SUPPLY CHAIN MANAGEMENT TECHNIQUE AND APPLICATION

Supply Channels
The next step after deciding to source globally is to decide what supply channels to use. The lowest-price
method for procuring goods globally usually is to procure them directly. Direct procurement requires the
buying firm to deal with all of the issues associated with getting the goods to facilities. Although direct
procurement may result in a low price, total costs may be prohibitive. In addition, limited resources in
supply management may make direct procurement infeasible. The simplest way to source globally is with
an intermediary. The value of using intermediaries dissipates over time as learning by the buying firm
increases.

Global Trade Intermediaries

Selection of the appropriate intermediary is a function of availability and of the services required. The use
of such intermediaries typically adds a significant cost to the overall cost of the transaction but in most
cases avoids many unforeseen problems.

The supply manager who is venturing into global sourcing is well advised to solicit the advice of colleagues
from the local supply management association. Some typical intermediaries are described below:

■ Import merchants buy goods for their own account and sell through their own outlets. Since they
assume all the risks of clearing 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 usually act for exporters abroad, selling in the United States and receiving a
commission from the foreign exporter. Such houses generally do not have goods billed to them, although
they handle many of the shipping and customs details.

■ Agents or representatives are firms or individuals representing sellers. Since the seller pays their
commission, their primary interests are those of the exporter. They generally handle all shipping and
customs clearance details, although they assume no financial responsibility of the principals.

■ Import brokers 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 also may 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 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. Standard directories and trade publications list such firms, their
capabilities, and areas of service.

■ Subsidiaries are established by multinational corporations in countries where a physical presence is

needed to improve competitive capability and/or meet host government restrictions. For example,
Hitachi, a Japanese company, created a Hitachi Americas subsidiary to serve North American markets.
Subsidiaries can increase sales and lower costs through employing a workforce with unique training and
education and through reduced transport distances and tariffs. Subsidiaries usually start with a large
percentage of expatriate managers competent in the local language, which lessens over time as qualified
managers from the host country are developed. Subsidiaries serve to buffer

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the supply manager from both language and time-zone problems. They offer to set prices in local currency
and deliver material to buyers with all duties paid. Unfortunately, they are often remote from
manufacturing and marketing decision makers and can be blockers in the flow of technical information.
One experienced global sourcing authority finds that subsidiaries add 5 to 35 percent for their services.

International Procurement Offices

When an organization’s purchases in a foreign country or region warrant it, consideration should be given
to establishing an international procurement office (IPO), also called an international purchasing office.

An IPO is an office in a foreign country that is owned and/or operated by the parent company in order to
facilitate business interact tions in the foreign country and surrounding region.

Supply management professionals at an IPO quickly become familiar with qualified sources, thereby
expanding the buying firm’s potential supplier base. IPO personnel can physically and personally evaluate
suppliers, 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, labor issues, and governmental actions than are domestically based supply
managers. The IPO facilitates payments to suppliers, provides on-site support at the supplier’s site if
problems arise, and provides logistical support.

Expatriates who have worked for the domestic manufacturer, usually in a technical role, normally staff
IPOs; however, this generalization is changing as the percentage of locals staffing IPOs is increasing. IPOs
normally are established as cost centers, charging a percentage markup (typically 2 percent) for their
services. Competition from other channels (foreign trade intermediaries and direct relations) tends to
keep IPOs efficient.

The one weakness of IPOs that has been observed is their tendency to represent the local supplier’s
interests over those of the parent company.

Deere & Company has undertaken an aggressive globalization program under the direction of Dave
Nelson, vice president of Worldwide Supply Management. Deere’s International Supply Management
Services has established IPOs around the world. According to a Deere & Company newsletter, the
International Supply Management Services “group’s mission has evolved into leveraging opportunities
around the world for strategic sourcing teams and for all of Deere’s 75 factories.”

Three of the group’s key response bilities are

(1) “maintaining cross-cultural relationships and training sourcing team members in global supply
management,”
(2) “serving as the main link between supply man-
agement activities and the Deere & Company functions that global trade requires: customs, law, finance,
and others that deal with such murky issues as quotas and duties, world economic forecasts, business
development, risk management, currency and taxes,” and
(3) establishing and facilitating International Purchasing Offices. According to Dave Nelson, “These offices
will link local manufacturing to common enterprise processes, work to improve supplier capability by
accessing and applying proven Deere & Company programs (such as Achieving Excellence and Supplier
Development), and facilitate understanding of in-country trade and regulatory requirements, as well as
cultures.”

