Purchasing Social Responsibility

Examining Purchasing Social Responsibility  

by Jimmy Alyea

Purchasing Social Responsibiliy Definition.

The concept of purchasing social responsibility (PSR) is defined by Carter and Jennings as “the involvement of purchasing managers in the socially responsible management of the supply chain” (2002)  and as “purchasing activities that meet the discretionary responsibilities expected by society” (2004).  Discretionary activities are those based upon an organization’s judgment rather than upon legal requirements or ethical issues.  Carter and Jennings consider five discretionary undertakings of supply management--diversity, the environment, human rights, philanthropy, and safety--to be interrelated parts of a broader concept of purchasing social responsibility (PSR) rather than stand-alone areas of management and of research.

Why Purchasing Managers Should Be Concerned.

Purchasing managers should be concerned with PSR because of their unique position to leverage strategic roles to set company standards for socially responsible practices.  Purchasing’s organizational importance has changed from that of providing  the lowest-cost supply solution to that of coordinating  and integrating procurement processes, both internally and externally, to one of adding value to the supply chain.  Through interaction with other key functional areas of an organization, as well as externally with suppliers and customers, purchasing managers can positively impact social responsibility performance in the supply chain both upstream and downstream.  For example, contract language and conditions can require that suppliers (and second- and third-tier suppliers) observe environmentally sound practices, provide safe and humane working conditions, and permit periodic audits of their compliance in these areas.  On the other hand, irresponsible actions by supply managers and their suppliers in areas such as human rights and the environment can significantly damage a firm’s performance and reputation, which can lead to backlash from customers, stakeholders, regulatory agencies, activist groups, and the media.

Another PSR area of significance to purchasing organizations is the understanding by supply management of the interrelatedness of individual discretionary undertakings of social responsibility, such as diversity and philanthropy, within a broader framework of purchasing social responsibility.  With this understanding,  Carter and Jennings (2004) point out that supply managers can leverage the knowledge gained in implementing one area of PSR when determining how to implement and manage other PSR activities.  Specifically, the similarity of the drivers, barriers, and effective tactics used to overcome these barriers to implementation of an initiative such as minority business enterprise (MBE) sourcing may, in many cases, be applied to implementing and managing programs in other areas of PSR such as human rights issues in suppliers’ plants. 

To help supply managers fully understand the interrelationships among key social-responsibility elements, the ISM’s (Institute for Supply Management) Commission on Social Responsibility identified seven core principles and practices of PSR in 2002.  ISM (2008) believes that utilizing these guidelines will enable purchasing professionals to strengthen an organization’s culture, improve trust in internal and external relationships, anticipate challenges more readily, and reduce business risks, while adding significant long-term value to their organizations and to society. 

How purchasing can help shape the direction of anorganization’s social responsibility agenda.

The best corporate social responsibility initiatives often come from within a company whose employees readily embrace new ideas and truly care about making changes for the better.  As reported by Carter and Jennings (2004), top management leadership by example, combined with shaping an organizational culture that embraces fairness and good corporate citizenship, has a direct and significant effect on purchasing social responsibility (PSR).  Supply management professionals are a key to helping organizations identify methods and opportunities to support future social responsibility initiatives.  They are uniquely positioned to take a leadership role within the organization and with suppliers.  With their wide range of contacts and sphere of influence throughout the supply chain, they can be pivotal in the success of “raising the bar” and removing barriers to developing and implementing new PSR programs.  By working across boundaries, purchasing managers can take the lead in highlighting what needs to be done in terms of social responsibility, now and in the future.

Innovative employee initiatives of front-line purchasing personnel who are aware of customer demands and trends—such as concerns for product safety, environmental impact, and product origin--are also important to shaping forward-looking PSR programs.  Carter and Jennings (2004) found that although individual values of supply management employees do not directly impact PSR programs, their values can play a key mediating role in initiatives instituted by employees.  The implication for purchasing managers is that employees selected to develop new PSR programs should be ones whose personal values and beliefs support PSR and align with the activity under consideration.  Additionally, successful employee initiatives concerning the enhancement of PSR activities are more likely to occur in a people-oriented environment that allows for missteps and risk-taking in order to capture opportunities and encourage innovation.

           

The Institute for Supply Management’s (ISM) seven core Principles of Social Responsibility (2008)  provide a framework for purchasing organizations to lead the way in developing proactive programs as new PSR issues arise or are foreseen.  These guidelines are organized by the following dimensions of social responsibility involving the purchasing function:  community, diversity, environment, ethics, financial responsibility, human rights, and safety.  They can be used by supply management to define and put into place, both internally and externally, ambitious and demanding goals for the future.  ISM recommendations for interacting with suppliers on social responsibility issues can be used to encourage collaboration, partnerships, and open communication lines for the sharing of product innovation, new technology, and the use of best practices in order to better position the supply chain to meet future PSR challenges.  For example, early supplier involvement in such areas as product design for reuse and disassembly, waste reduction, reduction of packaging material, and product life-cycle analysis can increase commitment and opportunities for firms to be environmentally responsible and to stay ahead of rising public expectations and demands for environmental friendliness. 

