SUPPLY CHAIN MANAGEMENT
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  • 1. Supply Base Optimization and Integrated SUPPLY CHAIN MANAGEMENT Competition is not just firm versus firm, but chain versus chain (or network versus network). Company executives have recognized the pivotal role of supply chain management and the organizational benefit of integrated supply chain management. B Y S H I R L E Y PAT T E R S O N 24 ■ Contract Management / January 2005
  • 2. Fortune 1000 corporations are Raytheon’s Case for Action on fewer suppliers. beginning to recognize that untapped Like our industry peers, Raytheon has The results from characterizing our potential resides within their supply been contemplating “the issue of how current supply base made it clear that chains. This potential, when extracted, to harness the power of SCM….” Our a new source-selection process was creates strategic competitive advantage chief executive officer and other com- warranted. We needed to optimize for the corporation, impacts the bottom- pany executives have recognized the our base to provide a competitive line, and contributes significantly to pivotal role of supply chain and the advantage to our company. This customer success. “A recent survey by organizational benefit to be gained by analysis also helped our key stake- Deloitte Consulting revealed that 91 implementing integrated supply chain holders understand the need for percent of North American manufac- management. This acknowledgement conscious redesign of the supply base. turers ranked supply chain management in the executive ranks has provided Benchmarking data showed that our as very important or critical to overall the momentum for Raytheon to competition was already engaged in company success (although only 2 accelerate our pursuit of “world-class supply base rationalization initiatives percent said their supply chains were supply management.” and that world-class companies have currently world class).”1 A review of our internal data and elevated supply base management to Richard L. Pinkerton in “the performance history revealed that our an art form. An extensive literature Evolution of Purchasing to Supply current supply base was too large for review validated our hypothesis that Chain Management,”2 explores the effective management. Poor supplier “an optimized supply base would transition from the “passive-reactive performance was impacting key pro- result in increased bottom-line purchasing function focused on paper grams. There was a lack of alignment performance through improved cost, trails and inward orientation to the with our business plan. There was quality, and schedule.” A financial proactive strategic supply chain con- significant redundancy in certain analysis projected savings over a cept….” Pinkerton cites authors D.S. commodities and single sources of five-year period at $52 million. Ammer and V. H Pooler Jr., as among supplier in other areas, creating a the first to articulate the concept that high degree of vulnerability. Many What Is Supply Chain material savings directly improve new suppliers were being added with- Management? profits as a higher leverage factor than out valid justification when existing The Supply Chain Management merely increasing sales. Dr. David suppliers had the capability and Review defines supply chain manage- Burt further expounds upon this value capacity to meet requirements. Our ment as “the science of integrating the proposition in his campaign to inspire analysis revealed that significant ben- flow of goods and information from firms to pursue World-Class Supply efits are obtainable through leveraging initial sourcing all the way through to Management. effective supplier management and delivery to the end-user. Key activities proactive supplier development, when within this end-to-end process include The issue of how to harness the power we strategically focus our resources purchasing, production planning, of SCM (supply chain management) is creating debate in upper management boardrooms and academic classrooms across the world. Firms need to come to terms with how they are going to improve their competitiveness in the future through SCM. Competition is not just firm versus firm, but chain versus chain (or network versus network).3 About the Author SHIRLEY PATTERSON is the manager of supplier diversity for Raytheon’s Space and Airborne Systems (SAS) business unit. This article was developed as the result of research for Raytheon’s Supply Base Optimization project for the Supply Chain Management Institute at the University of San Diego. Send comments on this article to cm@ncmahq.org. January 2005 / Contract Management ■ 25