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Direct Suppliers
Dealing directly with the supplier usually will result in the lowest purchase price (including transportation
and import duties). It eliminates the markups of global trade intermediaries. However, it requires an
investment in travel, communications, logistics, and interpretation of costs. Direct relations with the
supplier should be undertaken only after carefully conducting a cost/benefit analysis. It is important to
note that conditions in developing countries are often problematic. Buyers should anticipate problems.
For example, China, India, South America, and Eastern Europe have relatively poor transportation
infrastructure systems in comparison to North America, Western Europe, and the Pacific Rim.

Eliminating Intermediaries
After the buying firm has gained confidence in the quality of the imported materials, and volume
increases, the firm typically attempts to discontinue the use of global trade intermediaries for major
procurements. Its major motivation is to avoid the intermediary’s markup. The supply manager should
inform its supplier of this new policy and then visit each of the manufacturers, without the intermediaries,
to negotiate new contracts. While cost and the desire for direct dealings on technical issues may motivate
the buying firm to deal directly with the supplier, the final decision will be made at the supplier’s head-
quarters. The supply manager should anticipate resistance by both the intermediaries and their
manufacturers. But this resistance normally can be overcome. In some cases, new suppliers may have to
be developed because of the tight ties the global trade intermediaries may have with the existing supplier.
Before taking such action, the supply manager must ensure that his or her company is set up to handle
items such as traffic, customs clearance, and international payments.

Direct procurement requires the involvement of the company in all aspects of the transaction; when
properly conducted, it eliminates the added profit of the middleman. Outside agencies may be engaged
to perform specialized services. For example, customs brokers can be used to handle entry requirements,
export brokers to handle foreign clearances, and freight forwarders to arrange for transport. Such agents
do not take title to the goods. Most direct purchasers whose scale of activities does not warrant such in-
house capability use outside agencies.

Identifying Direct Suppliers

Global trade intermediaries also are an excellent source of information. Unfortunately, these
organizations have a vested interest in maintaining their position in the supply channel. The best way to
prepare to bypass the intermediary is to develop direct contacts with key players at the division
performing the design, manufacture, and marketing of the item or commodity class. The supply manager
should provide performance feedback directly to the supplier. The supply manager should tell the
intermediary that he or she wants to visit with the supplier’s key personnel the next time they are in the
country or the next time the key personnel are in the buyer’s country. Dick Locke recommends meeting
the supplier’s key personnel and presents other tips summarized in the following list:

■ Use the meeting to provide performance feedback and to explain your company’s purchasing goals and
values. Take care not to appear to be an unreasonable company to work with, even if you must deliver a
critical message. Work to make foreign visitors to your company feel as welcome as possible.
■ As part of the strategy, consider the timing of your request. The ideal time is when you are considering
a change in suppliers or are selecting a supplier for a new project. The possibility of a major increase in
business will give you more leverage.
■ If you’re dealing with a new supplier, state your intention to deal directly right from the start. Once a
subsidiary or representative has started to handle your business, they are difficult to dislodge. It’s easier
to change your mind and start dealing through reps than the other way around.

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■ Once your company has established a relationship with the business and technical staff of the supplier,
make the request to deal more directly. You might be requesting to deal through an IPO (referred to as
GPO in this book), or you might be asking to deal directly. This request should go to the supplier’s sales
management, and specifically to an individual whom you already know.
■ Be prepared to give reasons. These might be that you need a lower cost and believe that both parties
can benefit by removing intermediaries. Another might be that the representative or subsidiary doesn’t
add enough value to the transaction to justify the markups it must be charging. Potential direct global
suppliers can be located through a wide variety of sources. The chapter on sourcing presents a detailed
section on discovering sources of supply.. The use of the Internet is particularly advantageous in
discovering global sources.

Qualifying Direct Suppliers

Prior to investing additional energy in dealing with a global supplier, two issues should be addressed:
country and regional stability and the potential supplier’s financial condition.

For approximately $750, Dun & Bradstreet will prepare a Country Analysis Report for its clients, including
some 70 pages of in-depth research, information on both the current and historical economy and
government, import and export practices, trading partners, and monetary policies.

Most experts recommend a survey of a region as well as the company and country because such factors
as political and monetary stability, currency transfer laws, and trade and product liability policies may be
crucial to doing business there. According to Heidi Jacobs and Barbara Ettorre, The client should also ask
what is needed to engage in commerce in a particular country.

