: 

Evaluation of consumer and / or industrial customer needs.



Identification of possible target markets.



Evaluation of target markets.



Selection of target markets.



Formulation of channel objectives and strategy.



Identification and evaluation of channel structure alternatives.



Selection of the channel structure.



Development of the strategic logistics plan.

Developing a Strategic Logistics Plan Before any strategic logistics plan can be developed, the individuals or team responsible for developing the plan need to have sufficient and adequate information relating to their corporate strategy and supporting marketing plan in order to optimise cost-service trade-offs. The team has to understand about customer’s expectation and requirements and how each customer service elements, and how the performance of the company compared with its competitors. In addition, the team is required to be knowledgeable about the cost and profitability of channel alternatives, such as carriers, warehouses, logistics service providers, etc. The Logistics Plan With the development of strategic plan, a logistics plan needs to be developed to support that strategy. The plan includes the specific activities that the logistics function will undertake to achieve its objectives. Generally, logistics plan can be in three levels namely strategic level, tactical level, and operational level. 

Strategic Level

At this level, the company considers only issues pertaining to business objectives and customer service requirements.

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ADVANCED 

Tactical Level

At this level, the company makes decisions on the number, size, and location of distribution

S tr a te g ic

T a c tic a l

O p e r a tio n a l

• B u s in e s s o b je c tiv e s • M a r k e tin g s tr a te g y • C u s to m e r s e r v ic e r e q u ir e m e n ts • • • • • • • • • • • • •

C u s to m e r s e r v ic e a c tiv itie s D e m a n d f o r e c a s tin g I n v e n to r y c o n tr o l M a te r ia l h a n d lin g O r d e r p r o c e s s in g P a r ts a n d s e r v ic e s u p p o r t P ro c u re m e n t P la n t a n d w a r e h o u s e s ite s e le c tio n W a r e h o u s in g a n d s to r a g e T r a f f ic a n d tr a n s p o r ta tio n S a lv a g e a n d s c r a p d is p o s a l R e tu r n h a n d lin g P a c k a g in g

• • • •

O p e r a tin g p o lic ie s O p e r a tin g c o n tr o l r u le s O p e r a tin g p r o c e d u r e s R o u tin g a n d s c h e d u lin g

centres; transportation modes preferred; and the type of inventory control system. Hierarchical Nature of the Logistics Plan 

Operational Level

At this level, company considers about day-to-day decisions, such as expediting policies, vehicle routing, and scheduling. These decisions are usually iterative by nature. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

In order to accurately assess the performance of an existing supply chain and its related processes, one must have objective performance information

Benchmarking analysis has been shown to be an effective means of determining the supply chain’s performance relative to those of other organisations

True

False

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ADVANCED Question 3

The Balanced Scorecard method recommends that supply chain measures be tracked based on four perspectives: Financial perspective, Customer perspective, Internal business perspective and Innovative and Learning perspective.

The scope of SCOR processes include the following: Plan, Source, Make, Deliver and Return

Extended Enterprise integration – a stage in which a company needs to develop excellence in its cross-functional processes rather than within its individual functional departments. Metrics for a company in this stage will need to focus on cross-functional processes

Enterprise-Wide Integration – stage in which a company needs to develop excellence in inter-enterprise processes. Metrics for a company in this stage will focus on external and cross enterprise metrics. Historically most companies have focused their performance measurement on achieving functional excellence

Tactical planning is an intermediate level plan which generally lasts between one to five years into the future

Operational Level – at this level, the company considers only issues pertaining to business objectives and customer service requirements

Tactical Level – at this level, the company considers about day-to-day decisions such as expediting policies, vehicle routing and scheduling. These decisions are usually iterative by nature

Strategic Level – at this level, the company makes decisions on the number, size, and location of distribution centres; transportation modes preferred and the type of inventory control system

True

False

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ADVANCED CHAPTER 13 - INFORMATION TECHNOLOGY IN THE SUPPLY CHAIN US: 336703 Design a distribution network PURPOSE: This chapter will be able learners to to design the distribution route from sources to customers. LEARNING OBJECTIVES: A learner will be able to:   

Establish distribution relationships with different stakeholders. Design a distribution network. Analyse the difference between distribution channels and distribution networks.

Measurement (Visibility & Performance Management) TMS solutions have or need to have a Logistics KPI reporting function for transport. We will examine the various KPIs that can be incorporated in later chapters TMS usually "sits" between an ERP or legacy order processing and warehouse/distribution module. A typical scenario would include both inbound (procurement) and outbound (shipping) orders to be evaluated by the TMS Planning Module offering the user various suggested routing solutions. These solutions are evaluated by the user for reasonableness and are passed along to the transportation provider analysis module to select the best mode and least cost provider. Transportation management involves the assignment of people and equipment to general tasks and dispatching them to specific tasks. Transportation management may also involve negotiations with outside carriers that the firm does not wish to perform (Outsourcing), transportation maybe private, for hire or mixed. In private carriage, the firm owns both the primary goods and the business unit that moves them. In for-hire carriage, the firm engages or buys from another firm offering transportation services. In a mixed setup, both private and for-hire carriage is engaged. Amidst this background, the advent of TMS surfaced. TMS is an omnibus term that covers a wide spectrum of activities. These could include conventional shipper-centred activities like carrier bidding, transportation optimisation planning, labelling and manifesting and transportation monitoring; manufacturer or retailer centred inbound logistics activities like inventory control, planning, scheduling, warehousing etc. and transport service provider activities like fleet planning, route optimisation, cargo tracking and tracing. The TMS market only evolves only in the 1980s, when user applications to aid in transport planning and optimisation were introduced. These tools brought basic computing capabilities into transport planning at the enterprise level and were seen to be helpful in reducing transportation costs. The early TMS addressed issues from the shipper’s perspective but in __________________________________________________________________________________ 289 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED recent years, the shift in focus is more towards 3PL, Logistics providers and/or Transport operators. In more recent times, we have seen that these systems are being offered in many different types of licensing arrangements. These different arrangements have given shippers who otherwise would not be able to afford sophisticated software the opportunity to utilise TMS to better manage this vital function. Additionally, we are seeing that some software providers have either been acquired or merged with traditional supply chain management consultancies and are now offering shippers "blended" managed and software services as an outsourced process. Primary Tier 1 TMS providers are still independent, carrier and 3PL neutral, and ERP neutral. Total Cost Analysis An inherent characteristic of the business logistics approach is the Total Cost Analysis. The interrelationship between transportation, warehousing, inventory, and customer service suggest that a decision in one area has a definite impact in another. For example, the decisions in transportation are likely to have an impact on the cost of warehousing and inventory, product marketing and the cost of lost sales and productivity. In the absence of a Total Cost Analysis approach, the firm may use a transportation mode which is the least costly. The use of a low-cost transportation methodology may minimise the transportation cost, but it does not guarantee the minimisation of total movement and storage costs. Low cost transportation is generally associated with slow service. This generally means higher warehousing and inventory costs and lower customer service. The Total Cost Analysis (TCA) compels the decision-maker to consider cost trade-off within the system. A decision to use air rather than sea would trade the higher cost of transportation for lower warehousing and inventory costs. Cost trade-off may result in lower overall logistics costs or higher total costs. The significance of the cost trade-off and the TCA is the recognition of the interrelationship of the logistics variables. Without a business logistics within the firm, the TCA approach may pose some difficulties in implementation. For example, total costs may be lowered by a switch to higher cost air transportation because of lower warehousing or inventory costs. This will be viewed positively by the firm. However, from the Transportation Manager’s perspective, the use of air carriage may not be desirable especially if he or she is being measured by lower transportation costs. In the absence of an integrated business logistics the switch to air carriage is unlikely to be made. In its drive to reduce costs and minimise expenses, industries are using a TCA approach to deciding logistics choices. When reviewing costs across the logistics chain, managers are looking at trade-off among various expenses. Additional trade-off might be from manufacturing or result from improved cash flow resulting from more competitive deliveries. Reviewing the logistics activities, maybe a good baseline, to identify and isolate the cost drivers and decide __________________________________________________________________________________ 290 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED and what action can be taken to enable a positive effect to the TCA. A rule of thumb on logistics cost drivers is reflected below: Total Logistics Cost = Transport Cost + Warehouse Cost + Stock Holding Cost + Packaging Cost + Information Processing Cost + Other Logistics Overheads Organisations create value for their customers either by increasing the level of ‘benefit’ they deliver or by reducing the customers’ costs. In fact, customer value can be defined as follows: Customer value = Perceived benefits/Total Cost of Ownership Perceived benefits include the tangible, product-related aspects as well as the less tangible, service-related elements of the relationship. The key point to note is that these benefits are essentially perceptual and that they will differ by customer. The ‘total cost of ownership’ reflects all the costs associated with the relationship, not just the price of the product. Hence, the customer’s cost of carrying inventory, ordering costs and other transactions costs all form part of this total cost concept. Because logistics management, perhaps uniquely, can impact upon both the numerator and the denominator of the customer value equation, it can provide a powerful means of enhancing customer value. Carrier Characteristics and Selection Carrier selection logically follows mode selection. Having chosen a mode of transportation, the integrated logistics manager must now decide which carrier or carriers to use. The choice will depend on which carrier best manifests the characteristics of the mode. Many of the same criteria used in mode selection are reused here. Carrier’s selection is generally based on: 

Costs/Price



Accessibility



Responsiveness



Claims Record



Reliability

Because carrier selection can be complex, many integrated logistics managers prefer to adopt the Core Carrier Concept, contracting with a limited number of carriers rather than using every carrier that might make equipment available. Costs/Price Price or costs, depending on the perspective you are looking from, will almost always be the predominant factor in carrier selection. Many integrated logistics systems demand the basic serviced offered by the mode of transportation. Managers assume that most carriers provide the basic core services so the major distinction between carriers must be price. In effect, with __________________________________________________________________________________ 291 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED all other considerations being equal, the integrated logistics manager will most often choose the least cost alternative. Accessibility Accessibility is the cornerstone of service for a shipper. The transportation capacity must be available when and where the integrated logistics system needs it. Rail and truck normally spot equipment at customer sites to ease loading/unloading. The carrier that places equipment in such manner creates a competitive advantage over other who does not. Large carriers can enjoy an advantage over coverage while small carriers may made equipment available when large carriers cannot. Responsiveness For carrier selection, this means how readily the carrier responds to changing customer needs. Some carriers provide service under detailed contracts but provide services only under the contract. This opens up opportunities for small, flexible carriers to fill the seams of the contract or even grow at the expense of the large carrier.

Claims Record This is about the integrity and dependability of the carrier. Carriers which have a large number of claims could mean that the contractual agreements between the carrier and shippers are ambiguous. It could also imply that shippers do not fully understand the shipping conditions spelt out in the contract. Regardless of whether it is the fault of the carrier or shipper, frequent news of claims can have negative implications for the carrier in the long term. Reliability Carriers must not only be dependable. They have to be reliable. Reliability is a function of the people, commitment, resources, and information available to the carrier. Reliability is a measurement of how consistently and constantly meets the delivery schedule of the shipper. A carrier may be dependable and what really matters to users is how often the shipper can depend on the carrier to meet commitments. Carriers who deliver their goods on time are generally well regarded by the shipper as they add value compared to those who do not. The importance of reliable delivery and pickup arise from firms moving towards JIT, quick response and ECR programs. JIT fails without reliable carriage regardless of the mode. The higher the reliability requirements, the more likely goods will move by faster modes of transport and carriers.

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ADVANCED Transportation and the Economy Transportation is one of the tools of industry. Without transportation, we could not operate a grocery store or win a war. The developed a society becomes, the more indispensable are the elements of transportation systems. Transportation systems are so well developed that people do not think about their benefits. Everyone though, use a form of transportation, in one form or another, every day. It provides the arteries for the nation’s products, movement to/from work and supports wide communications networks. Transportation services are normally influenced by 3 factors: 

Movement Service – This includes speed, reliability, and frequency of service



Equipment Used – Primary consideration for movement of people and freight. For passengers, equipment used affects comfort and safety. For freight, equipment used affects shipment preparation, size of shipment and loading/unloading costs



Cost of Transportation Service – Includes all direct and indirect charges associated with the movement

Transportation should not be viewed as a simple movement of people or things a certain space. In fact, the user is actually purchasing a bundle of services. The bundle of services varies between carriers and modes with different prices frequently in effect for different services. If the user uses a simplistic view and opt just for the least cost transportation mode, the advantage, if any, in realising cost savings in other areas, e.g. inventory savings etc may not be fully exploited for a higher cost transportation mode. Transportation has an indirect impact on the production of goods and services. The basic function of transportation networks is providing the marker access to resultant products. In this end, transportation provides a key link between geographical nodes and helps direct goods and services to point of needs. Transport Functionality The role of transport can also be viewed from the aspect of its functionality. 

Product Movement

Regardless of the form of the product; be it raw materials, work-in-progress or finished goods, the role of transportation is to move these to their destination such as factories, distribution centers, resellers and consumers. Since transportation uses resources, it is important that goods be moved only when it truly enhances the product value – possession utility, form utility and time & place utility.

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ADVANCED The objective of transportation is then to move product from an origin location to a prescribed location while minimising resource cost. At the same time, loss and damage must also be minimised while meeting shipper’s demands regarding delivery performance and shipment information availability. 

Product Storage

A less common objective of transportation is temporary storage. Vehicles are expensive storage facilities. As an example, vehicle storage may be used in place of in-transit storage if the unloading and loading is very short in terms of days and the warehouse space is limited or the cost of warehouse space is very high. Diversion may be used if the destination warehouse has limited capacity. Economic Significance Transportation systems determine the economic value of goods. A reduction of in the cost of transportation may help expand the existing markets or open new ones. Lower freight costs may encourage buyers to purchase a product from a distant vendor. This will either increase competition or allow users to introduce new products. The more sophisticated the transportation systems, the more geographic specialisation and large-scale production will become factors. Locations will have geographic advantage in raw materials; labour or capital can this advantage to service markets further away. This will lead to increase competitive pricing and positions. Land values can be influenced as it allows people to live at a distance from their work and home. Non-urban land prices can be greatly enhanced if people choose to commute between the distances because of an efficient and reliable transportation network. Environmental Significance Transportation affects the environment in a number of ways including noise, fumes, and air quality. Water transportation can affect water quality while serious safety issues are raised by products being transported (e.g. hazardous materials) and method of transport (e.g. large trucks on roads). Social Significance A good transportation system can also enhance the health and welfare of the general population. One of the major problems facing the famine relief efforts in Eastern Africa in the 1980s was the inadequate and ineffective networks available at that time. Insufficient railroad, trains, trucks, road, facilities, and related distribution facilities hamper the distribution and delivery of badly needed food and supplies to the population. Political Significance The state has a significant responsibility to promote and regulate transportation as this can have a serious effect on the users and the people living in the affected area. Let us review the __________________________________________________________________________________ 294 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED setup of Alberta Coalmines regarding how transportation was developed in relation to the factors as discussed.

Alberta Coalmines Transport Routing Across Canada

Aggregation and Demand Elasticity The demand for transportation can be examined at different levels of aggregation. Aggregate demand for transportation is the sum of the individual demands associated with for the freight and/or passenger transportation. In addition, aggregate demand is the sum of the demand for transportation via different modes and the aggregate demand for a particular mode is the sum of the demand for the carriers in that mode. Demand elasticity refers to the sensitivity of customers to changes in price. If customers are sensitive to price, a price reduction will increase the demand for the product and the total revenue received. If customers are insensitive to price, that is, demand is inelastic, a price reduction will result in a small relative change in quantity demand and total revenue will fall. Demand elasticity is the ratio of the percentage change in quantity demanded to percentage change in price i.e. Elasticity = % change in quantity / % change in price __________________________________________________________________________________ 295 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED If demand is elastic, the quantity demand changes more than the change in price and the elasticity co-efficient (E) is more than 1. Conversely, a product or service is said to be price inelastic, or insensitive to price change, if the quantity demanded changes less than the change in price (E is less than 1). In general, the demand for freight transportation is inelastic. Freight rate reductions will not dramatically increase the demand for freight transportation because transportation costs represent, in the aggregate, less than 4% of a product’s landed cost. Substantial rate reductions would be required for a meaningful increase in demand for the product and consequently a demand for the transportation of the product. On a modal and carrier specific basis, demand is price sensitive. The relative modal share of aggregate demand is in part determined by the rates charged. Reductions in rates charged by a particular mode will result in increases in volume of freight handled by that mode. This assumes that the mode that reduced the rate is physically capable of carrying the additional load. For example, truck transportation companies dominated the long-haul transportation of new automobiles in the USA in the 1960s. In the 1970s, the railroads introduced rail cars specifically designed to transport new automobiles. This new rail car enabled the railroads to improve efficiency and reduced the rates for the transportation of new automobiles. Today, trucks are used only to transport new automobiles over short distances or to rail yards for onward carriage across continental USA. Modal and specific carrier demands are also service elastic. Assuming no price changes, the modal or specific carrier demand is much more sensitive to changes in service levels provided. Many air passengers monitor the “on time” service levels of various air carriers and, where possible, will select the carrier that provided the best “on time” service.

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ADVANCED

Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

An inherent characteristic of the business logistics approach is the Total Cost Analysis

Total Logistics Cost = Transport Cost + Warehouse cost + Stock Holding Cost + Packaging Cost + information processing Cost + Other logistics overheads

Price or costs, depending on the perspective you are looking from will never be the predominant factor in carrier selection

Carriers must not only be dependable; they have to be reliable. Reliability is a function of the people, commitment, resources, and information available to the carrier.

Reliability is not a measurement of how consistently and constantly someone meets the delivery schedule of the shipper

Transportation has no effect on the environment at all

Transportation systems determine the economic value of goods. A reduction in the cost of transportation may help expand the existing markets or open new ones. Lower freight costs may encourage buyers to purchase a product from a distant vendor. This will either increase competition or allow users to introduce new products

Transportation affects the environment in a number of ways including noise, fumes, and air quality. Water transportation can affect water quality while serious safety issues are raised by products being transported (i.e. hazardous materials) and method of transport (e.g. large trucks on roads)

Demand elasticity refers to the sensitivity of customers to changes in price. If customers are sensitive to price, a price reduction will increase the demand for the product and the total revenue received. If customers are insensitive to price, that is, demand is inelastic, a price reduction will result in a small relative change in quantity demand and total revenue will fall

A product or service is said to be price inelastic or insensitive to price change if the quantity demanded changes less than the change in price (E is less than 1)

True

False

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ADVANCED

CHAPTER 14 - INTERNATIONAL TRANSPORTATION AND SUPPLY CHAIN CHAPTER 15 - TRANSPORTATION MANAGEMENT SYSTEM US: 336712 Outline the philosophy of Supply Chain Management – A PURPOSE: This chapter will enable learners to outline and discuss the philosophy of Supply Chain Management, also demonstrate a clear understanding of the concepts of Supply Chain, Supply Chain Management, Supply Management, Procurement, Operations, Distribution and Logistics. They will be able to debate these concepts and compare the philosophy of Supply Chain Management with traditional business models giving practical examples of the advantages and disadvantages of adhering to a Supply Chain Philosophy. Competent learners will also demonstrate understanding of the challenges facing organisations when they attempt to implement a Supply Chain Based business model and give some recommendations on a possible change process that could lead organisations towards reaping the benefits of implementing the Supply Chain approach to work. LEARNING OBJECTIVES: Learners will be able to: __________________________________________________________________________________ 298 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED   

Interrogate the inter-relationship between the concept of Supply Chain Management and Demand, Acquisitions, Distribution and Logistics. Map the Supply Chain and describe the benefits of applying the philosophy. Identify areas within a supply chain that require improvements.

CHAPTER 14 - INTERNATIONAL TRANSPORTATION AND SUPPLY CHAIN

Strategic Channel Intermediaries A greater role is played by intermediaries in global logistics than in domestic U.S. operations. Intermediaries have a strategic role in helping new and established company ventures into the global market. Foreign freight forwarders are knowledgeable in all aspects of international shipping and are used by small international shippers. Freight Forwarder Functions For a company with little international shipping expertise, the freight forwarder is the answer. The freight forwarder who employs individuals who are knowledgeable in all aspects of international shipping supplies its experts to small international shippers who find employing such individuals in their shipping department uneconomical. In some countries freight forwarders are regulated. In the case of US, these are regulated by FMC or Federal of Maritime Commission. The freight forwarders like their domestic counterparts consolidate small shipments into more economical sizes. In the international arena, these larger sizes range from containers up to entire ships. The freight forwarders also perform the outline actions that shipments require. The functions they perform include the following: Quoting water and foreign carrier rates Chartering vessels of booking vessel space Obtaining, preparing, and presenting all documents Obtaining cargo insurance Paying freight charges Collecting and submitting money for shipments Tracing and expediting shipments Providing language translation Arranging inland transportation service __________________________________________________________________________________ 299 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Since no two international sales are exactly alike and since shippers have varying international traffic capabilities, the forwarder usually performs the export work that the shipper cannot handle. The logistics manager must weigh up the forwarder’s cost against the cost of hiring personnel to perform the same tasks. The forwarder derives income from different sources. One source is the fees charged for preparing export documentation. Another source is the commissions the forwarder receives from carriers. These commissions are based on the amount of revenue the forward generates for the carrier. The third type of income comes from the price difference between the rate the forwarder charges a shipper and the lower rate per pound it pays for the consolidated shipments. The final two sources are from the provision of inland transportation and warehousing functions. Airfreight Forwarders They consolidate small shipments into larger, more economical shipments, and perform certain routine actions shipments require. Export work is performed that the shipper cannot handle. Income for the forwarder comes from three sources: Fees charged for preparing expert documentation. Commissions received from carriers. The price differential between the rates quoted shippers, and the lower carrier rate for consolidated shipment. Airfreight forwarders carry out the same functions, but for air shipments. Non-Vessel Operating Common Carriers The non-vessel-owning common carrier (NVOCC) consolidates and dispenses containers that originate at or are bound to inland points. The need for these firms arose from the inability of shippers to find outbound turnaround traffic after unloading inbound containers at inland points. Rail and truck carriers often charge the same rate to move containers, whether they are loaded or empty. To reduce these costs, the NVOCC disperses inbound containers and then seeks outbound shipments in the same containers. It will consolidate many containers for multiple-piggybackcar or whole-train movement back to the port for export. They also provide scheduled container service to foreign destinations. The shippers and receivers of international shipments gain from the shipping expertise NVOCC possess and from the expanded and simplified import and export opportunities. The Ocean carrier gains from the increased market area made possible by NVOCC solicitation services. Customs House Brokers Customs house brokers oversee the movement of goods through customs and ensure shipment documentation is complete and accurate. They argue for the lowest possible rates and duties and reduce importing costs for their clients. __________________________________________________________________________________ 300 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Ship Brokers A ship broker acts as an intermediary for shippers desiring to charter a ship. The ship broker is sales and marketing representatives for ship owners and a purchasing representative for the shipper. The ship broker knows when ships will be or could be in port and coordinates this with the needs of the shipper. Ship Agents The ship agent is the local representative of the ship operator when the ship is in dock. The ship agent arranges for the ship‘s arrival, berthing, clearance, loading and unloading, and for the payment of all fees while the ship is in port. Shippers can contact the ship agent for information regarding the arrival of the ship, the dock location, and arrangements for picking up or delivering the shipment. CHAPTER 15 - TRANSPORTATION MANAGEMENT SYSTEM

Transportation Management System or TMS focuses on the inbound and outbound and is part of the Logistics Information System. Like the WMS, it shares information with other systems such as order content, item weight and volume, quantity, promised delivery date, and vendor shipment schedules. Its purpose is to assist in the planning and controlling of transportation activity. This involves: 

Mode selection



Freight consolidation



Routing and scheduling shipments



Claims processing



Tracking shipments



Freight payment

Mode Selection Transport of cargo can take the shape of multiple shipment sizes that result in multiple freight services. Transport service choices typically range from small airfreight and ground package carriers to ocean container and rail carload movements. The TMS can match shipment size with transport service cost and performance requirements especially when there is competing choices involved. A good TMS will store data on multiple modes, freight rates, expected shipment times, mode availability and service frequency and will suggest the best carrier for each shipment. Freight Consolidation One of the primary functions of the TMS is to recommend the patterns for consolidating small shipments into larger ones. Since a primary characteristic of freight rates is that unit shipping __________________________________________________________________________________ 301 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED costs drop disproportionately as shipment size increases, shipment consolidation can result in substantial transport cost savings especially when shipment sizes are small. The TMS can keep track of in real time shipment sizes, destinations and promised delivery dates. From this information, economical loads can be built while serving delivery service goals.

Routing & Scheduling Shipments When a transporter owns or leases a fleet, careful management is required to ensure that the fleet is operated efficiently. With the order information and order-processing information, the TMS assigns loads to vehicles and suggests the sequence in which the vehicle stops should be made. Time windows during which stop offs can be made, pickup of returning merchandise from stop off points, planning for backhauls, driver restrictions on length of driving and rest breaks and utilisation of the fleet. The TMS retains data on stop locations, vehicle types, vehicle numbers, capacity, loading and unloading times and route restrictions. Claims Processing There will be times when cargo will be damaged. The system will store information on content, value, carrier used, origin and destination, liability limits, insurance company, insurance certificate, insured value. Tracking Shipments I.T. has played a major role tracking the progress of shipments once they are transferred to carriers. Bar coding, RFID and GPS are key information systems that allow the location of shipments to be known real-time. Tracking information can then be made available to the shipments’ receivers through the internet or electronic means. Even estimates of arrival times can be calculated. DHL, FEDEX and UPS are great examples of carriers in such information system development. Freight Bill Payment Determining the freight changes for shipments can be complicated because of the many exceptions that can be placed on freight rates. Since carriers charge only the lowest applicable rate, when a rating error occurs the shipper can make a claim on the carrier for the difference between the actual charges and the lowest charges. Distribution System

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ADVANCED v alue-added custom ers

custom er sati sfacti on

custom er del i very/transport

on-l i ne del i very

DC / transport

servi ce l evel s

m anufacturi ng

raw m ateri al suppl i ers

product qual i ty & capaci ty

raw m ateri al s qual i ty & del i very servi ces

Integrated Manufacturing & Transport System The above illustrates a typical firm’s integrated manufacturing and distribution network. The network is made up of the total set of manufacturing, distribution and customer delivery locations and facilities through which the company moves products to satisfy customers. The focus is on the mission of the network, its design, and its operation. Such networks are designed and constructed to integrate and serve three fundamental processes in a company: manufacturing, distribution, and customer delivery. From the view of the customer, these are the processes that add value and make for customer satisfaction. The way in which a company designs and uses its network to achieve customer satisfaction depends on which of the three processes the company decides to pursue and operate. To describe the mission, design, and operation of the network, we must understand the network consists of more than just plants and warehouses and transport systems. It includes the firm’s choices for: 

Network facility which comprises the types, numbers, and locations of facilities



The product flow processes



The return on investment

Network facility will be described below while product flow process has been discussed in detail in Supply Chain module and Return on Investment has also been discussed in Financial Management module. Network Facilities Three types of facilities are found in an integrated network. These are: __________________________________________________________________________________ 303 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 

Manufacturing. Facilities where value is added through the conversion of raw materials and labour into products whose value, quality and cost are desired by customers.



Distribution. Facilities where value is added by keeping products or consolidating products at a location that is close enough to customers in distance or time to offer delivery service levels that satisfy customers’ requirements; or facilities whose locations, relative to manufacturing and customer delivery processes, offer value by enabling lower transportation costs.



Customer delivery. Facilities which add value by carrying out the order management process to assure that customer order deliveries, made up of both products and services can be carried out to satisfy customers.

Raw materials Manufacturing purchasing

Distribution

Customer delivery

Customers

Time to market Order management

Process to satisfy customer

Network Facilities Integration for Customer Satisfaction The above illustrate how these three types of facilities are integrated to achieve customer satisfaction. Two business processes serve to integrate the network – time to market and order management. In many firms, each type of facility is in a different geographical location. In many others, however, two or more of these facility types are co-located. For example, the manufacturing and distribution facilities many share the same building or campus. Manufacturing and customer delivery facilities may be in the same building when distribution processes are not performed by the company in its business environment. Manufacturing Facilities In the integrated manufacturing and distribution network, manufacturing facilities have the broader responsibility of making those quality products at just the right time. If they produce them too early or in quantities that exceed customer demand, undesired inventories __________________________________________________________________________________ 304 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED accumulate adding to investment requirements for working capital and increasing the risk that customer demand will not materialise. If manufacturing produces products too late, the company will not be able to deliver customer orders in the required time. Market share could be lost. These requirements for timely production have become the most important goals for most facilities. To achieve them, manufacturers are turning to a wealth of productive concepts that offer competitive advantages in time to market and, when executed well, other advantages such as cost reduction and flexibility are also enjoyed. These concepts have been covered extensively in Production & Operation Management module.

Customer Distribution & Delivery Facilities Changes in the marketplace, have forced supply chain managers to relook at their delivery services. The traditional DC can no longer act as just a warehouse. It has to meet the demands of customers and to satisfy those requirements. Customer distribution & delivery facilities add value by making products available to customers at locations or in quantities that offer levels of service – product availability – which meet customer’s requirements. They also add value by offering space and services that help reduce transportation expenses, usually through the ability to transport FCL quantities for much of the supply chain distance between manufacturing and customer delivery locations. These facilities sometimes offer services such as product packaging, labelling and final assembly that add value when such processes can be postponed until the product has left the manufacturing facility. In essence, customer distribution & delivery services consist of facilities, people and vehicles and transportation systems and modes that perform the final delivery of products to customers. The most illustrative examples lie in such products as snack foods, health and beauty aids, mass merchandise products, office equipment and computers. These products share the common customer requirement that the delivery process cover much more than simply leaving the product on the customer’s receiving dock. They include a substantial amount of value-added service that benefits both the seller and the customer. Store-door deliveries in the grocery industry exhibit a whole range of value-added services for the customer and seller. Consider the driver of a route delivery truck. His truck, the product on the truck, and the order management process he carries out at each customer location are together well-defined customer delivery facility. They just happen to move around together. Once at his customer’s location, the driver inspects the display area and immediately enters restocking quantities on his hand-held computing device to bring the shelf stock up to the desired levels. His device contains all the software needed to determine order quantities, prices, discounts. After restocking, he can transmit directly from his truck, sales data for each customer. __________________________________________________________________________________ 305 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED That information is used to restock his truck when it returns to his base and to make reports to his company. The installation of computer network uses a different delivery system. This customer delivery facility is assembled at the customer’s location. It brings with it all the people, equipment, training, and services needed to satisfy the customer’s order. As companies realise that their integrated and distribution networks must extend into their customers’ businesses, they are employing processes like the two outlined above. These processes provide the following benefits: 

A detailed understanding of each customer’s requirements and the ability to meet them without undue cost or time requirements.



A way to customise distribution and delivery service for important customers without giving up any of the economies of scale, such as regional warehouse and distant manufacturing facilities.

Formative Self-Assessment - CHAPTER 14-15 True or False – indicate with a  whether the following statements are true or false. Question 1

Intermediaries do not have a strategic role in helping new and established company ventures into the global market

The forwarder derives income from different sources. One source is the fee charged for preparing export documentation. Another source is the

True

False

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ADVANCED commissions the forwarder receives from carriers 3

Customs house brokers oversee the movement of goods through customs and ensure shipment documentation is complete and accurate

The non-vessel-owning common carrier (NVOCC) consolidates and dispenses containers that originate at/or are bound to inland points

The ship agent is the local representative of the ship operator when the ship is in dock. The ship agent arranges for the ship’s arrival, berthing, clearance, loading and unloading and for the payment of all fees while the ship is in port

True or False – indicate with a  whether the following statements are true or false. Question

True

TMS is the acronym for Trade Modal System

One of the primary functions of the TMS is to recommend the patters for consolidating small shipments into larger ones

Customer delivery facilitates which add value by carrying out the order management process to assure that customer order deliveries, made up of both products and services, can be carried out to satisfy customers

Manufacturing – facilities where value is added by keeping products or consolidating products at a location that is close enough to customers in distance or time to offer delivery service levels that satisfy

The traditional DC can no longer act as just a Warehouse. It has to meet the demands of customers and to satisfy those requirements

False

CHAPTER 16 - GLOBAL PROCUREMENT & GLOBAL PROCUREMENT RISK US: 252025 Monitor, assess and manage risk PURPOSE: This chapter is intended for managers in all economic sectors. These managers would typically be second level managers such as heads of department, section heads or divisional heads, who may have more than one team reporting to them. __________________________________________________________________________________ 307 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED LEARNING OBJECTIVES: learner is capable of:    

Demonstrating an understanding of business processes and potential risks to a unit. Identifying potential risks and assessing the impact thereof in a unit. Developing contingency plans for managing risk. Testing and revising contingency plans.

Introduction – Global Purchasing The role of purchasing is to act as an interface between customer and supplier in order to secure and supply goods and services to both internal and external customers. The scope of local purchasing is often limited to local suppliers; local purchasers do source globally, these are not as frequent as global purchasers. Global purchasing always sees the world as its resource. Global purchasing can be defined in a number of ways. One is to use the functional method. Its functions are: •

Formulate and implement strategic procurement policies and strategies.

•

Improve procurement systems including I.T. systems.

•

Establish a database of global strategic suppliers.

•

Continuously seeking new sources of quality supplies.

•

Working with end-users on alternative materials and standardisation.

•

Involve with users on capital equipment acquisition.

The role of global purchasing is not only significant but critical. Some of these include: •

Costs. Contribution to the bottom line through cost management.

•

Value. Contribution to cost-effective material acquisition, product design, development and production, transportation, and delivery.

While the role of global purchasing in these areas is challenging, it carries with it risks. Risks Risks occur in all aspects of business and institutional management. With an increasing proportion of external resources contribution to ever-critical areas of purchasing activities, exposure to risk in procurement must rise accordingly. So, what are the risks encountered by procurement? Investopedia.com defines risk as “The chance that an investment’s return will be different than expected”. This includes the possibility of losing some or all of its initial investments. In Webster’s Dictionary, Procurement is defined as “The act of securing or obtaining; obtainment; attainment”. Procurement is essentially a process of bringing together diverse groups of organisations and people with different skills and experience to achieve tasks and requirements in an effective __________________________________________________________________________________ 308 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED and economical way. Whenever information is passed from one mind to another there are associated risks. The risks are: 

Business risk associated with continuity of supply



Price associated with financial (foreign exchange and financial health of the supplier)



Operational risks (social, events, political and environmental)

Business Risk Business risk that has an impact on continuity of supply is: •

Formal contracts

•

Law on Shipping (INCOTERMS) and different system of measurement.