Other ways in which purchasing can influence an organization’s future social responsibility agenda is by having clear policies firmly in place concerning issues such as safety and human rights and by following through on their utilization.  To address diversity, purchasing can encourage or require the use of minority business enterprise procurement programs in certain areas of its own and its suppliers’ organizations.  It can refuse to do business with firms that are irresponsible in dealing with human rights issues such as paying workers a living wage and providing humane working conditions in factories.  Other important PSR considerations can be included in the supplier selection process and in procurement contracts.  Social responsibility audits can be conducted periodically to insure compliance although guidelines and standards need to be developed for consistency in evaluating findings.  Similarly, purchasing needs to develop performance metrics for most of the PSR dimensions in order to build a convincing business case for their implementation.  A purchasing organization that does more than “talk the talk” on socially responsible practices will be in a stronger position to influence its firm’s social responsibility agenda as it evolves in a complex and dynamic environment.      

Conclusion.

Social responsibility has to be a companywide, cross-functional effort that is embedded in an organization’s culture and that extends outside the organization as well.  Although no one function or person can do it all, supply management is well suited to be the facilitator for developing, coordinating, and implementing a firm’s socially responsible initiatives and for guiding its future progress.

Copyright 2012.  James L. Alyea.  All Rights Reserved.

For more information, please contact Jimmy Alyea:

Email, LinkedIn, Twitter, or Blog

Works Cited

Carter, C. R.  (2006).  Purchasing social responsibility—what is it, and where should we be headed?   In J. L. Cavinatto, A. E. Flynn,  & R. G. Kauffman (Eds.)  The Supply Management Handbook, Seventh Edition (pp. 393-407).  New York:  McGraw-Hill.

Carter, C. R., & Jennings, M. M. (2000).   Purchasing’s contribution to the socially responsible

management of the supply chain.  Focus Study:  Center for Advanced Purchasing Studies.  Retrieved from http://www.ism.ws/files/sr/capsarticle_purchasingscontribution.pdf

Carter, C. R., & Jennings, M. M. (2004).  The role of purchasing in corporate social

responsibility:  a structural equation analysis.  Journal of Business Logistics, 25.1. 

Retrieved from http://web.ebscohost.com.ezproxy.uhd.edu/ehost/pdfviewer/pdfviewer?vid=3&hid=14&sid=62c64b61-3153-4887-9dc1-b54b2cd26ff9%40sessionmgr13

ISM principles of sustainability and social responsibility. (2008).  Institute for Supply Management.  Retrieved from http://www.ism.ws/files/SR/SSRwGuideBook08.pdf

Total Quality Management - The Deming Award

Total Quality Management Case Study on the Deming Prize:  

Analysis of, “Deming’s Luster Dims at Florida Power & Light”

by Jimmy Alyea

The key to managing a successful supply chain is balancing efficiency and responsiveness.  A supply chain manager must manage the little details without losing sight of the big picture in order to achieve total quality.  In this case study, Florida Power & Light lost sight of this while trying to win the Deming Prize.

Case Background.

In 1989, Florida Power & Light (FPL) became the first American company to win Japan’s prestigious Deming Prize for outstanding performance in quality control management.  FPL had established a $4 million quality-improvement program in 1985 several years after its company’s chairman visited a Japanese utility company that won the Deming Prize in 1982.  Although the award’s sponsor, the Japanese Union of Scientists and Engineers (JUSE), opened competition to overseas companies in 1986, no foreign firms applied for the award until 1989 when FPL decided to “go for the gold.”  According to FPL’s president at the time, Bob Tallon, applying for the Deming Prize provided FPL’s 14,000 employees with added incentive to accomplish needed quality goals (Kolody, 1989).

Implementation. 

FPL entered the race wholeheartedly.  Instead of continuing  to implement the company’s 1985 quality-improvement initiative gradually, employees were given less than six months to meet Deming award requirements.  Rigorous weekly training courses were developed for first-line, nonsupervisory employees, and over 1700 teams were formed to come up with problem-solving solutions to reduce costs or improve efficiency.  Managers were required to master new managerial theories and complex statistical calculations.  Supervisors spent their time tracking and calculating dozens of cross-referenced indicators such as the percentage of street lights installed in 21 days.  A functional review team was required to document and analyze 800 different procedures for everything from conducting energy surveys to answering customer complaint letters.  An area manager of customer service for the utility’s commercial/industrial group summed up the rigid process and the avalanche of paperwork by stating that preparing for the exam was “grueling.” 