Credit professionals cite such factors as: required documentation for transactions, the transportation and
distribution infrastructure, religious customs, quality standards and existing regulations that may restrict
sale of the client’s product or service. Will there be overseas agents to facilitate a deal? How reliable and
experienced are they? Many a deal has been derailed by such cross-border questions as whether the
desired country prohibits sales of products whose components originated in a certain country.

The supply manager or buying team is cautioned not to judge the creditworthiness of the potential
supplier by the ability of its key personnel to speak fluent English. A careful financial analysis (as discussed
in Chapter 15) must be conducted. Jacobs and Ettorre list the following sources of information for such
analyses: Dun & Bradstreet, Gradon America, Owens On Line, Justitia International Inc., and Piguet
International.

International credit specialists representing U.S. firms also caution their clients to familiarize themselves
with the Foreign Corrupt Practices Act, which bars United States companies from engaging in bribery and
other practices when doing business overseas.

Preparing for Direct Relations

Cultural Preparation Virtually all supply relationships with global suppliers are the result of negotiations.
The success of each of these negotiations is influenced, in part, by the negotiator’s ability to understand
the needs, and ways of thinking and acting, of representatives of global firms. What is considered ethical
in one culture may not be ethical in another. The intention of filling commitments, the implications of gift
giving, and even the legal systems differ widely.

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In addition to the conventional preparation for any negotiation, it is essential to conduct an extensive
study of the culture(s). It is important to emphasize that this study should focus on the culture, not the
language. The ability to understand a supplier’s cultural background is of great practical advantage for
several reasons. Negotiators perform more effectively if they understand the cultural and business
heritage of their counter parts and the effect of this heritage on their counterparts’ negotiation strategies
and tactics. Also, it puts the supplier off his or her guard. Talk with others who have experienced
living or working in the culture. Learn what the holidays are, what the units of measure are, what the
currency exchange is, what topics are taboo, and so on.

Another aspect of cultural preparation becomes important in cases in which there is a strong likelihood
of continuing relations (i.e., one or more transactions that would require a year or more for completion).
Under such circumstances, the supplier’s representatives (accompanied by their spouses) frequently visit
the domestic firm. The buying firm’s hosts should go to considerable lengths to become acquainted with
their counter parts (and their spouses) on a social basis. Americans, for example, should entertain the
visitors in their homes (a rarity in Europe and the Far East). This will give the Americans and their spouses
an opportunity to develop good relations with their counterparts. This bank of goodwill, while not a means
of co-opting the foreign supplier, projects a desire and willingness to understand, which frequently proves
to be invaluable during subsequent transactions.

One other aspect of cultural preparation needs to be emphasized: It takes much longer to negotiate with
foreign suppliers. This is especially true if the supplier has not had extensive exposure to the buying firm’s
business practices and specifications. The time required varies based on the mode of operation. In the
case of European firms, it usually takes at least twice as much time as with U.S. firms, and up to six times
as long is often required for Far East firms. As a result, U.S. negotiators must be aware of the requirement
for additional time and plan accordingly. Cultural preparation is specific to the country in which a supply
professional is planning to conduct business. As a result, a detailed discussion is beyond the scope of this
book. Several excellent resources are provided in the footnote below to aid the reader in his or her efforts.

Interpreters Language frequently poses a significant barrier to successful global business relations.
Bilingual business discussions usually require a third-party interpreter even when both of the principal
parties are fluent in one of the two languages. Differences in culture, language, dialects, or terminology
may result in miscommunication and cause problems. Both parties may think they know what the other
party has said, but true agreement and understanding often may be missing. Think, for instance, of the
confusion the simple word “ton” can create. Is it a short ton (2,000 lb), a long ton (2,240 lb), or a metric
ton (2,204.62 lb)? The use of textbook English raises innumerable interesting problems. For example, in
the Far East, the word “plant” is interpreted to mean only a living organism, not a physical facility.

When there are language differences between cultural groups, many busy executives believe that a
competent interpreter is all that is necessary to overcome these differences. While a good interpreter can
speed negotiations, an ineffective interpreter, or one ineptly used, can convert even simple matters into
interminable wrangles. Complex discussions may simply grind to a halt amid a haze of miscommunication.
The inexperienced supply manager risks wasting inordinate amounts of time for very little gain while
acquiring the necessary communication skills. According to Hal Porter, a specialist with interpreters, “One
or two words with a double meaning can certainly change the entire content of a statement.” Executives
experienced in international trade usually have learned these lessons, if only by trial and error. The use of
interpreters, while allowing communication to take place, does not obviate the need for an understanding
of the sup plier’s culture. Even when one overcomes the natural barriers of language difference, it is still
possible to fail to understand and be understood.