Formal Contract You saw an advertisement for a power tool at $200.00. Happily, you inform the requester that the tool he needed is on sale and can be purchased for $200.00 cash. You obtain the money and proceed to the store. At the store, the sales person informs you that there is an error in the price and should be $300.00. He is prepared to sell at $300.00. Can you insist that he sells you at $200.00? How would you explain to the requestor who requisitioned the item? It is very embarrassing having to explain your mistake, isn’t it? In the law of contract, the advertisement is “an invitation to treat.” It is merely requesting you to make and offer and not an offer on the part of the seller. Until the seller agrees to the price there is no contract, but in business, we are not talking about just buying a simple power tool that cost $200.00. Consider this scenario: We have been preparing to contract (PO or other formal agreement) with a supplier. In each agreement there is usually a request from the buyer that the seller acknowledges the order. In acknowledging the agreement, the seller will attach his or her own sales agreement and sent it to the buyer. When there is a dispute which contract will prevail? It all depends on the circumstances but usually the court will take the latest agreement into consideration when deciding the case. As a buyer it is therefore essential that to know what elements make a contract legally binding to minimise the risk in suppler looking for reasons not to supply. It is not just enough that you know what makes a contract legally binding. It is your responsibility as a buyer to ensure that the supplier carries out stipulated functions. A contract is a formal agreement whose purpose is to ensure that stipulated functions are carried out. The best contracts should include some incentive to do the work well and on time. At an end of the scale the fixed price contract can be seen to place all the risk with the supplier. At the other end, a cost, plus contract, transfer the risks to the purchaser. An incentive seeks to share the risks and if carefully set up, can be successful in stimulating innovative input to produce the best value for money and a delighted customer who is very likely to return for more business next time there is a requirement. __________________________________________________________________________________ 309 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED An example of the successful application of an incentive is where say the target cost has been agreed at $100,000 and the agreed fee is $10,000. If the project goes entirely to plan, the buyer will be happy to accept a final price of $110,000. The incentive to the supplier to improve on this will be based on 50/50 share line. Now let us say that if costs can be reduced below $100,000, say by $10,000, then both customer and supplier benefit by $5,000. This takes the form of a final invoice reduce to $105,000 for the buyer and an increased fee of $15,000 for the supplier. This example is good for repair works or similar contracts. Buyers need to know the types of contract that will motivate suppliers to ensure continuity of supply. Incoterms When buying from overseas it is important to establish and be aware of the obligations of both parties in respect of “terms of delivery”. Both buyer and seller will have obligations concerning the transportation, insurance, and shipment of the goods under their contract for the sale and supply of the goods. Misunderstanding can easily arise if there is no agreement as to the respective roles of each of the parties- seller and buyer. It is desirable to take appropriate steps to prevent problems of this kind from occurring. Take an example of buying ex-works. Charges paid by buyer will begin with the loading on to road or rail vehicle and delivery will take place at seller’s premises or another notified warehouse. Let say that during the night there is a fire and the goods are destroyed. The seller sent you an invoice to pay up. Should you pay? It depends on whether the seller has notified you that the goods are ready for collection. If the seller has informed you then, in terms of the Incoterms Rules, the risk in those goods has passed to you. As a prevention of this risk, depending on the value of the shipment, you need to determine whether insurance coverage is necessary. Incoterms will be discussed in detail later in this chapter. Price Risk The conversion of one currency into another does not, of itself, pose any great difficulty if the currencies are ‘convertible’, but the extent to which exchange rates fluctuate does cause considerable problems and risk either to the buyer or seller. The risk and uncertainty associated with the change in relative values between the buyers’ and sellers’ currencies has to be taken into account and managed. For instance, you have entered into a contract with a USA supplier for a contract value of to buy widget of at USD1 each for quantity of 100,000/- at today’s exchange rate of One US Dollars equals to SAR8.09. Your finance department set a standard cost of SAR8.50. You informed your boss that the saving is SAR41, 000.00 (SAR8.50- SAR8.09 x 100,000 pieces). Delivery is 2 months away. Your boss gives you the permission to proceed with the order. However, before delivery could be made, the exchange rate has risen SAR8.20. Instead of the saving of SAR41,000.00, you have a favourable variance +SAR30,000.00. What this means is that the material cost technically increased by SAR0.11 per unit. How are you going to explain to your boss? Will he understand that the exchange rate is beyond your control?

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ADVANCED In another example a supplier is at risk. You are buying a disk plate from a Japanese company who quotes you in Japanese Yen (JPY). You agree to pay in JPY, the raw materials he needs are from USA and he pays his supplier in USD and the conversion rate at USD1.00 = JPY160.00. However, the Yen has weakened against the US Dollar and the exchange rate is now JPY120.00 = USD. Your supplier now comes running to you and informs you that he needs to adjust the price to compensate his loss on currency exchange. What would you do? Let us consider another case. You have located another source in USA and the terms and conditions of the contract are favourable. You enter into a contract with the supplier and he request that you make an upfront payment for tooling as this order requires to be specially manufactured to your specifications. You effected payment of this tooling up cost on the first item in the order which is due for delivery in 3 months. Before delivery can take place however the supply company goes into liquidation. The source you were using cannot meet your production requirement and this new source was started to fill the shortfall in capacity. How are you as a buyer going to explain to the production manager or your immediate supervisor? Is this a commercial risk which has gone wrong or a currency fluctuation risk? In any event, how do we protect our business against such risks? Operational Risk Import and export procedures between countries are different and require careful administration to avoid unnecessary expense. It is important to reduce the length of time goods are in Customs. Every day’s delay can add to costs. Inaccurate, incomplete, or incorrect information on documents such as invoices, and waybills causes. Buyers should also learn that commodities brought into a country might enjoy duty-free or special lower tariffs. These are spell out in the Harmonised Tariff Schedule of Trade. Political events such as the Sept 11, accounts have impacted the business. (See article) Besides flight restriction, airlines now impose security surcharge that will impact the cost of doing business. US to limit overseas flights on Sept 11 Reuters Posted online: Thursday, August 29, 2002 at 1114 hours IST Washington, August 29: As part of stepped-up security for the one-year anniversary of the hijack-attacks on the United States, the Bush administration plans to restrict international flights to and from New York and Washington for much of September 11 and 12, the government said on Thursday. The plan, developed by defence, transportation, and national security officials, is subject to change and also includes flight bans and air space restrictions for certain private aircraft. A Federal Aviation Administration spokeswoman said the international flights that would normally operate within a 30-mile radius of New York and Washington will be prohibited during much of the peak morning and evening travel times. __________________________________________________________________________________ 311 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The restrictions will affect international passenger and cargo flights, which will also be prohibited from flying near Shanksville, Pennsylvania. Even the SARS ‘flu outbreak in Asia, business was affected. Business trips were either cancelled or postponed and urgent business discussions were done using video conferencing. Contracts are made with emotions and not solely base on logic. It is important that buyers understand the difficulties in communication and different cultures. An example “Knock me up at 7 in the morning” is a perfectly good way for the British business person to leave a morning wake up call. To an American, of course, it means to get someone pregnant. In Asia, small talk is not wasting time. It breaks the ice and established relationship. But to people in Europe and USA it is a waste of time. To them, time is money. Contract Risks Because of the economics of scale, large-quantity buyers generally purchase their high-dollar value materials under long-term contracts. Some of the contractual arrangements that buyers commonly use to cope to meet their requirements are: Definite Delivery-Type Contracts When production schedules for the entire period of a contract are known, definite quantities for delivery on definite dates can be established. A contract with these provisions is called a definite delivery type contract. This is an ideal type of ordering arrangement (i.e. when such a degree of certainty is present). Indefinite Delivery-Type Contracts In most cases however, production schedules cannot be planned precisely; hence, the quantities of materials required and their times of use, or both, are unknown. Materials and services for the support of such operations must be contracted for on an indefinite delivery schedule. There are three basic types of indefinite delivery contracts. In order of preference for the best pricing, they are:

•

(i)

definite quantity contracts,

(ii)

requirements contracts, and

(iii)

indefinite quantity contracts. Definite Quantity Contracts

These provide for the purchase of definite quantities of materials or services – whose time of use is uncertain. The contract therefore specifies that instructions regarding delivery schedule will be provided later. Because the quantities are known, however, favourable prices are possible for this type of agreement. •

Requirement Contracts

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ADVANCED These contracts provide for the purchase from one supplier of a buyer’s entire requirement, for a stipulated time period, for specified materials or services for a designated operation or activity. Requirement contracts typically are used in applications such as the support of a firm’s automotive repair shop, with parts being purchased from a specific parts dealer during the life of the agreement. To be certain that this type of contract is both legal and mutually satisfactory, the contract should provide for a minimum quantity which the buyer is committed to take, and it should stipulate that neither party can terminate the contract during its life, as long as performance is satisfactory and as long as the buyer’s requirements continue to exist. Without such provisions, requirement contracts have been found by courts to be unenforceable. •

Indefinite Quantity Contracts

During an agreed-upon period of time, these contracts provide for the delivery of a specific category of materials or services. Quantities and delivery dates are indefinite, but they buyer is committed to purchase between designated high- and low-quantity limits. The indefinite quantities associated with both indefinite quantity contracts and requirement contracts preclude optimum pricing. However, the contracts represent a total volume of business that, although indefinite, is large enough for suppliers to want and to price competitively to obtain. Scheduling order releases for these three types of indefinite delivery-type contracts usually is delegated to the using department, often the production-scheduling group. In some cases, releases are issued automatically by a buyer MRP system directly to the supplier’s MRP system. National Agreements National agreements are used by many firms that have two or more operating locations. Such an agreement usually takes the form of a long-term contract with a supplier for the purchase of material that is used regularly at a number of different operating sites. The item purchased can range from light bulbs to personal computers to production materials. At firms such as Hewlett Packard, national contracts are awarded by the corporate purchasing organisation. At other firms, such as the General Electric Company, the operating location with the largest volume of purchases for the item in question is usually assigned responsibility for sourcing the corporation’s domestic requirements. National contracts provide a number of benefits – continuity of supply, consistent quality, material standardisation throughout the organisation, reduced prices, lower inventory levels, reduced delivery costs, and improved efficiency for the corporation-wide procurement staff. Such contracts normally provide price protection for both the buying and selling organisations by means of an escalation formula that usually is tied to the supplier’s basic costs of production. Consequently, prices may increase or decrease during the life of the contract, depending on the behaviour of the selected price or cost indexes. __________________________________________________________________________________ 313 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED National contracts require considerable time to establish and administer. Purchasers must continually monitor the performance of selected suppliers, the market condition concerning price and availability, and how the selected supplier compares with competitors. Nevertheless, the benefits of such agreements offset the cited costs many times over. Contract Risk Appraisal The degree of cost responsibility a supplier reasonably can be expected to assume is determined primarily by the cost risk involved. It is to the buyer’s advantage to estimate this risk prior to negotiation. Since the majority of contracts are “forward priced” that is, period to completion of the work, some cost risk is involved. A buyer should insist on a fixed price contact unless (i) the risk will result in a contract price containing large reserves for contingencies that may not occur, or (ii) the risks in reliable suppliers refusing to agree to a fixed price contract because a significant loss might be incurred, or (iii) the use of a fixed price contract could result in the supplier, ‘cutting corners” in order to avoid taking a loss. Managing Technical Risk Technical risk is associated with the nature of the item being purchased. Appraisal of technical risk includes analysis of the type and complexity of the item or service being purchased, stability of design specifications or statement of work, availability of historical pricing data, and prior production experience. Think, for example of the technical risk involved in the Apollo mission to put a man on the moon, leaving the earth’s gravity, sustaining life in a gravity-less environment, landing on an unknown surface structure of the moon’s crust, and re-entering the earth’s stratosphere without burning. To minimise technical risk the job requirement, production methods, and pricing data needs to become better defined and the design specifications or statement of work has to become more stable. Schedule Risk Schedule risk refers to assessing and determining the supplier’s risk cost. This practice attempts to anticipate material and labour cost increases during performance of the contract. Preferred procurement practice calls for forward pricing of contact efforts. In order to reduce and manage the risk, incentive needs to be incorporate into the contract and classified into three broad categories:

•

(iv)

fixed price contracts,

(v)

incentive contracts, and

(vi)

cost reimbursement contracts.

Fixed Price Contract

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ADVANCED Under this fixed price arrangement, the supplier is obligated to deliver the product called for by the contract for a fixed price. If, prior to completion of the product, the supplier finds that the effort is more difficult or costly than anticipated, the supplier is still obligated to deliver the product. Further, the supplier will receive no more than the previously agreed-on amount. The amount of profit the supplier receives will depend on the actual cost outcome. There is no maximum or minimum profit in fixed price contracts. A fixed price arrangement is normally used in situations where specifications are well-defined, and the cost risk is relatively low. •

Incentive Contract

Incentive contracts are employed in an effort to motivate the supplier to improve cost and possibly other stated requirements such as schedule performance. In an incentive contract, the buyer and the seller share the cost responsibility. This sharing addresses two issues (1) the desire to motivate the supplier to control cost and (2) an awareness that if the supplier assumes all or most of the risk when significant uncertainty is present, a contingency allowance will be required, thereby inflating the contract price. Incentive contracts are of two types (1) fixed price incentives where the buyer’s obligation is to reimburse the supplier for all allowable, reasonable, and allocable costs incurred, and to pay a fixed fee. (2) cost plus incentive fee. This is where the ceiling price is agreed to (or fixed) during negotiation and supplier is reimbursed for all allowable costs incurred, up to any prescribed ceiling. In addition, the supplier receives a fee designed to motivate it to meet the buyer’s cost and other stated objectives.

•

Firm fixed Price Contract

The most preferred contract if appropriate for procurement is the firm fixed price. A firm fixed price (FFP) contract is an agreement to pay a specified price when the items (services) specified by the contract have been delivered (completed) and accepted. The contracting parties establish a firm price through either competitive bidding or negotiation. Since there is no adjustment in contract price after the work is completed and actual costs are known, the cost risk to the supplier can be high. It is important that the buyers have a base understanding on what makes a contract legally binding to prevent entering a contract that is not enforceable in law. The objective is to minimise the procurement risk that would be costly to the company due to litigation and not intended to make lawyers out of you. Contract law originally was derived from English common law and is a body of documented case precedents. Contract law is basically the same around the globe. Your contract (purchase order) is implied or, mostly, express (written). __________________________________________________________________________________ 315 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED For a contract to be binding there has to be four elements: •

An offer

•

Acceptance

•

Consideration

•

Capacity to contract

Cultural Differences Risks Business Customs and Cultural Nuances Consider this scenario of an American failure to understand another culture. Buyer John wants an agreement with a Japanese company, so he arranges a trip to Japan. He sets the meeting for 9 A.M. Monday, after arriving late the evening before. John opens the meeting by saying, “I have to be in the office by Wednesday and want to settle today!” John lays his cards on the table, asks their head man Yamamoto-San, “Can’t we get right to the point? I can accept your price and is it possible to reach an agreement today?” John plunges into detail upon hearing “Yes” “and we need the deliveries in three months and not five months. You can do it, I know you can.” Yamamoto San, deep in thought, replies “It’s very difficult.” John grinds Yamamoto San further and glad to hear the answer to his every question, “Hai, Hai!” although he knows that it will take at least three months to complete the delivery. John again asks for reassurance, “Yamamoto San, aren’t you going to meet my deliveries”?” Yamamoto San replies, “Yes” along with a nod on his head. John replies, “Good, and we will let our lawyer tight up the loose ends if need be.” John brings the meeting to a close, shakes hands with everyone and bids farewell. Upon his return to office John informs his boss, “No problem we will get our goods within three months.” Two and a half months later, an upset boss walks into John’s office saying, “That son of a gun did not even deliver samples! You had better get another source in a hurry to avoid a line down that would upset our customers. How could you have misread the supplier so badly?” How would you advise John as to what to do now? Update his CV? Japanese Culture Japanese cultural drive to be “number one” economic leader. •

Japanese strive to emulate Western culture even in dress code but retained their own culture within their homes. They share a common heritage and language that is said to allow communication by tacit understanding.

•

They do not like arguments and place much importance in achieving harmony with others. They are uncomfortable in conflict situations.

•

They will not use their first name but add suffix “San” like John San

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ADVANCED •

There are three types of bow when greeting guests: o 15-degree bow is used upon first meeting a colleague in a hallway. o 30-degree is standard greeting for customers o 45-degree stooped-over, humble bow is for special occasions.

•

A rule of thumb is to match by bowing as low and long as the host-you cannot go wrong.

•

Pass out plenty of business cards to everyone. Have your card printed in Japanese on one side if possible. Give the card with both hands - with the Japanese side up.

•

Do not put your arms around their back or pat them. They prefer to stand their distance.

•

Do not embarrass them be they your host or your guests. “Loss of face” is not just an expression. They try very hard to be accurate and accommodating.

•

They negotiate in teams. Do not rush negotiation and discussion. Until they know you and trust you, they will be innately cautious and not give much information

•

During discussion, they frequently will remain silent. Long silence can mean disapproval, but short silence is habitual, a sort of time to think between speaking.

•

They are excellent at taking notes and documentation because they do not want to lose face or be embarrassed.

•

Style is important to them. When sitting down to negotiate or eat, the guest is always placed by the window and the host will sit by the door. This is to protect the guest from attack from the doorway.

Taiwanese Culture The residents of the Republic of China (ROC) do not like to discuss the topic of Mainland China. People are sternly anti-Communist. Because many top-level executives or their parents came from Mainland China during the revolution, many Chinese features of culture apply here. Taiwanese of mainland Chinese heritage speak good English. Lower level native management speak Taiwanese. The written language is classical Chinese character. Mandarin is the official language of the island, but the Cantonese and Taiwanese dialects are spoken. Use plenty of business cards printed in English and Chinese. Elder people are greeted first. A nod of the head upon meeting is normal and bows are considered a sign of much respect. Mr., Mrs., and Miss are used, followed by the single-family name. Friendly relationships must be cultivated with great patience. Taiwanese are characterised as soft sell, but, at the same time, they “buy hard.” They are competitive bargainers, who expect to “haggle,” and so on. Taiwanese are highly inquisitive and more open than the Japanese. Still, do not be too abrupt. A subtle approach is always best in __________________________________________________________________________________ 317 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED the Orient. Consistency that comes from well-prepared agenda and approach is desirable. Chinese expect to entertain the visitor in restaurants. Do not address business during entertaining time. Dinners consist of many courses, so be sure not to eat too much early. The host will serve his guest. Afterwards, he will characteristically apologise that the food was not good. Politeness calls for the visitor to maintain strongly how good it truly was. Small gifts are common, but not necessary. Because of Chinese influence, many remarks on the Chinese culture apply in Taiwan as well. According to an analyst (Singapore Straits Time dated 15 June 2010), if a Taiwanese cannot do a job, he would rather pass it on to his competitors than to lose it to a company outside Taiwan. Chinese Culture The People’s Republic of China, Mainland China, or Communist China are common Western terms denoting China, the world’s oldest civilisation and the third largest country in the world. Most Chinese businessman speaks the national “Standard Chinese,” which is Mandarin, and perhaps one other dialect such as Shanghainese or Cantonese. Usually, Chinese can read the different dialects, as the written forms are similar, though the meanings and pronunciations are quite different. A few words of greeting in their tongue will please the host. Atheism is official endorsed by the Communist government. But religions are allowed, such as Buddhism, Taoism, and Christianity. Ancestor worship or folk religions such as Confucianism greatly influence family life! Dealing with China, the buyer needs to be invited to trade, so it is usually to start by approaching a State Trading corporation. This often means red tape, and delay, but to trade, the system must be followed. There are two types of trading groups: those authorised by the Ministry of Foreign Economic Relations and Trade (MOFERT), and the others that are industrialtype corporations run directly by government agencies such as the Ministry of Agriculture and the Ministry of Petroleum. Shaking hands is done in business, but more commonly, a nod or slight bow is customary. Do not greet too casually, as introductions are quite formal. Mr. and Madame are usually used followed by the family name. So Yeh Sedong is addressed as “Mr. Yeh,” while his wife would be “Madame Yeh”. Use business cards freely that are printed in both Chinese as well as English. Do not put your arm around or touch people, especially when talking with people of rank or importance. Avoid showing the sole of your feet, pointing shoes toward others while sitting, or using the feet to move chairs, or hold a door open. Feet are considered unclean. Avoid talking politics or Chinese leaders. Discussing Taiwan has been considered off-limits The Chinese refer to Taiwan not as the Republic of China, but as the “Formosa Province” This is changing as relations become better. Still, it is better not to discuss other countries, such as South Korea or Israel that they do not recognise. Chinese are punctual and usually arrive early for meetings. In negotiations, be certain that the person or trading organisation has the authority to accept your offer to buy or sell. One reason for net clearing matters promptly is the inability to __________________________________________________________________________________ 318 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED determine who has the power or authority to negotiate and adopt a team concept in. If you have three members, they may have 20. Their large buying teams are known to shock the seller by immediately requesting a price cut of about 30 %. Conversely, sellers would be surprised if the American buyer suddenly just bought their initial offer. Not skilled in cost analysis, they often assure the buyer that, “Prices will be cheap.” Prices will not be based on cost, rather what they think others would charge, regardless of their labour costs. Sometimes this leaves Westerners feeling they are price gougers. Chinese keep good records of conversations. They use Memorandums of Understanding (MOU). There is a deep-seated distrust of legalities, and China has not yet developed a system of commercial law. Mediation solves most Chinese disputes. It is advisable that you keep note and records visibly. Failure may mean that you are not too serious. The Chinese usually will not speak English in negotiations. A widely used tactic is to use interpretation even when they may understand English. It allows time to think. Be prepared to stay in China for a while during negotiation. The Chinese has a lot of patience and are prepared to wait out for concessions. Learn to accept periods of silence, which do not necessarily mean disapproval. Discussions may circuitously move to an issue previously thought settled or change to a new issue. Be prepared that after days of negotiation and getting an agreement signed, the Chinese may reopen negotiation issues. Chinese believe old friends, or even people from the same community, school, or company, should act as friend even if they do not know each other. When being entertained, never ask for the bill. It will cause them to “lose face.” For understanding of other cultures please refer to “Global Purchasing, Reaching the World” by Victor H. Pooler. Foreign Exchange Risks Currency Risk With the increase of international commerce, it is prudent that an understanding on how to convert prices from one currency to another, the definition of weaker and stronger currencies, and the concept of exchange risk will affect the Cost of Goods Sold. Currently, most major currencies “float” against each other. Up to 1973, there was a worldwide attempt to maintain fixed exchange rates. In Europe, a second attempt to stabilise European currencies against each other took place from the late 1980s until late 1992, when it largely collapsed. In 1944, the countries that expected to win World War II set up an exchange rate control mechanism that lasted until 1973. It is called the Bretton Woods Agreement, where the US government guaranteed to sell an ounce of gold for $35. All countries guaranteed to keep their currencies at a fixed exchange value versus the dollar by raising and lowering interest rates and by controlling imports. __________________________________________________________________________________ 319 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The agreement collapsed in 1973, when the United States eliminated convertibility of the dollar into gold. Part of the reason was that the US was experiencing inflation, and part of the reason was that in 1971 the US developed a negative balance of trade for the first time since World War II. It was also during that time, that the application of electronics to currency trading began to develop, and the ability of any government to control the value of its currency began to decline. It became so easy to transfer funds electronically between private parties that the transaction volume became larger than the capabilities of government to influence prices. From the buyer’s point of view, the preferred method of payment is after receipt and inspection of goods. However, it is customary in many countries for advance payment to be made and tied up the buyer’s capital. DC (Documentary Credit) is a common form of payment. Under this form of payment, the funds of the buyers are committed from the establishment of the DC until payment is effected (not to mention the cost of establishing the DC and any subsequent amendments). The absence of fixed exchange rate can be a problem; it creates at least four potential risk situations. The formulas for converting currency are simple. To convert prices from one currency to another, the amount of one currency is either divided or multiplied by the ruling exchange rate. The trick is in understanding how the exchange rate is expressed. For example, an exchange rate of USD1.00 = SAR8.27 is the same as the exchange rate SAR1.00 = USD0.121. Case 1 A contract calls for payment in a foreign currency. The exchange rate, assuming that a contract was awarded to a supplier in Germany for 1 Million Euros, assume further that the exchange rate was EUR 1.0 = SAR 10.86 Ignoring all other costs, the EUR cost to the South African buyer would be: EUR 1,000,000 X 10.86 = SAR 10, 860, 000 Assume that the SAR weakens to the point that it cost SAR 14.00 to buy Euro 1. The cost in SAR becomes EUR 1,000,000 X 14.00 = SAR 14,000,000 This is an increase of SAR 3,140,000, or a 28.91 % increase in the cost of item in SAR. Note the German supplier is no better off, since it receives only Euro 1 Million, while the South African buyer has suffered the 28.91% increase in the cost of the item in SAR. Case 2 Assume now that the SAR improves to SAR 9.5 now buys EUR 1.00. The cost of the item in SAR now is EUR 1,000,000 X 9.5 = SAR 9,500,000

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ADVANCED The South African buyer has reduced its cost from the initial likely amount of SAR 10,860,000 to SAR 9,5000,000 - a 12.52% saving. Case 3 Assume now the contract is awarded and with payment in SAR and the SAR weakens. Assume further that when the contract was awarded, the exchange rate was EUR 1.0 = SAR 10.86; the cost of item was EUR 1 Million, or SAR10, 860,000. Were there no change in the rate of exchange, the supplier would convert the SAR 10,860,000 received into EUR 1 Million. Unfortunately for the supplier, the SAR has weakened so that it now costs SAR 14.00 to buy Euro 1. Now when the supplier receives its SAR10, 860,000 it will only receive SAR10,860,000/ 14.00 = EUR775,714, a 22.43 % reduction from what is expected under the former exchange rate. Quite obviously, the supplier will very unhappy and may translate this either to nonperformance or to a demand for a price increase Case 4 Let us now assume that the SAR strengthens and with Case 3, the contract called for payment of SAR10, 860,000. Assume the exchange rate is SAR9.5 purchases Euro 1. When the supplier receives its SAR10, 860,000, has it converted to EUR at the current rate, it will receive SAR10,860,000/ 9.5 = EUR1,143,158, a windfall gain of EUR143,158. While the German supplier may be delighted, the South African buyer should be less enthusiastic. So how does a buyer manage the exchange risk and protect his or her company against unexpected price changes?

Many buyers prefer to pay in dollars. They often believe that this is the most risk-free to buy. They will occasionally see headlines describing major losses in currency markets and be even less inclined to work in foreign currencies. Sometimes you should buy in U.S. Dollars and other times in a foreign currency. The correct choice depends on two factors: •

The type of product you are buying

•

The country you are buying from

The most effective weapon against foreign exchange fluctuation risk is however the forward exchange contract (FEC). Forward Exchange contracts An FEC may be defined as a foreign currency transaction in which two parties agree to exchange two designated currencies at a specific time in the future at an agreed exchange rate __________________________________________________________________________________ 321 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED (the forward exchange rate). These contracts always take place on a date after the date that the spot contract settles and are used to protect the importer or exporter from fluctuations in currency prices. The following information comes from: 

Forex Relationship Centre



Corporate and Investment Banking Division



Standard Bank

Forward exchange contracts are used to secure a rate today for settlement at some time in future, usually longer than two business days. In this document we will look at the different types of cover, factors to consider when selecting a contract type, as well as the various methods of delivery that can take place with a FEC. These are: •

early delivery,

•

extension and cancellations or

•

surrenders.

Types of cover There are two distinct ‘legs’ (transactions) in any rand / foreign currency deal. The importer / exporter can cover either one of the two legs of the transaction, or both, depending on the client’s view of the currency market. The client can opt for: •

Foreign currency / dollar cover (thereby leaving the rand / dollar leg uncovered)

•

Rand / dollar cover (thereby leaving the foreign currency / dollar leg uncovered) or

•

Rand / foreign currency cover (thereby eliminating the entire currency risk)

A customer wanting to enter into a forward exchange contract must state what type of contract is required and what type of cover is needed. Considerations when selecting the type of contract: •

Is the payment / accrual date of the underlying commitment determinable, or is there some uncertainty?

•

What are the terms and conditions of the underlying contract of sale and is there any uncertainty regarding the adherence to manufacturing / delivery dates which in turn will have a bearing on payment / accrual dates?

•

Is the currency quoted at a premium or discount?

•

Is it likely that the premium / discount will increase / decrease during the life of the contract?

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ADVANCED Forward exchange contracts – Early delivery An early delivery is when a forward exchange contract is used before the maturity date of a fixed contract OR during the fixed period of a partially optional contract. Delivery will take place on a “swap” basis. To understand a “swap” transaction, consider the following example: A person invests money on fixed deposit with the bank for six months. After three months, that person needs the money on fixed deposit. However, the bank cannot release the money under a fixed deposit, so it then arranges for a loan for three months to help that client. On maturity of the fixed deposit, the proceeds are used to offset the three-month loan. The client will either have to pay or receive the difference in the interest between the overdraft rate and the fixed deposit rate. Swap contracts operate on a similar basis. The importer needs to make a payment but is unable to use the contract because of the fixed period. To assist the client, the bank provides the foreign currency converted at the current ruling rate of exchange. The forward contract therefore remains unused and is surplus to requirements. To eliminate the surplus funds, the bank enters into a contra (swap) contract to buy back (offset) the amount on the maturity date of the original contract. Forward exchange contracts – Extension On occasions, payment is delayed owing to late arrival of documents or other mishaps. When payment or receipt of funds is deferred for any reason, the maturity date of the forward contract has to be extended. This is also done by means of a swap. The importer must fulfil his obligation under the existing contract, that is, he will receive the foreign currency against the settlement in rand at the forward contract rate. As the importer has no foreign currency commitment at this time, he must sell the foreign currency to the bank at the spot (current) rate of exchange. At the same time, and based on the same spot rate, the bank will provide a fresh forward contract to the new maturity date. The exporter must fulfil his obligation under the existing contract by selling the foreign currency to the bank against settlement in rand at the forward contract rate. He will, but the foreign currency from the bank at the spot (current) rate of exchange, as there is no foreign currency accrual. He will obtain a fresh forward contract, to the new maturity date, based on the same spot buying exchange rate. Please note (using the case of the importer as an example): •

The difference in exchange between buying the foreign currency at the forward contract rate and selling the currency at the spot rate of exchange is not a profit or loss in exchange but is merely a prepayment to or an advance by the bank.

•

The importer does not lose the benefit of the rate of exchange on which the original contract is based.

Forward exchange contracts - Cancellations or Surrenders __________________________________________________________________________________ 323 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED In the event of an importer being unable to use the forward exchange contract, in whole or in part, the outstanding balance is surrendered by settlement for the difference in exchange between: •

The forward contract rate, and

•

The current day’s spot telegraphic buying rate of exchange

If an order is cancelled, the forward exchange contract must be cancelled at the prevailing spot exchange rate, which can result in financial loss. Forward exchange contracts – Advantages Forward exchange contracts offer the following advantages: •

They cater for a diverse type of commercial and financial transactions and both importers and exporters can make use of it.

•

The company is protected against unfavourable exchange rate fluctuations.

•

The exact value of the export and import order can be calculated on the day it is processed.

•

Budgeting and costing are accurate.

Forward exchange contracts – Disadvantages •

Once a company has covered a transaction with a forward foreign exchange contract, it cannot take advantage of preferential exchange rate movements.

•

If an order is cancelled or there is any surplus amount outstanding on a forward exchange, it must be surrendered at the prevailing spot exchange rate, which can result in a financial loss.

•

Early deliveries, extensions, surrenders and cancellations during the fixed period of a forward exchange contract are done on a swap basis causing additional administration.

Forward exchange contracts – Exchange control requirements The South African exchange control authorities allow banks to enter into FECs subject to the following conditions: •

A firm and ascertainable foreign exchange commitment must exist. For example, a commitment to pay for imports

•

The transaction is permitted in terms of the exchange control rulings or a specific authority has been granted by the authorities for the transaction

•

The period of cover does not exceed 12 months at a time

•

The commitment is not already covered

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ADVANCED •

Documentary evidence of the commitment is presented to the bank within 14 days of establishment of the FEC.