Quality improvements. 

When FPL received the Deming Prize in November, 1989, company president Bob Tallon cited numerous instances of quality-improvement benefits received from applying Deming principles.  For example, the company had reduced the average length of customer power service outages from 100 minutes annually in 1982 to 48 minutes in 1989.  In the safety category, FPL had reduced lost-time injuries from more than one per 100 employees in 1985 to 0.42 in 1989.  Additionally, customer complaints to the Florida Public Service Commission were at their lowest level in 10 years.  FPL also had reduced its fossil power plant’s forced outage rate from 14 percent in 1986 to less than 4 percent in 1989, saving ratepayers $300 million that would have otherwise been spent on new generating units (“FPL First International Winner,” 1989).

Problems revealed. 

At the same time, CEO James Broadhead acknowledged that there were “some glitches” in the system.  These problems were deemed by many, however, to have overshadowed the quality benefits.  Employees felt that the system was too bureaucratic and inflexible.  Many had put in long, extra hours to prepare the Deming application and the volumes of documentation.  First-line supervisors complained they could not get their jobs done because workers were attending problem-solving meetings every week.  Problem-solving teams were frustrated when they realized proposed solutions were being evaluated for procedures rather than for results and substance.  The Deming method was so rigidly applied to every team problem that something so simple as moving an office water cooler required that seven mandatory steps be followed.  Not only commonsense, but also customers took second place to following Deming guidelines.  Customer-service representatives were so pressured to answer calls quickly that they began issuing work orders for problems that could have been resolved faster over the phone.  In retrospect, one FLP official stated, “We had an internal revolt. . . .  Winning the prize became less important than the challenge of trying to meet the judges’ strict demands” (Bacon, 1990).

Dismantling the program. 

In response, FPL officials made sweeping changes during the months following receipt of the award.  The more stringent requirements of Deming’s quality program, though not abandoned, were pushed into the background.  The Quality Department was reduced from 85 full-time individuals monitoring the quality teams to 6, and the quality-related departments set up during the award application process to do statistical “quality reviews” were disbanded.  The number of tracked “quality indicators” were cut from 41 to 3.  First-line supervisors were included in training programs which began to focus on areas other than quality, such as supervisory skills and customer sensitivity.  Most significantly, the mandatory, often-dreaded “seven-step process” no longer had to be used for all problem solving.

Conclusions. 

The experience provided valuable lessons, including the need to bring all levels of employees into the program and to show them how all will benefit from it.  Mike Brunetti, FLP’s executive vice-president, now advises companies just beginning to implement quality management programs to start with the top and work down to middle management, then first-line management, and finally to first-line employees (Bacon, 1990).  Brunetti said FPL’s experience also showed that in addition to team activity, it is equally important to have policies that stress external and internal customer satisfaction, that improve coordination within the company, and that concentrate company efforts on a few priorities at a time.

           

Without question, FPL’s commitment to quality was 100 percent.  Although service quality was obviously enhanced and a new corporate direction resulted, FPL’s profitability did not reflect improvement comparable to their winning the award.  The path FPL followed in pursuing the Deming Prize marked the company as one of the most-cited companies that failed to implement total quality management (TQM) properly (along with the bankrupt Wallace Co.).  FPL’s experience with TQM is an example of what can happen when companies adopt new management techniques too wholeheartedly.  As one outsider remarked, “people seemed more interested in the appearance of quality and jumping through the internal TQM hoops than on quality itself” (Harari, 1997).  Today, the Deming methods share the spotlight at FPL with other management tools such as benchmarking and reengineering, and employees have the freedom to innovate and solve problems without having to follow one particular methodology.

Copyright 2012 James L. Alyea. All Rights Reserved.

For more information, please contact Jimmy Alyea:

Email, LinkedIn, Twitter, or Blog

Works Cited:

Bacon, D.  (1990, January).  A pursuit of excellence – Florida Power and Light offers strategies

for successful quality management.  Nation’s Business.  Retrieved from http://findarticles.com/p/articles/mi_m1154/is_n1_v78/ai_8279735/

FPL first international winner of Deming Prize.  (1989, October 18).  Business Wire.  Retrieved

from http://search.proquest.com.ezproxy.uhd.edu/docview/447094933

Harari, O.  (1997, January).  Ten reasons TQM doesn’t work.  Management Review, 86.1. Retrieved from connection.ebscohost.com/.../ten-reasons-why-tqm-doesnt-work

Kolody, T.   (1989, October 19).  FPL captures Deming Prize:  utility lst U.S. firm to win award.