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Technical and Commercial Analysis Technical and commercial analysis is discussed in greater detail in the
chapter on source selection in this book. Before dealing with identified global candidate suppliers, the
supply management team should:

■ Prepare and review specifications and drawings.

■ Pack samples or photos of required materials if they would help in communicating requirements.
■ Clearly prepare the quality requirements.
■ Identify specific scheduling requirements.
■ Determine (as a group) what percentage of the annual requirements for the item can be placed offshore.
■ Determine requirements for special packaging.
■ Identify likely lead times.
■ Develop a clear idea of the price objective.
■ Prepare a briefing on your (the buying) firm. Frequently, much effort will be expended selling the
potential suppliers on doing business with the buying firm. The briefing should include:
o Information on the relevant product line and related lines.
o Actual and forecasted sales volume.
o Customers.
o Market share.
o Unclassified corporate strategy information.
o Annual reports.
o An indication of why the buying firm is soliciting the potential global supplier’s
o interest (quality? price?).

The Initial Meeting

Adequate preparation as detailed in the previous section will increase the probability of a smooth,
efficient, and successful initial meeting. At the initial meeting, it is good to con-duct a facility tour or visit
of the potential supplier’s facilities and meet with critical personnel. Plant visits are discussed in detail in
the chapter on source selection. For large procurements with complex specifications, the buying firm’s
technical people clearly must be part of the visiting team. The potential supplier will be judging the buying
firm just as much as the buyer will be judging the potential supplying firm. Experience has shown that the
controller of the target supplier usually occupies a very influential position.

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Global Supply Chains in a Post-Pandemic World

When the Covid-19 pandemic subsides, the world is going to look markedly different. The supply shock
that started in China in February and the demand shock that followed as the global economy shut down
exposed vulnerabilities in the production strategies and supply chains of firms just about everywhere.
Temporary trade restrictions and shortages of pharmaceuticals, critical medical supplies, and other
products highlighted their weaknesses. Those developments, combined with the U.S.-China trade war,
have triggered a rise in economic nationalism. As a consequence of all this, manufacturers worldwide are
going to be under greater political and competitive pressures to increase their domestic production, grow
employment in their home countries, reduce or even eliminate their dependence on sources that are
perceived as risky, and rethink their use of lean manufacturing strategies that involve minimizing the
amount of inventory held in their global supply chains.
Yet many things are not going to change. Consumers will continue to want low prices (especially in a
recession), and firms won’t be able to charge more just because they manufacture in higher-cost home
markets. Competition will ensure that. In addition, the pressure to operate efficiently and use capital and
manufacturing capacity frugally will remain unrelenting.
The challenge for companies will be to make their supply chains more resilient without weakening their
competitiveness. To meet that challenge, managers should first understand their vulnerabilities and then
consider a number of steps—some of which they should have taken long before the pandemic struck.

Uncover and Address the Hidden Risks

Modern products often incorporate critical components or sophisticated materials that require
specialized technological skills to make. It is very difficult for a single firm to possess the breadth of
capabilities necessary to produce everything by itself. Consider the growing electronics content in modern
vehicles. Automakers aren’t equipped to create the touchscreen displays in the entertainment and
navigation systems or the countless microprocessors that control the engine, steering, and functions such
as power windows and lighting. Another more arcane example is a group of chemicals known as
nucleoside phosphoramidites and the associated reagents that are used for creating DNA and RNA
sequences. These are essential for all companies developing DNA- or mRNA-based Covid-19 vaccines and
DNA-based drug therapies, but many of the key precursor materials come from South Korea and China.

Manufacturers in most industries have turned to suppliers and subcontractors who narrowly focus on just
one area, and those specialists, in turn, usually have to rely on many others. Such an arrangement offers
benefits: You have a lot of flexibility in what goes into your product, and you’re able to incorporate the
latest technology. But you are left vulnerable when you depend on a single supplier somewhere deep in
your network for a crucial component or material. If that supplier produces the item in only one plant or
one country, your disruption risks are even higher.

Identify your vulnerabilities.