Before continuing, some words need defining: Pricing Currency This is set to determine the purchase price and when you set the price in the seller’s currency, the buyer is taking on the exchange risks. The supplier will want a set amount of his currency in payment and does care how much that currency is worth. The same is true in reverse for the buyer when the currency is set at the buyer’s currency. Payment Currency In some cases, the buyer may pay in a different currency than prices in which contracts are set. The supplier might receive the dollar equivalent of the foreign currency price, or perhaps the foreign currency equivalent of a dollar price. This will occur in highly inflationary economies that, for example, import parts for assemblies made from foreign components (e.g. U.S. – built). Such contracts are often denominated US dollars. Mexican law requires payment in Pesos for domestic Mexican purchases, so purchase orders are written with prices stated as “The Peso equivalent of X.XXX dollars.” The opposite can also happen. Korea does not permit payment for exports in Korean currency (The Won). However, prices can be set in Won, and purchase orders can read “The U.S. dollars equivalent of XXX Won.” Manufacturer’s Currency This is the currency in which a manufacturer incurs costs. It will normally be the local currency of the supplier’s country. The supplier needs this currency to pay salaries, utilities, taxes, and building costs. The parts and materials that a supplier buys may or may not be priced in the currency of the supplier’s country. If the supplier is an assembler in a small or developing country, he or she is very likely to be importing parts for manufacturing. These parts may be priced in a third currency, different from either the supplier’s currency or the U.S. dollars. Assemblers in Taiwan, for example, buy many Japanese parts, and sometimes the majority of the supplier’s material costs will be in Yen. Floating Currency Floating currencies are the major, freely traded currencies. Free-market forces (with occasional government intervention) set exchange rates. These currencies can fluctuate against the dollar quickly and unpredictably. The value can change 10 % a month for a number of months in a row. E.g. of floating currencies are U.S. Dollars, Yen, Canadian Dollars, Aussie Dollars and all the Euro. Pegged Currency These are currencies of countries whose government attempt to maintain a fixed exchange rate against the dollars. An example is the Malaysian Ringgit at one time was set at 1 MYR to USD3.80. __________________________________________________________________________________ 325 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Pegged Currency Economics While a pegged currency is usually steady against U.S. dollar, there are cases where the peg has not held under stress. The currency of Taiwan strengthened against the U.S. dollar in 1988, and the currency of Mexico weakened against the U.S. dollar in 1995. Pegging works when a country with a small economy has (or can buy) enough dollars in reserve to be able to guarantee that they will give a fixed amount of dollars for their currency. They can use those dollars to create a positive balance of trade with the US, or with another hard-currency country whose currency can be traded for dollars. So how is the currency selected? Two factors to consider and it depend on the type of product that you are buying: •

Market-driven products

•

Cost-driven products

Market Driven Products These are commodities that have multiple, easily changeable manufacturers or sources. Examples are gold, oil, raw materials, and some electronic components such as dynamic random-access-memories (DRAMs). Generally, the worldwide market price is in U.S. dollars. If a DRAM cost $10.00 in the US, the price will be within a very small percentage of the equivalent amount of Yen in Japan or Euro. Manufacturing cost has very little to do with the sales of these products. Prices are set by pure competition and controlled by the most expert negotiators and most efficient manufacturers. When you buy these products, you should set prices in dollars, even if you make payment in another currency. There is no point in setting prices in a foreign currency. If you price in a foreign currency, the price will be much more variable than if you set in dollars because the foreign currency prices would have to vary to match the dollars price. If the dollar prices change rapidly, as they do during the first few months of a sale of a new generation DRAM, you need to negotiate new dollar pricing frequently. Cost Driven Products Other products are cost driven. You will recognise these because you will be having extensive discussions with the suppliers about their costs. You will probably be getting costed bills of materials from the supplier. These products are typically custom-designed and are built by only one supplier. They are difficult to transfer between suppliers. Mechanical parts, computer monitors, and power supplies, are example of cost drive product. The other factor in choosing a currency is whether the manufacturer’s currency is pegged to the dollar or floating. Pegged Currency __________________________________________________________________________________ 326 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED If you are buying from a country with a currency pegged to the U.S. dollar, the supplier’s currency is, for practical purposes, the U.S. dollar. You can price either in dollars or the supplier’s currency. This applies to both market-driven and cost-driven products. Because the currency is pegged to the dollar, there is very little exchange risk. If the supplier will permit dollar pricing, choose dollars because this is the easier choice. The supplier may want an ‘escape clause” to protect against US dollar devaluation if you price in dollars, and you should have one if you price in the supplier’s currency. If the supplier from a pegged-currency is assembling a cost-driven product with materials from other countries, it might be necessary to protect against movement of those currencies. Floating Currency (Cost Driven Products) You should price a cost-driven product from a floating currency country in the supplier’s currency and obtain a price decrease of between 5 to 10 % because you are relieving the supplier of the currency risk. It is true if the dollar weakens, the dollar cost will go up and you can protect this by hedging. (It must be emphasis that when hedging currency, this should be done with consultation of your finance manager). It is also true when the dollars cost will go down if the dollar strengths. In comparison if you price in dollars, the dollar cost will usually still go up if the dollar weakens. There too many cases from well-intentioned suppliers are forced to raise their supposedly fixed dollar prices when the dollar weakens. However, I have yet to see a supplier volunteer to lower his prices when the dollar strengthens. For further reading on Foreign Currency Risk, please refer to “Global Supply Management, A guide to International Purchasing” by Dick Locke and Global Purchasing, Reaching the World by Victor H. Pooler. Incoterms® 2010 Rules Incoterms® 2010 Rules are internationally accepted commercial terms defining the respective roles of the buyer and seller in the arrangement of transportation and other responsibilities and clarify when the ownership of the merchandise takes place. They are used in conjunction with a sales agreement or other method of transacting the sale. It is worth noting that the custodian of the Incoterms® 2010 Rules, the International Chamber of Commerce (ICC), has advised that 75% of all arbitration matters referred to its Arbitration Court are as a result of the incorrect use of Incoterms. It is therefore essential that the buyers and sellers know their respective risks, costs and responsibilities under each of the Incoterms® 2010 Rules and those buyers take the necessary action to minimise procurement risk that will impact the cost of goods sold. For example, a when supplier quotes under Incoterms® 2010 Rules EXW (Seller’s premises, Omaha, Nebraska, USA).

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ADVANCED In such a case, the seller’s responsibility would include cost of manufacturing, inspection and in some cases packing (making the shipment air or seaworthy.) The seller’s risk, costs, and responsibilities end when he notifies the buyer that the goods are ready for shipment. It is therefore the responsibility of the buyer to arrange for collection from the seller (including loading of the collection vehicle at the seller’s premises), inland transportation from the seller’s factory to load port, arrange for custom clearance and payment of all port charges, arrange for transportation by air or sea, clearance at port of discharge and transportation to the buyer’s factory. It is also the buyer’s responsibility to arrange for insurance coverage. What follows is a VERY brief summary of respective buyers and seller’s risks, cost, and responsibilities under the 11 different Incoterms® 2010 Rules. Those responsible for the international procurement function within the organisation are well advised to familiarise themselves fully with the all aspects of the Incoterms® 2010 Rules and to obtain copies of the Incoterms® 2010 Rules and the Guide to Incoterms® 2010 Rules which are published by the International Chamber of Commerce. •

EXW - Ex Works - Cost, risk and responsibility pass to buyer including payment of all transportation and insurance cost from the seller's door, used for any mode of transportation, can be used for any mode of transportation.

•

FCA - Free Carrier - Cost, risk and responsibility pass to buyer including transportation and insurance cost when the seller delivers goods cleared for export to the carrier. Seller is obligated to load the goods on the Buyer's collecting vehicle; it is the Buyer's obligation to receive the Seller's arriving vehicle unloaded, can be used for any mode of transportation.

•

FAS - Free Alongside Ship -- Cost, risk and responsibility pass to buyer including payment of all transportation and insurance cost once delivered alongside ship by the seller. Used for sea or inland waterway transportation. The export clearance obligation rests with the seller. Used for sea or inland waterway transportation.

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FOB - Free On Board Cost, risk and responsibility pass to buyer, including payment of all transportation and insurance costs, once delivered on board the ship by the seller. Used for sea or inland waterway transportation.

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CFR - Cost and Freight -- Risk passes to buyer when delivered on board the ship by seller at the loading port who pays the transportation cost to the destination port. Used for sea or inland waterway transportation.

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CIF - Cost, Insurance and Freight -- Risk passes to buyer to buyer when delivered on board the ship by seller who pays transportation and insurance cost to destination port. Used for sea or inland waterway transportation.

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CPT - Carriage Paid To -- Risk passes to buyer when delivered to first carrier in country of export by seller who pays transportation cost to destination. Used for any mode of transportation.

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ADVANCED •

CIP - Carriage and Insurance Paid To -- Risk passes to buyer when delivered to first carrier in country of export by seller who pays transportation and insurance cost to destination. Used for any mode of transportation.

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DAT - Delivered At Terminal -- Cost, risk, and responsibility pass to buyer once goods have been placed at the buyer’s disposal in country of destination unloaded from the arriving vehicle. Used for any mode of transportation.

•

DAP - Delivered At Place -- Cost, risk, and responsibility pass to buyer once goods have been placed at the buyer’s disposal in country of destination NOT unloaded from the arriving vehicle. Used for any mode of transportation

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DDP - Delivered Duty Paid -- Title and risk pass to buyer when seller delivers goods to named destination point cleared for import. Used for any mode of transportation.

Selection of an Incoterms® 2010 Rule The appropriate term will depend on whether your company (as a buyer) is handling its own freight and Customs work. If your company has appointed a forwarder it is always good practice to benchmark the total logistics cost picture (freight, handling, duties) of the product. The more your company assumes in terms of risk, costs, and responsibilities the greater control you have over each shipment. Therefore, you should obtain a price base on CIF (port of discharge) and EXW and benchmark against that of your appointed forwarder. Please bear in mind your selection of an Incoterms® 2010 Rule affects duty cost, as some of your freight costs are dutiable, as domestic freight in the seller’s country may become part of the total cost of the part when calculating duties. If the buyer pays the foreign inland freight directly, as would occur with Incoterms® 2010 Rules EXW buying, that freight is not dutiable. However, if the seller pays that freight, as would happen with all other terms, the foreign inland freight may become dutiable if such costs cannot be separated from the seller’s price. If the cost of the international leg of the transportation is included in the cost of the goods (as would occur with Incoterms® 2010 Rules starting with “C” or “D”), the cost of the international freight must be subtracted from the total cost of the part before duties are calculated.

Insurance You need to make your own judgment as to your company’s ability to cover the loss of a shipping container or a missing airfreight shipment. If you use established, reputable carriers and forwarders, problems are rare. If you were working for a multinational corporation (MNC), it would be most likely that your corporate will have a blanket insurance coverage. If your company does not have a blanket insurance coverage policy and you feel that insurance __________________________________________________________________________________ 329 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED coverage is necessary and a frequent shipper, consider obtaining a blanket policy that will be priced according to the amount of freight you ship. The premium will also vary based on the deductible amount, which you can set at the maximum loss you can reasonable sustain. Please refer to Incoterms® 2010 Rules publish by the International Chamber of Commerce for full details and other Incoterms® 2010 Rules. Lead Time Risks In determining the procurement risk in lead-time, the following lead-time has to be taken into consideration. Time needed by the supplier to manufacture the goods This would include the supplier lead-time in ordering the materials, time needed to make the tooling, manufacturing the goods including inspection time. It is well worth bearing in mind that things make by men are all subject to all kinds of risk. Examples abound - supplier does not have sufficient materials as there is a delay from their suppliers, insufficient quantity to meet your needs due to rejects, strikes by employee, etc. In the case of new suppliers, the buying company may have to increase their inventory holding, send quality personnel to supplier’s facilities to implement quality checks and control and possibly even send a buyer to “baby sit” the supplier to ensure that they continue to run production to meet the needs. Logistics lead-time The time needed to movement from point A to point B. The lead-time would include inland freight, outbound custom clearance and port clearance, outbound freight (for International shipment by air or by sea), destination port and custom formalities and trucking time to factory. Variable shipping schedules, unpredictable time requirements for Customs activities, the need for greater coordination in international purchasing, strikes by stevedores and maritime unions, and storms at sea (which can cause delays and damage) usually result in longer lead times. Airfreight may be used to reduce the lead-time but increases the cost of goods. Collaboration The traditional method used to try to prevent or mitigate the risk of a supplier failing to meet agreed delivery dates is to include the phrase “time is of the essence” or similar in the contract. This seeks to make sure that the offered and accepted date of delivery in the contract is a condition which goes to the root of the contract. Breach of such a condition by the supplier would allow the buyer to cancel the contract and go elsewhere, as well as claiming damages from the supplier. This could potentially result in a very large loss indeed for the supplier, therefore the presence of the phrase, is presumably meant to concentrate his mind on ensuring that delivery date is made on time.

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ADVANCED Damages claims under these circumstances are usually expressed as a percentage of the contract price, provided it is a fair and reasonable estimate of the actual loss. It is common practice to arrange for the damages to be deducted from the supplier’s invoice. The adoption is to minimise risk and provide an additional security for the buyer. Since it is the objective of the buyer is to obtain delivery of the required goods or services at the agreed time, it is important that the main focus of effort should be to work with the supplier to ensure that this is achieved, rather than diverting too much effort to ensure agreement on damages compensation in the unacceptable event of failure. Quality Risks The US is the only major nonmetric country in a metric world. This frequently leads to manufacturing tolerance problems. In many cases, there is the risk that production outside of the US firm’s control can result in “off-specification” incoming materials. Potential rework or scrap could add substantially to the total cost of doing business with international suppliers. While this may be insignificant where industries do not rely on tight tolerances, it does make a difference in certain industries like aviation, automation, I.T. and many others. The aviation industry in USA is one industry that does not make provision for tolerance difference. All their specifications are in Imperial units. The reason for them not wanting to change to metric specification is that it is too costly for them to make the switch. Additional Inventories The quantity of additional inventory needed when purchasing from foreign sources can be difficult to determine. Quite often, however, the additional inventories are not as large as one might expect. Nevertheless, inventory-carrying costs must be added to the purchase, the freight, and the administrative costs to determine the true total cost of buying from international sources. However, it must be noted that some buyers do not add buffer stocks, relying on airfreight in case of emergencies. Deeper collaboration with suppliers in the implementation programmes such as JIT, VMI/SOI is a key factor to the reduction of the risk of stock outs and the corresponding reduction in carrying and holding costs. Social and Labour Issues In Europe and US, unions and some politicians are pushing for retaliatory measures against exporting countries where workers lack clout and labour laws are either weak or routinely flouted. Retailers (Levi, Nordstrom, Wal-Mart, and Reebok) discern a greater tendency by some customers to shun production from sweatshops. (G. Pascal Sachary, “Levi Tries to Make Sure Contract Plants in Asia Treat Workers Well.” Wall Street Journal July 28, 1994.) It has become a requirement that international suppliers to such buyers put in place policies and procedures to safeguard workers’ welfare. Compliance Risks International procurement involves a number of unique documents, activities, and taxes. Failure to comply with statutory measures might result in the cargo being held by Customs or __________________________________________________________________________________ 331 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED other authorities pending clarification from the buyer or seller and when the authorities find errors, the company will be subjected to penalties. It must be noted that when such errors are uncovered, the penalties imposed will depend on whether (1) it was intentional, (2) gross negligence or (3) just plain negligence. Penalties are as high as 300% of the value of the goods, forfeiture of the goods and imprisonment of those responsible may be imposed. It is therefore in the interest of the buyer and seller to fully understand the requirement of each country governing the import and export of goods. All goods imported into or exported from South Africa must be declared to Customs on the correct documentation via the correct policies, processes, systems, and procedures. In addition, South Africa has entered trade agreements with a number of different countries which allow the reduction or elimination of import duties on different classes of goods originating from those countries. Harmonised Tariff System and Import Procedures It is important for you to have a little background knowledge on how Customs tariffs work, since this could make a big difference to the landed cost of the product in the end. Tariff Classification – it all starts off with classifying the product for Customs duty calculation purposes. The correct classification of goods is at the heart of obtaining Customs clearance at the time of importation. The Harmonised Commodity Description and Coding System South Africa has adopted the international classification system developed and compiled in Brussels by the World Customs Organisation. (Previously the Customs Co-operation Council.) This classification or coding system is known as the "Harmonised Commodity Description and Coding System, abbreviated to "Harmonised System" (HS). The South African Customs Tariff is structured in accordance with the HS system which has twenty-one general product categories or sections. Each section is divided further into more specific product types (called chapters) and there are ninety-eight of these chapters. For example, Section XI covers the category "Textiles and Textile Articles" and is broken down into fourteen chapters from Chapter 50 to Chapter 63. Chapter 50 covers "silk" and Chapter 52 deals with “cotton”. The Harmonised System of coding is based on a "four-digit" heading (e.g. 0101) and six-digit sub heading or code (e.g. 0101.90). The headings and codes, together with the product description, are mandatory and may not be changed unless with the concurrence of all the countries which use the Harmonised System. National states are permitted to include additional sub-divisions in their own tariff structures. South Africa has done this in many instances. __________________________________________________________________________________ 332 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Thus, the HS sub-heading 7412.20 is divided into four further sections as follows: 7412.20

Copper tubes or pipe fittings of copper alloys

7412.20.10 brass bends, and junctions for use with sanitary or waste water pipes 7412.20.20 branch pipe pieces, Y-pieces, and couplings for use with piping of an inside diameter not exceeding 25,4mm 7412.20.80 Other, for use with piping of an inside diameter not exceeding 12,7mm 7412.20.90 Other The Harmonised System has nothing to do with the setting of duties which is the prerogative of the importing country. It is possible, through the office of the Commissioner and with his agreement, to request a ruling on a tariff classification from the World Customs Organisation. The Importance of Correct Classification It is the importer who has the responsibility in terms of the Customs Act to correctly classify the goods being imported. Classification is not an easy matter and even experienced Customs officers can get it wrong. If goods are classified and declared incorrectly, and, as a result, duty is under paid, Customs can impose severe penalties. On the other hand, if duty is overpaid as a result of an incorrect tariff heading being selected and declared, Customs are not bound to advise the importer. Importers are entitled to contact a Customs office direct for assistance, but help may not be immediately available, and it is unlikely that Customs will assist any importer on a continual basis. Clearing agents in their capacity as Customs Brokers are trained in the interpretation of the tariff, and Customs work is a major part of their service to the importing community. When doing costing for instance the tariff heading used relates to a % value of the FOB cost of the product that when calculated becomes the duty amount to be paid on import. In the table below (not accurate) – the difference between tariff heading 7412.20.10.and 7412.20.80 could be considerable if 7412.20.10 was at 25% duty and 7412.20.80 is only at 5% duty. NOTE: Importers think they are being clever sometimes when they try to place a “cheaper” tariff heading to a product that has in reality a higher tariff heading. They often try “rewording” the description of the product to make this scenario work. AVOID this at all costs. __________________________________________________________________________________ 333 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED 7412.20

Copper tubes or pipe fittings of copper alloys

7412.20.10 brass bends, and junctions for use with sanitary or waste water pipes 7412.20.20 branch pipe pieces, Y-pieces, and couplings for use with piping of an inside diameter not exceeding 25,4mm 7412.20.80 Other, for use with piping of an inside diameter not exceeding 12,7mm 7412.20.90 Other The classifying of a commodity or product for Customs duty purposes is highly important and time needs to be taken to ensure that the end result is accurate, or penalties will be accrued in the process and the integrity of the importer and freight forwarder will be in jeopardy. One of Customs roles is to collect the revenue made from Customs duties on imported products, so they do pay attention to detail and often use the services of experts within the particular product related field to check if the tariff heading used by the importer is correct. There are: o 22 general product categories or sections in the South African Harmonised System o 98 chapters (each section is divided into more specific product types) o The chapters then break down further into sub-headings o The sub-headings breakdown further into more defined sections The chemical industry is a difficult industry when it comes to tariff classification of the chemical products, due to the nature of the product. There is a vast range of chemical products, some of them made from very similar ingredients, but it is possible sometimes that there may be one small ingredient that changes the tariff heading or there may be a different use for the product that defines the tariff heading. In these instances, the industrial chemist would be in a better position to define which tariff heading the chemical needed to go under, certainly not the “everyday” entry clerk or sales person. Let us look at something within the “chemical range” of products and relate it to a tariff heading group. The website www.cargoinfo.co.sa has been used for this exercise – it shows clearly the “roll-out” of the tariff heading in the examples used. The use of “screen prints” has been made to give a clear overview of the tariffing breakdown and experiments can be done using the same facilities. Screen print 1. Product category or section

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ADVANCED

Screen Print 2. Chapters within the product group

Screen print 3. Chapter breakdown into sub-headings

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ADVANCED

Screen print 4. Sub-heading breakdown into more detail

Screen print 5. Final breakdown into detail __________________________________________________________________________________ 336 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

The whole Customs tariff system is efficient and covers everything possible. However, it is important to know that in order to avoid delays and confusion; importers sometimes request a “TARIFF DETERMINATION” from Customs for their product. This is merely asking for a tariff ruling from Customs – product specific, generally because disputes arise at the stage of Customs clearance. Customs would review the importers request and issue an official “tariff determination” sheet for future use when the importers shipments are going through the Customs clearance process. The basic fundamentals to remember when a product tariff classification needs to be done are as follows: Item

Activity

Align the product to a tariff GENERAL PRODUCT CATEGORY

Align the product to a specific CHAPTER within the general product category

Align the product to a specific SUB-HEADING within the specific chapter

Align the product to a specific DETAILED SECTION of the subheading

Review the FINAL breakdown section and check that product description, contents, etc meet the fundamental criteria of the tariff heading now selected

Sign off a tariff agreement sheet between importer and freight

Done √

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ADVANCED Item

Activity

Done √

forwarder 7.

Communicate this tariff decision to ALL affected roll-players – e.g. entry clerks, quality controllers, etc

Keep up to date with any changes to the tariff heading, made by Customs

Customs tariff headings are used to ascertain import controls. Tariff headings are used to find out what import controls there are around a specific product. This kind of research needs to be done timeously to avoid delays during the customs clearance process. As the importer you should have done your homework prior ordering the product, but unfortunately very often importers do not do this, and additional charges are accrued at the customs clearance stage. Nowadays, with the strong and effective use of EDI (electronic data interchange) certain “freight packages” come with the harmonised system, for convenience of doing electronic import clearance submission to customs. These packages more often than not also have a column in the tariff final detail section that shows whether or not a permit is required. This makes life a little easier indeed as this kind of info would need to be obtained from DTI (Dept. of trade and Industry) or other such authority bodies otherwise. The Jacobson’s “BIG RED BOOK” has a section at the back showing any permit requirements but because this is not conveniently placed next to the tariff section as mentioned above, errors can occur, and delays could happen. Although some products may require an IMPORT PERMIT there are other products that do not require an import permit but are import controlled by the introduction an extra “duty payment” due like – anti-dumping. One of the import control documents required relating to the tariff heading issue is the import bill of entry (SAD500). The fundamental reasons for an import BILL OF ENTRY (SAD500) is: o The Customs and Excise Act 91 of 1964 as amended require it o A check on the product being imported (is it allowed, or not & does it need a permit or not) o The calculation of duties & surcharges aligned to the product by means of the tariff heading used o Valuation control – buying and selling done between related companies – possible price advantage __________________________________________________________________________________ 338 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED o Purpose code – for local consumption, removal in bond, etc Further Import Control Information Whether goods require an import permit or not they still need to be classified correctly to reach a tariff heading decision. Import control regulations are embodied in the Import and Export Control Act No.45 of 1963. The mechanism of control is the "import permit". Goods subject to import control measures may not be imported without an "import permit". In fact, goods for which a permit is required should not be shipped from the exporting country before a valid permit has been secured from the authorities. If goods subject to a permit control arrive at a port in the Republic and there is not valid permit, the importer will have contravened the Act. A permit is valid for the calendar year for which it is issued. Permits may be used for the clearance of goods shipped on or before the 31 December of the year they are issued. Permits allow for a pre-determined Rand value or quantity of goods to be imported during the validity period. This value or quantity is based on information requested of the importer and will relate to previous experience and anticipated import volumes. Supplementary amounts may be applied for if the original allocation is insufficient but there is no guarantee that these will be granted. Importers should take due care in their estimations. Under-utilised permits may jeopardise future applications. The value of imported goods used for permit purposes is the value for duty purposes. Import permits must be submitted at the same time as the bill of entry and Customs verify the amount deducted and the balance outstanding. The Act also allows the Minister holding the portfolio of Trade & Industry to prescribe that goods of a specified class and kind shall not be imported into the country at all. Under its WTO/ GATT commitments, South Africa is obliged to take steps to reduce and/or remove its permit controls as they are contrary to the spirit of the Convention which promotes unrestricted international trade. As it currently stands in the year 2010, very few commodities are subject to import control. Goods Requiring Permits A schedule of the goods which require permits is given in the Import Control Regulations. In addition to this, the Regulations state that all second-hand goods, including waste and scrap of whatever nature, shall not be imported without a permit. The Regulations also give a list of goods for which no import permit is necessary. Three examples of what is included in this list are: •

new spares, subassemblies and materials imported as original equipment for the manufacturing of motor vehicles

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ADVANCED •

certain goods imported from Malawi and Zimbabwe

•

Goods imported as household or personal effects by persons entering the Republic for the purposes of either permanent or temporary residence, but excluding weapons, ammunition, and motor vehicles.

The schedule of goods requiring permits gives a description of the goods, the tariff heading and the reference. The reference is simply the date on which the control was registered in the Government Gazette. Split Permits Manual permits may be issued as a single permit covering the full amount allocated by Import Control or they may be "split" into permits of lesser amounts making up the total. This facility enables importers to have a permit available at more than one port of entry, thus avoiding delays in the event of shipments arriving at different ports at the same time. For example, companies who import by air and by sea will find split permits useful to have. Application to "split" a permit may be done at the time the original permit is applied for or at a later stage. NOTE: With EDI (Electronic Data Interchange) a permit can be assigned to ANY PORT, which allows the system to ’split’ the permit automatically when it is used by ANY port within the customs system. After application for a permit and it is successful – ITAC give a copy to the importer of the permit. The import permit is then sent electronically to customs and gets loaded onto the customs system. The outstanding balances are calculated automatically during the clearing process. There is a report available off the system for importers to see the current status of the permit balance. Other Import Controls Although goods of a certain class or kind may be import permit free, other controls imposed on those goods may mean that the goods are subject to a permit issued by another authority. A good example of this is a police-permit for ammunition. The official “Consolidated List of Prohibited and Restricted Imports” gives details of goods which are prohibited, or require a permit, or must be detained for inspection by some competent authority. In summary, customs tariff headings can be used to ascertain import controls. The information can be obtained from some computer harmonised tariff system, the Jacobson Tariff book, Dept. of Trade and Industry or any other authority bodies applicable. Never forget that customs themselves or the SARS website, customs tab are available to answer any question and increase your knowledge. __________________________________________________________________________________ 340 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

Managing Duties and Tax Import Duties and Value-added Tax It is imperative that the buyer has a good understanding of the different taxes and duties payable imposed by different counties on imported goods. When goods are dutiable, three types of rate may be assessed: ad valorem, specific or excise rates. In addition, Value-added TAX (VAT) is payable on all imported goods. The United Nations Conference of Trade and Development (UNCTAD) formally approved GSP in 1968. Industrialised countries are encouraged to import from the emerging nations by benefiting from their duty-free treatment. Another method is to buy from countries that have MFN status. The most famous of MFN (Most Favoured Nations) comes under WTO (World Trade Organisation) that extends the same Customs and tariff treatment given to countries under MFN. When buying from a country with MFN status, a favourably low duty, usually less than 4% is levied. Antidumping Duties This is a tax imposed for imports to protect the industry when the sellers sell the product less than their fair market value. An antidumping duty may be assessed for imports sold to American buyers at prices less than their fair market value. As an example, a duty fine as high as 213 % was put on imported bearings. Nine foreign bearing makers were selling at about one-third the price in their home countries. The offenders simply reduced their shipments from their home plants. The US Department of Commerce (DOC) rules on dumping, making the price ruling based upon complaints presented. It is difficult to get the DOC to make a dumping ruling. To improve the chances for success of a filed complaint, critics want this authority transferred to the US Trade Representative. Action against dumping is controversial, as seen a recent case of imposing 35 % penalty on Canadian housing shakes. A problem of using duties to protect American industry is that there is always a trade-off penalty paid by the American consumer. A tariff was imposed that would have eliminated $350 million of Canadian lumber exports to the US. Four thousand Canadian jobs would have been cut. While highly unpopular in Canada, it was considered by Americans as an acceptable way to react to severe hardship suffered by American labour. This action generated Canadian debate on punitive counter measures. The final solution to the conflict was a 15 % surtax that was imposed on Canadian lumber dealers by the Canadian government to prevent higher proposed US Tariffs. Though praised as a compromise, this action meant a 15 % increase in cost to US consumers.

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ADVANCED In South Africa, anti-dumping duties are frequently imposed on imports, especially on certain manufactured goods and raw materials manufactured in different Far Eastern countries. The import buyer needs to keep abreast of any applications made to ITAC for anti-dumping duty on those products which the company imports. Essential Import Documentation •

Pro Forma Invoice

This document is used largely for banking purposes. It is an abbreviated invoice sent in advance of a shipment, usually to enable the buying firm to obtain an import permit or an exchange permit, or both. The pro forma invoice approximation of the weights and values of a shipment that is to be made. An invoice is an essential part of a credit and should be made out to whoever applied for credit. Invoices for more than the credit may be refused. The description of goods must coincide with that on the credit. When applying for an L/C, since an invoice is not yet issued, the bank needs a “Pro-forma Invoice” (simply the supplier’s quotation on the same form as his invoice). However, you can “preliminary advice” This is usually a tele-transmission giving brief information of the credit, with details to follow. This starts the L/C paper process. The buyer must see that the supplier/exporter has furnished a complete and accurate commercial invoice. The exporter must sign the invoice, certifying that it is true and correct. This supplier’s invoice states the amount of money and the currency they expect for payment, as well as country of origin. It should reflect all the details of the transaction in English. Poorly issued foreign invoices cause most problems encountered. The information on the “Pro Forma Invoice needs to be accurate and must match that of the supplier’s invoice. •

Packing List

The purchase contract should require a specified number of packing lists to facilitate the identification and movement of the order and checking of containers and contents. The lists should detail the contents with descriptions, weights, and measures, and marking. The shipper places the packing list in a waterproof envelope that is included in or attached to one of the packages. The envelope is marked, “Packing List Enclosed.” Customs officials normally use this packing list document, attached to the custom entry forms, to check the cargo. Your company will use it to receive and inventory the merchandise. In certain claims the packing list will help you facilitate in filing your claims with the shipper carrier. •

Bill of Lading

As in the case of domestic shipments, a bill of lading is a receipt issued by a carrier for merchandise to be delivered to a party at some named destination. These are: •

a contract for shipment of merchandise

•

a receipt of merchandise,

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ADVANCED •

a document of title to the merchandise,

•

a document of freight charges (where indicated),

•

a guide to the carrier’s staff in handling the shipment.

An ocean bill of lading covers the movement of goods by water and may be issued in either a ‘straight’ form or an “order” form. When a straight form is used, the consignee must be named in the bill. When an order form is used, either the consignee or a designee can be named. Steamship lines insist on surrender of an original bill of lading on both straight and order consignments. Air waybills are generally issued by air carriers in non-negotiable form, and the carrier will affect delivery to a straight consignee only. A “clean” B/L when signed by the carrier acknowledges possessions of goods in good condition. An “unclean” or “foul” bill means that the goods are damaged, or the packaging is broken. Any defects are noted by inserted writing by the carrier, such as “damaged boxes.” Carriers may reject shipments that do not meet packaging requirement. When tracing shipments by phone, ask for the shipper’s waybill number, which you will need to trace with the carrier. The bill protects the shipper dollar-wise by declaring exact payment charges. When signed upon receipt, the B/L is important for supporting loss and damage claims. Transit Risks and Claims Settling shipping claims is a problem for most buyers. Take an example where a shipment is four cases short. You must reorder, pay for the goods again, and place a claim with the carrier. The bill of lading is important in settling loss and damage claims. Claims fall into categories known as (a) known loss, (b) concealed loss, (c) known damage, (d) concealed damage, and (e) loss or damage due to delay. •

“Known Loss”

It refers to a loss that the carrier acknowledges up front. It is the simplest claim to settle. Known damage is noticed and acknowledges up front by the carrier when delivered. Such information should be noted on the receipt for goods before signing for receipt. The receiver must legally receive the goods, but this does not prevent a legitimate claim against the carrier for restitution. •

Concealed Loss

It is not apparent when delivered but discovered later. The shipment is in apparent good order and receipt is given. Perhaps the material does not agree with the quantity, implying an error in loading. Or someone has stolen part of the contents. Because the carrier did not have the chance to inspect and acknowledge until later, this is a tougher claim to clear. •

Losses or damage due to delay

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ADVANCED Losses or damage in transit are determined by comparing the actual time versus the normal length of time in transit. The carrier has to deliver within a “reasonable time.” If the carrier can be shown to be negligent, a claim can be made. However, unless a statement is made on the B/L about the urgency of delivery, a claim is almost impossible to collect. •

Certificates of Origin

Certain commodities require a document certifying the country from which the goods originated as distinct from the country from which they were immediately exported. This is called a Certificate of Origin (CoO). This certificate will permit importers to gain duty-free or reduced rate of duty under different trade agreements. There are different percentages specified in different trade agreements for the respective amounts of local content required in order for goods to qualify as originating in a specific country. These are known as Rules of Origin (ROO’s). In order for your imported products to qualify for the lower rate of duty under a Trade Agreement a duly attested CoO must be produced at time of importation. As far as South African importers are concerned, since sanction were lifted post 1994, this country has entered into more Trade Agreements than at any time in its entire history and therefore the international buyer needs to be aware of these in order to ensure that the goods imported attract the lowest possible rate of duty. Environment and Security The Supply Chain Manager must understand supply markets and monitor the supply environment to identify threats. These threats include material shortages due to disruption (terrorist attacks – Sept 11 on the World Trade Centre, political unrest (e.g. in the Middle East) that affect one or more industries that supply the firm. Shortages will affect both the price and availability of purchased materials and supplies. The firm should take actions to minimise the impact of such shortages by monitoring changes in the supply environment. •

Changes in legislation that affects the workplace. Such changes can affect both price and availability. An example is a new Environmental Protection Agency regulation on toxic wastes, which affects one or more suppliers

•

War and other Conflicts. This may disrupt the availability of materials the firm or its suppliers require.

Global Purchasing Organisation (IPO) When an organisation’s purchase in a foreign country or region warrant (e.g., $10Million to $20 Million per year), consideration should be given to establishing an international procurement office (IPO). Such an organisation quickly becomes familiar with qualified sources, thereby expanding the buying firm’s potential supplier base.

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ADVANCED IPO personnel can evaluate suppliers personally, negotiate for price and other terms, and monitor quality and job progress through direct site visits. IPO personnel are in a position to develop and maintain better information on local conditions such as materials shortages, labour issues, and governmental actions than are home base buyers. The IPO facilitates payments to suppliers, provides on-site support at the supplier’s site if problems arise, and provides logistical support. IPOs normally re staffed by expatriates who have worked for the company for a number of years, however with rising cost, companies now tend to look for local staff if available. IPOs normally are established s cost centres, charging 1 to 2 % mark-up for their services. Competition from other channels (foreign trade intermediaries and direct relations) tends to keep the IPOs efficient. The one weakness of IPOs, which has been observed, is their tendency to represent the local supplier’s interests more than those of the home base purchasing team. Capital Purchases Before we end the subject on risks, it may be necessary to discuss on the role of purchasing in capital equipment. There are the associated risks that purchasing need to be aware of: •

There are large sums of money involved

•

The firm's business situation may change during the time that it is waiting for delivery of the equipment

•

Terms and conditions of the purchase are more critical than in production buys

•

Financing of the purchase may be a problem for the buyer's firm

•

Negotiations can become critical enough that management excludes or prevents purchasing from dealing with the supplier

•

The user within the buyer's firm may dominate the negotiations due to its product knowledge

•

The supplier's salespeople have such a vested interest in making the sale that they are more likely to circumvent the purchasing function

•

There is the risk of buying either new or used equipment

The position of investments in equipment as part of a company’s capital structure has an important bearing on the purchase of such equipment. It brings financial departments and policies more intimately into the picture than is the case with the case of production materials. And it has important effects on the real cost, owing to taxes and the possibility of write-offs in the capital account.

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ADVANCED Like all capital investments, major equipment purchases should earn a return. The financial department is basically responsible for analysis of return of investment but purchasing managers should be familiar with the technique. Among the most commonly used methods are: •

Payback method

•

Return on investment

•

Net present value

Conclusion As companies become more globalised, the risks they face are multi-faceted, shaped by different national business regulatory frameworks, different cultures and customs and different business requirements. Firms will need to continually cope with the risks of not only these rules and practices but also the risk of changes. Those that are able to understand the risks and take a proactive stance have a higher chance of survival. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

The role of purchasing is to act as an interface between customer and supplier in order to secure and supply goods and services to both internal and external customers.