Sun-Sentinel.com.  Retrieved from http://articles.sun-sentinel.com/1989-10-19/business/8902040936_1_fpl-deming-prize-turkey-point

Wiesendanger, B.  (1992, September/October).  Deming’s luster dims at Florida Power & Light. 

Journal of Business Strategy, 14.5.  Retrieved from http://search.proquest.com.ezproxy.uhd.edu/docview/202687879

           

Supply Chain Flexibility

“E-­Commerce & Multi-Channel Fulfillment: 

Supply Chain Flexibility Key to Meeting Changing Demands”

Case Study Summary by Jimmy Alyea

Customer expectations in the online retail world are presenting supply chain professionals with a paradox, e.g., “how to do more for less.”  Today’s e-commerce customers are able to access an unlimited number and variety of products that they expect to be shipped quickly and free.  In order to stay relevant and profitable, many online retailers face the complex challenge of having to build or reorganize supply chain infrastructures that are flexible enough to meet the ever-growing expectations of consumers.  This commitment to customer satisfaction is hindered by rapid growth of online retail sales and unpredictable consumer demand due to ongoing financial uncertainty.  The dilemma of retailers is to balance these drivers against a central priority of reducing or controlling supply chain costs.

Keeping the customer happy. 

Raised consumer expectations of faster, free delivery and increased cross-channel services puts pressure on e-commerce retailers to provide more for less to differentiate a brand and stay competitive.  One low-cost solution is to implement process mapping of the order cycle to look for time inefficiencies in each element of the delivery process.  A more capital-intensive option is to put additional distribution nodes in the network.  Raised customer expectations also present retailers with the challenge of providing seamless cross-channel services.  The key to successfully transferring brand experience between channels is to have the visibility and business intelligence tools necessary to coordinate the interaction in a cost-efficient way.  Failure to implement initiatives to meet customers’ perceived standards can negatively impact sales, but fulfilling them is not without risk.

Negotiating peaks and valleys.   

To successfully meet customer demand, online retailers must be able to negotiate the differences between peak and off-peak demand.   Although many feel competent to handle predictable peaks and dips, they are challenged to handle demand volatility caused by the impact of economic uncertainty.  Rapid shifts in consumer confidence, combined with the lengthy time delay from when forecasts are made, highlight the importance of supply chain agility.  Retailers can either over-stock or under-stock, but they must be adequately prepared to minimize the risks of doing so.  This would include utilizing relevant supply chain metrics, close collaboration between sales and operations planning, and seeking collaborative opportunities with other retailers.  Such collaboration can be facilitated by third-party logistics companies that provide access to shared-use facilities.

Finding a flexible structure. 

The online retailers interviewed were focused on a long-term growth strategy as part of their supply chain plans.  Redesigning the retail supply chain provides the opportunity to build flexibility into the structures and processes needed to grow, as well as the means to get closer to the customer.  One way to do this is to utilize shared-use facilities which can provide cost efficiency and agility to support peak management and demand fluctuations.  To be viable, providers of shared-used facilities need to offer customizable services to facilitate retailers’ control of order cycle times and the delivery experience.  Online retailers must also have the right systems in place to allocate stock efficiently between channels and to reduce cross-channel conflicts and the impact of sudden demand peaks in one channel.

Conclusion. 

Expanding a retail business in the growing e-commerce world requires aligning and integrating traditional and e-commerce channels and systems to meet customer expectations.  As customers increasingly expect fast, free delivery and seamless cross-channel services, retailers are striving to meet these demands in order to stay competitive.  Growing retailers without an established network must decide whether to make internal adjustments to their supply chain structure or outsource to a third-party logistics provider.  They must also deal with uncertain economic times and rapidly changing technology.  With a goal of flexibility, outsourcing provides immediate gains in speed, agility, and scalability of facilities and people.  Making the right decisions at the supply chain level helps increase turnaround times, balance seasonal fluctuation, and provide a supply chain infrastructure that facilitates rapid growth.

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

Case Summary Reference:

www.exel.com

Identifying Procurement Contract Risk

Supply Chain Case Study on, 

“Identifying Contract Risk and Contingency Planning”

by Jimmy Alyea

This case study’s thesis is that “the Defense Supply Center Columbus (DSCC) was justified in terminating for default an indefinite-delivery purchase order (IDPO) contract at a firm fixed price (FFP) when New Era Contract Sales (New Era) failed to supply coupling tubes as required by a June 29, 2006, delivery order.

Contract performance. 

When New Era, a government contractor, made delivery on a July 6, 2004, IDPO received from DSCC for coupling tubes, a contract was formed.  The contract obligated New Era to supply parts for two years at a firm fixed price.  New Era’s pricing to DSCC was based on a two-year quote from its supplier, Harrison.  New Era’s contract with DSCC contained a standard supply contract default clause but no price adjustment clause.