Understanding where the risks lie so that your company can protect itself may require a lot of digging. It
entails going far beyond the first and second tiers and mapping your full supply chain, including
distribution facilities and transportation hubs. This is time-consuming and expensive, which explains why
most major firms have focused their attention only on strategic direct suppliers that account for large
amounts of their expenditures. But a surprise disruption that brings your business to a halt can be much
more costly than a deep look into your supply chain is.

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The goal of the mapping process should be to categorize suppliers as low-, medium-, or high-risk. To do
that, Tom Linton, who served as a supply chain executive at several major companies, and MIT’s David
Simchi-Levi suggest applying metrics such as the impact on revenues if a certain source is lost, the time it
would take a particular supplier’s factory to recover from a disruption, and the availability of alternate
sources. (Disclosure: I am on the boards of directors of Flex, a large manufacturing and supply-chain
services provider where Linton is a senior adviser, and Veo Robotics, a company that has developed an
advanced vision and 3D sensing system for industrial robots.) It’s vital to ascertain how long your company
could ride out a supply shock without shutting down, and how quickly an incapacitated node could recover
or be replaced by alternate sites when an entire industry faces a disruption-related shortage.

The answers to those questions depend, in part, on whether your manufacturing capacity is flexible and
can be reconfigured and redeployed as needs evolve (as is the case for many manual or semi-automated
assembly operations) or whether it consists of highly specialized and difficult-to-replicate operations.
Examples of the latter include production of the most advanced smartphone chips, which is concentrated
in three facilities in Taiwan owned by the Taiwan Semiconductor Manufacturing Company; fabrication of
exotic sensors and components, which happens largely in highly specialized facilities in a handful of
countries, including Japan, Germany, and the United States; and refining of neodymium for the magnets
in AirPods and electric-vehicle motors, almost all of which is done in China. Once you have identified the
risks in your supply chain, you can use that information to address them by either diversifying your sources
or stockpiling key materials or items.
Diversify your supply base.

The obvious way to address heavy dependence on one medium- or high-risk source (a single factory,
supplier, or region) is to add more sources in locations not vulnerable to the same risks. The U.S.-China
trade war has motivated some firms to shift to a “China plus one” strategy of spreading production
between China and a Southeast Asian country such as Vietnam, Indonesia, or Thailand. But regionwide
problems like the 1997 Asian financial crisis or the 2004 tsunami argue for broader geographic
diversification.

Managers should consider a regional strategy of producing a substantial proportion of key goods within
the region where they are consumed. North America might be served by shifting labor-intensive work
from China to Mexico and Central America. To supply Western Europe with items used there, companies
could increase their reliance on eastern EU countries, Turkey, and Ukraine. Chinese firms that want to
protect their global market share are already looking to Egypt, Ethiopia, Kenya, Myanmar, and Sri Lanka
for low-tech, labor-intensive production.

Reducing dependency on China will be easier for some products than others. Things like furniture,
clothing, and household goods will be relatively easy to obtain elsewhere because the inputs—lumber,
fabrics, plastics, and so forth—are basic materials. It will be harder to find alternative sources for
sophisticated machinery, electronics, and other goods that incorporate components such as high-density
interconnect circuit boards, electronic displays, and precision castings.

Building a new supplier infrastructure in a different country or region will take considerable time and
money, as China’s experience illustrates. When China first opened its special economic zones in the 1980s,
it had almost no indigenous suppliers and had to rely on far-flung global supply chains and on logistics
specialists who procured materials from around the world and kitted them for assembly in Chinese
factories. Even with the support of government incentives, it took 20 years for the country to build a local

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base capable of supplying the vast majority of electronic components, auto parts, chemicals, and drug
ingredients needed for domestic manufacturing.

Shifting production from China to Southeast Asian countries will necessitate different logistics strategies
as well. Unlike China, those locations often do not have the efficient, high-capacity ports that can handle
the largest container ships or the direct marine liner services to major markets. That will mean more
transshipment through Singapore, Hong Kong, or other hubs and longer transit times to reach markets.
In the long run, though, it would be a mistake to cut China completely out of your supply picture. The
country’s deep supplier networks, its flexible and able workforce, and its large and efficient ports and
transportation infrastructure mean that it will remain a highly competitive source for years to come. And
because China has the second-largest economy in the world, it is important that firms maintain a presence
to sell in its markets and obtain competitive intelligence.
Hold intermediate inventory or safety stock.