China is the world’s oldest civilisation and the 3rd largest country in the world

Floating currencies are the major, freely traded currencies. Free-market forces (with occasional government intervention) set exchange rates

Known Loss – it is not apparent when delivered but discovered later

Losses or damage due to delay – the shipment is in apparent good order and receipt is given

Concealed Loss – Losses or damage in transit are determined by comparing the actual time versus the normal length of time in transit. The carrier has to deliver within a “reasonable time.”

Incoterms® 2010 Rules are internationally accepted commercial terms defining the respective roles of the buyer and seller in the arrangement of transportation and other responsibilities and clarify when the ownership of the merchandise takes place

True

False

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ADVANCED 8

The Harmonised System has nothing to do with the setting of duties which is the prerogative of the importing country

The Supply Chain Manager must understand supply markets and monitor the supply environment to identify threats

As companies become more globalised the risks, they face are multifaceted, shaped by different national business regulatory frameworks, different cultures and customs and different business requirements CHAPTER 17 - GLOBAL PURCHASING ORGANISATION STRUCTURE US: 336713 Demonstrate an understanding of the supply chain environment

PURPOSE: This unit standard will enable learners to demonstrate an understanding of the supply chain environment. People credited with this unit standard will be able to know how to analyse spending and supply markets and identify appropriate supply chain strategies to apply in various circumstances. LEARNING OBJECTIVES: Learner will be able to:  Specify the difference between centralised and decentralised procurement.  Analyse the components and application of total cost of ownership (TCO) principles.  Conduct a supply market analysis.  Identify and analyse the process of selecting and evaluating suppliers. Evolution of Purchasing Structures in Global and International Multinational Corporations (MNC’s) Purchasing has long been considered one of the basic functions common to all organisations. Curiously, only during the past two centuries has purchasing been addressed in trade books and textbooks. For example, in 1832, Charles Babbage addressed the topic in his book “On the Economy of Machinery and Manufacturing”. One of the early books focusing on purchasing was written by H. B. Twyford of the Otis Elevator Company only some eighty years ago. Twyford was prophetic when he wrote: “A (purchasing) staff which is entirely unsympathetic with the particular needs of the users of the material will fail to grasp what is one of the most essential things for their department. They will be dealing with papers and accounts instead of with men and things.” Unfortunately, since senior management’s interest historically has focused on marketing, R&D, finance, and operations, purchasing has all too frequently been subordinated to these familiar functions. With many notable exceptions, those individuals historically assigned to purchasing had neither the skill nor the aptitude to develop this function in a way that it contributed fully to the __________________________________________________________________________________ 347 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED success of the organisation. Ironically, during this period, purchasing was responsible for a signification portion of the cost of goods sold. Purchased materials were the source of a large share of the firm’s quality problems. In many cases, purchasing had more impact on the bottom line than did any other function. During the 1960s and 1970s, purchasing and materials management frequently used manual “kardex’ systems to manage inventory. The buyer’s major focuses were purchase price and the prevention of line shutdowns. The typical department had a series or senior or junior buyers, clerks, an expeditor, a purchasing manager and perhaps several purchasing supervisors, depending on the size of the firm. Then the world of procurement changed. By the end of the 1970s, the market place had become more international from both marketing and supply point of view. Joint ventures and the quest for world trade growth have led to the emergence of the “global corporation.” Computers began to help in the management of inventory. Also, the cost of material had become a more important topic as oil embargoes and inflation drove unit costs up. Companies faced tough domestic and foreign competition. An example is the auto industry in USA faced competition from the Japanese imports. The US auto industries have to close plants, lay-off employees, and fought to survive. The US auto industry moved offshore to Canada, Brazil, Australia, Mexico, and many other countries. They sought help from the Department of Trade and sought imposition of quotas. Japan invoked their “voluntary quotas” to forestall imposition of formal quotas. Offshore organisations expanded their form. Each of the Big 3 automakers has joined forces with a Japanese producer. Chrysler owns part of dominant partner Mitsubishi Corporation. Chrysler builds in the United States, but on a Mazda chassis. In turn, Mitsubishi Corporation is a 15 % owner of Korea’s Hyundai. General Motors and Toyota have similar arrangements. These transitions brought about significant changes in purchasing. Purchasing and materials management began taking a more important role within manufacturing, institutions, service forms and government. During the early 1980s, many organisations became more profitable largely through the careful management of their inventories. These organisations had discovered that inventories cost 25 to 35 % of the value of the items carried, depending on the cost of capital. Computer-generated material management requirement plans (MRP) and improved supplier discipline-including just-in-time inventory – allowed customers to reduce their inventories significantly. New people who were educated in materials, logistics, and computers were recruited into the materials and purchasing function. Purchasing stopped accepting people who could no longer make value-added contributions. “Kardex cards” disappeared and MRP action reports surfaced. The buyer became a person who was functioning with higher levels of authority because of enhanced efficiency of the materials management systems. There was greater recognition that purchasing, and materials management, was positioned to contribute to the financial success of the organisation. Up until this point, when engineering assistance was required to interface __________________________________________________________________________________ 348 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED with a supplier, manufacturing or design engineering would become involved: at that point, such expertise was not employed in the purchasing department. By the late 1980s, material costs made up approximately 60 % of the cost of goods sold in the US. The impact of purchasing managers on company assets became very significant and very visible. The US manufacturing industry (and many service firms) started implementing many systems which had been initiated by the Japanese: Kanban, quality circles, just-in-time, and kaisen (continuous improvement). These changes, coupled with electronic purchasing systems and growing recognition by senior management of the crucial role played by purchasing and supply management, provided the stimulus for more change. Purchasing began to see the need for two types of resources in the organisation: (1) a team of people who manage the operational and tactical activities of purchasing (materials coordinators) (2) supply managers, who are involved in the development of broader policy aspects of the function. Supply managers now participate in new product development and are responsible for selection sources, managing costs, developing, and nurturing supplier partnerships and strategic alliances, and issuing long-term agreements with carefully selected suppliers. Materials coordinators are responsible for placing orders against these purchase agreements keeping the production lines running, and also minimising inventories. At the most progressive organisations, supply managers also are active participants in the organisation’s strategic process. Organisations now recognise supply strategy as a strategic weapon equal in importance to the firm’s marketing, conversion, and finance strategies. These four strategies, when properly integrated, become the organisation’s strategic business plan. Purchasing in the Organisation Structure Where should purchasing be in the organisation structure? This question, which has been dealt by several authors but nobody, has a simple, clear answer. In some cases, the function may not be significant (in terms of the value of goods purchased as a percentage of cost of goods sold) and will be placed in a subordinate position in the hierarchy. The converse is true when the size of purchase expenditure relative to corporate turnover is such that a very senior executive is appointed to control the function, or when key supplies emanate from volatile markets, or when the proportion of the cost of a product, which is bought in, is significant. Between these extremes, on what might be thought of as a continuum, lie many variants. In answering this question, it would help if the different structures are explained. An organisation challenge first emerges when a business expands beyond a single manufacturing location. Establishment of a second plant location does not necessarily affect the marketing operation; after all, it is possible to keep up sales and related activities just as though the company still had a single production operation. However, buying is not quite the same. Management has several __________________________________________________________________________________ 349 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED organisational choices to consider with respect to optimising the purchasing function. Various organisational arrangements accompany business growth. Buying can be done (a) from the original plant with existing people; (b) by new buyers at the second plant reporting to the new plant manager, or (c) back to the purchasing manager at the original plant, or (d) to other top management personnel. There are four basic types of organisation: (a) line, (b) line-and-staff, (c) functional, and (d) committee. In practice purchasing departments are combinations of these four types. Line The concept of line organisation is, of course borrowed from the military. The captain commands the lieutenant; who in turn commands the sergeant, and so on. This is its pure form, may be practical in smaller and medium-size companies. These types of structure entitle a manager to direct work of a subordinate. It is the superiorsubordinate authority relationship that extends from the top of the organisation to the lowest echelon, following the chain of command. The division of responsibilities is quite straightforward. Generally speaking, the Purchasing Manager is responsible for the policymaking as well as the efficient management of the department as an element of the organisation. He usually retains responsibility too, for the most important contracts and purchasing decision. Purchasing Mgr

Assistant Mgr

Buyer

Assistant Mgr

Buyer

Line Organisation The Assistant Manager assumes responsibility delegated by the Purchasing Manger while the buyer deals with other aspects of purchasing. To enhance the purchasing efficiency of purchasing, one common approach to do this by commodity or material group, where each buyer deals with a particular range of items. For example, one buyer may be responsible for raw materials, another for mechanical components and another for electrical/electronic materials. __________________________________________________________________________________ 350 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Apart from the advantage of specialisation in a particular range of goods, this helps to avoid duplication of research and negotiation effort at plant level. It should also facilitate data collection of the company as a whole. It can strengthen the buyer’s negotiating position thorough consolidation of total requirements and can reduce time spent in negotiation. In addition, liaison with suppliers is often improved by this means. Line-and-Staff The line-and-staff is the most prevalent in business and industry. A good example is the purchasing department of the typical large manufacturing concern. The “line” consists of those in command – the Vice President, manager, senior buyers, and buyers. The “staff” is composed of vital specialists who collect and analyse data, recommend policy, work with the line to solve problems, and so relieve line management of much detail. VP

Purchasing Analyst

Purchasing Mgr

Purchasing Cost Analyst

Purchasing Engineer

Buyer

More Complex Organisation Examples of Staff function in the above figure are those of Purchase Analyst, Cost/Analyst and Purchase Engineer. Staff functions and personnel become involved when line managers cannot personally handle all their responsibilities. They cannot delegate management duties; so, a staff assistant is added to help extend the management duties; so, a staff assistant is added to help extend the management function by overseeing specific areas of responsibility. Currently, there is a tendency in business practice to combine the line and staff into a “fused organisation. Under this set-up, staff analysts, for example, because of their knowledge of a particular study, may give instructions to the buyer as needed, whereas that would not normally be expected. Functional Some companies- for example, those that manufacture a broadly diversified array of products or have important functions other than buying-feel that organisation by function is better suited to their particular needs than the ordinary line-and-staff setup. __________________________________________________________________________________ 351 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED A Functional Commodity Buying Organisation is quite common; as it makes no sense to have two or three buyers all talking to say, motor manufacturers. Channelling buys for motors through one individual gives the buyer greater ‘economic voice” in dealings with suppliers. However, to do this in multi plant operations is not simple. Span of Control Span of control is defined as the number of subordinates a manager can directly efficiently and effectively manage. There are two schools of thought around this subject: The Classical View The classical writers favoured small spans-typically no more than six-in order to maintain close control. However, several writers have pointed out that the level of a manager also needs to be considered when determining this span. They argued that as a manager rises in an organisation, he or she has to deal with a greater number of ill-structured problems, so top executives need smaller spans than do middle managers, and middle managers require smaller spans than do supervisors. Why is this span of control important? To a large degree, it determines the number of levels and managers an organisation has. All things being equal, the wider or larger the span, the more efficient the organisation designs. An example can illustrate the validity of this statement. Assume that we have two organisations, each of which has approximately 4,100 operative employees. One organisation has a span of 1 is to 4 and the other organisation is 1 is to 8. There the span for the organisation of 1 is to 4 will 1, 4, 16, 256, 1024 and 4096 while the organisation that have a span of 1 is to 8 is 1, 8,64, 512 and 4096. The wider span would have two fewer levels of management and, as a result, approximately 800 fewer managers. If the average manager made $35,000 a year, the wider span would save over $28 million a year in management salaries! Obviously, wider spans are more efficient in terms of cost. But at some point, wider spans reduce effectiveness. The Contemporary View Management guru Tom Peters recently predicted that Wal-Mart would pass Sears, Roebuck as the number one retailer in the US: “Sears doesn’t have a chance” he said. “A twelve-layer company can’t compete with a three-layer company.” Peters might have exaggerated the point a bit, but it clearly reflects the fact that the pendulum has swung in recent years toward designing flat structures with wider spans of control. More and more organisations are increasing their spans of control. For example, the span of for managers at companies like General Electric and Reynolds Metals has expanded to ten or twelve subordinates - twice the number of ten years ago. The span of control is increasingly being determined by looking at contingency variables. __________________________________________________________________________________ 352 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED For instance, it is obvious that the more training and experience subordinates have, the less direct supervision they need. Therefore, managers who have well-trained and experienced employees can function with a wider span. Other contingency variables that will determine the appropriate span include similarity of subordinates, the degree to which standardised procedures are in place, the sophistication of the organisation’s management information system, the strength of the organisation’s culture and the preferred style of the manager. Where Should Purchasing Report to? The classical writers argued that activities in the organisation should be specialised and grouped into departments. Division of labour creates specialists who need coordination. This coordination is facilitated by putting specialists together in departments under the direction of a manager. Creation of these departments is typically based on the work functions being performed, the product or services being offered, the target customer or client and the geographic territory being covered. The classical writers advocated no single method of departmentalisation. The method or methods use should reflect the grouping that would best contribute to the attainment of the organisation’s objective and the goals of individual units. By Functional Departmentalisation A manufacturing manager might organise his or her plant by separating into common departments. Plant Manager

Mgr Engrg

Mgr Acct.

Mgr. Mfg

Mgr HR

Mgr Purchasing

Functional Organisation Departmentalisation by function can be used in all types of organisation. Only the functions change to reflect the organisation’s objective and activities.

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ADVANCED A hospital might have departments devoted to research, patient care, accounting, Purchasing and Materials and so forth. A professional football franchise might have departments entitled Player Personnel, Ticket Sales, and Travel and Accommodation. By Product Departmentalisation The chart illustrates the product departmentalisation method used at Sun Petroleum Products. President

VP Fuels

VP Lubricants

VP Chemical

Marketing

Planning

Purchasing

Production

Organisation Structure by Product Each major product area in the corporation is placed under the authority of a Vice President who is a specialist in, and is responsible for, everything having to do with his or her product line. Notice, for example, in contract to functional departmentalisation, that manufacturing and other major activities have been divided up to give the product manager (vice president, in this case), considerable autonomy and control. By Geographic Departmentalisation The purchasing function might have been organised into western, southern, Midwest and eastern region where each plant takes care of different process.

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ADVANCED

CEO

VP Purchasing

VP North Region Casting

VP South Region Press

VP Eastern Region Tube

VP West Region Finishing

Organisation with Centralised Purchasing

The Matrix Departmentalisation The functional structure offers the advantages that accrue form specialisation. The divisional structure has a greater focus on results from duplication of activities and resources. If the organisation were to be completely organised around products-that is, if each product the company produced had its own supporting functional structure-the focus on results would again be high. Each product could have a product manager responsible for all activities related to that product. This too, would result in redundancy, however since each product would require its own set of functional specialists. Does any structure combine the advantages of functional specialisation with the focus and accountability that product departmentalisation provides? The answer is “Yes”, and it is called the matrix structure. The matrix structure creates a dual chain of command. It explicitly breaks the classical principle of unity of command. Functional departmentalisation is used to gain economics from specialisation. But overlaying the functional departments is a set of managers who are responsible for specific projects or programs within the organisation. The chart below illustrates the matrix structure of an aerospace firm.

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ADVANCED

Design & Engg

Production

Contract

Purchasing

Accounts

Proj 1

Design Group

ProdGroup

Contracts Group

Purchasing Group

Accts Group

Proj 1

Design Group

ProdGroup

Contracts Group

Purchasing Group

Accts Group

Proj 1

Design Group

ProdGroup

Contracts Group

Purchasing Group

Accts Group

Matrix Organisation Notice that the familiar functions of engineering, accounting, personnel, purchasing and so forth. Along the vertical dimension, however, are added the various projects that the aerospace firm is currently working on. Each project is directed by a manager who staffs his or her project with people from the functional departments. The addition of this vertical dimension to the traditional horizontal functional departments, in effect, weaves together elements of functional and project departmentalisation and hence the term matrix. How does the matrix work? Employees in the matrix have two bosses: their functional departmental manager and their project manager. The project managers have authority over the functional members who are part of that manager’s project team. The purchasing specialists, for instance, who are responsible for procurement activities on the Gamma project, are responsible to both the manager of Purchasing and the Gamma project manager. Authority is shared between the two managers. Typically, giving the project manager authority over project employees relative to the project’s goals does this. However, decisions such as promotions, salary recommendations, and annual reviews remain the functional manager’s responsibility. To work effectively, project and functional managers must communicate regularly and coordinate the demands upon their common employees. The matrix creates an overall structure that possesses the strengths of both functional and project departmentalisation, while avoiding the weaknesses of both. That is, the functional form’s strength lies in putting like specialists together, which minimises the number necessary, and it allows for the pooling and sharing of specialised resources across projects. __________________________________________________________________________________ 356 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Its primary drawback is the difficulty in coordinating the tasks of the specialists so that their activities are completed on time and within the budget. The project form, on the other hand, has exactly the opposite benefits and disadvantages. It facilitates the coordination among specialties to achieve on-time completion and meet budget targets. Furthermore, it provides clear responsibility for all activities related to a project. But no one is responsible for the longrun technical development of the specialties, and these results in the duplication of costs. The aerospace structure shown above illustrates a temporary matrix. Because the projects the organisation undertakes change over time, the structure at any given time is temporary. When new contracts are secured in the aerospace firm, drawing members from functional departments create project teams. A team exists only for the life of the project it is working on. This might be a few months or half a dozen years. In an organisation that has a number of projects, at any given time some are just starting up, others are well along on the way, and still others are winding down. Location of the Purchasing and Supply Function in an Industrial Organisation A firm’s organisational structure reflects management’s basic attitudes towards the major activities involved in its operation. Where should the purchasing and supply function fit in a firm’s organisation structure? A recent study of the Fortune 1000 firms reveals the reporting relationships show below: Percentage Firms

of Purchasing Reports to

34%

President or Executive Vice President

Vice President of Manufacturing

Other Functional Vice President

Other Units

The two most commonly found alternatives are shown below: President

Mgr Finance

Mgr HR

Mgr Engg

Mgr Production

Mgr Purchasing

Organisation Structure of an SME (Purchasing at 1st Level)

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ADVANCED

President

Mgr Finance

Mgr HR

Mgr Engg

Mgr Production

Mgr Purchasing

Organisation Structure of an SME (Purchasing at 2nd Level) Organisation for purchasing and supply management in a single-plant company The nature of purchasing activity permits effective use of the functionalisation concept. Purchasing and supply work divides naturally into five distinctive classifications, each of which encompasses a fairly wide range of activities. In most cases the classifications can be further divided into more specialised task, each of which still involves working with different problems, different products, and different suppliers. This happy circumstance permits the attainment of a high degree of specialisation, without creating motivation problems for most purchasing or supply personnel. The five classifications of work in purchasing operations are: Management Management of the purchasing and supply function involves all the tasks associated with the management process, with emphasis on the development of policies, procedures, controls, and the mechanics for coordinating purchasing operations with those of other departments. On an exception basis, it also involves the management of unique supplier and commodity problems. The Manager or the Chief Purchasing Officer manages this function. Buying This includes a wide variety of activities, such as working with users to help develop requirements and specifications, reviewing requisitions, analysing specifications, investigating suppliers, analysing supplier capabilities, interviewing sales people, studying costs and prices, analysing bids, negotiation, and selecting suppliers. Some firms expanded the buying job and now see it as “supplier management” This additional responsibility involves continuing work with a supplier to improve supplier capability and performance, particularly in the quality area. This function managed by the Senior Buyers/Buyers. Follow-up and Expediting

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ADVANCED Order follow-up activity involves various types of supplier liaison work, such as reviewing the status of orders, writing letter, telephone and faxing suppliers, and occasionally visiting supplier’s plant. This function is also by the Senior Buyer/Buyer. Strategic Planning and Research Work A well-developed purchasing and supply management operation has an unending number of research projects and systems studies requiring specialised knowledge and analytical ability. The more an organisation has progressed toward a supply management focus, the more emphasis it places on these strategic activities. The core activities in this area include economic, industry and supply market studies; development of material buying strategies; development of supply base and partnering; product research and value analysis work; and operating and information systems analysis. The function is managed at corporate level. Clerical Activities Every department must write orders and must maintain working file, catalogue and library materials, and records for commodities, suppliers, prices and so on. The Senior Buyer/Buyer manages this function. The precise manner in which purchasing work is divided and grouped depends on the size of the department, which in turn depends on the size of the company. The size of the purchasing and supply department typically runs somewhat over 1 % of the total company work force in small to substantially less than 1 % in large firms (1.2 to 0.7 % is frequently cited range). In a small company, say 150 employees, purchasing and supply frequently is a two-person department. The manager handles all work in the first four classifications, and an assistant performs the clerical work. As the size of the department increases, additional personnel are usually assigned joint buying and follow-up work. As the department grows, buyers continue to specialise in increasing narrower commodity functions. Eventually, the follow-up and expediting work may be withdrawn from the buyers and assigned to expeditors, who may specialise in somewhat the same manner as buyers. Continued growth often results in the additional of one or more staff personnel who specialise in the various kinds of strategic supply project work. Organisation by Product or Project Few single-plant companies are large enough to support a separate purchasing group for each major product line the firm manufactures. A few large firms making a limited number of major products, however, do organise the total purchasing activity on the basis of product or project. General Motors and the aerospace industry are one of such companies. In such firms each product or project division is largely autonomous and to a great extent operates its own manufacturing facility, complete with all supporting functions.

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ADVANCED The basic objective of this type of organisation is to develop a group of employees whose interests and identification with specific production effort transcend their identification with a functional department. This attempt to motivate individuals and to develop a smoothly coordinated team effort is based on the same reasoning as that involved in grouping buyers’ materials by end use. Viewing the total operation from the standpoint of each product or project manager, this form of organisation permits more effective coordination and control of operating functions contributing to his or her production responsibility. From a strategic management point of view however, this decentralised form of organisation can in some cases possess two disadvantages. First, when the autonomous division uses many of the same materials, savings can be lost through the failure to consolidate requirements and exploit the company’s full buying potential. Second, some duplication of buying effort always exists. Given a fixed number of buying personnel, this means that the firm is not taking full advantage of the potential benefits afforded by increased buyer specialisation that would be possible under a consolidated purchasing effort. The seriousness of these two disadvantages largely depends on the size of the individual product divisions. Organisation for Purchasing Management in a Multi-plant Firm So far, we have only concentrated on a single plant purchasing operation. We now turn to multi-site organisations. A multi plant firm faces one additional organisational question that does not concern most single plant companies. To what extent should the purchasing function be centralised at the corporate level? In practice, virtually every firm answers this question differently. Some firms centralise the activity almost completely, doing the buying for all sites at a central headquarters office. Others decentralise the function entirely, giving each site full authority to conduct all its purchasing activities. Still other firms - the majority of them - develop an organisation somewhere between these two alternatives. Each alternative offers significant benefits that are discussed below. Should Purchasing be Centralised or Decentralised? Centralised as applied to purchasing has two connotations. The first concerns the concentration of buying authority for a single plant within the purchasing department. There are situations where a vital item may be brought by a company official, even the president, because of the serious leverage it could have on the survival of the business. Examples might be hides for a tannery, wood for a paper mill, or lumber for a furniture plant. There are fewer such exceptions today than in past years. In general, most single-plant companies have centralised control of the buying function. The second, more common connotation of the term implies central purchasing control, usually at headquarters, even when there are several plants in different locations, run by division managers. Conversely, a department is said to be decentralised if there are several independent purchasing groups reporting to the individual plant managers and not to one purchasing head. __________________________________________________________________________________ 360 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Either form of organisation can, or does, operate in similar industries; sometimes strong management personalities will influence the choices. There are, however, situations that usually will make one of them more appropriate. Advantages of centralisation: •

economies obtained by consolidating like requirements of all units in the group, thereby improving purchasing strength in negotiation and facilitating supplier relationships;

•

avoidance of price anomalies between group units and of competition between them for materials in short supply;

•

better overall stock management and material utilisation;

•

economies of staffing and clerical effort together with uniformity in procedures, forms, standards, and specifications.

Advantages of decentralisation: •

the local buyer will have a better knowledge of the needs of his particular factory or unit, of local suppliers, and transport and storage facilities.

•

he will be able to respond more quickly to emergency requirements, partially because of the shorter line of communication and partially because he will have a greater awareness of local circumstance than someone sitting many miles away.

•

the local buyer’s direct responsibility to his immediate management will produce better liaison and tighter control by local top management – particularly where they operate as a profit centre. Since materials represent such a large proportion of works cost in manufacturing, a common argument revolves around authority and responsibility. That argument runs: if local management is not authorised, for example, to select and deal with their own suppliers, how can they be held responsible for output which relies so heavily on supplier efficiency?

To minimise one of the major disadvantages of decentralised purchasing, many firms use purchasing councils. In a decentralised operation, a purchasing council is simply a coordinating committee made up of purchasing managers and selected senior buyers from each of the firm’s plant. Council members meet periodically to coordinate policies and buying activities, to consolidate purchases for selected major materials, and to stay abreast of the latest trends and their implications for the corporation. The Eaton Company, headquartered in Cleveland, Ohio, utilises a decentralised purchasing function in its various operating units. It supplements the operation with three different types of purchasing councils - commodity councils, councils for specific issues, and councils for similar business units.

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ADVANCED Eaton’s director of purchasing explains, “We created the council network as a way to bring the business units together from the standpoint of the buying expertise we have in the company.” Trends in Industry While the purchasing organisations of some multi plant firms are found at both ends of the centralisation continuum, most are located somewhere between two extremes. The NAPM study cited earlier found that 60 % of the Fortune 1000 firms employ a combined centralised/decentralised form of organisation, 26 % a centralised form, and 14 % a straight decentralised form. The trend clearly appears to be toward the general type of organisation shown below. This organisation includes elements of both centralisation and decentralisation. Its objective is to reap the major benefits offered by both approaches. Corporate VP Procurement

Policy & Systems Studies

Govt Contract Regulations

Corporate Contract Placement

Economic Ind & Mkt Analysis

Supply Base & Buying Plan Development

Strategic Materials / Supply Planning AVP Purchasing & Supply

Chemical buyer

Metals buyer

Machinery buyer

Common buyer

Construction buyer

Materials A buyer

Functional Authority

Plan 1

Plant 2

Plant 3

Plant 4

Plant 5

Centralised / Decentralised Procurement A centralised purchasing management office is established at the corporate level, with the chief purchasing usually reporting to the president or executive vice president. Duties of the centralised office typically include strategic planning, research, and specialised buying. Economic and industry analyses, technical commodity research, strategic materials planning, systems planning, and government contract regulation work are the most common types of planning and research activities. Buying activities conducted centrally vary widely from firm to firm; however, they focus on the material classifications for which highly specialised buying and requirements consolidation produce the greatest profit. In addition, many of the important long-term contracts are __________________________________________________________________________________ 362 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED negotiated centrally on a company wide basis. Plant purchasing departments then issue orders against these contracts in accordance with their needs. In most cases, the relationship between the central purchasing office and the plant purchasing departments is a “function” relationship. This means that each plant has its own purchasing department, whose manager usually reports directly to the plant manager. By explicit agreement, however, the plant purchasing department relinquishes to the central purchasing department certain planning and buying responsibilities. The central department generally has no line authority over the plant manager of purchasing, but typically it does have the authority to determine specifically which materials will be purchased locally and which centrally. The central department also serves in a coordinating capacity by formulating and enforcing basic purchasing policy and by designing systems and procedures for all the plants. Cross - functional teams Current Status A research study conducted jointly by the Centre for Advanced Purchasing Studies and the Graduate School of Management at Michigan State University revealed that “almost 80 % of the US firms surveyed plan to emphasise the use of cross - functional teams to support procurement and sourcing decisions over the next three years.” Throughout American business today, the concept of drawing on the coordinated expertise of a group of people from different functional areas to investigate and resolve operating issues as a “team” appears to have caught on. In the procurement area, this development clearly will have a long-run impact on the purchasing organisation structure. A research study conducted by two professors from Arizona State University has produced some revealing insights into the current and expected use of cross - functional teams in the purchasing area. Professors Lisa Ellram and John Pearson surveyed 600 members of the National Association of Purchasing Management with respect to cross-functional team participation in 18 activities normally considered to be areas of significant responsibility for purchasing personnel. They asked purchasing manager the extent to which “teams” participated in these activities in 1993 and also the extent to which teams were expected to participate in 1995. The results of showed an average increase of 20 to 40 % increase of activity using crossfunctional team. There is a definite trend toward team responsibility for 18 key decision issues investigated in the study. This does not mean, however, that the purchasing function’s responsibilities are being diminished. The strategic function of purchasing is in fact, is becoming more recognised - for example, the development of material specifications and the firm’s materials standards program. Some of the cross-functions being adopted within the purchasing function are Commodity Teams, __________________________________________________________________________________ 363 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Sourcing Teams, Supplier Performance Evaluation Teams, Supplier Certification Teams, New Product Development Teams. Main Barriers to Cross - functional teams in a Global Organisation While there are successful teams implemented in certain organisation, there are organisations that find it difficult to implement Cross - functional teams. The main barriers are: Cost Cost has been an issue for all organisations. When the economy is doing well, and the company makes profit cost will not be a hindering factor. Cost will arise when the economy is facing a down turn due to external factors. Most, if not all companies will cut back on non-essential spending. Travel is the first budget that will be cut. As the cross-functional team needs funds to fulfil their roles, when travel budget is cut, all the activities will be put on hold until such a time when the budget permits. The use of various virtual meeting teams is however beginning to overcome the need for a large amount of travel. Lack of Support from Senior Management In order for the cross-functional team to be successful, it needs the support of top management. Direction and objective have to be set by top management to provide direction that will enable the cross-functional team to prioritise the activities. Unless top management recognises the benefits that the cross-functional team will bring to the organisation, management will not support it. To be successful, the cross-functional concept must be driven by senior management. Conflict of Interest between Plant Management The resources for the cross - functional teams are drawn from various resources within the organisation, and each part of the organisation has its own objectives. If these objectives conflict with those of the cross-functional team, the resources will not be released to form the cross-functional team until these conflicts have been resolved. Shortage of Manpower There is an ever-increasing need for cost control to achieve product price leadership. Organisations need to be lean. Purchasing needs to manage multiple roles. Work needs to be prioritised. Due to the limitation of resources, team members have limited to time to work on the issues and the objectives of the team. Results may not meet the expectations of certain plant managers. As such, management is reluctant to allocate new resources to the teams. Cross - functional teams are complex and dynamic; teamwork is sensitive to all aspects of organisational environment. Like the mighty oak, teamwork grows slowly, but on occasion it __________________________________________________________________________________ 364 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED declines quickly, like the same oak crashing to the forest floor. For example, too many changes and personnel transfers interfere with group relationships and prevent the growth of the crossfunctional team. A good example of the effect of personnel changes on teamwork is the following: An international company builds a new plant in a community of about ½ million people where it already had three operating plants doing relation work. The new plant was staffed for the most part by new hires, and within a short time excellent teamwork and productivity developed. In about three years there was a moderate layoff affecting all four plants. Since layoff was according to seniority among the four plants and since employees in the new plant had least seniority, people from the other plants forced new-plant employees into layoff. As a result, most teams in the newest plant received three to five transferees from other plants (about 25 to 50 % of the team). As a result, teamwork was disruption and deteriorated quickly. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question

True

Purchasing is not considered one of the basic functions common to all organisations

Kanban, quality circles, “just-in-time” and kaisen improvement) were initiated by American companies

Supply managers now participate in new product development and are responsible for selection sources, managing costs, developing, and nurturing supplier partnerships and strategic alliances and issuing longterm agreements with carefully selected suppliers

Purchasing is the only role that should be cross-functional

An organisation challenge first emerges when a business expands beyond a single manufacturing location

More and more organisations are increasing their spans of control by creating more hierarchical structures

One of the advantages of centralisation of purchasing is the economies obtained by consolidating like requirements of all units in the group, thereby improving purchasing strength in negotiation and facilitating supplier relationships

False

(continuous

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ADVANCED 8

One of the advantages of decentralisation of purchasing is that the local buyer will have a better knowledge of the needs of his particular factory or unit of local suppliers and transport and storage facilities

Cost is one of the main barriers to cross-functional teams in a global organisation

The resources for the cross-functional teams are drawn from various resources within the organisation and each part of the organisation has its own objectives. If these objectives conflict with those of the crossfunctional team the resources will not be released to form the crossfunctional team until these conflicts have been resolves

US: 336711

CHAPTER 18 - GLOBAL PROCUREMENT OPERATIONS Demonstrate an understanding of the key elements in developing strategies to optimise operational supply

PURPOSE: This unit standard will enable learners to demonstrate an understanding of the key elements in developing strategies to optimise operational supply. LEARNING OBJECTIVES: Learner will be able to:   

Analyse the influence of an organisation's strategy on the performance, supply chain and operational process types. Evaluate the implications of pursuing specific performance objectives. Assess key aspects influencing market and customer profiling.

