7102IBA Strategic Supply Chain Management

7102IBA Strategic Supply Chain Management

Assessment 1

[X] Plant Hire is a specialist business unit of [Y] Construction, an $8 billion dollar global engineering enterprise. In Australia, [Y] has been involved in some of the largest rail, building, mining and oil and gas infrastructure projects the country has seen. [X] is responsible for the procurement and supply (through hire arrangements), of all plant and equipment utilised on [Y] joint venture and alliance projects.

The plant and equipment required to deliver these projects range from a hundred dollar hose to a 20 million dollar rail track laying machine any everything in between creating a complex global supply network. Further complications are experienced due to the structure of the [Y] organisation which involves many other specialist business units, such as a manufacturing division.

[X]maintains its own asset base of equipment and supplements demand with equipment sourced from other hire companies in the market. This unique relationship creates operational and commercial benefits yet is not without inherent challenges. As most organisations focus on increasing net income through a reduction in supply chain costs (Pettersson & Segerstedt 2013), this strategy will not ensure sustainable competitive advantage (Klibi et al. 2010) nor has it always been perceived to be in the interests of the [Y] group, who, as the legal entity, need to maintain a financially sustainable rate of return on their investment whilst demonstrating value to their clients. Moreover, as [X] operates as a separate reporting (not legal) entity, the approach to supply network management has not always taken an integrated approach as management independently seek to exceed their targeted budgets and personal career ambitions. Furthermore, as most supply chain costs incurred by [X] are passed downstream to [Y] who in turn must recover costs from their client there is a lack of ownership by [X] of supply chain costs. An integrated and holistic approach to supply chain management is therefore not achieved.

The conflicting priorities, interpretation and application of this arrangement have led to an ineffective approach to supply network management by [X] both upstream and downstream. This has further contributed to operational and financial targets not being met by either business unit. This is in contrast to the strategic purpose of the business structure, which is to deliver value through aligning the organisations supply chain strategy with its overarching business and marketing strategies which is also described by (Christopher & Ryals 2014).

The concept of the supply chain or supply networks have been detailed by many academics however Christopher (1998) defined supply chain as

the network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer.

(Mentzer et al. 2001) acknowledge the complexities of the supply chain and suggests three models of supply chain; direct, extended and ultimate with all models consisting of at least three entities involved in either the upstream or downstream flows. While the literature on supply network management suggests the ultimate customer can be much farther afield than [Y]’s client, for the purposes of this paper they are considered to be the ultimate customer.

Despite inconsistent empirical findings (Mackelprang et al. 2014), integrating supply chain management with organisational objectives is recognised as a driver of competitive advantage (Qrunfleh & Tarafdar 2013). Achieving complete supply chain integration is a complex process yet due to the structure of the [X]/[Y] business, one in which they should have an advantage in achieving. Building trust through sharing information is a critical part of successful and beneficial collaboration (Kumar & Banergee 2012) and given [X] and [Y] are the one company it can be assumed that information is free flowing and trust will be easier to obtain. Furthermore, as there is a direct link downstream, the business is afforded more opportunities than most organisations to concentrate their integration efforts upstream through the supply chain. Disintegration has emerged as a major challenge to risk management (Vilko et al. 2014) as competition has moved from organisation to supply chain level and organisations are no longer able to succeed alone (Prajogo & Sohal 2013). Supply chain integration is not the only challenge facing the supply management function within [X], globalisation, increased competition (Kumar & Banerjee 2012), natural disasters, industrial disputes (Christopher & Peck 2004), increased employment costs, occupational health and safety, innovation, corporate responsibility and the environment are all continual challenges that will be experienced and will need to be addressed by the supply chain management function to ensure long term sustainability of the [Y] group of businesses.

The design of an organisation’s supply chain network (SCM) is a result of the strategic decisions an organisation makes regarding the internal and external capabilities to provide goods or services to customers (Klibi et al. 2009). The initial identification of supply chain partners is critical however organisations must also seek value co-creation from the supply chain (Fawcett & Waller 2014). Supply chain network design is a critical element of all organisations as generally and most certainly in the case of [X], a large proportion of revenue will have already been expended upstream and as a supply chain is interconnected, a disruption to any stage of the supply chain can negatively impact the entire supply chain (Ouabouch & Pache 2014).

A holistic review of [X]’s supply chain environment was conducted commencing with an analysis of the current supplier network. [X]currently spends approximately three hundred to five hundred million dollars per annum with both national and international suppliers. [X]’s supply network can be broken down to four main segments:

1. National network of hire companies in which supplementary hire equipment is sourced when internal capacity is reached. This segment represents the largest proportion of expenditure; approximately two hundred and fifty to three hundred and fifty million dollars per annum. The supply network for this segment is the most diverse in location.
2. Global and Australian Original Equipment Manufacturers (OEM’s) from which brand new plant, equipment and spare parts are procured. This segment represents the second largest proportion of expenditure; approximately fifty to one hundred and
3. After market spares market where spare parts are procured for plant and equipment no longer in their warranty periods. This segment consists of both Australian and international suppliers however represents the lowest expenditure level; approximately five to twenty million dollars per annum.
4. Consumable market where small tools under the value of one thousand dollars and consumable items are procured. This segment represents the most fluctuating expenditure levels with an approximate spend between approximately five and fifty million dollars per annum.