When New Era received DSCC’s second IDPO on June 30, 2006, it found that Harrison had been sold and its new owner would not honor the original price quote.  On July 5, 2006, New Era asked DSCC to cancel its contract with no liability for either party because its supplier refused to honor the quoted pricing due to an increase in material costs.  When DSCC refused, New Era asked to negotiate a new price based on a new supplier’s higher price quote.  DSCC again refused and terminated the contract for default when New Era did not fill the order.  New Era appealed the decision to the Armed Services Board of Contract Appeals (ASBCA) based on the provisions of the default clause, Federal Acquisition Regulation (FAR) 52.249-8.

           

FAR 52.249-8.   

The clause stated DSCC’s default contract rights but provided an exception for contractor liability if the following occurred: “If the failure to perform is caused by the default of a subcontractor at any tier, and if the cause of the default is beyond the control of both the Contractor and subcontractor, and without the fault or negligence of either . . . .unless the subcontracted supplies or services were obtainable from other sources in sufficient time for the Contractor to meet the required delivery schedule.”

New Era’s opposing view of the thesis. 

New Era believes that its nonperformance is excusable under FAR 52.249-8.  The refusal of its subcontractor’s new owner to honor the original price quoted to New Era was “beyond its [New Era’s] control and without its fault or negligence.”  Similarly, the subcontractor’s refusal to perform was also “beyond its [the subcontractor’s] control and without its fault or negligence” because Harrison had quoted an unusually low price two years ago and because the present cost of titanium had increased dramatically.  As a result, New Era’s subcontractor would have only been able to supply product from its distributor at a cost/unit of more than three times the original contract price.  New Era states that as a small business owner, it could not absorb the resulting $23,904.66 loss.

New Era also asserts that it had taken “all reasonable action” to perform the contract by looking for alternative sources from which to obtain the product in time to meet the contract delivery date.  However, since none of these alternative suppliers carried stock of the needed item and produced only on an “as-needed basis,” this option would not have enabled New Era to deliver in a timely manner.  Although DSCC offered to extend the delivery date in exchange for a $510.18 contract price reduction, New Era believed it should not have had to incur this extra cost because DSCC did not respond for eight months to New Era’s request to cancel the contract without liability because it could not perform.

Because these unforeseen circumstances regarding pricing and product availability were beyond its control, New Era asserts that it was not negligent in its nonperformance of DSCC’s June 29, 2006, order and should be discharged without liability from its contract with DSCC. 

DSCC’s supporting view of the thesis. 

New Era entered into a binding IDPO contact when it fulfilled DSCC’s July 6, 2004 delivery order, obligating itself to honor the offered prices for two years.  As the FFP contract contained no price adjustment clause, New Era accepted the risk of increased prices from its subcontractor.  Thus, New Era’s claim that a price increase was beyond both it and its subcontractor’s control was not a basis on which to abandon performance under the contract’s default clause.  New Era and its subcontractor did not take “all reasonable action” to perform because they could have provided the ordered parts, even though at a loss.

DSCC seeks affirmation from ASBCA of its decision to terminate New Era’s contract for default and to recover costs from having to reprocure from a new source.  The Board found New Era in default of the contract and affirmed DSCC’s actions and request for reimbursement for additional procurement costs.  The Board stated that renegotiating a contract because of a supplier’s price increase would defeat the purpose of a firm-fixed-price contract, which was to protect DSCC from price variations.  It also noted that DSCC had grounds for termination when New Era notified it on July 5, 2006, that it could not make delivery on DSCC’s second order. 

Implications. 

Lessons for contract managers include the importance of protecting against contract risk and of making contingency plans.  New Era should have taken the time to understand the contract terms, particularly the implications of filling the first order of an IDPO contract at a FFP, as well as the consequences of default and the lack of a price escalation clause.   It should have also locked its supplier into a contractual agreement as to pricing and the subcontractor’s liability for default, instead of depending solely upon a price quote.  New Era would have ultimately been better off had it performed the contract at a loss and then brought suit against its supplier.  Good advice for contract managers would be to expect the best but plan for the worse, and when in doubt, seek legal advice quickly before a problem escalates.

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

Case Study Reference:

“IDENTIFYING CONTRACT RISK AND CONTINGENCY PLANNING” by Jack Horan, Contract Management, Aug., 2009. Retrieved from http://www.mckennalong.com/media/site_files/1140_August%202009.pdf

Analyzing Wal-Mart's Distribution and Logistics System

Wal-Mart has been able to achieve respectable leadership in the retail industry because of its focus on supply chain management.  Discuss in detail the distribution and logistics system adopted by Wal-Mart.