  • 3. S U P P LY B A S E O P T I M I Z AT I O N The Progression to World-Class Supply Management SM Stage 1: Clerical Stage 2: Mechanical Stage 3: Proactive Stage 4: World Class Process paperwork Transactional focus Coordinate procurement Supply management and Confirm actions of others React to acquisitions system core competence Emphasis: convenience Not involved in key Develop suppliers Strategic sourcing Relationships: personal source selections Long-term contracts Monitor supply environment Bottom-line impact: Emphasis: purchase price Involved in develop- Develop and implement Overhead Relationships: transactional/ ment of requirements Commodity strategies Reporting: very low level adversarial Plan for recurring Commodity teams Bottom-line impact: requirements Data: not available Develop and manage revenue neutral Procurement adds value alliances and networks Reporting: low level Active in source selec- Time-based competition Data: used to expedite tion Virtually defect-free mate- Computers and process Near defect-free materials rials and services paperwork and services Leverage supplier tech- Emphasis: cost, quality, nology timeliness Integrated supply strategy Relationships: transactional and collaborative manage risk Bottom-line impact: profit Emphasis: total cost contributor Relationships: transactional, Reporting: upper man- collaborative, and alliances agement Bottom-line impact: increase Data: facilities sourcing shareholder value and pricing Reporting: member, Fulfill social responsibilities executive group E-commerce Data: facilities strategic planning Understands key supplier industries E-commerce II 1 2 3 4 5 6 7 8 9 10 Figure 1. order processing and fulfillment, needed to achieve world-class status. (4) Incorporates integrated supply inventory management, transportation, (See Figure 1.) strategy, which upon execution distribution, and customer service.” A world-class supply chain becomes an integrated supply chain. World-Class Supply Chain (1) Has “bottom-line impact” and Integrated Supply Chain Management contributes to shareholder value; Management Burt provides a four-stage continuum We define the integrated supply chain toward “world-class,” whereby firms (2) Is a core competency; (ISC) as the “value-added coordina- can assess the current state of their tion in the design, execution, and supply chain and determine the (3) Is by “design” based on an under- measurement of all the activities that appropriate process improvements standing of key supply industries; and go into satisfying customers.” ISC 26 ■ Contract Management / January 2005
  • 4. S U P P L Y B A S E O P T I M I Z A T I O N aligns our resources and processes with our suppliers’ capabilities to Customers’ meet the needs of our customers and Needs the objectives of our shareholder’s (See Figure 2). Components of the ISC include the firm and its internal resources necessary to provide customer requirements and meet customer demand, including Raytheon Supplier manufacturing operations, engineering, Resources Capabilities product design, purchasing, logistics, & Processes quality, and program teams. An integrated model also involves suppliers R6 Raytheon Six Sigma and customers at critical junctures. According to Paul D. Cousins and Robert Spekman, “Strategic supply symbolizes the importance of enterprise wide thinking where functional units inside the firm and key suppliers from the firm’s supply chain all work in concert to bring value to the marketplace.”4 Figure 3 depicts the conceptualiza- Shareholders’ tion model of an integrated supply Objectives chain by the space and airborne sys- tems’ supply base optimization team. This model was developed with Figure 2. Raytheon Integrated Supply Chain consideration of our findings from benchmarking and played a key role in our supply base optimization (SBO) process design. According to Robert Porter Lynch, author of “10 Solution Sets of Strategic Customer Needs Market Demands Sourcing Alliances,” a strategic alliance SAS Strategic Plan workshop from the Warren Company, the most sustainable source of competitive advantage in today’s fast- Technology Roadmaps moving business environment is the ability to improve and innovate faster and smarter than the competition. Raytheon Integrated Supply Chain SAS Business Plan Increasingly, suppliers are becoming as critical to a firm’s performance and Strategic/Core Competencies competitive position as the internal functional components of the firm.5 As much as 60 percent of a manu- Make Buy facturing firm’s end product is now provided by suppliers. Innovation, which Define Supplier Relationship Strategies is a key contributor to competitive advantage and growth, is increasingly provided by suppliers or resulting Strategic Partners Transactional from integrated product development teams that include suppliers. Therefore, Commodity it is imperative to ensure the best-value Strategies suppliers compose the supply base. Our supply chain management team uses the model depicted in Figure 3. SAS SBO Integrated Supply Chain Model Figure 4 to demonstrate the need for 28 ■ Contract Management / January 2005