Key Success Factors in Global Operations and Benchmarking Practices A firm has two categories of suppliers: (1) the firm itself and (2) outside suppliers. Prior to addressing this issue, world class-firms conduct a strategic analysis of what their core competencies are – the skills and processes, which are the basis of their success and competitive advantage. Item 1 is the success factor of the company and item 2 are the process for a successful global sourcing strategy. Success Factors in Global Operations Early Purchasing and Supplier Involvement In many progressive firms, a team representing a number of functional areas conducts the design of new products. Product planning, design engineering, reliability engineering, __________________________________________________________________________________ 366 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED purchasing, manufacturing engineering, quality, finance, field support, marketing, and frequently, carefully selected suppliers. Anecdotal evidence indicates that the development of new products by such cross-functional teams and the use of concurrent engineering (a process in which functional specialists execute their parts of the design as a team concurrently instead of a separate department serially) have the potential of significantly improving three key issues: time, quality, and cost. The turnaround of many troubled manufacturers during the recent decade was the result of replacing departmental walls with teamwork among those who should be part of the design process. The lack of effective, cooperative teamwork among the groups noted frequently has been accompanied by quality problems, cost overruns, forgone all-in-cost, major scheduling problems, and new products which are late to enter the market place. Extensive redesign, rework, and retrofit operations are common when operating in the traditional functional mode. Cost overruns and forgone cost savings frequently result when the designers (or the design team) fail to consider the supply base’s design, manufacturing, quality, and cost capabilities. For example, during the early 1980s, design engineers at GE’s Jet Engine Division frequently designed materials to be purchased from outside suppliers under the mistaken belief that the outside suppliers had the same manufacturing and process capabilities as GE. In fact, this was not the case; outside suppliers frequently did not possess the same equipment and process. The results were cost growth and schedule slippages as the suppliers, through a trial and error process, attempted to meet GE’s specifications. Frequently, it became apparent that these specifications could not be met, and costly and timeconsuming processes of reengineering would be required. Having a Good Supplier A good supplier is an invaluable resource to the organisation requiring its product or service. Such suppliers make a direct contribution to the firm’s success. They can assist their customers with product development, value analysis, and timely delivery of the desired level of quality. Good buyer-seller relationships facilitate the buyer’s efforts to gain superior performance, extra service, cooperation on cost reduction programs, and a willingness to share in the new processes and procedures. Development and Maintenance of the Supplier Base An adequate supplier base is essential to the economic wellbeing of a firm. Such a base is as much a resource as are research scientists or skilled production personnel. The supplier base is especially critical in high-technology industries and in industries where scarcity of materials is a potential occurrence. Whether the supplier base is single or multi sources is a controversial subject. Some buyers argue that multiple sources reduce risk while increasing costs. However, the major thrust has __________________________________________________________________________________ 367 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED been quality guru Edward Deming’s advocacy for using just one supplier. He claims that you are lucky if you get one company who can make what you want. Also, some American automakers who sole source say the practice cuts down on component dimensional variability. With fewer suppliers, they claim to be able to work more closely in meeting design and quality requirement. Another example, Xerox reduced its supply base by 92 % in the early 1980s – from 5,000 to 400 suppliers. Determination of the optimal size of the supply base is a strategic issue. Quality, cost management, technology access and the firm’s ability to substitute the management of supplier relationships for the effects of market place competition drive the supply base strategy. Sources of information concerning suppliers are plentiful. They are: •

Supplier purchasing information file

•

Supplier catalogues

•

Trade registers and directories

•

Trade journals

•

Yellow pages

•

Filing of mailing pieces

•

Sales personnel

•

Trade exhibition

•

Company personnel

•

World wide web

•

Other purchasing and supply management department

The Importance of Supplier Goodwill Business has long recognised that customer goodwill is a valuable asset. A company develops customer goodwill by selling acceptable products at a fair price, supported by good service with the customer’s interest in mind. The buying firm develops supplier goodwill by being open, impartial, and scrupulously fair in all its dealings with suppliers. A company’s purchasing organisation is able to motivate the supplier by completely understanding the mutual advantage of a continuing relationship. Such a relationship permits the supplier to learn the intricacies of the buyers’ operations, and vice versa. The supplier learns about the buyer’s business problems - manufacturing, inventory, receiving, and overall operational problems. As the relationship develops, the supplier typically can reduce its direct selling effort; consequently, it can afford to direct additional effort to the study of mutual problems that will reduce price. __________________________________________________________________________________ 368 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The end result of good supplier relations is a meshing of the operations of both companies. The seller’s production and distribution facilities in reality become an extension of the buyer’s production line. Partnerships A supply partnership is a collaborative relationship between a buyer and seller that recognises some degree of interdependence and cooperation on a specific project or for a specific purchase agreement. Long-term supplier partnering agreements encourage suppliers to invest research and development dollars in order to propose technologically current, cost-effective, and high-quality solutions to the buying firms’ needs. Properly priced life-of-product agreements encourage suppliers to invest in the equipment, training, and appropriate management systems required to be an efficient, low-cost producer. The buyer benefits from such an agreement in many ways: low “all-in-cost” (total cost), a dependable source of supply, and a partner familiar with his or her needs. Success Factors in Benchmarking Definition of Benchmarking Benchmarking is the process of determining who is the very best, who sets the standard, and what that standard is. In baseball, you could argue that seven consecutive World Series Championships made the New York Yankees the benchmark. If we were to benchmark "world conquest", what objective measure would we use to compare Julius Caesar to Adolph Hitler, Genghis Khan to Napoleon? Which of them was the epitome, and why? We do the same thing in business. Who is the best sales organisation? The most responsive customer service department? The leanest manufacturing operation? And how do we quantify that standard? Usually benchmarking is possible on the following types of activities: •

Internal processes, performance, and people

•

Competitive activities, within a company’s industry or business

•

Functional activities

•

Non-competitive activities, outside a company’s industry

Phases of National Association of Purchasing Managers (NAPM) Benchmarking NAPM defines three phases in the benchmarking process, and these are outline as follows: Phase I The usual way to begin is to have a benchmarking team that decides what to benchmark. The team collects and analyses the data and evaluates a way to monitor processes on a continual basis. The team also gathers purchasing performance benchmarking reports from selected companies Phase II __________________________________________________________________________________ 369 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED This phase consists of identifying the “best-in-class,” by selecting organisations reasonably compatible. For example, a bank’s purchasing management will want to compare other bank’s practices Phase III The last phase is optional visits to best practices sites. Each participant can judge how best to use the reports within his company. Among benefits reported is the ability to take process improvement action. The success factors in benchmarking are as follows: a.

The dollar value of the specific purchase must be large enough to justify the expense, to both and seller, that accompanies this method. It does not make economic sense to carry out benchmarking when the volume does not justify the expense. There has to be sufficient volume to entice the supplier to bid for the business and the buyer must be able to obtain a fair value for the work involves.

b. The product or service to be purchased has clear specifications for benchmarking and the specifications are explicitly clear to both buyer and seller. In additional, the seller must know from actual previous experience, or be able to estimate accurately from similar past experience, the cost of producing the item or rendering the service. In the benchmarking exercise the buyer is able to provide material specifications, tolerances, standardisation, order sizes, process changes in supplier’s manufacturing, packaging needed, inventory stocking, mode of transportation and assembly changes in buyer’s plant as when the assembly is needed. c.

The market must consist of an adequate number of sellers. There are sufficient sellers who are willing and able to offer a fair market price. How many suppliers are needed will depend on the business needs? Most successful benchmarking exercises have a minimum of 5 suppliers responding to the exercise. This will enable the buyer to short-list the supplier base if needed.

d. The sellers that make up the market must be technically qualified and actively want the contract. Frequently, success factor 1 to 3 prevails, yet there is no real competition because the suppliers are not anxious to bid. Backlogs of work in some potential suppliers’ plants may prevent competition. Under such circumstances, additional orders would entail overtime operation and its attendant problems of scheduling difficulties and premium wage payment. Under such circumstances, if bids are made at all, they are at prices that include numerous contingencies. The buyer will not be able to determine a fair market price. e.

The time available must be sufficient for using this method of pricing – suppliers competing for large contracts must be allowed time to obtain and evaluate bids from their subordinates before they can calculate their best price. Bidders must also have time to perform the necessary cost analysis required within their own organisation and to assure

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ADVANCED themselves of reliable sources of materials. The time required for preparing, mailing, opening, and evaluating bids is usually considerably longer than those unfamiliar with this system would expect. Thirty days is not an uncommon timeline. In addition to the above, benchmarking should not be conducted where the following circumstances prevail: a.

Situations under which it is impossible to estimate costs with a high degree of certainty. Such situations frequently are present with high-technology requirements, with items requiring a long time to develop and produce, and under conditions of economic uncertainty. An example is the defence industry where a trial-and-error specification are needed before a final decision could be made to accept the final product.

b. Situations under which price is not the only important variable. For example, quality, schedule, and service may well be negotiable variables of equal importance. c.

Situations under which the purchasing firm anticipates a need to make changes in the specification or some other aspect of the purchase contract. When unscrupulous suppliers anticipate changes, they may “buy in” with the expectation of ‘getting well” (and even wealthy) on the resulting changes.

d. Situations that special tooling or set-up costs are major factors. The allocation of such costs and title to the special tooling are issues best resolved through negotiation. The Process of Global Sourcing The first phase of the global sourcing process in determining what to buy is the most critical of the process. Some 80 % of the total cost is either designed in or excluded during this phase. Professional sourcing, pricing, and contract management may be able to affect some savings of both cost and time, but usually no more than 20 % of the total available through sound procurement. We have learned that when purchasing is not involved from the beginning of the sourcing process, this would result in cost overruns, foregone savings and scheduling problems resulting from late delivery of required parts. Purchasing is moving to earlier involvement in the new product development process because of the important contributions it can make in the area of quality, cost, and timely market availability. This will be covered in a later chapter. The Concept of Strategic Processes for Value Creation – Segmentation and Outsourcing This topic covers two parts. The first part is how management arrives at a decision whether to outsource and the channels available for outsourcing. The term “outsourcing” is evolved from the “make or buy” decision. Is it an extension to include the “buy” side issue? When a firm considers which components or subsystems it should make and which it should buy, it should analyse the issue at two levels – strategic and operational or tactical. The strategic, obviously, is the more important of the two as far as the future of the firm is concerned. __________________________________________________________________________________ 371 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Strategic Decision The starting point that most firms use in conducting the strategic analysis is to identify the major strengths of the firms – and then build on them. What is it we really do well – better than most firms? Do our strengths lie in certain design skills, unique production skills and equipment, different types of people skills? A thorough investigation of these types of questions is what many people today call identifying the core competencies. The next step in the process is to look at the current and expected future environment in which the firm operates – the competition, and the governmental regulatory climate, the changing characteristics of sales and supply market, and so forth. The key question that needs to be answered is “Precisely what business do we really need to be in to maximise the use of our core competencies as we proceed into the future? In considering what to make and what to buy, the decisions should cultivate and exploit the firm’s core competencies. The items that should be made in-house are those that require capabilities that are closest to the core competencies which separate the firm from its competitors. This is the fundamental strategic consideration that guides the original make-or-buy decisions, and which ultimately shapes the character of the firm. A rule of thumb used by some firms to determine whether to outsource subsystems and components falls into three categories: •

An item that is critical to the success of the product, including customer perceptions of important product attributes

•

An item that requires specialised design and manufacturing skills or equipment – and the number of capable and dependable suppliers is extremely limited

•

An item that fits well within the firm’s core competencies or within those the firm must develop to fulfil future plans.

Components or subsystems that fit into one of these categories are considered strategic – and are produced in-house if possible. The analytical procedure used in making these decisions is straightforward and is shown in the following simplified illustration. 1. The product itself No

Outsource

Yes

Further analysis required

Is it strategic?

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Can the subsystems

ADVANCED

If the analysis at this point indicates that, a ‘make” decision is desirable, from a strategic point of view, before the decision is made, several additional factors must be analysed. These practical considerations focus on a comparison of the firm’s present situation with that of potential suppliers with respect to the matters of design, manufacturing, and quality capabilities. Similarly, relative costs and volume also need to be compared and evaluated as supplementary information to be used in conjunction with the strategic analysis in reaching a final decision. Tactical Decision Although the decision may be to make in house, certain operational considerations have to be considered before a final decision can be effected. Changing sales demands, restricted capacity and the modification of an existing product are just a few of the operating factors that generate these needs to be outsourced. These investigations tend to be driven by operating considerations of efficiency, control of quality and reliability, cost, capacity utilisation and so on. In short management should ensure that the decision is made only after all the relevant inputs have been evaluated. Once the decision has been reached to outsource and to help determine if components or subassemblies are candidates for global sourcing, ask the following questions: •

Does it qualify as “high-volume” in your industry?

•

Does it have a long life (two to three years)?

•

Does it lend itself to repetitive manufacturing or assembly?

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ADVANCED •

Is demand for the product fairly stable?

•

Are specifications and drawings clear and well defined?

•

Is technology not available domestically at a competitive price and quality?

If the answer to all six questions is “yes”, then the buyer may want to evaluate the support network within his or her firm, asking the following questions: •

Is there engineering support to efficiently facilitate engineering change orders when they do occur?

•

Will the buyer be able to allow sufficient time to phase out existing and “pipeline” inventory?

•

Will the buyer’s firm take the responsibility for providing the necessary education and training for those that will have to interact with and support foreign suppliers?

•

Is the firm prepared to make a financial commitment for expensive trips to the supplier?

•

Is management willing to change the approach; is some cases even the policy, of how business and related transactions are conducted?

•

Is the buyer aware of the environment – i.e. current and forecasted exchange rates, general impact of tariff schedules, available technologies, and products from other countries, as well as their political climates, and leading economic indicators both in the locally and abroad?

If the answers to both sets of question are all positive, globally sourcing may be a realistic possibility for the buyer. A significant number of negative responses indicate the potential for real problems if a globally sourcing arrangement is developed. Before a positive decision is made, however, the buyer needs to explore several issues with top management. First, do the required procedural and policy changes mesh satisfactorily with the firm’s existing mode of operations? More important, is the globally sourcing concept and its underlying rationale compatible with the firm’s long-term plans? It is important that the program contribute positively to achievement of the firm’s long-range goals – and that the commitment to be made as something more than a short-term strategic decision. Supply Channels Once a decision has been made to consider goods for globally sourcing, the step is the selection of trade intermediaries. Selection of the appropriate intermediary is a function of availability and of the services required. The buyer who is venturing into globally sourcing is well advised to solicit the advice of colleagues from the local purchasing management association. Some typical intermediaries are as follows: __________________________________________________________________________________ 374 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED Import Merchants Import merchants buy goods for their own account and sell through their own outlets. Since they assume all he risks of clearing the goods through customs and performing all the intermediate activity, their customers are relieved of import problems and, in effect can treat such transactions as domestic purchases. Commission Houses They usually act for exporters abroad, selling into the country and receiving a commission form the foreign exporter. Such houses generally do not own the goods which they import, although they handle many of the shipping and customs details. Agents or reps Are firms or individuals representing international sellers? Since the seller pays their commission, their primary interests are with the exporter. They generally handle all shipping and customs clearance details, although they assume no financial responsibility of the principals. Import Brokers They act as “marriage brokers” between buyers and sellers from different nations. Their commissions are paid by sellers for locating buyers and by buyers for finding sources of supply, but they are not involved in shipment or clearance of an order through customs. They may also act as special purchasing agents for designated commodities on a commission basis. Like agents, import brokers do not assume any of the seller’s fiscal responsibility. Trading Companies They are large companies that generally perform all the functions performed individually by the types of agencies previously listed. The worldwide operations and know-how of such firms offer significant advantages and convenience. The use of Japanese trading companies is particularly advantages to importers since the Japanese government exercises a high degree of control over their operations. Standard directories and trade publications list such firms, their capabilities, and areas of service. Subsidiaries Steinmüller South Africa, and Hitachi South Africa, are examples of representative offices that have been established by international manufacturers to facilitate international sales in South Africa. They are staffed with people who speak some of the local languages. They serve to buffer the buyer from both language and time zone problems. They offer to set prices in SAR and deliver the material to the buyer with all duties paid. Unfortunately, they are remote from the manufacturing and marketing decision makers and can be blockers in the flow of technical information. One experienced international authority finds that these subsidiaries add 5 to 35 % for their services. __________________________________________________________________________________ 375 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED International Procurement Offices When an organisation’s purchases in a foreign country or region warrant it (e.g. $10 million to $20 million per year), consideration should be given to establishing an international procurement office (IPO). They are familiar with the sources, thereby expanding the buying firm’s potential supplier base. They can evaluate suppliers’ performance, negotiate prices and other terms and condition, monitor quality and job progress IPOs’ normally are established as cost centres, charging a 1 to 2 % mark-up for their services. Competition from other channels (foreign trade intermediaries and direct relations) tends to keep the IPOs efficient. Direct Purchasing Dealing directly with the supplier usually will result in the lowest purchase price (including transportation and import duties). It eliminates the mark-ups of international trade intermediaries. This does however require an investment in travel, communications, logistics, and many other costs. Direct relations with the supplier should be undertaken only after carefully conducting a cost/benefit analysis. Direct purchasing requires the involvement of the company in all aspects of these transactions; when properly conducted, it eliminates the added profit of the middleman. Outside agencies may be engaged to perform specialised services. For example, customs brokers can be used to handle entry requirement, export brokers to handle foreign clearances, and freight forwarders to arrange transport. Such agents do not take title of the goods. They are used by most direct purchasers who scale of activities does not warrant such in-house capability. Third-party/Contract Logistics Services Outsourcing Strategy The use of third-party logistics 3PL essentially converts fixed costs to variable costs, by Outsourcing a function and relying on the provision of services from the market rather than in-

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ADVANCED house provision. Key Drivers for Outsourcing Logistics Services However, in the same survey, it is interesting to see that shippers rarely outsource all their logistics operations to 3PL. Only 14% of respondents said that they outsource 80-100% of their total logistics operations, while 34% use 3PLs for between 40 and 80%. Overall, 1 in 4 respondents outsources less than 20% of their logistics operations to 3PLs.

Outsourced Services Distribution The figure below illustrates some of the common pros and cons when evaluating an

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ADVANCED outsourcing strategy from the strategic, financial, and operational perspectives. Outsourced Pros and Cons

What NOT to do when Outsourcing DON'T consider outsourcing itself as the strategy. Outsourcing is a tactic to achieve your logistics strategy; It is not the strategy itself. If you consider outsourcing as a strategy, you have not looked at the total picture. DON'T outsource what you do not understand. One of the biggest reasons for failure is that the outsourcing company does not totally understand what they are outsourcing. Many companies try to outsource problems but do not know the solution to the problem themselves it is unrealistic for them to expect the provider to find a solution in the short term. DON'T make the outsourcing decision in a vacuum. In some cases, the top logistics or operations executives making the outsourcing decision do not include lower level managers in the decision-making process. Those people who are closest to the operation may have some requirements that are critical to consider when evaluating a 3PL. They may also have a different perspective on what to look for in a 3PL. Executive-level people are furthest from the action; they cannot make the outsourcing decision in a vacuum. There should be a single outsourcing vision throughout the company that everybody buys into and has input into forming. DON'T neglect to document your requirements. Whether or not you issue a formal RFP; even if you think you know the 3PL you want to work with, first document your requirements. The exercise not only provides an opportunity to spot glitches in the system, it also forces everyone to take a comprehensive look at your operation. Documenting your requirements enables you to give potential providers the greatest amount of insight into your operation. The more information you provide the 3PL about what it takes to make the operation work, the more successfully the 3PL can respond to your needs. While most companies will not knowingly provide a 3PL with bad data, they may provide information that is incomplete or inaccurate because that is the best data they have. In addition, critical sources of information such as operations personnel out in the field may not be asked to provide data, as they are left out of the outsourcing process. As a result, it is common for the provider to discover that the job it bids on is not the work it winds up doing. The gap can be significant. That is why agreeing to a clause in the contract that allows the partners to reopen rate negotiations if, after six months of working together, the account profile is off by 150 % or more. DON'T skimp on the selection process. Some users rush into outsourcing, and do not invest the necessary time for evaluation and selection. Evaluating 3PLs is a very time-consuming project. __________________________________________________________________________________ 378 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED That is why many consultants suggest narrowing an initial long list of perhaps eight to 10 providers down to a short list of three to five providers, at which you take a really hard look. You need to evaluate their responses, go on site visits, and talk to the people who manage those facilities. Check references carefully. In addition to talking with clients the 3PL gives you, see if you can identify and talk with other clients, too, so that you can get a true picture of the provider's performance. It is understandable and expected that there have been some problems. What has important is how the problems were handled, and whether they were resolved. If technology is to be a key part of the relationship, do a conference room pilot, as not every system will give you what you want. DON'T overlook lesser-known providers. There are a lot of lesser known very strong third parties that are all about serving their customers well, but they may get overlooked by companies that consider only the best-known providers. Just because you have not heard of a provider does not mean it cannot supply you with very good service. DON'T expect the moon and the stars. While 3PLs can improve your logistics and supply chain capability and performance, they generally do not perform magic. Yet users, particularly those new to the outsourcing process, may have unrealistic expectations that are difficult to achieve. One of the biggest mistakes that users make is in believing that outsourcing to a third-party is always going to save them money. For some companies with logistics costs that are higher than reasonable, the 3PL can come in and reduce operating costs. But for companies with solid logistics operations, a 3PL can provide better logistics competencies but may not necessarily achieve savings such as a cents-per-case reduction. To avoid getting off on the wrong foot, make sure that you are realistic in your expectations regarding savings and service. DON'T expect problems not to occur. Even in the most successful relationship, difficulties are bound to crop up. Anticipating the types of issues that may occur can enable you to talk through potential solutions before you need them. DON'T overlook the importance of the relationship. Despite all the sophisticated systems that are an integral part of logistics today, outsourcing is still a personal relationship. Forming and nurturing a solid relationship provides a strong foundation that can help you get through the rough spots with your logistics partner. Invitation to Tender (ITT)/Request For Proposal (RFP)/Request For Quotation (RFQ) The major part of the contractor selection process revolves around the provision of detailed data and information to the short-listed companies, which they then use to develop a plan and cost the proposed operation. These responses are then compared by the user company to enable them to identify a limited number of companies with which to complete the final negotiations. This process is based on a very important document, known as the Invitation to Tender (ITT), the Request For Proposal (RFP) or the Request For Quotation (RFQ). There are two main objectives for the ITT. __________________________________________________________________________________ 379 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED To provide a specification of business requirements to selected vendors in a standard format to facilitate objective comparison of proposals and to maintain equitable flow of information across all tenderers and establish total confidentiality rules. The data to be provided with the ITT should be at a sufficient level of detail to allow the contractor to undertake adequate analysis to calculate the resources required to run the operation and to identify all the associated costs. As might be imagined, this is a lot of data! Again, this will vary depending on the services required, but typical distribution data is likely to include those elements outlined in

the figure below. Typical Data for an RFQ (Logistics)

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ADVANCED

Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

In many progressive firms a team representing a number of functional areas conducts the design of new products

A firm has two categories of suppliers: 1. The firm itself, and 2. Outside suppliers

A good supplier to the organisation requiring its product or service is easy to replace

The buying firm develops supplier goodwill by being open, impartial, and scrupulously fair in all its dealings with suppliers

An item that is critical to the success of the product including customer perceptions of important products attributes should be outsourced

An item that requires specialised design and manufacturing skills, or equipment and the number of capable and dependable suppliers, is extremely limited and should be outsources

An item that fits well within the firm’s core competencies or within those the firm must develop to fulfil future plans must not be outsourced

The use of third-party logistics 3PL essentially converts fixed costs to variable costs by outsourcing a function and relying on the provision of services from the market rather than in-house provision

Outsourcing is a tactic to achieve your logistics strategy. It is not the strategy itself. If you consider outsourcing as a strategy you have not looked at the total picture

The data to be provided with the ITT should be at a sufficient level of detail to allow the contractor to undertake adequate analysis to

True

False

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ADVANCED calculate the resources required to run the operation and to identify all the associated costs.

CHAPTER 19 - GLOBAL STRATEGIC SUPPLIER MANAGEMENT 252267 Negotiate with Suppliers PURPOSE: This chapter is intended for people who work in the buying/planning function of an organisation. They are responsible for setting the selling prices of stock for re-sale. Their negotiation could be for any reason such as price/deal negotiation, delivery, payment terms, designs etc. LEARNING OBJECTIVES: Persons will be capable of:    

Describe processes & principles used when negotiating with the suppliers. Plan to negotiate with the suppliers. Negotiate with the suppliers. Review negotiation with the supplier.

Introduction Global sourcing capabilities and competencies are greatly influenced by the level of Supplier Intelligence received by the company. In a Benchmarking Report conducted by the Aberdeen group, manager’s report that they would be likely to buy the following services to support their global sourcing activities: •

Supplier discovery

•

Landed cost intelligence and calculation services

•

Supplier capability information

•

Supplier qualification services

•

Supply market/region intelligence

•

Global sourcing strategy development assistance/advice

•

Supplier site assessments

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ADVANCED It is understandable that if a company wants to source globally, expertise of the geographic region from which the new suppliers originates would be vital for the analysis regarding security of supply.

Survey of Services The thrust of supplier intelligence is to be able to identify a good quality supplier. Supplier references and performance metrics such as on-time delivery and purchase costs only tell part of the story. Good suppliers do a lot more: become a true partner; deliver innovation; provide market intelligence; and provide superior service. These are the attributes that cannot be measured from conventional databases. Smart organisations greatly value good suppliers and therefore continually gather intelligence about supplier performance through internal and external assessment. Our supplier intelligence tools provide a wealth of intelligence on who to measure, what to measure and how to measure. Examples of some of our Supplier Intelligence applications are: •

Supplier Performance

•

Supplier as a Partner

•

Supplier Rankings

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ADVANCED

Survey on Vendors A survey from the Aberdeen group reveals that majority of companies obtain intelligence gathering from consulting firms and contract manufacturers, following by e-sourcing software vendors. Sources of Supplier Information Sources of Supplier information are classified in three categories: •

Public

Sources such as Internet resources (Hoovers, CNN FN, Bloomberg, Platts) are available on-line. International and Local newspapers provide information, which may not be available elsewhere, but may be too generic in nature, or sporadic with no continuity. Source

Region

Focus

Purchasing Magazine

Monthly transaction Steel price forecasts Non-ferrous Metals

Producer Index

Price US/UK

Monthly index selling prices

Sample Categories

of Chemicals Rubber and plastic products

Bureau of UK Transportation Statistics

Monthly airline fuel Airline Fuel cost and consumption

Energy Report

Quarterly Report Coal Pricing for Industrial Gas Energy Electricity

Pricing UK

Sources of Information •

Industry Specific

Trade magazines, industry newsletters, and lately the advent of the Internet has created numerous specialised intelligence reports for both suppliers and buyers in the specific market. Trade magazines mainly focus on company updates such as mergers and acquisitions, recently won business etc. Information with regards to supplier collaboration with customers is __________________________________________________________________________________ 384 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED commonly shown, and there is normally a strong focus on market demand and supply of particular commodities or products affecting the industry. Trade magazines tend to discuss current events and news. Specific supplier information is not readily available all the time, but there may be detailed studies from time to time on one specific supplier. Some common Trade Magazines in industry are: ERJ – European Rubber Journal ICIS LOR – Chemicals Prices CAN – Asia Chemical News Platts – Special Reports •

Proprietary

Customised news alerts such as Dow Jones, Bloomberg etc. fall into this category. Customers pay for focused intelligence reports on a particular industry such as securities analyst’s reports, or monthly news alerts on the latest issues. Ratings on predicting the performance of suppliers’ financial performances are common. Benefits of supplier performance data and timely data reporting implies that customers can afford a more in depth and focused intelligence gathering to allow them to make better decisions. Unfortunately, these data sources are expensive and perhaps only the larger companies can justify access to such data. Examples include: Company

Industry

Region

Pricing Information

Market Intelligence

Converge

Electronics

Global

Yes

Energy Argus

Energy

US/Europe

Yes

Energy Information Centre

Oil, Gas, Electricity

Yes

ICIS-LOR

Chemicals Energy

Yes

and EU

& Global

Industry Specific Information Informal / internal Sources Significant intelligence gathering may be obtained from informal supplier information, from both internal and external sources. __________________________________________________________________________________ 385 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED As each department interacts with the outside world, significant information gathering about the market and competitors is occurring, and the companies who have dedicated resources to gather such information will be at a competitive advantage. Many companies indeed have a dedicated intelligence department where information is received and thereafter sent to the appropriate personnel who may be affected by the new information. In this manner the Purchasing Department has significant input as it meets external suppliers regularly, and information about other suppliers, the market, as well as the competitors can be obtained. For most organisations, information gathering may not be supported due to the culture, or structure of the company. It can be seen that senior managers may be at an advantage as they have the means of networking within the company to obtain more information. Mind-sets for Establishing Supplier Intelligence Nearly every department in each organisation is interfacing with external companies or associations on a daily basis. News intelligence regarding suppliers and the overall market place is being gathered by all departments on an ad-hoc basis. This may be pro-actively sourced or acquired through indirect methods. As part of Purchasing Department’s on-going education for all departments, it is important to emphasise the need for all those employees with any interaction with the external world to have a mind-set of asking the appropriate questions to gather knowledge about the market, suppliers and competition. This may allow for more proactive marketing, or benchmarking information for internal processes. It is also important to obtain feedback regarding the perception which the “outside world” has regarding the company. Company Process for Informal and Formal Reporting Leading companies have dedicated resources for formal reporting systems. These are commonly referred to as the Intelligence Department, whose task is to gather information internally and externally and provide an update of information to the various departments and management about current affairs regarding the market, competitors, and suppliers. Having the latest information provides the respective departments with the ability to react quicker to market changes as well as to adopt more appropriate strategies catering to current market environments. For many companies, informal reporting systems exist whereby there is an informal communication to each respective head of department, who in turn provides information to the appropriate senior management executive. Information gathering, and communication is not as comprehensive and may not reach all relevant departments appropriately. Information dissemination is heavily reliant on the persons receiving and spreading the information appropriately. Processes for Establishing Supplier Intelligence Besides establishing Intelligence Departments for formal information gathering, several companies are using I.T. for ease of information sharing. In this context a virtual whiteboard is __________________________________________________________________________________ 386 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED a web-based collaborative system that provides a real time canvas for thinking, designing, and working with colleagues and clients. The use of a virtual whiteboard in email systems has the following advantages: •

Shows current events information

•

Allows for segregation of data into defined sub-topics

•

Users can access up-to-date data at their convenience

•

No clogging of email for constant updates from intelligence departments

•

Convenient housekeeping with only one owner to remove old news/information

In order to foster a mind-set for intelligence gathering, formal processes such as the virtual whiteboard mentioned above will provide an easy way of disseminating information with minimum inconvenience to all employees who wish to provide and receive information. Companies also use this tool to disseminate best practices currently used by suppliers and competitors. Inter-company communication may be vertical, horizontal, product or project based. The ease of intelligence gathering depends on how the company’s organisation structure is developed accordingly. Companies can also purchase several off the shelf I.T. products which assist in intelligence gathering. An example is an Intelligence company named Acuity which focuses on gathering intelligence from the Internet. Single Step Search Searching for information is often the most time-consuming chore a knowledge worker can embark on. IDC estimates that for every 1,000 workers, $2.5 million dollars are lost each year due to the inefficiencies of searching for internal and external information. Acuity eliminates most of this waste by combining the best public internet search sites (2000 sites in total) with the ability to search your own email, hard-drive, network, applications, and databases – including your subscription services such as a news vendor. Acuity, as shown in the diagram below, significant time savings to source, interpret and transform intelligence into readily digestible forms are provided by applying the appropriate software. This software may be built in-house to source for industry specific information or purchased off- the-shelf, as shown by our example of Acuity software below.

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ADVANCED

Common intelligence software available are: •

Acuity – Integrated workflow solution

•

DnB – Locating and qualifying global suppliers

•

Competitive Intelligence Services – Focused on customer’s competition

•

SAS – Integrated solutions including Supplier Management

An integrated workflow solution is necessary to institute a formal process of searching, analysing, and reporting. This process is a continuing, on-going process where the management will continually desire information regarding specific areas of concern be it in marketing, purchasing, financial or operational areas.

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ADVANCED But the full workflow process needs many pieces of software to accomplish in today's computing environment (Acuity). Currently Intelligence departments utilise a whole range of different software for searching and analysis. Several programs such as Acuity and SAS Intelligence software have the ability to do all three functions of searching, analysis, and reporting at the same time. However, each company must determine for itself the competency and quality of such programs to verify if the current systems being adopted may be more cost effective or provide better information than the proposed comprehensive software available.

The SAS software model includes Supplier relationship management as shown in the diagram

below. Initial cost and maintenance of these kinds of software are quite prohibitive to most organisations, and therefore a proper study of the value add to the organisation has to be conducted in detail to justify such a cost to the organisation. __________________________________________________________________________________ 389 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

Selection and Evaluation of Suppliers During the process of enlisting suppliers, purchasers need to understand that supplier list will continuously be updated. Some suppliers will be removed whilst new ones will be appended. Regardless, purchasers need to appreciate the fact that all suppliers will undergo a phenomenon known as life cycle (Dwyer, Schurr & Oh, 1987) as illustrated below:

Awareness

Exploration

Expansion

Commitment

Dissolution

Life-cycle model of supplier The model is similar to the 4-stage life cycle model which will be discussed in greater detail. Stage Life Cycle Model There is another life-cycle model which is useful. In the actual process of source selection, there are four stages (compare to the Life-cycle model discussed earlier): •

Survey stage, in which all possible sources for a product are explored

•

Inquiry stage, in which the relative qualifications and advantages of potential sources are analysed

•

Stage of negotiation and selection, leading to the issue of an initial order

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ADVANCED •

Experience stage, in which a continuing vendor-supplier relationship is established, or the earlier steps are reviewed in the search for a more satisfactory source.

As in all purchasing problems, the starting point is the need for a material or product. The exact specifications may or may not be fixed, but its general nature and purpose are known: •

What is available on the market?

•

Who makes such a product, or who can make it?

•

Who can supply it most satisfactorily and most economically?

Purchasing must understand the global strategies that impact sourcing. As a prerequisite to a continuous purchasing program, management must understand the global strategic issues and the external and internal drivers that impact sourcing decisions. On the external side, it is particularly important to understand the industry structure in the survey stage: •

Who is the competition?

•

Who are the suppliers to the industry?

•

What is the supplier's bargaining power?

•

What are the emerging technologies and substitute products?

•

What new entrants may enter the market?

•

Who are the customers in this industry and what is their bargaining power?