If alternate suppliers are not immediately available, a company should determine how much extra stock
to hold in the interim, in what form, and where along the value chain. Of course, safety stock, like any
inventory, carries with it the risk of obsolescence and also ties up cash. It runs counter to the popular
practice of just-in-time replenishment and lean inventories. But the savings from those practices have to
be weighed against all the costs of a disruption, including lost revenues, the higher prices that would have
to be paid for materials that are suddenly in short supply, and the time and effort that would be required
to secure them.

Take Advantage of Process Innovations

As firms relocate parts of their supply chain, some might ask their suppliers to move with them, or they
might bring some production back in-house. Either course—transplanting a production line or setting up
a new one—is an opportunity to make major process improvements. This is because as part of the change,
you can unfreeze your organizational routines and revisit design assumptions underpinning the original
process. (One challenge for companies with existing production lines is that when those assets are fully
depreciated, executives may be tempted to retain them rather than invest in newer, more competitive
plants and equipment: Since the depreciation expense is no longer factored into the calculated cost of
production, the marginal cost of boosting production at a plant with idle capacity is lower.)

Several years ago I spent a week at a new Chinese factory of a major American industrial-equipment
company. When creating it, the company had started with the designs of its U.S. and Japanese factories
and then improved on them by introducing newer equipment and ways of working. The result was a
streamlined operation that was much more efficient than those in the United States and Japan. When the
company built its next new factory—in the United States—it repeated the process, using the Chinese
factory as the starting point. Another example is the Flex factory complex in Guadalajara, Mexico. When
increases in productivity plateaued, the company often moved smaller assembly lines to another building
(or part of the same building). During each move, workers redesigned steps to use less space and less
labor, boosting productivity.

New technologies already or soon will allow companies to lower their costs or switch more flexibly among
the products they manufacture, rendering obsolete the installed bases of incumbent competitors or
suppliers. Many of these advances also present an opportunity to make factories more environmentally
sustainable. Examples include the following:

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 Automation: As the cost of automation declines and people see that robots can operate safely
alongside humans, more kinds of work are being automated. The pandemic has made automation
even more attractive, because social distancing in factories is now a necessity. As a result of these
developments, it’s becoming more practical to return off-shored production to higher-cost
countries. Robotic palletizers, which can sharply reduce the need for labor in preparing products
for shipping, will pay for themselves quickly, as will automated optical inspection systems for
quality control.

 New processing technologies: The latest chemical manufacturing equipment uses less energy and
solvents, produces less waste, is less capital-intensive, and is less expensive to operate. Similarly,
a new generation of compact bioreactors could allow makers of biopharmaceuticals and vaccines
to produce smaller batch sizes economically.

 Continuous-flow manufacturing: This innovation could significantly increase the resilience of the
supply chain for small-molecule generic drugs by making producers less dependent on imported
active pharmaceutical ingredients (APIs). The U.S. Defense Advanced Research Projects Agency
(DARPA) has funded one initiative in this area: the development of flexible miniaturized
manufacturing platforms and methods for producing multiple APIs from shelf-stable precursors
as specific medical needs arise.

 Additive manufacturing: This production method, also known as 3D printing, can dramatically
reduce the number of steps required to make complex metal shapes; it can also lessen
dependence on distant suppliers of the machinery and tools needed for, say, the injection molding
of plastics. Rapid advances in 3D printing are making it possible to economically produce an ever-
expanding array of items in much higher quantities.

In many industries, technologies such as these promise to upend the traditional strategy of seeking
economies of scale by concentrating production in a few large facilities. They will allow companies to
replace large plants that serve global markets with a network of smaller, geographically distributed
factories that is more resistant to disruption.

Revisit the Trade-Off Between Product Variety and Capacity Flexibility

During the pandemic, when demand surged in many product categories, manufacturers struggled to shift
from supplying one market segment to supplying another, or from making one kind of product to making
another. A case in point is the U.S. groceries market, where companies had difficulty adjusting to the
plunge in demand from restaurants and cafeterias and the rise in consumer demand. SKU proliferation—
the addition of different forms of the same product to serve different market segments—was partly
responsible. For example, one obstacle to meeting heightened demand for toilet paper at supermarkets
was that manufacturers had to change over their production lines, because consumers prefer soft multi-
ply rolls rather than the thinner toilet paper that many hotels and offices purchased in much larger rolls.
Adding to the complexity, different retail chains wanted their own packaging and assortments.