  • 5. S U P P L Y B A S E O P T I M I Z A T I O N early supply chain involvement in chain based on the selection of suppliers Trent, author of “What Everyone product design. With suppliers providing compared to another supply chain Needs to Know About Supply Chain such a significant portion of the bill and its suppliers.6 Conversely, suppliers Management,” Supply Chain of material on a typical production that don’t provide strategic competitive Management Review. Trent cites program, there is tremendous oppor- advantage could be viewed as a source the following classifications of supply tunity for the supplier to contribute to of risk and a source of waste to a firm. chain risk: “design, quality, cost, avail- overall product affordability by way of Naturally, the objective should be to ability, manufacturability, supply, the product design. The model depicts minimize risk wherever practical and financial, legal, and environmental, the traditional cost accounting treat- eliminate waste wherever possible. health and safety.”7 Needless to say, a ment of product cost breakdown: “Supply chain managers add value to haphazardly developed supply base is their organizations by conceptualizing rampant with risk. Strategic evaluation Design—5 percent, risk and establishing the procedures, and selection of suppliers minimizes a practices, and contingency plans to firm’s vulnerability related to supply Material—50 percent, manage those risks,” states Robert chain risk. A “right-sized” supply base Labor—15 percent, and Burden—30 percent. This is contrasted with the influence each of these categories has on total product cost, which is 70 percent of design, 20 percent of material, 5 per- cent of labor, and 5 percent of burden. When consideration is given to each category’s influence on total product cost, it becomes clear that the greatest opportunity to impact cost is during the design stage. The supply base optimization project will contribute significantly to the supply chain’s ability to reduce the total product cost at the front end of a program. The intentional design of the supply base will result in preferred suppliers that are strategically engaged in the design process early on. The preferred suppliers will be identified and available to work collaboratively with us as part of the integrated supply chain. This collabo- ration during the design phase will enable the suppliers to bring their core competencies to the table, which includes understanding how the design can enable or inhibit our ability to meet affordability targets. The suppliers will be empowered to make contributions that will result in more cost effective design and product innovation. According to Jeffery H. Dyer and Harbir Singh, in their article, “The Relational View; Cooperative Strategy and Sources of Interorganizational Competitive Advantage,” The Management Review, the competitive advantage is often found in the supply January 2005 / Contract Management ■ 29
  • 6. S U P P L Y B A S E O P T I M I Z A T I O N allows for more effective supplier management in general and the devel- opment of value added relationships and People strategic alliances where appropriate. This serves as motivation for our company and other Fortune 1000 firms to start down the path of “rationalizing” their supply base. According to Jack Meredith and Scott Shafer, authors of Operations Management for MBAs, Culture …in these days of intense global competition and supply chain management, the rela- tionship between customers and suppliers has changed significantly...customers are seeking a closer, more cooperative rela- tionship with suppliers. They are cutting back the number of suppliers they do Process Tools/ business with by a factor of 10 or 20, with those remaining getting the overwhelming Technology volume of their business.8 Simon Croom, lecturer at the University of San Diego, states, “…a firm can gain and sustain competitive Figure 4. Raytheon Knowledge Management Model advantage by accessing its key resources in a way that span the boundaries of the firm. Competitive advantage can be embedded in a set of relationships across the boundaries of firms, rather than residing inside an individual firm.”9 1. Frequently, it is the supply chain Determine what management organization that recog- to benchmark nizes the merit of value networks and collaborative relationships with key 5. suppliers. This recognition is indeed Take action 2. part of the value that supply chain Form a The bench- management brings to the organization; however, the challenge is implementa- Benchmarking marking tion. Supply chain cannot accomplish Process team successful execution of strategic supply 4. relationships in a functional silo. Collect and analyze Cross-functional buy-in and participa- benchmarking 3. tion are necessary for successful information Identify bench- design and implementation of value- mark partners added networks, which bring competitive advantage to the entire supply chain. Supply Base Optimization We set out to rationalize our supply (Source: “The Benchmarking Book” by Michael Spendolini 1992 published by AMACOM.) base through a continuous process that we refer to as supply base opti- Figure 5. The Five-Stage Benchmarking Process Model mization. Our definition of supply 30 ■ Contract Management / January 2005