On the internal side, it is important to understand the company's strategic direction and the tactical actions that are being pursued in the areas of technology development, engineering, materials management, manufacturing, distribution, and field service. A repetitive sourcing program should be designed around a company's overall corporate strategy so that products can be brought to the marketplace at the right time, at a competitive price, and with a reliable level of performance. Stage 1 – Survey Stage __________________________________________________________________________________ 391 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The original survey of potential sources should overlook no possibilities, provided that they are reasonably accessible and that there is some assurance that they meet required standards of quality, service, and price. Trade directories provide comprehensive and well-organised listings of the whole range of manufactured products and manufacturers on a nationwide basis, usually with at least a general indication of size and commercial rating. Supplementing these are regional directories such as those issued by state Chambers of Commerce and, on a still more local scale, the classified section of telephone directories. Specialised trade directories are available listing concerns that do not have product lines of their own but provide industrial services, such as foundries, screw machine shops, custom fabricators of plastic parts, and the like. With the continued expansion of world markets, more and more directories of suppliers in foreign countries are becoming available. The buyer's library of manufacturers' and distributors' catalogues is another reference source of prime importance, provided that the indexing system is adequate. Many purchasing managers also have a commodity information file in which they have collected vendors' contact details and data sheets, advertisements, and new product announcements from business magazines. Some of this information is so new that it has not yet found its way into the standard catalogues, but the alert buyer has it on hand when needed. Salespersons are an important source of information, both on their companies' products and capabilities and on their application to customers' processes. Experience has shown that the most successful salespersons are those who have not limited their service to buyers to merely selling the product at hand. Their approach aims more toward meeting the buyer's need, not only with products but also with whatever information, service, and technical advice are available from their companies. The buyer can build a workable list of likely sources using information from the publications and persons mentioned above. Those who appear to be reliable and stable, have the needed kind of manufacturing capability and experience, and are conveniently located (to keep transportation costs down) are put at the head of the list. Many times, the buyer will have the requisite information through reputation or advertising. Those who have low capitalisation or credit ratings or whose products are not in the required quality range will be excluded. If the product required is of a routine nature, the buyer may send out a request for bids from such a selected list. If the product is a more important or more complex one, or one for which there is likely to be a continuing need, there will be an intermediate stage of inquiry and research. Stage 2 – Inquiry Stage The second stage of supplier selection narrows the field from possible sources to acceptable sources. Inquiry at this stage is directed toward developing more specific information on vendors' production facilities and capacity, financial stability, product quality, technical competence, __________________________________________________________________________________ 392 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED manufacturing efficiency, general business policies, position in the industry, progressiveness, interest in the buyer's order, and cooperative attitude. The aim at this point is to find those suppliers who are capable of producing the item in the required quality and quantity, which can be relied on as a continuous source of supply under all conditions, who will keep their delivery promises and other service obligations, and who are competitive on price. Visits to supplier facilities are important in this stage. Particular features to be noted at the plant of a supplier or prospective supplier are modernity and efficiency of equipment, facilities for technical controls and the importance attached to such controls, calibre of supervision and inspection, evidence of good management and good housekeeping in plant operations, practice as to the maintenance of raw material stocks, and the character of the operation, especially as it relates to purchasing requirements and practices. Personal contacts should also be established with key people in management and production as a very helpful asset in the event that emergency or special requirements need to be discussed later at long distance. When the projected purchase involves substantial expenditure, or when the quality of the part to be bought is critical, inspection and evaluation of potential vendors is generally made a team effort. A typical team will include representatives from the purchasing, quality control, engineering, and production departments, although the makeup of the group may vary. A USA west coast manufacturer of complex electronic controls, for example, requires that a team consisting only of purchasing and quality control personnel check out suppliers of critical parts before they are accepted. Customarily, supplier survey teams follow a standard pattern of inspection and collection of information. Depending on the nature of the item being considered for purchase, the supplier's reputation and other factors, other teams might give more attention to condition and capabilities of machines, shop methods, inventory, housekeeping, and so on. The inspection can be speeded by having the supplier provide some basic information before the team's visit. One purchasing department, for example, asks suppliers to fill in the vendor capability survey form before deciding on how extensive an analysis the evaluation team should make. Stage 3 – Negotiation & Selection In the third stage – negotiation and selection stage – The result of the study at this point should be a list of several acceptable supply sources, not only capable of furnishing the requirements, but with any of whom the buyer would be willing to place an order. The list is not necessarily in order of preference. It may come very close to that point of decision, but, in the orderly process of vendor appraisal and narrowing of choice, there still remains the stage of negotiation in which details and terms are considered, to determine where the best ultimate value lies. Basically, this will be in terms of quality, service, and price. Beyond that, it will be influenced by the intangibles of interest, cooperation, and goodwill that enhance the value of all these factors. Beyond that, the decision may hinge on special __________________________________________________________________________________ 393 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED circumstances - the smaller company in which the order will have an importance that is lost in the larger operation, the company that has an engineer or superintendent particularly skilled in that type of production, or the company that has an open spot in its manufacturing schedule to accommodate the order. Stage 4 – Experience As a matter of fact, there may be no one best source, for the buyer usually wishes to establish alternative sources for the products that are to be bought, both as an added assurance of supply and to maintain competition. Then the decision as to where the bulk of the business will be placed will be made on the basis of a fourth and convincing criterion - experience. Selecting Strategic Suppliers Having defined and described the role and organisation of the purchasing department in the earlier chapter, we turn to its most basic and important job: Finding suppliers able and willing to provide consistently, quality, service, and competitive price. To get the best sources of supply for their needs, buyers may make choices from among a number of equally eligible sources. In other cases, an extensive search may be required to find one satisfactory supplier or even develop a source where none had previously been available. In either event, purchasing must continually monitor and evaluate supplier performance. Buyers choose and measure suppliers via intelligence. But it should be noted at the start that the principles and methods they use are being applied more intensely today than ever before. As companies are forced by competition to improve their products, they, in turn, pressurise suppliers to upgrade their performance on quality, service, and price. Some of the effects on buyer-supplier relationships are summarised here to add perspective to the comments on the selection and evaluation process: •

The growth in worldwide markets has given buyers more leverage in promoting competition because of the greater number of suppliers available. Companies are now insisting that domestic suppliers match the prices of lower cost countries.

•

Taking a leaf from Japan's book, companies are demanding that purchased parts come into their plants "100 % fit for use" if the suppliers want to keep their business.

•

Many companies are insistent that suppliers help them with their just-in-time (JIT) inventory programs, by making frequent deliveries for parts to arrive as they are needed on the production line and not before, which requires storage (postponement logistics).

•

Suppliers who meet these relatively new standards are being rewarded with additional business; those who do not are being dropped. The process is known as "narrowing the supplier base" - placing business with a few suppliers, where there might have been dozens previously as one executive put it: "We are better off with three or four suppliers than with twenty, none of whom cares enough about us to give us the quality and delivery we need."

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ADVANCED •

With suppliers they can depend on, buyers are increasingly turning to long-term contracts, running from one year up to as many as ten. Both sides benefit: the buyer gets a better price because of the volume involved, plus assurance of supply; the seller has the assurance of continuous volume of business and a chance to plan production more rationally.

In many instances, narrowing the supplier base comes down to placing all of a given set of requirements with one supplier. This approach is being taken in the automobile business. Single-sourcing arrangements would be the accepted way of doing business in the future. Given that kind of environment, purchasing managers must apply basic methods of selection analytically and aggressively. Selecting Supplier – Strategic Scenario Model In this model, two major parameters in deciding who your strategic suppliers are, is illustrated below. These are: •

Supplier’s exposure or vulnerability

•

Profit or value potential of materials supplied

Supplier's exposure / vulnerability

Strate gic Se curity - Ensure supplies - Cost insensitivity - Frequent review

Strate gic Critical - Ensure supplies - Close price management - Continuous review

Procurement Action

Tactical Acquisition - Automate - Delegate - Low attention

Tactical Profit - Seek opportunities - Take risks

Profit / value potential

Procurement Strategic Position There are 4 quadrants of concerns: __________________________________________________________________________________ 395 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED •

Strategic critical

Condition: High supplier’s exposure and high profit/value potential Strategies to minimise risks: Ensure supplies, Close price management, Continuous review •

Strategic security

Condition: High supplier’s exposure and low profit/value potential Strategies to minimise risks: Ensure supplies, Cost insensitivity, Frequent review Tactical profit Condition: Low supplier’s exposure and high profit/value potential Strategies to minimise risks: Seek opportunities, Take risks •

Tactical acquisition

Condition: Low supplier’s exposure and low profit/value potential Strategies to minimise risks: Automate, Delegate, Low attention Selecting Supplier – ESI Model The Design Process The desired levels of quality and reliability must be “engineered in” during the design stage of the new product. These days, one hears a great deal about designing for manufacturing; however, invariably, the focus is the firm’s internal manufacturing process but ignores the manufacturing process and technological capabilities of outside suppliers, problems with quality; time-to-market, configuration, control, and cost are the inevitable result. Therefore, suppliers must have access to product design as early as is humanly possible in the design process to assure optimal use of any special skills or process they can contribute. Selected suppliers should participate in feasibility studies, in value engineering, and in prototype, failure, and stress analysis, among other product development tasks. Manufacturers should allow key suppliers to review the design of the entire subassembly before committing to it. Not only does this tease out new ideas but is also helps the supply partner understand the customer’s real needs- and likely future needs. So how do we involve the supplier? Define the Product The design and development process begin with the investigation phase. First the product is defined. This function is normally performed with considerable marketing involvement and has been formally titled “customer focused product and process development” at some firms. One of the buyer’s key responsibilities is to acquire, assimilate, digest, and share information concerning new or forthcoming developments in the supply market for which he or she is responsible. __________________________________________________________________________________ 396 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Buyers should be able to obtain this information through interviews with present and potential suppliers, visits to suppliers (with emphasis on their research and development and production activities) attendance at trade shows and weekly reviews of relevant literature. This information may help product managers in marketing and senior design personnel responsible in identifying and developing new products. Set Objectives Next a statement of needs, desires, and objectives is developed. Needs are based on marketing’s perception or knowledge of what customers want (or the customer’s direct input if the customer is a member of the design team), balanced against the company’s objectives and resources. Purchasing and supply management provides information on the cost, performance, market availability, quality, and reliability of components which may be used. Purchasing works with other team members to identify and qualify supply partners. There is an unfortunate tendency to proceed with the first approach that appears to meet the needs, although there is an obvious alternative that may yield more profitable solutions. Alternatives approaches should be evaluated on the basis of suitability, producibility, components availability, economy, and customer acceptability. Purchasing provides input on the economy and availability of materials required with each approach. The make or buy issue should be addressed for all new items which can be either purchased or produced in-house. Every job release and every purchase request imply a decision to make or to buy. Purchasing and supply management play a key role in the make or buy process by providing information on the cost, quality, and availability of items. If purchasing and supply management personnel have the capability to undertake the exercise, this exercise should then be carried out by them. Drafting the Purchase Description and Specifications The next phase would be then to draft the purchase description and specifications. The purchase description forms the heart of the procurement. Whether or not a purchase order or contract will be performed to the satisfaction of the buying organisation frequently is determined at the time of purchase description is selected or written, specifying the quality requirement. Such purchase description and specification serve a number of purposes, among them to: •

Communicate to the buyer in the purchasing department what to buy

•

Communicate to the prospective suppliers what is required

•

Serve as the heart of the resulting purchase order

•

Establish the standard against which inspections, tests, and quality checks are made.

In determining the purchase specification and description, four approaches are available: __________________________________________________________________________________ 397 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED •

The Formal Committee Approach

This approach recognises that a good specification is compromise of basic objectives. A specification review committee is established, with representatives (as appropriate) from design engineering, production, purchasing, marketing, operations (including production control) and quality. All members will review the proposal, copies of drawing, bills of materials and specifications. No design becomes final until the committee approves it. •

The Informal Approach

This method emphasis the concept of a buyer’s responsibility to “challenge” materials requests, whilst at the same time, top management urges designers to request advice from buyers and work with them on all items that may involve commercial considerations. Emphasis at all times is placed on person-to-person communication and cooperation between individual buyers and designers. Using this approach, a company-oriented, cost-conscious attitude is developed at the grass-roots level throughout the organisation. •

The Purchasing Coordinator Approach

One or more positions are created in the purchasing department for individuals (who are frequently called materials engineers), to serve in a liaison capacity with the design department. Typically, the materials engineer spends most of his or her time in the engineering department reviewing design work as it comes off the drawing boards. He then searches for potential purchasing problems in an attempt to forestall them before they become serious. Writing the Specifications After the design of a product is determined, the next step is to translate the individual part and materials specifications into written form. One of the basic requirements of a good specification is to satisfy the procurement consideration of clear, concise, and unambiguous communication. In addition to the clarity, care must be exercised not to have specifications that are written around a specific product, as this will limit competition. Several years ago, a fire chief wrote into specification for a new fire truck the requirement that the truck’s 12-cylinder engine be produced by the manufacturer of the truck. Since only one manufacturer manufactured 12-cylinder engines this eliminated any competition. The fire chief should have specified what was wanted in terms of performance, characteristics, such as speed and acceleration. If this were the case, then competition would have been plentiful. Care also should be taken not to specify unreasonable tolerances. It will cost more to make materials to close tolerances, it costs more to inspect, and more rejects will typically result. Standard specifications should be used where possible. There are three principal types of detailed specification: commercial standards, design specification (generally accompanied by engineering, drawings) and material and method-ofmanufacture. Other forms of specification that may be used are performance specification, function and fit specification and samples. To meet the needs of all departments, a specification must satisfy the following requirement: __________________________________________________________________________________ 398 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED •

Design and marketing requirement for functional characteristics, chemical properties, dimensions, appearance etc.

•

Manufacturing requirement for workability of materials and produce ability

•

Inspection’s requirements to test materials for compliance with the specifications

•

Stores’ requirement to receive, store, and issue the material economically

•

Purchasing and supply management’s requirement to procure material without difficulty and with adequate competition from reliable sources of supply

•

Production control’s and purchasing’s requirement to substitute materials when such action becomes necessary

•

The total firm’s requirement for suitable quality at the lowest overall costs

•

The total firm’s requirement to use commercial and industrial standard material whenever possible and to establish company standards in all other cases where nonstandard materials and/ or components are used repetitively.

The Source Selection A good supplier is an invaluable resource to the organisation requiring its product or service. There are numerous sources in keeping and obtaining information about current and potential suppliers. These include current supplier’s purchasing and information record, the Internet, and other public suppliers’ catalogues such as the Yellow Pages or Green Book, Trade Registries from Associations and Chambers of Commerce and sales representatives from the companies. Trade fairs or expos, recommendations from staff or e-mail marketing. •

Single, Dual or Multiple Sources

Should one, two or more suppliers be used? It all depends. Single sources may be justified when: o The material or component is unique to that supplier o Better pricing results from a much higher volume (economies of scale). o Quality considerations o The buyer obtains more influence/ clout with the supplier o Lower costs are incurred to source, process, expedite and inspect o The quality, control, and coordination required with just-in-time manufacturing require a single source o Significantly lower freight costs may result o Special tooling is required, and the use of more than one supplier is impractical or excessively costly __________________________________________________________________________________ 399 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED o Total system inventory will be reduced o An improved commitment on the supplier’s part results o Improved interdependency and risk sharing result o Time to market is critical Dual or multi sourcing may be appropriate: o To protect the buyer during times of shortages, strikes, and other emergencies o To maintain competition and provide a back-up source. Through the award of 70 % of the volume to one supplier and 30 % to a second supplier, economies are obtained from the “big supplier” whilst the “little supplier” provides competition. Many Japanese firms use this approach. Any time the big supplier “misbehaves” its volume is reduced and given to the smaller supplier. o To meet local content requirement for international manufacturing locations o To meet customer’s volume requirements o To avoid lethargy or complacency on the part of the single-source supplier o When the customer is a small player in the market for a specific item Other factors When selecting the source, the buyer’s needs to take other commercial considerations. These are: •

Ethical Consideration

Buyers must be aware of potential conflicts of interest when selection suppliers. A conflict of interest exists when buyers must divide their loyalty between the firm, which employs them, and another firm. In purchasing and supply management, this situation usually occurs when a buyer is a substantial stockholder in a supplier’s firm or when he or she makes purchases form close friends and relative. Gifts, which are intended to influence buying decisions, have no place in a professional purchasing and supply management department. Lunches and dinner with the same supplier may be misinterpreted as showing favouritism. •

Dishonest Suppliers

Dishonest suppliers exist in the industrial world just as they do in the consumer world. A recurring technique used by dishonest suppliers is to contact the buyer by telephone, usually stating the buyer has been referred to them by a top corporate executive-commonly one who cannot be contacted quickly. A typical story centres that the supplier is going to liquidate the business or have excessive stocks. The entire inventory is offered at very low prices. When the buyer takes the offer, and many do, the result is the same, high prices, poor quality and late delivery. __________________________________________________________________________________ 400 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED •

Reciprocity

When the buyers give preference to suppliers that are also customers, they are engaging in a practice known as reciprocity. The practice can be illegal in certain countries (USA) and the line between legal and illegal reciprocal practices is frequently very thin. A key criterion used by the courts in determining illegality is the degree to which reciprocal activity tends to restrict competition and trade. Responsibility for Source Selection While purchasing and supply management has the ultimate responsibility for selecting the ‘right’ source, the process is handled in many ways. Procedurally, the simplest approach is when the buyer alone conducts the analysis and makes the selection. A second approach calls for the use of a cross-functional team consisting of representatives of purchasing, design engineering, operations, quality, and finance. The third common approach is the use of commodity team.

Evaluating the Potential Suppliers The use of supplier performance evaluation systems is on the rise. A recent survey conducted by Purchasing magazine shows that most of the major manufacturing firms either have established formal supplier-evaluation programs (59 %) or are in the process of doing so (30 %). Many progressive buying organisations monitor their major suppliers’ performance during the duration of each contract and then use the information obtained during source selection for follow-up procurement to ensure that only satisfactory performers are considered. Formalised supplier evaluation programs have never had better odds for success than today. Totally quality management (TQM) provide programs are giving rise to the major organisation changes that will enable purchasing professionals to step into the corporate limelight and orchestrate the development of the supply base. After a major supplier has been selected and the buyer-supplier relationship has begun to develop, it is important to monitor and assess the supplier’s overall performance. The purpose is to enhance the relationship and thereby control performance. Many evaluation teams use a three to six month moving average for the aggregate evaluation of a supplier’s performance. For example, with a six-month window, a supplier’s rating in June is an average of all the ratings accumulated between January and June. The moving average allows supplier to start over at some point. Their mistakes do not haunt them forever. They are motivated to improve. The length of the window is important and should be casespecific. A shorter window may be ineffective because it lets suppliers off the hook too easily. A longer window may be punitive and self-defeating. __________________________________________________________________________________ 401 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED The National of Purchasing Management investigated three types of evaluation of supplier performance plans: •

The categorical plan

•

The weighted point plans

•

The cost ratio plan

Each of these plans is reviewed below: Categorical Plan Under this plan, personnel from various departments of the buyer’s firm maintain informal evaluation records. The individuals involved traditionally include personnel from purchasing, engineering, quality, accounting, and receiving. For each major supplier, each evaluator prepares a list of performance factors that are important to him or her. At a monthly or bimonthly meeting, each major supplier is evaluated against each evaluator’s list of factors. After the factors are weighted for relative importance, each supplier is then assigned an overall group evaluation, usually expressed in simple categorical terms such as ‘preferred,” “neutral,” or “unsatisfactory.” Refer to the Figure which portrays a typical supplier performance evaluation form used in the categorical plan. This simple qualitative plan is easy to administer and has been reported by many firms to be very effective. Supplier Performance Evaluation Form (Categorical Plan) Supplier: Summary Evaluation, by Department

Date Preferred

Neutral

Unsatisfactory

Purchasing Receiving Accounting Engineering Quality Performance Factors Purchasing Delivers on schedule Delivers at quoted prices Has competitive prices __________________________________________________________________________________ 402 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Summary Evaluation, by Department

Preferred

Neutral

Unsatisfactory

Is prompt and accurate with routine documents Anticipates our needs Helps in emergencies Does not unfairly exploit a single-source position Does not request special consideration Currently supplies price, catalogue, and technical information Furnishes specially requested information promptly Advises us of potential troubles Has good labour relations Delivers without constant follow-up Replaces rejections promptly Accepts our terms without exception Keeps promises Has sincere desire to serve Receiving Delivers per routing instruction Has adequate delivery service Has good packaging Accounting Invoices correctly Issues credit memos punctually Does not ask consideration

for

special

financial

Engineering Has past record on reliability of products __________________________________________________________________________________ 403 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Summary Evaluation, by Department

Preferred

Neutral

Unsatisfactory

Has technical ability for difficult work Readily accepts responsibility for latent deficiencies Provides quick and effective action in emergencies Furnishes requested data promptly Quality Provides high-quality material Furnishes certification affidavits etc. Replies with corrective action The Weighted Point Plan Under this plan, the performance to be evaluated (often various aspects of quality, service, and price) are given “weights”. For example, in one circumstance, quality might be weighted 25 %, service 25 %, and price 50 %. In another, quality could be raised to 50 %, and price reduced to 25 %. The weights selected in any specific situation represent buyer or buying team judgments concerning the relative importance of the respective factors. After performance factors have been selected and weighted, a specific procedure is then developed to measure actual supplier performance on each factor. Supplier performance on each factor must be expressed in quantitative terms. To determine a supplier’s overall rating, each factor weight is multiplied by the supplier’s corresponding performance number; the results (for each factor) are then totalled to get the supplier’s final rating for the time period in question. The following hypothetical case illustrates the procedures. Assume that a purchasing department has decided to weight and measure the three basic performance facts as follows: Weight

Factors

Measurement Formula

50%

Quality performance =

100% - percentage of rejects

25%

Service performance =

100 – 7% for each failure

25%

Price Performance =

Lowest price offered divided by price actually paid

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ADVANCED

Assume further that supplier “A” performed as follows during the past month. Five % of its item were rejected for quality reasons; three unsatisfactory split shipments were received; and A’s price was $100/ unit, compared with the lowest offer of $90/unit. Below table summarises the total performance evaluation calculation of supplier “A”. Illustrative application of the weighted point plan – Supplier “A” Monthly Performance Evaluation: Factor

Weight

Actual Performance

Performance Evaluation

Quality

5% rejects

50 x (1.00 – 0.05) = 47.50

Service

3 failures

25 x [1.00 – (0.07 x 3)] = 19.75

Price

$100

25 x $90/100 = $22.50 Overall evaluation = 89.75

This procedure can be sued to evaluate any number of different suppliers whose performance is particularly important during a given operative period. The performance of competing suppliers can be compared quantitatively, and subsequent negotiation strategies developed accordingly. The user should always remember that valid performance comparisons of two or more suppliers require that the same factors, weights, and measurement formulas be used consistently for all suppliers. In contract to the categorical plan, that is largely subjective, the weighted point has the advantage of being somewhat more objective. The exercise of subjective judgment is constrained more tightly in the assignment of factor weights and the development of the factor measurement formulas. The plan is extremely flexible, since it can accommodate any number of evaluation factors that are important in any specific case. Also, the plan can be used in conjunction with the categorical plan if buyers wish to include important subjective elements in the final evaluation of their subsystems. Various research studies have noted, however, that a weighted point plan must be developed with care. The estimates of factor important must be consistent from one situation to the next, and they must be consistent with the performance measurement formulas used because of the obvious interaction them. Cost Ratio Plan This plan evaluates supplier performance by using the tools of standard cost analysis that business people traditionally use to evaluate a wide variety of business operations. When using this plan, the buying firm identifies the additional costs it incurs in doing business with a given __________________________________________________________________________________ 405 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED supplier; these are separated as costs associated with the quality, service, and price elements of supplier performance. Each of these costs is then converted to a ‘cost ratio” that expresses the additional cost as a % of the buyer’s total dollar purchased from that supplier. These three individual cost ratios are then totalled, producing the supplier’s overall additional cost ratio. For purpose of ration analysis, the supplier’s price is then adjusted by applying its overall cost ratio. The adjusted price for each supplier is then compared with the adjusted price for other competitive suppliers in the final evaluation process. For example, assume that for one supplier the quality cost ratio is 2 %, the delivery cost ratio is 2 %, the service cost ratio is –1 %, and the supplier’s price is $72.25. The sum of all cost ratios is 3 %; hence, the adjusted price for this supplier is: [72.25 = (0.03 x 72.250] = $74.42 This is the price used for evaluation purposes vis-à-vis other suppliers. Although the cost ratio plan is used by a number of large progressive firms, on the whole it is not widely used. Operationally speaking, it is a complex plan. It requires a specially designed, company-wide, computerised cost accounting system to generate the precise cost data needed for effective operation. Consequently, the majority of purchasing departments employing a quantitative type of evaluation rely on the simpler but effective weighted point plan – typically, modified specifically to meet their own unique circumstances. For these reasons, the cost ratio plan will not be discussed in detail. Nevertheless, it is an excellent concept that has the ability to provide the most precise evaluation data of the three plans discussed. For firms using sophisticated information systems, the cost of designing and implementing the cost ratio plan typically is repaid many times by savings resulting from more precise analysis of supplier performance. All three of the plans discussed – categorical, weighted point, and cost ratio – involve varying degrees of subjectively and guesswork. The mathematical treatment of data in two of the plans often tends to obscure the fact that the results are no more accurate than the assumption on which the quantitative data are based. In the final analysis, therefore, supplier evaluation must represent a combined appraisal of facts, quantitative computations, and judgments. It simply cannot be achieved effectively by mechanical formulas alone. Motivation Two common approaches are used in motivating suppliers to perform satisfactorily: punishment and reward. Many progressive buyers use a combination of both approaches. •

Punishment

Quite obviously, the greatest punishment for unsatisfactory performance (if the area of litigation and punitive damages is ignored) is not to award contracts for future requirements. This is a powerful motivator, especially during periods when buyers reduce the number of suppliers with whom they do business. A less drastic approach called the “bill back” is __________________________________________________________________________________ 406 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED especially appropriate when dealing with a “partnership” supplier or a defence contractor. Under the bill back, incremental costs resulting from quality problems or late deliveries are identified and then billed back to the appropriate supplier. Some progressive buyers have increased the motivational effect of the bill back by sending the bill to the supplier’s chief operating officer so that he or she is aware of problems within the supplier organisation. •

Rewards

The biggest reward for satisfactory performance is follow-on business. Additionally, as with raising children or dealing with “significant others” recognition also is a powerful stimulant to future successful performance. Recently, an Arizona purchasing manager divided her suppliers into three categories: outstanding, acceptable, and marginal. She wrote an appropriate letter to the CEO of each supplier firm. The results of her efforts were rewarding. The outstanding group performed even better! Most of the CEOs from the second and third groups requested meetings to discuss what they could do better to earn an outstanding letter! General Electric’s Major Appliance Group in Louisville, Kentucky (amongst many other companies), publicly recognises its most successful suppliers. Such suppliers are encouraged to share their recognition with their employees. The employees are encouraged to continue their efforts to improve quality and productivity. Many suppliers reward their employees with a trip to GE’s Appliance Park to see how their products are used (and to visit nearby Churchill Downs, home of the Kentucky Derby). Each year, the Major Appliance Group selects its 100 “best” suppliers. This selection is based on a combination of service, responsiveness, value analysis suggestions, cost, and related factors. Each representative and CEO attends the Supplier Appreciation Group’s Day. Over 50 senior GE managers also attend. Each of the 100 outstanding suppliers receives a plaque acknowledging its status and contribution. GE publicises this list in appliance and purchasing magazines to the delight of those listed. The Ford Motor Company, like GE, believes in recognising its successful supplier partners. Ford’s quality, engineering, manufacturing, and purchasing departments rate their suppliers based on an extensive system survey, defect prevention activities, delivery performance, technical capabilities, and management. The real test of vendor selection is, of course, the test of experience, or satisfactory performance by the vendor once the order has been placed with him or her. It is listed here as the fourth step in selection because it does more than confirm or refute the buyer's judgment and decision. It is the deciding factor in whether the selected vendor will continue to receive the buyer's business or be replaced by another source. Objective evaluation and rating of vendor performance has gained considerable acceptance in purchasing departments of all types in recent years. But, even when sophisticated, __________________________________________________________________________________ 407 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED computerised systems are used to compile comparative statistics on vendor performance, interpretation of those statistics is left to the buyer's judgment. Rating systems generally involve the three basic considerations in a good purchase-quality, service (delivery), and price - although any one of the factors named may be given more weight than the others. Quality is most important, example, for a manufacturer of complex components for spacecraft. Price might give equal weight in an evaluation system used by the manufacturer of highly competitive, "throw-away" items like party novelties. Formulas for rating suppliers vary in complexity, again depending on nature of the item being bought, the quality required, and competition within supplying industry. One company that buys its requirements under blanket orders uses a relatively simple system to measure supplier performance on two counts: quality and delivery (Price performance had already been determined when the contract was originally set up.) Each shipment against the order is rated as follows: by date request 100 %; one day late, 98 %; two days late, 95 %, and so on down 73 % for six days late. If quality is to specifications, the supplier is rated 2 %. If using departments complain about quality of the shipment, the rat drops to 95 %. For each complaint thereafter, the supplier loses 5 more percentage points. Suppliers are notified periodically of their performance records. Those falling below the tough new standards of quality and delivery are warned that they are in danger of losing the business. And in more they are being automatically dropped from the approved list. A Comprehensive Vendor Rating System A more comprehensive mathematical vendor-rating formula has been developed in the purchasing department of a large manufacturing company. It is known as the "incoming material rating" rather than as a vendor rating because the calculation is based upon experience with a single item or product; this is its logical application as a buying tool when procurement of that product is under consideration is designed to provide a comparative evaluation of vendor performance in any case in which an item is procured from two or more sources. This formula is based upon the principles that: •

The evaluation of a vendor performance must embrace all three major purchasing factors - quality, price, and service

•

The relative importance of these factors varies in respect to various items. The first step, therefore, is to assign appropriate weights to each, adding to a total weighting factor of 100 points.

For example, in a given case, quality performance might be rated at 40 points, price at 35, and service at 25, and these percentages are subsequently used as multipliers for individual ratings on each of three purchasing factors.

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ADVANCED The assignment of these weights is a matter of judgment. In the company in which this system originated, the importance of quality ran from 35 to 45 %, price from 30 to 40 %, and service from 20 to 10 %. The quality rating is a direct percentage of the number of acceptable lots received in relation to total lots received. In rating price, the lowest net price (gross price minus discounts plus unit transportation cost) obtained from any vendor is taken as 100 points, and net prices from other vendors are rated in inverse ratio to this figure. The service rating is a direct percentage of the lots received as promised, in relation to total lots received. These three ratings are multiplied by their respective weighting factors and the results are added to give a numerical "incoming material rating" for each vendor, for a given item. Perfect deliveries, on scheduled time, at the lowest net price earn a rating of 100 points. Any rejections, lapses in delivery, or prices higher than the lowest quotation reduce the rating. At the same time, there is an objective basis for determining the extent to which superior quality and service offset higher prices in overall value and satisfaction, or vice versa. Example: Vendor A has delivered 58 lots during the past year, of which two were rejected. The percentage of good lots is 96.5. Multiplied by the weight factor of 40, this gives vendor a quality rating of 38.6. The lowest net price from any vendor is $0.93 per unit. A's price is $1.07. By inverse ratio, A's price performance is 86.9 %. Multiplied by the weight factor of 35, this gives vendor A; a price rating of 30.4. Of the 58 lots delivered, 55 were received as promised. This is 94.8 % performance. Multiplied by the weight factor of 25, it gives vendor A; a service rating of 23.7. The sum of these figures gives vendor A; a total performance rating of 92.7. Vendor B, who furnished 34 lots during the same period, was the lowest-price supplier at $0.93 per unit, so has a price rating of the full 35 points. However, four of the lots were defective, giving B a quality rating of 35.3. Also, vendor B was late with five deliveries, so B's service rating is 21.3, for a total performance rating of 91.6. In this instance, therefore, vendor A is judged to be the more satisfactory source, and the buyer is warranted in placing the bulk of the business with A in spite of A's substantially higher price. If vendor B could be induced to cut delinquencies in either quality or service by one half, or if the price factor were deemed relatively more important in respect to this item, B would have the better rating. Detailed Evaluation of Strategic Suppliers __________________________________________________________________________________ 409 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED After developing a comprehensive list of potential suppliers, the buyer’s next step is to evaluate each prospective supplier individually. The types of evaluation required to determine supplier capability varies with the nature, critically, complexity, and dollar value of the purchase to be made. For complex, high-dollarvalue, and perhaps critical purchases, the steps may include: •

Preliminary Survey

If an examination of existing data indicates that a firm appears to be an attractive supplier for existing or anticipated requirements, a telephone or mail survey should be conducted to obtain additional information. The surveys is based on a series of questions which cover the principal officer and titles, bank references, credit references, the annual history of sales and profit for the last five years, a referral list of customers, the number of employee, the space currently occupied, expansion plans (including sources of funds), the current production defect rate for similar products, the number of inspectors used, the date when statistical process control was adopted and a list of all equipment and tools that would be used to manufacture, test, and inspect the purchase. •

Financial Condition

This review would be the financial statements and credit ratings on whether the supplier is clearly incapable of performing satisfactorily. This would entail reviewing the key financial ratios of the company. The typical ratios are working capital, current ratio, quick ratio, receivables to sales, average collection period, average accounts payable period, inventory turnover, average days in inventory, fixed asset turnover, profit margin, gross profit margin, return on assets and return to equity. •

Quality Capability

A critical factor to examine is the firm’s quality capability. The would include whether the firm practices total quality management, how they inspect the goods they manufacture, do they have a program to calibrate their equipment, what types of process control is implemented during production, what types of award and/ or certification does the firm possess – the Baldrige Performance Excellence Program, The Deming Prise, ISO 2000, ISO 14000 etc. •

Plant Visit

Depending on the importance of the visit, the company may send representatives from only purchasing and engineering or it may also include some combination of representation from finance, operations, quality assurance and marketing. The visit would entail the representative to determine the design capability, procurement – control of purchased material, material control, manufacturing control, quality management and final inspection. These visits are __________________________________________________________________________________ 410 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED normally done when the supplier has been short-listed and there is high probability of doing business with the supplier. •

Competitive Bidding or Negotiation

Once a buyer or the sourcing team has identified the potential suppliers, a decision must be made whether to use competitive bidding or negotiation. (See success factor in benchmarking to determine whether make use of single source of multi-source). Bidding normally consists of the following: Tender This is normally a sealed bid and is generally practiced by the government however certain private organisations do use this method. Government buyers generally are not able to restrict the number of bidders; rather all suppliers desiring to bid are permitted to do so. Routinely the contract is awarded to the lowest bidder provided the lowest bidder is deemed qualified to perform the contract. E-Purchasing This is usually done using through the Internet and using dedicated software where the suppliers are provided a password. They are required to bid for the business indicating their prices for all items. Normally the competing suppliers would be able to see the prices of their competitors, but they will not be able to know the names of their competitors. The buyers or the managers will have access to the information. Pending clarification of certain terms and condition and all things being equal, the contract will be offered to the supplier that provided the best prices. Reverse Auction Similar to E-Purchasing, however this entails a process in which suppliers are required to bid downwards against one another over a restricted time period (say one or two hours). Open Bid Similar to the Reverse Auction: all prices in a bid are open. The Approved List Before taking up the evaluation and rating of vendor performance, the practice of buying from alternative sources should be examined further. Purchasing policy in most companies traditionally called for at least two supply sources for any item purchased in volume. The objectives of such a policy are: a.

To protect the company's supply lines against supplier shutdowns caused by strikes or acts of God, and

To encourage competition among suppliers by implying that one supplier always has a chance to increase its share of a company's orders by outperforming another supplier.