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CONCLUSION
The economic turmoil caused by the pandemic has exposed many vulnerabilities in supply chains and
raised doubts about globalization. Managers everywhere should use this crisis to take a fresh look at their
supply networks, take steps to understand their vulnerabilities, and then take actions to improve
robustness. They can’t and shouldn’t totally back away from globalization; doing so will leave a void that
others—companies that don’t abandon globalization—will gladly and quickly fill. Instead, leaders should
find ways to make their businesses work better and give themselves an advantage. It’s time to adopt a
new vision suitable to the realities of the new era—one that still leverages the capabilities that reside
around the world but also improves resilience and reduces the risks from future disruptions that are
certain to occur.

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SUPPLY MANAGEMENT AND THE BOTTOM LINE

Supply management must be a core competency based on its overwhelming impact on the firm’s bottom
line. Supply management directly affects the two factors, which control the bottom line: total costs and
sales. Supply management also affects the investment in assets. Accordingly, supply management has a
major impact on a firm’s return on investment

Increased Sales
Supply management has a significant impact on the firm’s sales, principally in the following seven areas.

Faster to Market or Time-Based Competition Thirty years of marketing research have demonstrated the
importance of being early to market. In many cases, the first firm to introduce a successful new product
or service will hold 40–60 percent of the market after competition enters the picture. This research also
demonstrates that the profit margins enjoyed by the first firm to introduce a new product tend to be twice
those of its competitor, as first reported in the PIMS approach.

Firms, which have embraced World Class Supply Management, have reduced their new product
development cycles by an average of 30 percent as a direct result of a cross-functional approach to
product development (also known as concurrent engineering).

Purchasing and carefully selected suppliers are key members of these cross-functional teams. Time-based
competition also includes the firm’s ability to meet unexpected surges in demand for its products. In many
cases, a firm’s ability to ramp up production is constrained by its suppliers’ abilities to meet such surges
in demand. The development and management of a competent, responsive supply base plays a critical
role in the firm’s ability to meet unexpected demand.

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Improved Quality We are all sensitive to the quality of the products and services we purchase. An
automobile with a reputation for transmission problems will drive potential customers to its competitors.
Conversely, a firm whose products or lines of products have a reputation for quality gains market share
over its competitors and frequently is able to command premium prices. Some 75 percent of many
manufacturers ’quality problems can be traced back to defects in purchased materials. (The percentage
of quality problems that can be attributed to defective incoming materials for a services provider is usually
less, but still significant.) Thus, if a manufacturer or service provider is able to reduce defects in incoming
materials, it can improve the quality of its products in the marketplace. Firms that embrace World Class
Supply Management work with their suppliers to design quality nto the suppliers’ products and maintain
quality during production. The result is virtually defect-free incoming materials, improved quality in the
marketplace, more sales, and improved profit margins.

Pricing Flexibility Research conducted by the University of San Diego indicates that a world-class approach
to supply management will reduce the total cost of ownership associated with purchasing and owning or
leasing materials, equipment, and services an average of 25 percent. When the cost of producing an item
or service is reduced, marketing is given the gift of pricing elasticity. Through the application of sound
economic principles, marketing can estimate whether net income will increase more by (1) holding selling
price and sales volume constant and increasing net profit per unit, or (2) reducing the sales price, thereby
increasing sales volume.

Innovation The University of San Diego research study cited above indicated that of 240 firms surveyed,
approximately 35 percent of all successful new products were the result of technology gained from their
supply base. This leveraging of supplier technology is a major source of income for these firms.
Collaborative and alliance relationships with the firm’s supply base play a key role in ensuring and
enhancing this technology flow. The development and management of these supplier relationships is a
key responsibility of supply management.

Enhanced Customer Satisfaction World Class Supply Management helps achieve shorter fulfillment lead
times, consistent on-time delivery, high fill rates, complete orders, quicker response to customers’
requirements and the ability to meet unique or special requests.

The Supplier of Choice By providing the best value (a combination of quality, service and price), the firm
becomes the supplier of choice, whether to another channel member or to the end customer.

Customer Fulfillment Flexibility World Class Supply Management provides the supply support, which
allows the firm to be responsive to customer desires for flexible lead time and changes in product
configurations.

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Lower Total Cost of Ownership

The total cost of ownership shown in Figure 1.4 is the summation of the costs of acquiring and owning or
converting an item of material, piece of equipment, or service and post-ownership costs (the disposal of
hazardous and other manufacturing waste and the cost of lost sales resulting from poor product quality
reputation caused by defective materials or purchased services becoming incorporated in the end product
or service).