  • 7. S U P P L Y B A S E O P T I M I Z A T I O N base optimization is “the development processes. “Implementing best practices available to assist in the design and of the supply base that provides the gives you the greatest opportunity for implementation of benchmarking company with a competitive advantage strategic, operational, and financial engagements. These individuals also and consciously determines the advantage. It allows you to continu- facilitate the process by initiating “right” number of suppliers for a given ously improve your business while contact with potential benchmarking commodity.” Many supplier reduction developing a learning culture,” partners and securing their commit- or rationalization initiatives focus according to the APQC.10 ment to participate and adhere to strictly on reducing the number of At Raytheon, benchmarking is a established guidelines and protocol. suppliers. By design, our supply base major component of our knowledge As a member of the APQC, we adhere optimization initiative focuses on management system. It is included in to the benchmarking code of conduct, developing a repeatable process to use in determining commodity strategies for major classifications of products The integrated supply chain aligns our and services critical to our business. The intent is to identify the best re s o u rc e s a n d p ro c e s s e s w i t h o u r s u p p l i e r ’s value and the appropriate number of suppliers for each commodity based capabilities to meet our customers’ needs on our overall business strategy. The initiative encompassed development and our shareholders’ objectives. of the process for defining, communi- cating, executing, and maintaining an optimal supply base in support of our the “process” leg of our knowledge which provides guidelines to all par- overall strategic business environment. management triangle as one method ticipants and “contributes to efficient, The process is continuous because it for capturing and sharing knowledge effective, and ethical benchmarking.” is tied to the strategic business plan. (see Figure 4 on page 30). The commodity strategies must be We have been involved in hundreds Benchmarking Process refreshed in response to shifts in the of benchmarking studies and have A five-stage benchmarking process business strategy. The process must defined a process for documenting (see Figure 5 on page 30) was used by also allow for ongoing evaluation of and sharing best practices using a the Supply Base Optimization Team. supplier performance and inclusion simplified process to: (1) collect, The initial steps included conducting of new suppliers if circumstances (2) abstract, and (3) disseminate. key research to develop a list of warrant it. Our Knowledge Transfer & potential benchmarking partners, and Benchmarking Team consists then using comprehensive research Industry Benchmarking of subject matter experts that are and a prescreening interview to The hypothesis of the SAS SBO team was that optimizing the supply base would result in increased bottom-line performance through improved cost, quality, and schedule. We decided to benchmark with companies inside and outside of our industry to validate our hypothesis and to swiftly diagnose our problem areas and implement advanced solutions. Benchmarking would allow us to test our theories, benefit from lessons learned, identify key competitor strategies, adopt industry best practices, identify com- mercial SCM innovation, adapt global best of breed practices, identify future trends, and leapfrog the competition. The American Productivity & Quality Center (APQC) defines benchmarking as the process of identifying, sharing, and using best practices to improve business January 2005 / Contract Management ■ 31
  • 8. S U P P L Y B A S E O P T I M I Z A T I O N The Progression to World-Class Optimized Supply Base World Class Supplier Strategy Proactive Fully integrated supply strategy—early supplier involvement in design Supplier Program vs. global Global supplier Management supplier management management Social Mechanical Fulfills social Social responsibility Responsibilities responsibilities incorporated into commodity strategies SCM actively recruits SCM Skill Set SCM lacks technical Limited SCM technical experts and product expertise product expertise understands commodity/ industry trends Cross-functional teams SCM Involvement Clerical SCM not involved SCM involvement engaged in commodity in Supplier in source selection in key supplier strategies/supplier Selection selection selection Process No process defined No make/buy Make/buy strategy Supply base optimized process defined defined and aligned with busi- ness strategy Bottom-Line Sub-optimized Award of negative Favorable, but not Demonstrated positive impact Impact bottom-line impact, but not optimized impact to bottom line—directly associated quantifiable with optimization efforts Relationships Transactional Directed procure- Preferred supplier Collaborative ments lists and alliance Emphasis Convenience Parts availability Cost, quality, and Total cost of ownership procurement and purchase price timeliness Data Is not available Retrieval difficult Facilitates sourcing Facilitates strategic and manual and pricing sourcing/planning 1 2 3 4 5 6 7 8 9 10 “Current State” “Future State” Figure 6. 32 ■ Contract Management / January 2005