Supply Chain Case Study by Jimmy Alyea

As the world’s largest retailer with net sales of almost $419 billion for the fiscal year 2011, Wal-Mart is considered a “best-in-class” company for its supply chain management practices.  These practices are a key competitive advantage that have enabled Wal-Mart to achieve leadership in the retail industry through a focus on increasing operational efficiency and on customer needs     Wal-Mart’s corporate website calls “logistics” and “distribution” the heart of its operation, one that keeps millions of products moving to customers every day of the year.

Wal-Mart’s highly-automated distribution centers, which operate 24 hours a day and are served by Wal-Mart’s truck fleet, are the foundation of its growth strategy and supply network.  In the United States alone, the company has more than 40 regional distribution centers for import flow and more than 140 distribution centers for domestic flow (Logistics, 2011).  When entering a new geographic arena, the company first determines if the area will be able to contain enough stores to support a distribution center.  Each distribution center supports between 75 to 100 retail stores within a 250-mile area.  Once a center is built, stores are gradually built around it to saturate the area and the distribution network is realigned to maximize efficiencies through a process termed “reoptimization” (Troy, 2003).  The result is a “trickle-down” effect:  trucks do not have to travel as far to retail stores to make deliveries, shorter distances reduce transportation costs and lead time, and shorter lead time means holding less safety inventory.  If shortages do occur, replenishment can be made more quickly because stores receive daily deliveries from distribution centers.

The company’s hub-and-spoke distribution network utilizes a system of manufacturer storage with customer pickup.  No inventory is stored at Wal-Mart’s distribution centers.  Wal-Mart’s fleet of 6,500 dedicated trucks and over 50,000 trailers (SC Digest’s editorial staff, 2011) are used to pick up goods directly from manufacturers’ warehouses, thus eliminating intermediaries and increasing responsiveness.  The use of trucks raises transportation costs but is justified in terms of reduced inventory.   Merchandise brought in by truck to distribution centers is sorted for delivery to stores within 24 to 48 hours.  However, certain goods, such as automotive and drug products, are delivered directly to stores by suppliers.  Wal-Mart, a pioneer in the logistics technique of cross-docking, also has store-specific orders packed and shipped directly to the store by the manufacturer. 

Because Wal-Mart’s fast, responsive transportation operations are such a major part of the company’s successful logistics system, great care is taken in the hiring, training, supervising, and assigning of drivers’ schedules and job responsibilities.  From the onset of his retailing career, Wal-Mart founder Sam Walton recognized the importance of hiring experienced people and of building loyalty not only in his customers but also in his employees.  The company hires only experienced drivers who have driven more than 300,000 accident-free miles and whom it believes will be committed to customer service.  Its retail stores are considered important “customers” of the distribution centers.  As stated in the “Private Fleet Driver Handbook” that each driver is given a copy of, drivers are expected to be “polite” and “kind” when dealing with store personnel and others.

In addition to containing a driver’s code of conduct, the Private Fleet Driver Handbook gives instructions and rules for following pre-planned travel routes and schedules, the responsible unloading of a truck trailer at a retail store, and the safe-guarding of Wal-Mart’s property.  For example, although drivers deliver loaded trailers in the afternoon and evening hours, a trailer can be brought to the store’s docks only at its scheduled unloading time.  Because unloading is done at two-hour intervals during the night, a driver is expected to spend the night, returning to the distribution center at a pre-scheduled time with an empty trailer.  Coordinators closely monitor the detailed records of each driver’s activities for adherence to rules.  Violations are dealt with according to handbook procedures, which include employee education to prevent future occurrences of incorrect actions.  By effectively managing every aspect of its transportation operations and treating its drivers fairly, Wal-Mart gets results that are unrivaled in the logistics arena.  This philosophy parallels the successful coaching style of New York Giant’s football coach Tom Coughlin who believes that rules are more than just discipline.  Rules are a key to consistency, which leads to preparedness, which then leads to proper execution (Pennington, 2012).

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

References

Chandran, P. M. (2003).  Wal-Mart’s supply chain management practices. ICFAI Center for Management Research.  Retrieved from www.icmrndia.org

Chopra, S., & Meindl, P.  (2010).  Supply chain management:  strategy, planning, and operation. 4^th ed.  Prentice Hall: New York.

Logistics. (2011). Walmartstores.com.  Retrieved from http://walmartstores.com/AboutUs/7794.aspx.