Better Product Designs We estimate the 70%–80% of the total cost of ownership is built into a
requirement—whether for production materials, equipment, services or MRO—during the requirements
development process. Early supply management and supplier involvement can significantly reduce costs
during this critical stage.

Acquisition Cost The acquisition cost or price paid for an item or service is normally a major component
of the total cost of ownership. As will be seen in many of the following chapters, numerous actions may
be taken to reduce acquisition cost. A few such activities are specification of the most cost-effective
material or item of equipment, use of the appropriate specification, standardization, good sourcing, and
pricing practices. Processing Cost The investment in developing, sourcing, and pricing requirements and
then ensuring that they arrive on time in the quality specified can be reduced significantly through the
application of efficient supply management processes and techniques.

Better Asset Utilization Collaborative and alliance relationships allow buyer/supplier dyads to share
critical assets. The smoother, more timely inflow of materials results in less waiting time, resulting in
improved asset utilization.

Quality Cost Costs are incurred in ensuring that the buying firm receives the optimal level of quality. These
costs may be reduced through the application of progressive quality techniques, such as the design of
experiments and statistical process control. Selection of suppliers capable of producing the desired level
of quality and then certifying their design and manufacturing systems can improve incoming quality while
reducing administrative quality costs.

Downtime Cost Downtime frequently is the largest component of the total cost of ownership for many
items of production and operating equipment. One minute of down time in a production line may cost
$26,000.

At this rate, an hour can cost $1,560,000. Thus, when purchasing equipment, the sourcing team must
place as much—or more— emphasis on downtime as on purchase price.

Risk Cost Firms spend millions of dollars in efforts to minimize risk. These firms maintain inventories
and/or dual or even triple sources to ensure continuity of supply. Carefully developed and managed
relationships with appropriate suppliers can eliminate the need for inventory and/or dual sources.

Cycle Time Cost While difficult to quantify, the shorter the cycle time for virtually all activities, the lower
the cost. The shorter the cycle time to bring new products to market, to develop a statement of work, or
to select a new source, the lower the total cost.

Conversion Cost Machine time, manpower, process yield lost, scrap, and rework are examples of
conversion costs. These costs are every bit as real as the purchase price of an item entering the production

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process. A pound of brass may cost twice as much as a pound of steel; but the higher acquisition price for
the brass may more than be offset by savings in machine and manpower costs during conversion of the
brass to a component or end product.

Non-Value Added Costs A careful analysis of all of the costs involved in bringing an item or service to
market frequently reveals that 40–60 percent of the costs involved no value added! Robert Handfield
indicates that estimates of the amount of time spent on non-value activities can be as high as 80 to 90
percent of the total time required to complete a cycle.

Supply Chain Cost The development and management of supply chains and supply networks require a
significant investment, primarily in the form of human resources. The proper selection, training, and
education of the individuals involved in these activities together with the application of software systems
can reduce the necessary investments.

Post-Ownership Cost Such costs frequently are overlooked but must be considered when addressing the
total cost of ownership. They include the disposal of scrap and other waste, customer service, warranty
costs, and the cost of lost sales resulting from customer dissatisfaction with the product.

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The Four Phases of Supply Management

The four phases of supply management all require many perspectives and inputs best ob-
tained through a cross-functional approach. These four phases of supply management
are as follows.

Generation of Requirements
The generation of requirements is a critical activity that results in the identification of the optimal
materials and services to purchase, together with the development of specifications and statements of
work describing these requirements. Approximately 85 percent of the cost of purchased material,
services, and equipment is “designed in” during this phase.

Thus, supply management should be involved up-front during the generation of requirements to ensure
that all commercial issues such as cost, availability, substitutes, and so on, receive appropriate
consideration.

Sourcing
The objective of sourcing is the identification and selection of the supplier whose costs, qualities,
technologies, timeliness, dependability, and service best meet the firm’s needs. The development of
supply alliances is a sourcing activity.

Pricing
The objective of pricing is the development of prices that appropriately reward the supplier for its efforts
and which result in the lowest total costs of ownership for the customer firm. While negotiations occur
throughout the supply management process, their most significant role normally is during the pricing
phase.

Post-Award Activities
This important activity ensures that the firm receives what was ordered on time and at the price and
quality specified. Post-award activities include supplier development, technical assistance,
troubleshooting, and the management of the contract and the resulting relationships

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