The review of [X]’s supply chain environment included an audit of all information systems, processes and people. Upon reviewing the systems it was discovered that [X] has in excess of three thousand suppliers covering the four supplier networks outlined. When mapped, this demonstrates supplier selection has been random, not strategic and new suppliers are being engaged without review of the existing supply chain network (SCN). Christopher (2010) suggests this behaviour of matching supply with demand may be considered agile however not necessarily associated with ‘leanness’ and therefore increased costs and risks are associated with this practice. Furthermore, (Wieland & Wallenburg 2012) found that the impact on business performance from being agile was indirect as it was offset by the supply chain’s customer value, therefore not improving the organisations underlying performance. Having such a large, irrational supply chain is impeding the business both financially and strategically as well as increasing the organisation’s risk exposure.

Detailed and useful analysis of data relating to vendor spend and performance, category spend or geographical spend was not possible as the current system does not have the capabilities to perform such tasks. Moreover, the current systems have been designed around vendor payments therefore all vendor information relates to where a suppliers accounts departments are located, not where they undertake their business activities. All information relating to vendor capabilities and performance are stored on individual programmes and computers, such as Microsoft word and excel files. Furthermore, suppliers, and the money expended into the supply chain are not categorised therefore no historical or forecasted trend analysis can be undertaken. Despite the exponential growth that supply chain management (SCM) software systems have experienced in recent years and findings that organisations who use SCM software being more successful (PrajogoSohal 2013), [X]are yet to invest any time or money to quantify these findings. Without appropriate systems in place, [X] is unable to strategically assess the performance of their supply network.

The review of [X]’s supply chain management processes focussed firstly on supplier relationship management (SRM) and what frameworks are currently in place. There has been a shift away from traditional (short term) sourcing methods to more (long term) collaborative relationships within the business world and while there will still be a need for transactional relationships where the short term ‘buying’ of low value readily available goods will occur, organisations need to develop long term collaborative relationships with key suppliers to drive innovation and co-create value (Lambert & Schwieterman 2012). SRM does that through the creation of strategic, supplier centric business processes which outline the structure in which supplier relationships will be established, developed and managed. From an SRM perspective, suppliers are managed not unlike other organisational resources however unique challenges will be created due to differing organisational, financial and operational objectives. Developing a SRM framework will identify these differences and outline the approach to align the supply chain. As a result of challenges brought about through increased competition, globalisation and sustainability, SRM is now considered a critical business process (Lambert & Schwieterman 2012) that can produce innovation and improved organisational performance.

It was established that [X] does, to a small degree, segment suppliers however this assessment is carried out on less than 10% of the immediate supply network. Less than five suppliers have preferred supply agreements with another few hundred having been given approved supplier status. The remaining suppliers have had basic health, safety, environment, quality and financial checks however these are completed at a very basic level and are fraught with risk. The organisations standard contractual agreement for preferred suppliers has provision of a basic relationship framework. This framework covers frequency of reviews, generic key performance indicators (KPI’s) and basic expectations on both the supplier and [X]. Further investigations revealed supplier reviews are rarely completed when due, if at all. Suppliers with approved supplier status have no relationship frameworks, no performance metrics and undergo no review process. Without understanding the agility and robustness of the supply chain, [X] is at risk of adversely impacting the overall performance of the organisation. Furthermore, the business is at risk of damage to its reputation and being unable to meet their sustainability targets as the majority of the supply network is not aligned to the company’s objectives. This misalignment has the potential to further increase costs and impede operational performance as [X] are unable to share sustainability costs across their supply chain as many organisations do with success (Roehrich et al. 2014).

Despite [X]’s global sourcing activities being relatively infrequent in comparison to local spend; the monetary value and the risk created to our ultimate customer through possible disruption of supply are significant. Furthermore, global sourcing forms a significant proportion of our upstream supply chain network and therefore there are quanta of risks that can arise which are currently unknown and unmitigated, leading to the need to re-evaluate the supply chain risk within a global context (Christopher et al. 2011). (Christopher & Peck 2004) identify five categories of risk; process, control, demand, supply and environment further categorising the risk relationships into the following groups: risks internal to the organisation, risks internal to the supply chain and external to the organisation and those risks external to both. (Christopher et al. 2011) further add sustainability to the increased risk that global sourcing exposes organisations. Global sourcing adds a further level of complexity to the overall SCN design due to both the different types of risks associated and the increased levels of uncertainty. Without a global sourcing strategy integrated with the overall SCM strategy, [X] will become more susceptible to the uncertainties and risk in the global business landscape.