  • 9. S U P P L Y B A S E O P T I M I Z A T I O N down-select to five or six industry marking findings, provided clear leaders. The companies were then direction of changes needed to our invited to participate in a two-day current process. The resultant supply benchmarking symposium. The base optimization process design closes companies that participated were several of the identified gaps by inclu- IBM, Rockwell Collins, Northrop sion of the following: Grumman, and Motorola. Prior to the face-to-face meeting, Preferred supplier selection is now we developed a template that included linked to documented commodity the topics that each company should strategies. address in their presentation at the symposium. Key supplier selection is now linked The format of the event was such to technology road maps. that each company presented their supply chain process while the others The supply base design is now asked clarifying questions and recorded aligned with the business strategy. best practices based on the information shared. A general discussion followed Social responsibility is now incorpo- the presentations, allowing for further rated into each commodity strategies. clarification and consensus generation around the identified best practices. Strategic supplier development A facilitator captured the information targets will be identified early. and recorded it in the following categorizes: organizational structure Employee skill set is being upgraded and culture; process methodology, to effectively manage an integrated measurements, and metrics; tools, supply chain. technology, and systems; barriers and challenges; and key knowledge thoughts. Organizational structure is being The results of these exercises along revised to facilitate commodity with the presentations were shared management. with all of the benchmarking partners. Benchmarking became a significant In closing these gaps, we shift contributor to our evolving supply dramatically from tactical to strategic base optimization process design. In supply management. addition to the forum, we participated During our benchmarking process, in two additional benchmarking we identified two important lessons events, which included companies learned: (1) process improvements such as Cisco, Boeing, Motorola, must be driven from the top down, Unisys, and Tyco. The major learning and (2) multifunctional senior leader- from the three benchmarking events ship endorsement is a must. Our is listed in Table 1 on page 34. team’s vision is to develop “a collabo- rative supply management process, World-Class Supply Base which ensures best-value execution, Optimization Defined in support of our customer require- Using our research and benchmarking ments.” Achieving this vision will findings, we created a step chart iden- put us much closer to the world-class tifying the progression toward a finish line. The involvement of key world-class, optimized supply base, stakeholders and cross-functional modeled after the Burt WCSM contin- teams was necessary to help select uum (see Figure 6 on page 32). This the pilot commodities to test our allowed us to characterize our current hypothesis, minimize risk to pro- state and determine gaps that needed grams, and increase the probability closure in order to reach world class. of ongoing success. Our 2003 assessment placed us at the To that end, we solicited and lower end of the proactive stage. This secured the vice president of supply assessment, coupled with our bench- chain management and the vice presi- January 2005 / Contract Management ■ 33
  • 10. S U P P L Y B A S E O P T I M I Z A T I O N round of supply base optimization has Keys to Supply Base Optimization resulted in several tangible benefits, including, a documented repeatable Derived from Industry Benchmarking process for developing and imple- menting commodity strategies; a 20 Process must start with the customer and then work backward percent reduction in the number of suppliers; a gating process to control to define the supply chain strategy. the addition of new suppliers; a cost Significant portion of product cost is driven by external sources. savings of more than $1 million associated with the three pilots; cross- Strategies should be linked to business processes. functional collaboration in the SBO Measure success through business performance improvement. process; senior leadership team involvement, a shift of SCM resources Supply chain must own sourcing. from tactical to strategic tasks, and Supply executive leader should report to the business president. the development of skills to facilitate the ongoing process implementation. Process improvements must be driven from top-down to be successful. The success of this project is largely attributable to the effective application Multifunctional senior leadership endorsement is a must. of knowledge gained through bench- Tools are used to bring processes upstream into the design process marking with firms that are leading to ensure critical early involvement with engineering. the way in answering the question of how to harness the power of supply Strategic approach results in significant reductions in number chain management. of suppliers. Conclusion Commodity strategy is prioritized around spend. We have begun a journey toward Commodity teams are