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ADVANCED Management generally supported the policy as being in the best interests of the company. There are exceptions to the multi-source policy, however, and indications that there will be more exceptions in the future. One country's largest food processors, for example, have had a single supplier for all its packaging requirements for more than 25 years. Other types of companies, notably the automakers mentioned earlier in this chapter, are now sole-sourcing critical parts and plan to continue the practice. Such relationships, however, require the highest degree of cooperation and coordination between buyers and seller’s technical staffs, comprehensive and airtight contracts, and greater incentives for suppliers – mainly long-term contracts that assure them of continued business and reasonable profits. (As one auto industry purchasing executive put it: "To meet our requirements, suppliers will have to put up more bricks and mortar, and they can't be expected to do that with one-year purchase orders. ") It is unlikely however that multiple sourcing will be abandoned as basic purchasing policy. The larger companies that use sole sourcing restrict it to very specific items, and often for only a specific period (i.e., for critical parts for a given model of automobile). What can be expected is a continuation and wider use of the policy of narrowing the supplier base. More companies will concentrate their purchases with fewer companies which have proved that they can and will meet high standards of quality, service, and delivery - at a competitive price. In the preceding sections we have traced the finding and selection of suppliers, assuming the company has never purchased the item before. Acceptability of the source has been considered strictly from the purchasing viewpoint. It is assumed that the requirement has been defined or specified so that the delivered product, in accordance with the specification, will also be acceptable to all concerned. Deciding on the source, then, is entirely a responsibility of purchasing. Now take another example. The company engineers have designed a product incorporating a common electrical part. For their development work they have selected such a part, from a manufacturer's catalogue or from an electrical supply house. Their main interest has been merely to find something that will serve the desired purpose. The selected part proves satisfactory and is incorporated in the product design. In drawing up a bill of materials for the first production order, the part is naturally specified by the manufacturer's name and catalogue number. When the purchasing manager receives the requisition to purchase, the manager is bound to conform to this request, and does so. However, he or she properly challenges the specification that ties the requirement to a single source. However, the buyer is not to be the sole judge of quality. The buyer is not authorised to make a substitution arbitrarily without the consent of __________________________________________________________________________________ 412 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED the specifying engineers. In most cases, an alternative requires engineering approval in advance of any purchase. The buyer therefore promptly starts a search for acceptable alternative products and sources. When a promising new supplier is located, samples are obtained for inspection and test. Assume that, for example, three samples are approved as acceptable alternatives for the specified item. Now, instead of a single source the buyer has an "approved list" of four suppliers and enters their names, together with that of the original supplier, on the purchase record. It is now the buyer's privilege to patronise any one of the four at his or her discretion. Or, the buyer has a mailing list readymade for issuing invitations to bid, with the assurance that any one of the offerings will be acceptable as to quality and suitability. It is quite likely that the buyer will continue to purchase the bulk of his or her requirement from the source originally named, provided that there is a real preference for the product and that the supplier's quality, price, and service are satisfactory. But the buyer will also make some purchases from the others or give them a chance to quote regularly to maintain their interest. An alternative source that is merely another name on a list represents no advantage either to the buyer or the seller. The approved list of supply sources must be utilised to be useful. Sentiment in favour of approved vendor lists was strongly reinforced by purchasing executives' experiences in the fourth stage (experience stage) especially during periods of shortages. Two major criticisms are made of the approved-list approach. One is that it is discriminatory and serves to blacklist any supplier that is not included, whereas every qualified seller should be allowed to quote. The other is that it limits buyers and restricts the scope of their choices. Flexibility and periodic review will overcome both objections. As to the first, it is assumed that all qualified sources have been investigated and given the chance to present their story when the list was being built. Further, it assumes that if conditions have changed or if new sources enter the field, the opportunity will be given. If they can at any time give good reasons why they should be added to the list--or replace one or more of the suppliers already included--their claims should get full consideration. The purchasing manager should always be ready to maintain the list at the highest possible standard. As to the second criticism, the limitation on buyers, if any, is a self-imposed one. In principle, the limitation is set by either of two causes. One is the absence of additional technically or commercially competent suppliers. The other is that there are practical limits to the size of a working list beyond the basic assurance of supply and reasonable competition. Conclusion Significant competitive advantage can be gained by applying formal processes for intelligence gathering. Information gained from external sources assists the company in feedback of products, competitors and company reputation amongst industry and consumers. This results in faster time to market and higher customer-oriented products. Intelligence gathering requires senior management approval for dedicated resources for intelligence gathering, which may __________________________________________________________________________________ 413 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED involve expenditure not only for hiring of new personnel, but also appropriate software and proprietary information sources. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

The thrust of supplier intelligence is to be able to identify a cheap supplier

Trade magazines, industry newsletters and lately the advent of the Internet has created numerous specialised intelligence reports for both suppliers and buyers in the specific market

As a prerequisite to a continuous purchasing programme, management must understand the global strategic issues and the external and internal drivers that impact sourcing decisions

The original survey of potential sources should overlook no possibilities provided that they are reasonably accessible and that there is some assurance that they meet required standards of quality, service, and price

Recognition is not a powerful stimulant to future successful performance

The greatest punishment for unsatisfactory performance (if the area of litigation and punitive damages is ignored) is not to award contracts for future requirements

After developing a comprehensive list of potential suppliers, the buyer’s next step is to evaluate each prospective supplier individually

A reverse auction is normally a sealed bid and is generally practiced by the government however certain private organisations do use this method

It is quite likely that the buyer will continue to purchase the bulk of his/her requirement from the source originally named provided that there is a real preference for the product and that the supplier’s quality, price, and services are satisfactory

Information gained from external sources assists the company in feedback of products, competitors and company reputation amongst industry and consumers

True

False

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ADVANCED

CHAPTER 21 - FACILITY AND LAYOUT PLANNING US: 336706 Establish a competitive supply chain infrastructure PURPOSE: This chapter will enable learners to establish a competitive supply chain infrastructure. The person accredited with this unit standard will be able to facilitate the creation of a competitive Supply Chain Infrastructure that covers:  Site location.  Supply and distribution networks.  Effective organisational structures.  Effective transport system.  Effective communication system.  Ensure that optimum infrastructure is created. LEARNING OBJECTIVES: Learner’s will be able to:    

Use a variety of tools and methods to facilitate the site location decision. Use a variety of tools and methods to facilitate the design of the facility layout. Design an effective and competitive logistics system. Initiate and participate in the establishment of supply chain organisational structures.

Location Planning Location decisions typically compromises the multiple objectives of owners, employers, employees, suppliers, and customers. In general, firms seek to maximise profits from a location that is suitable as well as a comfortable environment for the employees. Some firms’ choice of location may be restricted by the availability of raw materials and accessibility while others may be constrained by the location of markets. Locations are often chosen based on economic and non-economic reasons. To remain viable, they must give priority to economic measures such as labour, materials and utilities. In addition, __________________________________________________________________________________ 415 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED quantitative factors such as ecological and environmental impact of the facility upon the community and the suitability of the community for the employees, warrant consideration. We can now consider the location problem as applying in two basic situations:= •

The case of the entirely new business.

•

The case of the existing business.

The choice of location is a vital decision for any new business; indeed, there are numerous examples of new businesses which have had brief and troubled lives solely because of their disadvantageous location. The existing firm will seek new facility locations either in order to expand capacity or to replace existing facilities. An increase in demand, if it is to be satisfied by the organisation, gives rise to one or more of three decisions: •

Whether to expand the present capacity and facilities.

•

Whether to seek locations for additional facilities.

•

Whether to close down existing facilities in favour of larger premises or elsewhere.

•

Replacement of existing facilities may be occasioned by one or more of the following occurrences: o The movement of markets, i.e. changes in the location of demand. o Changes in the cost or availability of local labour. o Changes in the availability of materials. o Demolition or compulsory purchase of premises. o Changes in the availability or effectiveness of transport. o Relocation of associated industries or plants. o National legislation.

For our purpose in discussing the facility location problem, it makes little difference whether we consider the problem as applying to a new business or to an existing one. However, since the latter tends to be the more complex, we shall focus on it. An increase in demand will, unless associated with increased productivity, inevitably result in pressure for additional capacity; the only alternatives to an expansion of the existing facilities or the acquisition of additional facilities are a reduced share of the market or an increased amount of subcontracting. On the other hand, a reduction in demand will often result in the under-utilisation of existing capacity and encourage a move to smaller premises. The Figure below crease or a decrease in the amount of space available. __________________________________________________________________________________ 416 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED While the main forces are associated with demand, and hence with the operations and marketing functions, it is worth noting that both finance and labour management might also be instrumental. Changes in interest rates may affect the cost of holding stock and cause a change in stock-holding policy, which in turn may affect space requirements. Legislation relating to investment allowances, employment tax, depreciation, etc. may influence company financial policy enough to affect the scale or the nature of the undertaking; similarly, legislation relating to labour may necessitate a change in the nature or extent of facilities, e.g. the addition of extensive training facilities and welfare facilities. Scientific discoveries or developments, new fields of technology, increasing competition, licensing, or patent arrangements all may affect company research and development effort, which in turn will influence space requirements, as will changes in operations technology, obsolescence of equipment. A change in space requirements is only one of several possible reasons for the need to consider the acquisition of an additional facility location. The Figure below identifies other forces which may give rise to such a decision. The need to seek smaller or larger premises may arise without the occurrence of a change in demand and thus capacity. For example, the cost associated with the present location may change through increases in the cost of labour caused, perhaps, by increasing employment opportunities ties in the area. The price of raw materials or indirect materials may change through changes in the cost of transport or changes within associated industries. Indirect costs such as those associated with communications, education, housing, etc. may change. Also new competition or changes in taxation may prompt the decision to seek alternative premises as may other external pressure such as labour disputes. These forces may prompt the consideration of a complete move or the acquisition of an additional site(s).

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ADVANCED

Business Policy Changes Changes in Demand

Finance Changes

Marketing Changes

Other External Pressures

Operations Changes

Labour Mgt Changes

Scales of Output/Throughput and Mix

Changes in Taxation

Growth

Equilibrium

Decline

Need for Training, facilities, canteens, carparks, etc

Stocks & WIPs Machinery & Manpower

Growth

Equilibrium

Decrease

Changes in Space Requirements

Figure 1 Pressures for Change inSpace

Factors Forcing Change Factors Influencing Locational Choice Simchi-Levi et al (2000, p28) claim that factors such as “geographical and infrastructure conditions, natural resources and labour availability, local industry and tax regulations and public interest” play very a very important role in the determination of the location of a warehouse.

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ADVANCED Theoretically, both new and existing businesses have a vast range of alternative new locations. The selection of the site of the facility will be the final stage of a sequence of decisions which begins with the selection of an appropriate region, then involves the selection of an appropriate area in that region, etc. For an international organisation, it is possible to identify at least four stages in this locational choice process, as outlined in Table 1. Different factors will influence decisions at each of these levels, and these also are outlined. Table 1 Decision No 1

Regional Decision (Asia) Some factors influencing choice: - location of markets - location of suppliers - location of existing plants, offices, etc - transport costs - availability of resources - climate - management preferences - costs - labour etc - legislation

Decision No 2

Area Decision (S'pore) Some factors influencing choice: - location of markets in the region - location of suppliers in the region - resources availability - management preferences - availability of suitable site - costs/inducements/taxes - transportation/communications etc.

Decision __________________________________________________________________________________ 419 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED No 3

Community Decision (Clementi Park) Some factors influencing choice: - sites available - communications - costs - land, construction - availability of utilities - amenities - local taxes, rates - proximity to related organisations - accessibility to and by customers

Decision No 4

Site Decision Some factors influencing choice: - site characteristics - services available - environment impact - expansion potential - local transport and amenities - labour availability - accessibility to and by customers - visibility to customers

Specific Site Selection The relative importance of some of these factors will depend on the type of operation or business which is to be located. For example, whilst proximity to suppliers and customers will be of importance in most types of business, the manner in which this factor is viewed or assessed may differ. Thus, for manufacture, which is a 'fixed' activity, the movement or transport of items in (from suppliers) and out (to customers) will be of importance and transport distances and costs may be appropriate measures. Similarly, for supply activities, transport in from other locations will be important, but when the supplier takes items to customers, transport out is unimportant. __________________________________________________________________________________ 420 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED In such cases proximity to customers is to do with the ease with which customers can come to the location. Similarly, for fixed services proximity to customers is likely to focus on their ease of access to the facility, when the service is taken to the customers - as in some emergency services. Thus, the distinction between fixes and delivered supply/services is an important one in location choice. Although transport, by definition, moves, it can also be classified as fixed or delivered for the purposes of locational choice. This, of course, is the distinction between those transport systems to which customers come to start their journeys (e.g. ferry and air service) and those which go to the customers in order to start the journey from there (e.g. couriers). In general, fixed supply, service and transport systems will evaluate locational alternatives in terms of accessibility by customers (e.g. distance to be travelled by customers), while delivered systems will consider accessibility to customers (e.g. time to reach customers). In both cases, customer density in a given area will be important, and in the case of supply systems proximity to suppliers will also be important. Change in Space Requirements

Expansion

Capacity limits of existing space

Existing Locational Costs

Existing Locational Receipts

Other External Pressures

Contraction

Increase in overheads

Direct input

Indirect cost of

Competition

Taxes

Subjective

Planning requirements

Review of Movement Process cost, willingness, etc Need for new location

Evaluation

Accomodation on existing site Decision to Move

Scale of economies

Mgt factors

Timing

Quality, value, tenure of existing bldgs

Establish new warehouse

Cost and willingness of mgt and labour force to move

Any cost change in existing site

Complete relocation of business

Figure 2 Pressures for a New Location

Factors Influencing Site Decision

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ADVANCED Costs Strategies Another way of looking at locational choice is cost objectives which tend to focus on cost minimisation in making location decisions as summarised in Table 4-2. Tangible Costs

Intangible & Future Costs

Assumptions

- transportation cost

- attitude towards union

- location is major

- energy cost

- quality of life

determinant of

- utility cost

cost

- labour

- major cost can be

- taxes

identified

- etc

explicitly for each site

Location Strategies Establish new waerhouse

Complete relocation of business

Ties with parent site

Levels of throughput

Accessibility by customers

Accessibility Land Labour

Raw materials Components

Energy

Markets

Bldg

M/C

Public services Taxes/grants

Unit cost and transportation cost

Fixed costs

Taxes/rebates Variable costs Demand and revenue factors

Economic viability of project Subjective factors Alternative locations

Choice of location Figure 3 Choice of New Site

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ADVANCED Principal Factors in Locational Choice Selecting New Site The figure examines in more detail some of the factors which will generally be of importance in locational choice. These can be summarised as four sets of factors: •

Variable costs

•

Fixed costs

•

Revenue factors

•

Subjective factors (examples include EPEST)

Variable Costs Perhaps the main factor here is the 'accessibility' of the proposed location in terms of both inputs and outputs. As regards input, accessibility to labour is important; not merely sufficient labour, but labour of the correct type and at a correct price. Accessibility of raw materials, subassemblies and components is important, the cost of such input being mainly a function of transport. Access to technical and to other services such as warehousing and maintenance is often essential. With regard to output, a location must clearly have easy access to adequate markets, as well as public services and associated industries. Fixed Costs These are associated with the provision and maintenance of facilities. The design of buildings and the layout of facilities will influence such costs. The cost of erecting and maintaining buildings, the cost of access roads, the cost of transportation of machinery, rates, and rental and so on will all influence the choice of location. We should also consider as fixed costs the cost of inventories of materials and finished items which may depend on the plant location. Choice between 2 Locations Break-even Volume Analysis Management often has to pick the most appropriate location from a list of sites. There are many methods. One such technique is the break-even model. The prime advantages are its simplicity and its quantitative nature. Conversely, it suffers from its ability to assess multiple locations; it allows at any one time, two locations to be compared. Plant Layout A layout is the physical configuration of departments, workstations, and equipment in the entire conversion process. It is the spatial arrangement of physical resources used to create the product or service.

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ADVANCED

Cost

FC2

FC1

BE Volume

Throughput

The right layout for an organisation improves productivity, the quality of the product or service, and the delivery rates. The layout decision is very important strategically for any organisation to stay competitive in the present era. The basic objective of layout is to ensure a smooth flow of work, material, and information through the system. McDonald’s looks for competitive advantage with its new high-tech kitchen layout In 2001, McDonalds completed its 5th major innovation, and, not surprisingly, it is a new layout to facilitate a mass customisation process. Dubbed the “Made for You” kitchen system, sandwiches are now assembled to order, and production levels are controlled by computers. The new layout is intended to both improve the taste of food by ensuring it is always freshly made, and to facilitate the introduction of new products. Under the new restaurant design, shown on the figure on next page, no food is prepared in advance except the meat patty, which is kept hot in a cabinet. To shorten total production process to 45 seconds, some steps were eliminated and some shortened.

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ADVANCED For instance, the company developed a toaster that browns buns in 11 seconds instead of half a minute. Workers also figured out they could save 2 seconds if condiment containers were repositioned to apply mustard to sandwiches with one motion instead of two. What is the payoff for the layout change? McDonald’s will save $100 million per year in food costs, largely because only the meat, and no longer the bun or other ingredients, will be discarded when sandwiches do not sell fast enough. The company is banking that with the new layout, new standards of efficiency and happier customers will provide a competitive advantage. What Makes a Good Layout? These factors are to be considered for a good layout: 

Inherent safety

- No entry to unauthorised personnel to processes that might pose a danger - Clearly marked fire exits - Clearly defined and uncluttered pathways 

Flow length

- Appropriate channelling of flow of materials, information, or customers - Minimisation of travelling distance of work-in-process (WIP) 

Flow clarity

- Clear and evident signposts 

Comfort of staff

- Well ventilated, well-lit, and pleasant working environment - Location of staff away from noisy or unpleasant part of operations 

Co-ordination of Management

- Communication devices for staff location and supervision 

Accessibility

- Sufficient accessibility for maintenance and proper cleaning of machines, plant, or equipment 

Space Utilisation

- Appropriate use of total available space 

Long term flexibility

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ADVANCED Types of Layouts Layout decisions include the best placement of machines (in production settings), offices and desks (in office settings), or service centres (in setting such as hospital or department stores). An effective layout facilitates the flow of materials, people, and information within and between areas. To achieve these objectives, a variety of approaches has been developed. There are six types of layout. These are summarised in Table 4-3 below: Type of layout

Description

1. Fixed position layout

Addresses the layout requirement of large, bulky and stationery projects such as ships and building.

2. Process-oriented layout

Deals with low-volume, high variety production (also called “job shop” or intermittent production)

3. Cellular layout

A special type of process-oriented layout where machines and workers are grouped into a cell for a certain volume of product.

4. Product-oriented layout

Seeks the best personnel and machine utilisation in repetitive or continuous production

5. Office layout

Positions workers, their equipment, and spaces/offices to provide for movement of information

6. Retail layout

Allocates shelf space and responds to customer behaviour.

7. Warehouse layout

Addresses trade-offs between space and material handling.

Types & Nature of Layout Fixed–Position Layout A fixed-position layout is appropriate when, because of size, shape or any other characteristic, it is not possible to move the product. A fixed-position layout is the arrangement of facility so that that product stays in one location and tools, equipment and workers are brought to it as required. The layout for a fixed material location department differs in concept from the other layout. Aircraft assembly (see the photograph), shipbuilding and most construction projects use fixedproduct layout. Fixed-product layout involves the sequencing and placement of workstations around the product.

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ADVANCED The fixed-product layout involves made-to-order products and low volume production. It involves little or no workflow. It requires great flexibility where work assignments and locations vary a lot. Material handling in fixed-product layout is often variable and low. It generally requires heavyduty, general-purpose handling equipment. The inventories are often variable in fixed-product layout and the tie-ups are frequent due to the long production cycle.

Fixed Layout The Advantages and Limitations of Fixed Position Layout Advantages

Limitations

As the product stays at one place, the Due to the fixed product, the personnel and material movement is minimal in fixed- equipment movement is very high in the product layout. Since majority of fixed- fixed-product layout. product layout use team approach there is a continuity of operations and responsibility among personnel. The made-to-order characteristics of the The fixed-product layout results in product in this type of layout result in more duplication of equipment. Since many job enrichment opportunities for the processes are performed on a fixed product, fixed-product layout requires greater skill for personnel. personnel. The layout promotes pride and quality as an individual can complete the "entire job". The fixed-product layout results in increased Due to the non-movement of product the space and greater work-in-progress. Fixed__________________________________________________________________________________ 427 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED layout is highly flexible and can product layout requires close control and accommodate changes in product design, coordination in scheduling production. product mix and production volume. Fixed-position layout requires low fixed costs Since the product manufactured is generally and high unit labour and materials costs. very big in size, there is small output per unit space. Process-Oriented Layout

Process Layout A process-oriented layout is most appropriate for intermittent operations. The layout for a process consists of grouping like processes together and placing individual process departments relative to one another based on workflow between departments. Process layout is suitable for operations when workflow is not consistent for all output. Typically, there is a high degree of interdepartmental flow and little intradepartmental flow. __________________________________________________________________________________ 428 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Process layout suits well when the volume of activity for individual or groups of parts is very high and has a high degree of variations. This type of layout is appropriate for diversified products using common operations, varying volumes, and varying rate of output. It is suitable for operations with variable workflow where each product may require unique sequence of operations.

Process Layout The Advantages and Limitations of Process Layout Advantages

Limitations

Since the layout deals with varied workflow, Due to the variation in workflow, process it increases machine utilisation. The layout often produces duplicated handling. breakdown of departments according to the processes they perform requires only __________________________________________________________________________________ 429 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED general-purpose equipment. There is a low turnover of raw material and This type of layout is highly flexible in work-in-progress inventories and there is a allocating personnel and equipment. Process high raw material inventories. layout reduces material handling As far as space utilisation is concerned there requirements. is small output per unit space and there is a Because of the variety of processes to large work-in-progress requirement. perform there is a diversity of tasks for Process layout results in long production personnel. lines. Though it requires low fixed costs, yet The personnel working in this type of layout it requires high unit costs for direct labour, perform tasks of scheduling, materials materials, and materials handling. handling and production and inventory control. Cellular Layout Cellular work arrangements are used when volume warrants a special arrangement of machinery and equipment. In a manufacturing environment, group technology identifies products that have similar characteristics and allows not just a particular batch (for example, several units of the same product) but also a family of batches, to be processed in a particular work cell. Work cells can be thought of as a special case of process-oriented layout. The work cell idea is to reorganise people and machines that would ordinarily be dispersed in various process departments and temporarily arrange them in small groups so that they can focus on making a single product or a group of related products. The work cell, therefore, is built around the product. •

Advantages of Work Cells o Reduced Work-In-Process (WIP) inventory because the work cell is set up to provide a balanced flow from machine to machine. o Less floor space required because less space is needed between machines to accommodate WIP inventory. o Reduced raw material and finished goods inventories because less WIP allows more rapid movement of materials through the work cell. o Reduced direct labour cost because of improved communication between employees, better material flow, and improved scheduling.

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ADVANCED o Heightened sense of employee participation in the organisation and the product because employees accept the added responsibility of product quality being directly associated with them and their work cell. o Increased use of equipment and machinery because of better scheduling and faster material flow. o Reduced investment in machinery and equipment because good facility utilisation reduces the number of machines and the amount of equipment and tooling. •

Requirements of Cellular Production o Identification of families of products, often through the use of group technology codes or equivalents. o A high level of training and flexibility on the part of employees. o Either staff support or flexible employees to establish the work cells initially. o Test (poka-yoke) at each station in the cell. Work cells and assembly lines are sometimes organised in a U shape. U-shaped facilities, as shown in the diagram, have at least five advantages over straight ones: o Because tasks can be grouped, inspection is often immediate o Fewer workers are needed o Workers can reach more of the work area o The work area can be more efficiently balanced o Communication is enhanced

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ADVANCED

Before and After Process Layout Product-Oriented Layout A product-oriented layout is most appropriate for continuous operations. A product layout is an arrangement of a facility so that work centres or equipment is in line to afford a specialised sequence of tasks. Product-oriented layout is appropriate in producing standardised product in large volume. Typically, material flows directly from one workstation to the adjacent one in a well-planned way which results in high volume environment. In a product-oriented layout, each unit of output requires the same sequence of operations from the beginning to the end. Each work centre performs one highly specialised part of the total product build-up sequence. Example : Assembly Line •

Assembles fabricated parts

•

Uses workstation

•

Repetitive process

•

Paced by tasks

•

Balanced by moving tasks

A row of operators working at an electronics component’s assembly line •

Advantages and limitations of Product Layout

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ADVANCED Advantages

Limitations

Product layout produces smooth, simple, logical, and direct workflow lines. As the layout is appropriate for standardised production in large volume, it results in stable rate of output. The presence of smooth workflow lines between different departments reduces the work-in-progress inventories.

The smooth and sequential workflow between the various machines in product layout is susceptible to any machine failure, which stops the entire line. Any change in product design makes the layout obsolete.

The layout reduces the total production time The slowest station in the production line per unit. Material handling is often governs the speed of production in product predictable, systemised, and automated. layout. There is a high turnover of raw material and work-in-process inventories. These types of layout require a large number Because of smooth workflow, simple of support staff that schedules materials and production control is possible. As the layout people and monitor and maintain work. produces large output per unit space, the space is efficiently utilised. Due to the large volume of production, the layout results in The layout requires large investment in low unit costs for direct labour and specialised equipment and process. The materials. The personnel working in this type product layout is characterised by relatively of layout perform highly specialised high-fixed costs. repetitive tasks at fixed pace.

Office layout

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ADVANCED

Accounting Fin a n ce Fin. M a na g er

Acct.

B ra nd X

The main difference between office and factory layouts is the importance placed on information. Even though the movement of information is increasingly electronic, analysis of office layouts still requires a task-based approach. Managers, therefore, examine both electronic and conventional communication patterns, separation needs, and other conditions affecting employee effectiveness. General office-area guidelines allot an average of 100 square feet per person. In contrast, restaurants provide from 16 to 50 square feet per customer. By making use of vertical dimension in a workstation, some office designers expand upward instead of outward. This approach keeps each workstation unit (what designers call the “footprint”) as small as possible. However, these American concepts of space are not universal. In a typical Japanese office, they work out in the open, with desks crammed together in clusters called “islands”. Islands are arranged in long rows; managers sit at the ends of the rows with subordinate in full view. On the other hand, some layout considerations are universal. They have to do with working conditions, teamwork, authority, and status. Should all or only part of the work area be airconditioned? Should all employees use the entrance, rest rooms, lockers, and cafeteria? As a final comment on office layout, we should note two major trends. First, technology, such as cellular phone, home offices, laptop, and PDAs, allows increasing layout flexibility by moving information electronically. Second, virtual companies create dynamic needs for space and services. These two changes tend to require fewer office employees on site. Retail Layout Retail layouts are based on the idea that sales and profitability vary directly with customer exposure to the products. Thus, most retail operations managers try to expose customers to as many products as possible. __________________________________________________________________________________ 434 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

Retail Outlet Layout Studies do show that the greater the rate of exposure, the greater the sales and the higher the return of investment. The operations manager can alter both with the overall arrangement of the store and the allocation of space to various products within that arrangement. Four ideas are helpful for determining the overall arrangement of many stores: •

Locate the high-draw items around the peripheral of the store. Thus, we tend to find dairy products on one side of a supermarket and bread and bakery products on another.

•

Use prominent locations for high-impulse and high-margin items such as housewares, beauty aids, and shampoos.

•

Distribute that are known in the trade as “power items” – items that may dominate a purchasing trip – to both side of an aisle and disperse them to increase the viewing of other items.

•

Use end-aisle locations because they have a very high exposure rate.

Once the overall of a retail store has been decided, products need to be arranged for sale. Many considerations go into this arrangement. However, the main objective of a retail store is to maximise profitability per square foot of floor space. Big ticket, or expensive items may yield greater dollar sales, but the profit per square foot may be lower. Warehouse Layout The objective of warehouse layout is to find the optimum trade-off between handling cost and costs associated with warehouse space. Consequently, management’s task is to maximise the utilisation of the total space of the warehouse – that is, utilise its full volume while maintaining low material handling costs. __________________________________________________________________________________ 435 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED We define material handling costs as all the costs related to the incoming transport, storage, and outgoing transport of the materials to be warehoused. These costs include equipment, people, material, supervision, insurance, and depreciation. Effective warehouse layouts do, of course, also minimise the damage and spoilage of material within the warehouse. Management minimises the sum of the resources spent on finding and moving material plus the deterioration and damage to the material itself. The variety of items stored, and the number of items “picked” has direct bearing on the optimum layout. A warehouse storing a few items lends itself to higher density than a warehouse storing a variety of items. Modern warehouse management is, in many instances, an automated procedure using automated storage and retrieval systems (AS/RS). An important component of warehouse layout is the relationship between the receiving (unloading) area and the shipping (loading) area. Facility design depends on the type of supplies unloaded, what they are unloaded from (trucks, rail car, barges etc.) and where they are unloaded. In some companies, the receiving and shipping facilities, or “docks” as they are called, are even the same area; sometimes they are receiving docks in the morning and shipping docks in the afternoon. There are four factors to consider when designing the layout: •

Customer service Level

If customers demand fast delivery, then layout must be designed to ensure materials are retrieved as quickly as possible. •

Material Flow

The warehouse must be designed to allow the goods to flow smoothly and travel the shortest distance to its storage destination. •

Lowest Cost

The racking should be built as high as possible and aisle as narrow as possible to maximise volumetric space to minimise cost. •

Types of Activities

A cross-docking, a DC, or a warehouse built to support manufacturing will have different layout designs. Let us now consider some general principles of layout design, and then examine layout in the context of the several categories of space previously discussed. The most commonly accepted principles of warehouse design and layout are as follows: •

Use a one-storey facility wherever possible, since it usually provides more usable space per dollar of investment and very often is less expensive to construct.

•

Use straight-line or direct flow of goods into and out of the warehouse. Such an approach avoids backtracking and inefficiency in warehouse operations. Implied in this principle is

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ADVANCED the need to avoid warehouse designs that are not laid out in a straight line - that is, avoid any design that forms an L, a T, or any other odd shape. •

Use of efficient materials handling equipment and operations. The fundamentals of materials handling are explored in the next chapter. Basically, materials handling equipment helps to improve efficiency in operations as well as other benefits to be delineated.

•

Use of an effective storage plan in the warehouse. In other words, the goods have to be placed in the warehouse in such a way as to maximise warehouse operations. If goods are not placed in the warehouse properly, this can also result in inefficiencies. Stated simply, we are seeking to achieve as complete and effective utilisation of existing space as possible while at the same time providing adequate protection for the goods being stored.

•

Keep aisle space to a minimum within the constraints imposed by the size, type, and turning radius of materials handling equipment. Consideration also must be given to the products themselves, and to the constraints imposed by the products.

•

Make maximum use of the height of the building - that is, to utilise the cubic capacity of the building effectively. This usually requires integration with materials handling.

•

Despite the high costs of vehicles capable of manoeuvring in small aisles and stacking many times higher than conventional vehicles, there are potentially large overall systems savings. This is because the major expense, construction, falls rapidly since using height costs only a fifth of the cost of building the same cubic footage horizontally.

•

All materials should be readily observable at all times and there should be no ‘hiding places’ into which goods can get mislaid.

•

Goods placed in the warehouse storage systems must be accessible. Do note that this does not mean 100% accessible.

•

All movements should be both necessary and direct. Handling material adds to the cost of the products but does not increase its value.

•

Work lanes and transport lanes must not cross. No gangways must ever be used for storage purposes, even temporarily.

With these general principles in mind, we re-visit the design requirements of some of the basic space areas in the warehouse: Shipping & Receiving Area With regard to the shipping and receiving areas, consideration will have to be given to whether stock will be placed temporarily in these areas and whether equipment has to be stored in these areas. The turning requirements of materials handling equipment will also influence needs in this area.

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ADVANCED An analysis also will have to be made of the number of bays, as well as their size and shape. The bay requirements will be influenced by the type of carrier utilised, product characteristics, and materials handling equipment. Order Picking & Preparation Area For the order picking and preparation area, it must be kept in mind that this section of the warehouse is characterised by almost constant movement in a physical distribution warehouse. It is difficult to utilise cubic space effectively because of the need to keep items within reaching distance for order pickers. This problem can be overcome to some extent by utilising materials handling equipment. However, the problem will never be completely resolved, because constant movement requires more open space. There are two basic ways to layout the order picking and preparation area: •

One is to use the general area approach. Here, the order picking and preparation area is basically mixed in with the storage area, with appropriate racks and equipment for order preparation.

•

The second basic layout for order picking and preparation is the modified area approach. This approach has separate areas for storage and for order preparation. The order picking bays are usually smaller than the storage bays to allow better access. The order picking bays will be stocked on a regular basis, and usually there will be provision made for partial and full boxes. The separation of order picking from storage offers the advantages of reducing picking time and distance but reduces the flexibility of the facility.

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ADVANCED

Ware hous e Layou t Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

Warehouse locations are never chosen based on economic reasons

The choice of location of a warehouse or manufacturing facility is not a vital decision for any new business

A fixed-position layout is appropriate when, because of size, shape or any other characteristic, it is not possible to move the product

A process-oriented layout is most appropriate for intermittent operations. The layout for a process consists of grouping like processes together and placing individual process departments relative to one another based on workflow between departments

A product-oriented layout is most appropriate for continuous operations. A product layout is an arrangement of a facility so that work centres or equipment is in line to afford a specialised sequence of tasks

True

False

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ADVANCED 6

Retail layouts are based on the idea that sales and profitability vary directly with customer exposure to the products. Thus, most retail operations managers try to expose customers to as many products as possible

The objective of warehouse layout is to find the optimum trade-off between handling cost and costs associated with warehouse space. Consequently, management’s task is to maximise the utilisation of the total space of the warehouse

There are four factors to consider when designing the layout – Customer service level, material flow, lowest cost, and types of activities

One of the most commonly accepted principles of warehouse design and layout is to use a one-storey facility wherever possible, since it usually provides more usable space per dollar of investment and very often is less expensive to construct

For the order picking and preparation area it must be kept in mind that  this section of the warehouse is characterised by almost constant movement in a physical distribution warehouse

CHAPTER 20 - GLOBAL ALLIANCES

CHAPTER 22 - ECONOMIC ORDER QUANTITY (EOQ) MODEL

US336707: Demonstrate an understanding of the key issues important for compliance with corporate governance principles and social responsibility

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ADVANCED PURPOSE: This Chapter will enable learners to demonstrate an understanding of the key issues important for compliance with corporate governance principles and social responsibility, also be able to demonstrate a clear understanding of the need for complying with corporate governance principles and social responsibility in procurement, including ethical conduct, Black Economic Empowerment (BEE), environment protection and health and safety. LEARNING OBJECTIVES: Learner’s will be able to:   

Assess and apply the key issues critical for compliance with corporate governance principles. Assess key procurement concepts to determine their impact on corporate governance and social responsibility. Evaluate the legislative environment influencing corporate governance and social responsibility.