Pennington, B. (2012, January 22). Tom Coughlin goes by the book and wins.  New York Times.  Retrieved from http://www.nytimes.com/2012/01/22/sports/football/tom-coughlin-goes-by-the-book-and-wins.html?pagewanted=all

SC Digest’s editorial staff. (2011, October 12).  Wal-Mart tells CSCMP audience it is more flexible on inbound transportation program.  Supply Chain Digest.  Retrieved from http:www.scdigest.com/ONTARGET/11-10-12-1_Walmart_Inbou…

Troy, M. (2003).  Logistics still cornerstone of competitive advantage. Retailing Today.  Retrieved from http://search.proquest.com.ezproxy.udh.edu/docprintview/22851744…

Examining Near Sourcing

Near sourcing has found favor over global sourcing in import circles.  What does this suggest?  Why are we beginning to replace, or supplement, global sourcing?

Supply Chain Analysis by Jimmy Alyea

Near sourcing has been variously defined in professional  publications as “producing products closer to where they are ultimately sold,” or “the practice of getting work done or services performed in neighboring countries rather than in your own country.”  It is a concept in which a company decides to relocate its business processes to countries which are geographically nearer and, generally cheaper.  An example would be a U.S. firm moving its sourcing from China to Canada or Mexico.  More specifically, the terms refer to companies moving from one foreign sourcing or manufacturing locale to another in search of the lowest-cost labor and materials.

The growing popularity of near shoring, rather than offshoring, not only includes seeking lower-cost labor and materials due to inflation in the supply chain caused by changing wage structures and higher employee turnover rates in some countries, but also that other costs of doing business far away from home are increasing.  These include the worldwide economic crisis, the rising price of oil and thus higher costs of transportation, as well as supply chain interruptions from natural disasters such as the recent earthquake in China.  As a result, companies are rethinking their long distribution systems and sourcing patterns and redesigning them with fewer links to reduce network costs.

The advantages of reversing low-cost supply chain strategies and embracing near sourcing are many, including:   no  time-zone differences or lag time that prevents real-time communication and collaboration, fewer language and cultural barriers, lower business travelling costs to plan and oversee projects and work, shorter time to market in the case of manufacturing and reduced inventory holdings because of shortened transit times.  Near sourcing also supports the increased focus by firms on the importance of customer accommodation and fulfillment in order to achieve a strategic competitive advantage.   Ultimately, a well-run, shortened supply chain is in large part dependent upon a firm’s logistical expertise.

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

What Does a Perfect Order Mean in Logistics?

What does a “perfect order” mean in logistics? 

by Jimmy Alyea

A perfect order is what is “perfect” for end customers since they ultimately provide profit to the company.  A more technical definition is perfect orders mean delivering the desired assortment and quantity of products to the right location on time, damage-free, and correctly invoiced.  Thus, the goal of the supply chain is to find a perfect balance between efficiency and responsiveness in order to make the most profit.

Information is now traveling at a very fast speed thanks to advancements in technology such as computers, the Internet, and smart phones.  Because of these advancements, global competition among firms is increasing so firms must rely on their supply chains to provide competitive advantages. 

While the goal in logistics is to have everything in the supply chain go according to plan, it rarely happens.  Humans are imperfect by nature and, according to Murphy’s Law, “If anything can go wrong, it will” (www.murphys-laws.com).  For example, an order might have the wrong quantity or the wrong items, arrive late or too early, go to the wrong destination, or contain damaged items.  Unfortunately, the speed of information makes these mistakes visible quickly, and customers can easily develop a negative perception of a firm’s service.

It is possible to change customers’ negative perceptions, though.  While a picture is worth a thousand words, actions speak volumes.  A firm must overcome a negative perception by working to improve it, and the first step is admitting its shortcomings.  In the 1960’s, Hertz was the number one rental car service in America, and Avis was a distant second.  However, that did not intimidate ad agency executive Bill Bernbach who said, “We knew our ad campaign, which stated ‘Avis is only number 2.  We try harder.’ would work because if there is one thing America loves, it's the story of an underdog finding a way to win.”  Sure enough, customers responded by using Avis’ services, and the company gained a larger market share because of this approach!

The next step in improving a company’s image is to set goals and then work towards reaching them.  As Hall of Fame Football Coach Vince Lombardi once stated, “Perfection is not attainable but, if we chase perfection, we can catch excellence” (www.vincelombardi.com).  We are what we repeatedly do.  A firm has to take action and make corrections to their mistakes.  Then, they must strive to do better each and every day.  The last steps include making sure customers are aware of the firm’s responsiveness and ability to solve problems through the use of advertising and public relations.  Once this tactic has been implemented, it is up to the company’s Sales and Marketing Department to ask for the customers’ business!