cross-functional. world-class supply chain manage- ment. The WCSMSM continuum Focus on standardization to reduce complexity. developed by Dr. David Burt and his Involvement of entire value chain including customer produces associates was used to assess the current state of our organization. An greatest success. analysis of our current supply base Trust and collaboration with suppliers is a key enabler. identified the need for a sourcing strategy and process that was aligned Early involvement with the “right” suppliers is key to success. with our organizational business plan. Process centralization adds to efficiency and focus. Analysis also confirmed the fact that our current supply base was too large Staff for success. to effectively manage. Literature review confirmed that significant Move resources from tactical to strategic focus. competitive advantage could be Evaluate employee skill sets and train, develop, and make changes gained through strategic supply base if needed. design. Working collaboratively with the “right” suppliers would result in a Create urgency through clear case for action. definable competitive advantage for the entire supply chain. Strategic involvement with suppliers Table 1. during the product design phase would assist us in providing solutions dent of engineering as our initiative a Raytheon Six Sigma master expert, to our customers. The supply base sponsors. This helped us to build the and the senior leaders of two of our optimization process was established necessary political clout to gain active major engineering centers. to move SAS up the continuum on participation from other key stake- We identified circuit card assemblies, the world-class SCM scale. SAS was holders. We were able to form an machining, and facilities as the com- able to move swiftly in developing and expanded advisory council consisting modity areas on which to pilot our piloting the SBO process as a result of of the vice president of quality, the new process. The results of the pilots our effective use of industry bench- director of manufacturing operations, exceeded expectations. Our first marking. The benchmarking process 34 ■ Contract Management / January 2005
  • 11. S U P P L Y B A S E O P T I M I Z A T I O N allowed us to quickly test our hypoth- 3. Ibid. Management 578, University of San Diego (USD), 2004. esis and design a process that could 4. Paul D. Cousins and Robert Spekman, be used to engage our cross-functional “Strategic Supply and the Management 10. American Productivity and Quality subject matter experts in a radically of Inter- and Intra-organizational Center Web site: www.apqc.org. different source selection process. In Relationships,” Journal of Purchasing Accessed April 10, 2004; 1:18pm (PT). and Supply Management (January addition to the SBO process design, 2003): 19–79. References our benchmarking activity helped us to develop a change management pro- 5. Robert Porter Lynch, “Ten Solutions Dyer, Jeffrey H. Collaborative Advantage gram and measurement system. Sets of Strategic Sourcing Alliances, Winning Through Extended Enterprise Strategic Alliance Workshop.” The Supplier Networks. New York: Oxford Sharing knowledge and best practices Warren Company. Version 1.0 dated University Press, 2000. with industry leaders significantly August 2003. reduced the time required for process Raytheon Company Internal. “Knowledge design and implementation. It also 6. Jeffery H. Dyer and Harbir Singh, Management and Benchmarking.” “The Relational View: Cooperative Raytheon Company Internal. 2004. Web increased the probability of the suc- Strategy and Sources of site: http://home.ray.com/urkm/bench- cess of our pilots. In summary, we will Interorganizational Competitive mark/ (November 18, 2003). realize more immediate savings and Advantage,” The Academy of other benefits related to SBO as a Management Review 23, no. 4 result of our use of benchmarking. CM (October 1998): 660–679. 7. Robert Trent, “What Everyone Needs Endnotes to Know About SCM,” Supply Chain 1. Robert Trent, “What Everyone Needs to Management Review (March 2004): 2. Know About SCM,” Supply Chain 8. Jack Meredith and Scott Shafer, Operations Management Review (March 2004): 2. Management for MBAs, 2d ed. (New 2. David Burt, Donald Dobler, and Stephen York, NY: John Wiley & Sons, 2001.) Starling. World Class Supply 9. Simon Croom, “Session 6 Lecture: Management The Key to Supply Strategic Capability and Value Management. 7th ed. (New York, NY: Networks,” lecture in Supply Chain McGraw-Hill Companies, 2003.) NCMA’s 2005 Educational Conference Calendar Attendance at NCMA’s conferences offer you: April 25–27, 2005 ways to stay in touch with contemporary issues, NCMA World Congress 2005 Phoenix Civic Plaza /Hyatt Regency Phoenix exposure to best practice models, Phoenix, AZ opportunities for networking with those in the same field, July 28–29, 2005 career growth programs, and Aerospace and Defense Contracting points toward certification. Conference Hyatt Regency Long Beach, CA For more information, please contact Michelle Bourke, CMP, at 571/382-1135, or visit our Web site at www.ncmahq.org. January 2005 / Contract Management ■ 35