Lastly a review of the procurement professional’s capability within the organisation was undertaken with concerning outcomes. A number of personnel are currently completing procurement courses through the Chartered Institute of Purchasing and Supply (CIPS) however at the time of the review, only two employees had successfully completed their course, only one was still employed by [X] and the remaining employee does not hold a decision making procurement role. There is only one role dedicated to supply management with other individuals involved in certain aspects on an ad-hoc basis. An organisation’s procurement professionals are critical to the success of supply chain design (Prajogo & Sohal 2013). (Fawcett & Waller 2014) argue that in order to co-create value, organisations must have, and effectively manage simultaneously, their people, suppliers and processes. The lack of focus in this area goes a way to explaining the lack of supply chain management demonstrated and the current issues that the organisation is experiencing. Procurement professionals are required to have a diverse skill set not limited to technical, environmental, legal, technological and inter-personal and given business globalisation, the ability to effectively communicate with parties from other cultural backgrounds is of vital importance. Attracting and retaining supply chain talent at [X] will become increasingly difficult without establishing a framework of core skills and competencies required.

The lack of overall supply network management including systems, processes and supply professionals capability will create a significant risk for [X] and governance and risk management will be critical. Furthermore, the long term viability of the organisation can be questioned. The paper to follow will address the theoretical frameworks and organisational systems and processes that [X] need to implement to effectively manage their supply chain network.

References

Christopher, M 1998, Logistics and supply chain management: Strategies for reducing costs and improving services, 2 ed. Pitman, London

Christopher, M 2010, Logistics and Supply Chain Management, 4 ed. Financial Times/ Prentice Hall

Christopher, M, Mena, C, Khan, O & Yurt, O 2011, ‘Approaches to managing global sourcing risk’, Supply Chain Management: An International Journal, vol. 16 no. 2, pp. 67-81, Emerald Insight, viewed 26 April 2015, <

Christopher, M & Peck, H 2004, Building the resilient supply chain’, The International Journal of Logistics Management, vol.15 no 2, pp.1-14, Emerald Insight, viewed 17 April 2015, <

Christopher, M & Ryals, L 2013, ‘The supply chain becomes the demand chain’, Journal of Business Logistics, vol. 35 no. 1, pp. 29-35, ProQuest, viewed 10 April 2015, <

Fawcett, S & Waller, M 2014, ‘Supply chain games changes-mega nano and virtual trends-and forces that impede supply chain Design (i.e., building a winning team)’, Journal of Business Logistics, vol. 35 no. 3, pp. 157-164, ProQuest, viewed 10 April 2015, <

Hallikas, J, Kahkonen, A, Lintukangas, K & Virolainen, V 2011, ‘Supply management-missing link in strategic management’, Journal of Purchasing and Supply Management, vol. 17, pp. 145-147, Emerald Insight, viewed 14 April 2015, <

Klibi, W, Martel, A, Guitouni, A 2010 ‘The design of robust value-creating supply chain networks: A critical review’, European Journal of Operational Research, vol. 203, pp. 283-293, Elsevier, viewed 14 April 2015, <

Kumar, G & Banerjee, R 2012, ‘Collaboration in supply chain’, International Journal of Productivity and Performance Management, vol.61, pp. 897-918, Emerald Insight, viewed 17 April 2015, <

Lambert, D & Schwieterman, A 2012, ‘Supplier relationship management as a macro business process’, Supply Chain Management; An International Journal, vol. 17, pp. 337-352, Emerald Insight, viewed 26 April 2015, <

Mentzer, J, DeWitt, W, Keebler, J, Min, S, Nix, N, Smith, C & Zacharia, Z 2001, ‘Defining supply chain management’, Journal of Business Logistics, vol. 22 no. 2, pp.1-25, ProQuest, viewed 10 April 2015, <

Ouabouch, L & Pache, G 2014, ‘Risk management is the supply chain: Characterization and empirical analysis’, The Journal of Applied Business Research, vol. 30, pp. 329-340, Emerald Insight, viewed 14 April 2015, <

Pettersson, A & Segerstedt, A 2013, ‘Measuring supply chain cost’, International Journal of Production Economics, vol. 143, pp. 357-363, Elsevier, viewed 14 April 2015, <

Prajogo, D & Sohal, A 2013, ‘Supply chain professionals: A study of competencies, use of technologies, and future challenges’, International Journal of Operations & Production Management, vol. 33, pp. 1532-1554, Emerald Insight, viewed 17 April 2015, <

Qrunfleh, S, Tarafdar, M 2013, ‘Lean and agile supply chain strategies and supply chain responsiveness: the role of strategic supplier partnership and postponement’, Supply Chain Management: An International Journal, vol. 18, pp. 571-582, Emerald Insight, viewed 10 April 2015, <

Roehrich, J, Grosvold, S & Hoejmose, S 2014, ‘Reputational risks and sustainable supply chain management’, International Journal of Operations and Production Management, vol. 34, pp. 695-719, Emerald Insight, viewed 17 April 2015, <

Vilko, V, Ritala, P & Edelmann, J 2014, ‘On uncertainty in supply chain risk management’, The International Journal of Logistics Management, vol. 25, pp. 3-19, Emerald Insight, viewed 17 April 2015, <

Wieland, A & Wallenburg, C 2012, ‘Dealing with supply chain risks’, International Journal of Physical Distribution & Logistics Management, vol. 42, pp. 887-905, Emerald Insight, viewed 17 April 2015, <