CHAPTER 20 - GLOBAL ALLIANCES

Introduction – Definition of Partnership Look up the meaning of the word 'partnership' in a dictionary and you will see phrases such as 'close co-operation', 'shared interests' and 'joint rights and responsibilities. Then ask supply chain professionals to describe partnerships and see if the definitions bear any resemblance to the phrases listed above. You will undoubtedly get a wider range of responses, ranging from stalwart support, to agreeable nods, to much less-refined outbursts ~ so why the difference? Why does the condition that nearly every retailer and supplier agree is fundamental to future supply chain effectiveness meet with such scepticism? The answer is because the majority of attempts at implementing retailer-supplier relationships are fraught with resistance, seldom meeting either party's expectations. Instead of reaping the benefits of synergistic supply chain relationships, most retailers have either avoided strategic partnerships or have done so only in a half-hearted manner. Even worse, many retailers have altered the meaning of partnership to that of a one-way compliance programme, a relationship that achieves measurable short-term benefits, but negates the opportunity for future 'win-win' improvement. How can this pattern be reversed? How can retailers and suppliers who want to build effective relationships achieve the resulting benefits of shortened lead times, reduced stockholding levels and rapid throughput? These questions can be answered by following two seemingly simple processes: •

First, identifying the prerequisites for true partnership building and

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ADVANCED •

Second, building the processes, implementing the measures, and establishing the accountabilities that will sustain and reinforce the relationship.

Unfortunately, however, knowing what to do is simple. The execution, or changing behaviours, is where the real challenge lies and is where most good intentions fall by the wayside. Let us look first, at the prerequisites that must exist for effective supplier-retailer partnerships, to evolve, and then examine the practicalities of making these partnerships work in the supply chain. Finally, we will look at the logical starting points for building these links between traditional adversaries. Partnership Prerequisites Certain conditions must be met before any partnership can work. The most basic of these centres around one word “willingness”. Both parts must be willing to enter into a relationship that runs contrary to previous cultural and business practices. This is no small obstacle to overcome. Traditional supplier-retailer relationships have been founded not on trust, but rather on exploitation. Whoever held the upper hand used it to gain advantage over their opposite number. Suppliers of popular products rationed deliveries to retailers, required investments for promotional activities and pitted customer against customer. Converse 'category killers' and many of today's mega-retailers account for such large percentage of some supplier's annual turnover, that the pressure they exert on supply chain compliance, systems investment and stock holding handcuff the supplier from growing their own businesses. Yet when roles reverse, as they invariably do, the underdog will strike even harder at its old adversary, perpetuating the downward spiral of inefficiency. The key to overcoming this legacy and thereby creating the willingness by both parties to act as partners is dependent on two conditions. Both supplier and retailer must: •

Have common, shared goals, and

•

Be mutually dependent on achieving these goals.

Common goals imply that both parties understand the benefits that can be realised by successfully transforming their relationship to one of shared risks and benefits. These benefits include the obvious ones of freed capital from reduced stockholding, drastically reduced operating costs and improved sell-through, in addition to the less tangible benefits of reduced stock-outs, enhanced brand integrity, increased consumer loyalty. Both the supplier and retailer must understand that these opportunities exist and recognise that the benefits are available to all participants in the supply chain. Mutual dependence is the condition that begins to eliminate barriers between parties. Retailers and suppliers will never realise shared goals if they act autonomously in improving supply chain processes. __________________________________________________________________________________ 442 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED They may improve discrete processes, such as inbound transportation, order fulfilment or DC space utilisation, but the 'step change’ improvements that will mark tomorrow's winners will only be achieved by viewing the supply chain as a single, seamless process. Tasks must be performed at the most suitable place in the supply chain, with responsibilities apportioned accordingly. All supply chain participants must then act in concert, regardless of past practices, to holistically streamline internal and external supply chain processes. Creating this willingness is largely achieved through understanding the dynamics of world-class supply chain processes and the position of the participating businesses relative to these benchmarks. The pain resulting from this gap, coupled with education and an open dialogue between suppliers and retailers paves the way for creating an environment where the two parties are now willing to act in concert. We have seen that common goals and interdependence are the bedrock upon which any successful partnership is built. This only provides the starting point. However, with sound implementation skills and commitment of time and resources as the catalyst, the concept can be turned into reality. Implementation Implementation encompasses many diverse challenges, not least of which is where to start. Most retailers who have developed sound supplier relationships have started slowly, usually through a limited roll-out with a single or relatively few key supplier partners. This enables the processes to be developed in a less cluttered, focused manner, while also reducing the time and resource commitment necessary to see it through. It also lessens the impact of mistakes, which will occur, but which also typically provide the greatest learning opportunities. Expediency is less important than success in the initial phases. After all, when the business has successfully rolled-out its programme across the bulk of its supplier base, no one will remember that it started small. Rather, they will remember that it was successful, gaining momentum as it evolved. Selecting the 'right' supply chain partner to prototype the partnership process is the next critical step. What makes the right supplier partner? A few key traits include: •

A stable product-line

•

Comparable technology levels

•

Aligned cultures, especially with regards to initiative-taking business improvement

•

Sound financial position

•

High degree of trust between top management levels.

These, of course, are in addition to the shared goals and understanding of the interdependence that were highlighted earlier. __________________________________________________________________________________ 443 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Once the right partner(s) is identified, the businesses must focus on building a critical mass of sponsorship. As the process unfolds, both physical and cultural obstacles will be encountered. These will come from both within the organisations and from external factors, and can only be overcome through the top-level commitment, by both parties, to see the process through to a successful conclusion. But what is effective sponsorship? Sponsorship is not merely rhetoric. Effective sponsorship, the kind needed for meaningful supplier-retailer partnerships, takes the rhetoric, and backs it up with tangible actions. This is both public and private in form. Public sponsorship includes openly advocating and legitimising the initiative throughout all affected areas of the business. It means committing the time and, more importantly, the resources necessary to support the initiative. It means publicly acknowledging and rewarding those employees whose behaviour is aligned with the partnership goals. Finally, it means having the resolve to stay the course, continuing to support the partnership when financial, operational, or political pressures may be threatening to undermine the process. Private sponsorship, though by definition less obvious, is just as critical to success. Private sponsorship revolves around top management's willingness to take corrective action against individuals or parties who are resisting the partnership. This action must not necessarily be punitive, but it must be constructive. Counselling, backed up by performance measures that provide feedback and direction consistent with the business's objectives, is much more effective in changing behaviours than an axe looming over someone's head. Nonetheless, if the sponsor is truly committed to building a lasting partnership, he/she must take drastic action if required to ensure that the same level of commitment has cascaded throughout all levels of the organisation. The need for dual sponsorship of any partnership initiative cannot be overemphasised. More partnerships fail because of a lack of sponsorship than for any other reason. Often this is not because they did not want the partnership, but rather they did not understand the level of commitment and length of time required to see it through to fruition. Sponsorship is critical to success and cannot be avoided, delegated, or ignored. Once the required levels of sponsorship are achieved, the real implementation work begins. This centres on the creation of a prototype team, comprising representatives from both the supplier and retailer organisation. Each affected functional area within the business must also be represented, with the core team typically containing members from: •

Distribution

•

Buying and merchandising

•

Information technology

•

Human resources

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ADVANCED •

Finance; and

•

Warehouse operations.

This team, legitimised by the sponsors, has complete responsibility for designing and implementing the change within both organisations. While the team will typically follow the same roller-coaster path of all groups in becoming an effective working group, its power is inestimable. Just the simple act of having dedicated participants from both sides in the same room makes huge strides in breaking down barriers to improvement. It is common to identify potential improvements in the first meetings, just by surfacing and discussing issues in an open, non-accusatory environment. Often, the response from suppliers to specific retailer requests or problems is astoundingly simple: 'We can do that...you should have asked us a long time ago'. Identifying these potential problems and opportunities, and then devising processes to solve them consistent with the businesses' vision is the team's charter and is the catalyst for achieving future change. In developing the resulting partnership processes, the team should maintain a long-term focus, but also be constantly aware of short-term improvement opportunities. It is much easier to maintain momentum and advocacy if the team is building a track record of wins from the very beginning. In many instances, these can fund the longer-term investments required for changes in I.T. systems or improvements in material-handling equipment and processes. Thus, the financial burden of the partnership initiatives is lessened, thereby eliminating another potential obstacle to the change. Long-term partnership objectives vary greatly by business and culture. Nonetheless, experience in quick response (QR) and most recently, efficient consumer response (ECR) relationships has shown that the successful sharing of demand and sales data, dual product development, continuous store distribution and, ultimately, vendor-managed inventory (VMI) are potential windfalls for both suppliers and retailers. These are attributes of mature partnerships, however, and will not be achieved overnight. Instead, the team should maintain these as their ultimate objectives, but begin developing the infrastructure and processes to support these capabilities in the long term. These shorter-term changes may be as simple as establishing EDI links where they do .not currently exist, identifying uniform packaging types and markings that are suitable for both businesses' operations and, where possible, picking and packing by retail outlet to speed the flow of the product to the store shelves. These need not be monumental improvements, as long as they are aligned with the long-term goals and demonstrate tangible, meaningful progress toward achieving these objectives.

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ADVANCED The final implementation success factor for effective supplier-retailer relationships is the need to instil in the team, and ultimately both businesses, the necessity for continuous improvement. This philosophy, when fully internalised, underpins every supply chain process. As the prototype nears completion and the businesses are ready to roll the programme out on a wider scale, lessons learnt must be critically and constructively examined for potential future enhancements. Well-defined performance measures and standards must back these up. These then become the next levels of improvement for which to strive. The process of improvement for both parties must be continuous, because standing still in today's business environment means falling behind. To summarise, the benefits of meaningful supplier-retailer relationships far outweigh the cost and risk required for their implementation. But the path to achieving these benefits is not simple. If both parties share the programme goals and objectives and are willing to commit the time and resources necessary to achieve them, these benefits can become a reality. It is then that the true textbook definition of 'partnership' can be internalised, and a win-win business environment realised. Strategic Global Alliances – “Win-Win Situation” Another exciting and challenging change in how business is conducted is progressing in parallel with the development of supply chains: the development of supplier partnerships and strategic global alliances. These partnerships and alliances are not legal entities but rather, mutually beneficial, and open relationships wherein the needs of both parties are satisfied. As shown in the Figure below, a customer organisation will have different types of supply relationships in support of its operation. Arm’s Length Relationship

Collaborative Relationship

Suppliers

Certified Suppliers

Traditional Suppliers

Partnership type relationship

Strategic Alliances

Historically, the vast majority of buyer-seller relationships have been conducted in an arm’s length mode. In many cases, these relationships were adversarial wherein both buyer and seller believed that the only way to get a ‘good deal’ was at the other’s expense. Accordingly, much time and effort were involved in zero-sum games. Common sense and advances in how we conduct business, enlightened self-interest, and the realisation that competition is (or should be) between value chains – and not between members of a value chain – all combine to motivate buyers and sellers to work in a __________________________________________________________________________________ 446 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED collaborative mode. The natural outcome is the forming and nurturing of buyer-seller partnerships and, in selected cases, strategic alliances. The characteristics of such a relationship are: •

A compatibility of interests

•

Mutual need

•

A willingness to be open, sharing information as well as the benefits resulting from the relationship; and

•

Perhaps of greatest importance, trust

Many in the field have asserted the advantages of global alliances. One analysis (“Partners for Profit” – Purchasing, April 28, 1988 p. 63) indicated the following benefits from global alliances that benefit both parties. Advantages to Buyer •

Inventory reduction

•

Reduced paper work

•

Reduced acquisition costs

•

Typically, standardised prices for longer term decisions

•

Improved quality

Advantages to Seller •

Increased business

•

Increased efficiencies within the seller with higher sales

•

More stable customer relationships that are renewed and reinforced.

Interesting, the advantages to the seller often translate to buyer advantages that supports the wisdom of the practice. Another survey (Purchasing Magazine, July 1988 p.23) of ‘win-win situation” reported that their reasons for adopting global alliances were as follows: •

Reduced inventory – (76%)

•

Cost control – (75%)

•

Dependable supply levels – (70%)

•

Reduced lead time – (67%)

•

Reduced paper processing (46%)

•

Improved quality control – (43%)

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ADVANCED •

Technical support – (23%)

Competitive Advantage Business has long been recognised that customer goodwill is a valuable asset. In fact, customer goodwill has legal recognition, and it is carried as an asset on many company balance sheets. Business is just beginning to realise that supplier goodwill is also an important company asset. A company develops customer goodwill by selling acceptable products at a fair price, supported by good service with customer’s interests in mind. The buying firm develops supplier goodwill by being open, impartial, and scrupulously fair in all its dealings with suppliers. A company’s purchasing department should motivate its suppliers to participate in a mutually profitable buyer-seller relationship. To create such motivation fully, it is essential that both buyer and seller completely understand the mutual advantage of a continuing relationship. Such a relationship permits the seller to learn the intricacies of the buyer’s operations and vice versa. The seller learns about the buyer’s business problems – manufacturing, inventory, receiving, and overall operational problems. As the relationship develops, the supplier typically can reduce its direct selling effort; consequently, it can afford to direct additional effort to the study of mutual problems that may reduce prices. The end result of good supplier relations is a meshing of the operations of both companies. The seller’s production and distribution facilities in reality become an extension of the buy’s production. In 1976, two UK authorities presented several arguments for what they called “voluntary collaboration” or partnerships: •

Every time a new set of partners comes together, a learning process is required. The potential for communication difficulties is much greater during early transactions than during later ones.

•

Changing market conditions and changing technology that affect the buying process require adaptation on the part of buyers and sellers. Such adaptation can be much less painful under conditions of an on-going and mutually beneficial relationship where the parties have learned to adapt together.

•

The likelihood of quality problems and late deliveries is greatly reduced in a continuing relationship.

•

Open relationships can help to cushion bad times. Customers and suppliers who value each other, based on long-term relations and respect, are more likely to come to each other’s aid during times of adversity.

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ADVANCED •

Suppliers learn from the behaviour of an aggressive, price-optimising purchaser. Such buyers will find it more difficult to obtain delivery of the required goods on time than will buyers who have developed continuing relations with their suppliers.

•

Opportunistic buyers are subject to more shocks resulting from capacity or supply problems encountered by the supplier than the buyers who maintain continuing relations with their suppliers.

•

Opportunistic buyers should expect less effective performance from suppliers who believe that they have little to lose in the way of follow-up business.

More recently another group of researchers (Chan K. Han, Kyoo H. Kim, and Jong S. Kim “Cost of Competition: Implications for purchasing strategy”) advanced three significant cost-based arguments against the traditional short-term competitive-based approach to partnership: •

Significant cost reductions in manufacturing operations typically are achieved through the development and implementation of methods improvements and technological innovations. Such accomplishments generally require significant research and development expenditures and / or capital investment. Clearly, an uncertain business environment and the potential loss of business are negative factors in the management and analysis of these types of opportunities. Suppliers tend to view such a situation as too risky, and perhaps too costly, and will be reluctant to make these types of long-term commitments without some assurance of obtaining an adequate return on investment. Consequently, major opportunities for cost reduction through R&D and capital investment are typically severely limited.

•

The use of multiple-sourcing and competitive-bidding strategies requires that a buyer provide potential suppliers with fully developed and precisely described product specifications. In order to ensure uniformity of product quality, the buyer must insist that suppliers conform strictly to the specifications. Consequently, suppliers are not likely to take the initiative in considering modifications that may improve product quality or reduce production costs, since their commitment is tied only to the current contract. In essence, possible productivity improvement through value analysis/engineering is severely limited.

•

Furthermore, by frequently changing suppliers, a buyer deprives his or her current suppliers of the chance to reduce their production costs through the extended learning curve effect that accomplishes from continuing production, a supplier obviously would be in a better position to achieve certain improvements that could well result in reduced costs.

However, for the partnership to grow requires careful managing. A progressive approach has been developed by David Nelson, Vice President of purchasing, Honda America Manufacturing (HAM).

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ADVANCED Every key supply relationship has a relationship manager to ensure that the relationship meets Honda’s present and future needs. Additionally, an ombudsman is appointed for each relationship. This individual is available to the supplier, should it feel that it is not being treated fairly by HAM. Several actions must be taken to ensure the success of each partnership or strategic relationship. For example: •

The cross-functional teams from both the buying and selling firms must receive training in being constructive cross-functional team members.

•

The inter-firm team composed of representatives of both firms must jointly receive training and development in cross-functional team skills.

•

The two firms must develop an integrated communication system responsive to the needs of both parties in their area of cooperation.

•

Plans to increase trust between the two organisations must be developed and implemented.

•

Arrangements for co-location of key technical personnel and for periodic visits to each other’s facilities must be developed and implemented.

•

Plans must be developed and implemented for training on issues, including the designing of variance out of products and processes, quality, procurement, value engineering, strategic cost analysis, activities-based management.

•

Measurable quantifiable objectives must be established in areas, including quality, cost, time, and technology.

•

The results of such improvement efforts must be monitored and reported to appropriate management.

It is the interest of both the buying and selling firms for the buyer to support the supplier’s operations. In order to build up a layer of supportive suppliers, it is necessary to foster strong relationships with suppliers. Establishing the Supplier Relationship The aim of careful vendor selection is to find the one most satisfactory source, or a group of alternative sources with adequate and reasonably comparable qualifications. This can only be achieved if there is supplier intelligence on whether such a relationship is of strategic value to both partners. Thus, succeeding orders for the same item can be placed with these same suppliers with confidence in the original selection. In other words, the decision as to a source of supply contemplates a continuing relationship. It is to be expected that this relationship will improve with experience and growth in mutual understanding. The purchasing manager, on his or her part, should make every effort to foster that improvement. The elements that contribute to such improvement include: __________________________________________________________________________________ 450 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED •

Completeness and clarity of communication concerning the need, the application and usage of the purchased material or product; The scope and limitations of the product itself; The outlook for continued usage and probable quantities required; and any special requirements of either a technical or commercial nature.

•

Mutual understanding of the conditions and problems of both usage-and production, resulting from that communication.

•

Mutual confidence in the statements and intent of both parties.

•

Mutual consideration--no unreasonable demands, as much notice as possible in the event of changes in schedules or instructions; a fair and open mind in the discussion of differences and willingness to waive or modify nonessential details of the agreement if the modification does not impair quality of service and is substantially to the advantage of either party.

•

A genuine interest in the mutual problem of procurement and supply, rather than mere contract fulfilment. This includes suggestions for cost reduction in the product itself and in methods of packing, shipping, usage, and accounting.

•

Cooperation - an active effort to fulfil contract obligations, prompt shipment by the supplier to minimise the need for inquiries and expediting action, and prompt processing and payment of invoices by the buyer.

•

Continuous improvements of ordering methods and supplier service as the opportunities arise.

•

Cultivation of personal contacts in the buying and selling organisations, making for better liaison and goodwill.

Many companies have found it helpful to hold annual, or more frequent, suppliers' conferences, when vendors are invited to gather at the buyer's plant, to see at first-hand how their materials or parts are used, to share in the pride of product, and to be briefed on the reasons for certain buying policies and for the insistence on certain quality specifications. Conversely, buyers find it advantageous to make periodic visits to the plants of their suppliers to see at first-hand how the things that they buy are produced and to keep in touch with the problems and progress of supplier industries. One important factor in securing relationships with suppliers is that buyers should adopt a new mind-set with interacting with suppliers. Buyers should consider loyalty to suppliers as a way of establishing a group of strategic suppliers. Loyalty to Vendors A continuing buyer-seller relationship, based on mutual confidence and satisfaction, implies a policy (and, indeed, a responsibility) of loyalty to suppliers. This is the antithesis of opportunism and constant "shopping around" in purchasing. It is true that some cost savings can be made by such methods, but it is usually at the sacrifice of uniformity and continuity of supply and of most of the factors that have been cited as making up good supply service. Especially, it __________________________________________________________________________________ 451 ©Global Maritime Legal Solutions (GMLS)

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ADVANCED sacrifices the assurance of supply that is the first responsibility in purchasing. Without established and loyal sources of supply, every recurring requirement presents a procurement problem of the first order, and the work of the purchasing department is magnified beyond all reason and proportion.

Experienced purchasing managers are in practical agreement that the long-range considerations of reasonable cost, of satisfaction and of value in respect to purchases are best attained through a consistent policy toward supply sources: a sound purchasing program, like any sound business program, is based on long range considerations. The buyer who relies on opportunism to gain an immediate advantage makes himself or herself and the company the vulnerable prey of opportunism in selling. A high rate of turnover among suppliers suggests either that the purchaser's company is basically an undesirable customer or that wrong decisions as to supply sources have been made in the first place. Assisting and Developing Sources of Supply So far, we have assumed that adequate sources exist to supply every need and that the purchasing manager's problem is merely one of selection from among the available suppliers. In the majority of cases, and under normal business conditions, this assumption holds true. However, the exceptions to the rule are equally important in the complete supply program and are likely to present difficulties that will put the procurement officer's resourcefulness to a severe test. The buyer's survey and search for the most satisfactory source may result in the discovery that no satisfactory or willing source can be found; yet the requirement exists, and it is the buyer's responsibility to meet it. Products or parts that have not previously been made, intricacies of special design, unusual requirements in the specification or difficult conditions of application and use, and the utilisation of new or unfamiliar materials for which there is little precedent in treatment and fabrication are some of the factors that may lead to a situation for which no established supply source stands ready at hand. Or, from the standpoint of practical procurement, the only available sources may be too distant, prices may be exorbitant or out of line with budgeted costs for the product, production capacity may already be fully occupied so that no new customers may be accommodated, or the potential suppliers may simply be unwilling or uninterested in additional business. The process in its earlier stages is like that already described. However, the emphasis of the search is placed on qualifications, equipment, and experience in a similar type of operation that might logically be applied to production of the material or part in question. Then, in place of a process of elimination or narrowing of the field, the buyer must concentrate on the most likely sources, persuading them to undertake the desired production and, if __________________________________________________________________________________ 452 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED necessary, helping to implement their plant and personnel for such expansion or conversion of facilities as may be needed. In such cases, procurement is partly a matter of selling ability, seeking to establish the buyer's company as a desirable customer in the same way that the salesperson normally seeks to establish his or her company as a desirable supplier. Among the incentives offered are the steady flow of guaranteed orders over a period of time at a satisfactory price level, technical assistance in setting up the process on an efficient basis that will result in a satisfactory product, assistance in the procurement of raw materials even to the point of furnishing such materials for fabrication only by the supplier, so that risks of waste and spoilage in the initial stages are for the account of the buyer, and, sometimes, subsidising the costs of new equipment and tooling until they may be absorbed by the volume of business that develops. Termination As mentioned earlier, purchasers must be fully aware that suppliers will not be supplying materials to their companies forever. There are many valid reasons. These include a change of business, a decline in quality, unacceptable terms and conditions of payment and liquidation. Purchasers must be prepared to have a list of alternative suppliers. More importantly, purchasers must explore ways with suppliers to end the partnership amicably. Litigation should be the last resort after attempts to mediate or negotiate fails. Negotiation in the Purchasing Process Negotiation in the purchasing process covers the period from when the first communication is made between the purchasing buyer and the supplier through to the final signing of the contract. Negotiation can be as simple as trying to obtain a discount on a case of safety gloves through to the complexities of major capital purchases. A purchasing professional must aim to be successful in their negotiations with suppliers to obtain the best price with the best conditions for every item that is purchased. Smaller Supplier Base and Long-Term Contracts The negotiation process has become a more important sector in the supply chain process as companies look to reduce their expenditure whilst increasing their purchasing power. This means that purchasing professionals have to negotiate increasingly better rates with suppliers whilst maintaining or increasing quality and service. In the past companies had a long list of suppliers who they would purchase different items from which required purchasing resources to spend limited time on negotiating the lowest prices. The best solution available was to compare list prices from catalogues and select the vendor based on that information. The trend over the last decade has been to rationalise the supplier base and enter into longterm agreements with single sourcing. This offers companies the ability to negotiate significantly lower prices for items that they were purchasing from a number of separate vendors. __________________________________________________________________________________ 453 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED Vendors Are Partners The emphasis in negotiation moved away from lowest price scenario to negotiating with fewer vendors to obtain the lowest price with the best service, quality, and conditions. The aim for companies were to reduce overall spends rather than negotiate lowest price with a large number of vendors, which did not give the best overall result. The negotiated long-term contracts with a smaller supplier base have produced more of a partner relationship between buyer and supplier. The relationship can become less adversary which benefits buyer and vendor. In a partner type or relationship, the buyer will encourage the vendor to increase quality and service and the vendor knows that by doing this the partnership will continue with a renewed contract with guaranteed sales. Negotiation or RFQ Non-government purchasing departments continue to offer a range of prequalified vendors a request for quotation (RFQ) for items or services that it wishes to purchase. The competitive bid process can produce a range of bids and conditions that the purchasing department will evaluate and then award the business. This may or may not involve some form of negotiation. Most negotiated business will involve items or services that are not necessarily definable by an RFQ. The purchasing department and the vendor will negotiate more than a price. The negotiation will usually cover what is to be manufactured or what is the extent of the service to be provided, the warranty, the transportation services, technical assistance, packaging alternative, payment plans, etc. Purchasing items or services of significant cost will require extended negotiations to arrive at a final contract. Purchasing professionals are required to participate in these types of negotiation to ensure their companies obtain the best price with the most favourable terms, and staff may need to be trained in negotiation methods as it becomes more commonplace in a difficult economic climate. Negotiation Objectives Purchasing staff should enter all negotiations with clearly defined objectives. Without having objectives, the possibility for the purchasing professional to concede on price, quality or service is significantly raised. The negotiator should enter into discussions with the vendor with precise objectives that they wish to achieve for their company. The objective should not be absolute and should allow for some flexibility. However, the negotiator should also ensure that they do not deviate from the objectives and allow themselves to negotiate on areas that were not part of the discussion. For example, a negotiator may have worked with the vendor on their objectives on price and service, but not quality. When the vendor starts to discuss quality, the negotiator should refrain from any agreement where they are without a set objective.

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ADVANCED Negotiation is an important part of the role of the purchasing professional. It is a skill that is learnt, and training can help purchasing staff in understanding what is needed when negotiating with vendors.

Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

Many retailers have altered the meaning of partnership to that of a one-way compliance programme

Retailers and suppliers will easily realise shared goals if they act autonomously in improving supply chain processes

Most retailers who have developed sound supplier relationships have started slowly, usually through a limited roll-out with a single or relatively few key supplier partners

Long-term partnership objectives will include experience in quick response (QR), efficient consumer response (ECR), relationships has shown that the successful sharing of demand and sales data, dual product development, continuous store distribution and ultimately vendor-managed inventory (VMI) are potential windfalls for both suppliers and retailers

Advantages to Buyer from Supplier partnerships are increased business; increased efficiencies within the seller with higher sales; more stable consumer relationships that are renewed and reinforced

A company’s purchasing department should motivate its suppliers to participate in a mutually profitable buyer-seller relationship

Business has long been recognised that customer goodwill is a valuable asset. In fact, goodwill has legal recognition and it is carried as an asset on many company balance sheets

The emphasis in negotiation moved away from the lowest price scenario to negotiating with fewer vendors to obtain the lower price with the best service, quality, and conditions

Purchasing staff should enter all negotiations with clearly defined

True

False

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ADVANCED objectives. Without having objectives, the possibility for the purchasing professional to concede on price, quality or service is significantly raised 10

Negotiation is an important part of the role of the purchasing professional. It is a skill that is learnt, and training can help purchasing staff in understanding what is needed when negotiating with vendors

Chapter 22 - Economic Order Quantity (EOQ) Model

The question of how much to order is frequently determined by using an Economic Order Quantity (EOQ) model. EOQ model is used to identify a fixed order size that will minimise the sum of the annual cost of holding inventory and ordering inventory. Assumptions for the EOQ model: 

Only one product is involved



Annual demand requirements are known



Demand is spread evenly throughout the year so that the demand rate is reasonably constant



Lead time does not vary



Each order is received in a single delivery



There is no quantity discount

Quantity on hand

Usage rate = 100 units/day

Order Size, Q = 700 units Usage rate = 100 units/day Lead time = 2 days Re-order point = 200 units (2 day’s supply)

Q=700 units

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ADVANCED

EOQ Model Annual carry cost is computed by multiplying the average amount of inventory on hand by the cost to carry one unit for one year, even though any given unit would not necessarily be held for a year. The average inventory is simply half of the order quantity. The amount on hand decreases steadily from Q units to 0, for average of (Q+0)/2, or Q/2. Using the symbol H to represent the average annual carrying cost per unit, the total annual carrying cost is: Annual carrying cost = (Q/2) x H Where

Q = Order quantity in units H = Holding (carrying) cost per unit

Annual ordering cost is a function of the number of orders per year and the ordering cost per order: Annual ordering cost = (D/Q) x S Where

D = Demand, usually in units per year S = Ordering cost

Order Quantity Annual Cost

(Q/2) H

A. Carrying costs linearly related to order size

Order Quantity

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Order Quantity

ADVANCED

Steps in Computing Total Cost of EOQ Model The total annual cost associated with carrying and ordering inventory when Q units are ordered each time is: Total Cost = Annual carrying cost + Annual ordering cost TC = (Q/2)H + (D/Q)S The total cost curve is U-shaped, and it reaches its minimum at the quantity where carrying and ordering costs are equal. An expression for the optimal order quantity, Qo can be obtained using calculus.

The result is the formula: Differentiate TC with respect to Q d TC / d Q = d (QH/2) + d (D/Q) S = H/2 – DS/Q2 Setting the result equal to zero, and solving for Q 0 = H/2 – DS/Q2 Q2 = (2DS)/H Q = √ (2DS/H) __________________________________________________________________________________ 458 ©Global Maritime Legal Solutions (GMLS) Version 1_2020 THIS IS ACCREDITED MATERIAL THAT IS COPYRIGHTED TO GMLS AND AS SUCH SHOULD NOT BE COPIED OR DISTRIBUTED WITHOUT THE EXPRESS WRITTEN PERMISSION FROM GMLS MANAGEMENT

ADVANCED

The minimum total cost is then found by substituting Qo for Q, thus Qo = √ (2DS/H) Example: A telecommunication manufacturing plant uses approximately 64,000 integrated circuit (IC) chips every year. Annual holding cost is $6 per chip and ordering cost is $120. Determine the optimal order quantity. Answer: Demand, D = 64,000 chips per year Ordering cost, S = $120 Holding cost, H = $6 per unit per year Optimal order quantity, Qo = √ (2DS/H) = √ (2 x 64000 x 120) / 6 = 1600 chips Fixed Order Quantity System & Fixed Order Period System The fixed order period model is used when orders must be placed at fixed time interval (weekly, twice a month, etc.): The timing of order is set. The question, them at each order point is, how much to order? Fixed period ordering systems are widely used by retail businesses. If demand is variable, the order size will tend to vary from cycle to cycle. This is quite different from an EOQ approach in which the order size generally remains fixed from cycle to cycle, while the length of the cycle varies (shorter if demand is above average and longer if demand is below average). Reasons for using the Fixed Order Period Model In some cases, a supplier’s policy might encourage orders at fixed intervals. Even when that is not the case, grouping orders for items from the same supplier can produce savings in shipping costs. Furthermore, some situations do not readily lend themselves to continuous monitoring of inventory levels. Many retail operations (e.g. small grocery stores) fall into this category. The alternative for them is to use fixed period ordering, which requires only periodic checks of inventory level. Determining the amount to order:

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ADVANCED The 2 figures that follow provide a comparison of the fixed quantity and fixed period systems. In the fixed quantity arrangement, orders are triggered by a quantity (ROP), while in the fixed period arrangement orders are triggered by a time. Therefore, the fixed period system must have stock-out protection for lead time plus the next order cycle, but the fixed quantity system needs protection only during lead time because additional orders can be placed at any time and will be received shortly thereafter. Consequently, there is greater need for safety stock in the fixed period model than in fixed quantity model. Both models are sensitive to demand experience just prior to reordering, but in somewhat different ways. In the fixed quantity model, a higher-than-normal demand causes a shorter time between orders, whereas in the fixed period model, the result is a larger order size. Another difference is that the fixed quantity model requires close monitoring of inventory levels in order to know when the amount on hand has reached the reorder point. The fixed period model requires only a periodic review (i.e. physical count) of inventory levels just prior to placing an order to determine how much is needed.

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ADVANCED Fixed Period Order Model

Order quantity

Quantity on hand

Safety Stock

Time

Place order

Receive order

Place Receive order order

Place order

Receive order

Fixed Interval Model

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ADVANCED Fixed Quantity Order Model Order Quantity on hand

Reorder point (ROP)

Safety Time

Place order

Receive order

Place order

Receive order

Place order

Receive order

Fixed Quantity Order Model

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ADVANCED Probabilistic Demand spare stock as lead time demand < LT * D

spare stock as leadas time Shortage stock demand > LT * D

lead time demand > LT *D

LT * D

Demand

Mean lead time demand

Safety Stock = S + σ * √LT Example A retailer guarantees a 95% service level for all stock items. Stock is replenished from a single wholesaler who has a fixed lead time of 4 weeks. What reorder level should the retailer adopt for an item which has Normally distributed demand with a mean of 100 units a week and a standard deviation of 10 units? What would the reorder level be if a 98% service level were used? Solution The reorder level is found from: ROL = lead time demand + safety stock = LT * D + SS = 4 * 100 + SS

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ADVANCED For a service level of 95%, the number of standard deviations from the mean, S, is found from Normal tables to equal 1.64. Then: Safety stock = S + σ * √LT = 1.64 * 10 * √4 = 33 (when rounded) The reorder level becomes: ROL = 400 + SS = 400 + 33 = 433 units If the service level is increased to 98%, S = 2.05 and Safety stock = 2.05 * 10 * √4 = 41 units and reorder level

= 400 + 41 = 441 units

Conclusion To summarise, good inventory management is often the mark of a well-run organisation. Inventory levels must be planned carefully, in order to balance the cost of holding inventory and the cost of providing reasonable level of customer service. Successful inventory management requires a system to keep track of inventory transactions, accurate information about demand and lead times, realistic estimates of certain inventory related costs, and a priority system for classifying the items in inventory and allocating control efforts. Formative Self-Assessment True or False – indicate with a  whether the following statements are true or false. Question 1

EOQ model is used to identify a fixed order size that will minimise the sum of the annual cost of holding inventory and ordering inventory

The fixed order period model is used when orders must be placed at

True

False

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ADVANCED fixed time intervals (weekly, twice per month) 3

In the fixed period arrangements orders are triggered by a quantity

In the fixed quantity arrangement orders are triggered by a time

Good inventory management is often the mark of a well-run organisation

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THE END

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