Copyright 2012 JamesL. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

E-Business Distribution Networks

How Amazon has used its distribution system in e-business, and general features of e-business distribution networks

by Jimmy Alyea

Distribution systems have been used in e-business to improve customer service in terms of access, customization, and convenience and to lower costs in supply chains.  For example, Amazon.com has lower inventory and facility costs due to their use of e-business for sales rather than bricks-and-mortar retail stores, but their transportation costs are high because they must ship books to customers. Shipping costs are a big portion of their book costs.  However, inventory costs are low compared to retail stores because Amazon.com is able to aggregate inventory in a few geographical locations.  They keep mainly medium- to high-demand books in their own warehouses and purchase low-demand books from a distributor when a customer orders.  This reduces inventory costs considerably, but their facility costs are growing since business is increasing and they have had to add warehouses. 

In the customer-service area, customer experience is very positive in terms of access, customization, and convenience.  Customers, however, must be willing to wait for delivery of books they have ordered unless products can be downloaded.  Benefits to customers also include better order visibility and quicker access to new products.

Basic features of an e-business distribution network include low facility and inventory costs but high transportation costs.  An e-business can carry a wide variety of products, but response times are longer than those at retail stores, excluding products that can be downloaded.  In terms of product availability, e-businesses communicate customer demand information throughout the supply chain faster, so their forecasts are much more accurate.  Also, they can launch new products faster by shipping directly to the customer instead of having to first stock retail shelves.  Overall, the customer experience is very personal due to access, customization, and convenience of online shopping.

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

Example of how a manufacturer would sell and distribute widgets to Wal-Mart

An example of how a manufacturer would sell and distribute widgets to Wal-Mart stores nationwide

by Jimmy Alyea

As a manufacturer of widgets, a fast-moving, low-value consumer goods product, sold mainly to Wal-Mart stores nationwide, I would utilize a distribution network incorporating manufacturer storage with customer pickup.  To facilitate compatibility with Wal-Mart’s focus on customer needs and strategy of reducing costs through efficient supply chain management practices, widgets from our three geographically- disbursed factories would be stored at our warehouse/distribution centers located within acceptable driving distance of selected Wal-Mart distribution centers (DCs).  With Wal-Mart’s approximately 150 distribution centers centrally located within its network of stores, our storage facilities could be located to serve more than one Wal-Mart distribution center.  Additionally, sufficient storage could be provided at our three manufacturing plants to accommodate direct pickup by trucks from Wal-Mart distribution centers located nearby.

The significant increase in processing and new facilities costs incurred because of the number of distribution centers we would require in order to be located close to selected Wal-Mart DCs would have to be weighed against the increase in revenues received because of better responsiveness.  The capacity of each of our facilities would be determined by the number of Wal-Mart DCs served:  the more facilities, the lower the inventory required at each facility.  Accordingly, the more facilities, the more coordination and investment required in information systems.  With global giant Wal-Mart as our number-one customer, the most effective distribution network for our widget company would be one of manufacturer storage with customer pickup, even though facilities most likely would have to be added beyond the total logistics cost-minimizing point. 

Copyright 2012 JamesL. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

What is Cross Docking and Why You Would Use It

What is cross-docking, and why you would use it

by JimmyAlyea

Cross-docking is a flexible operations arrangement between firms that involves multiple suppliers arriving at a designated time at the handling facility where inventory receipts are sorted and consolidated into outbound trailers for direct delivery to the customer.  Cross-docking is typically used to avoid storage and materials handling.  Mass merchants in the retail industry using cross-docking receive store-specific assortments and are able to maintain continuous inventory replenishment without having to hold large stocks of inventory.

Cross-docking is defined as a system in which inventory is not stocked in a warehouse but rather is shipped for stores from the manufacturer.  Shipments from manufacturers to Wal-Mart, a pioneer in cross-docking, arrive at Wal-Mart distribution centers where they are quickly sorted and transferred to trucks for direct delivery to stores.  Because products are stocked only at stores, Wal-Mart significantly reduces inventory and thus handling, storage, and operating costs.  Cross-docking streamlines the supply chain from the point of origin to the point of sale, which increases supply chain efficiency.  

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

How a manufacturer can increase its responsiveness to customers through inventory management

How a manufacturer can increase its responsiveness to customers through inventory management

by Jimmy Alyea

The location and quantity of inventory can be used by manufacturers to increase supply chain responsiveness to customers. Generally, increasing inventory increases responsiveness.  “Responsiveness”  includes handling a large variety of products, meeting short lead times, meeting a high service level, handling supply uncertainty, responding to wide ranges of quantities demanded, and building highly innovative products.  The more of these capabilities a supply chain has, the more responsive it is.  However, a trade-off is involved between responsiveness and efficiency.  A manufacturer focusing on improving responsiveness may choose to increase inventory in the form of raw materials, work in process, and finished goods, but at the same time it decreases its efficiency by incurring higher inventory holding costs.

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For example, a furniture manufacturer using a flexible manufacturing process could increase its raw materials inventory to become more responsive to customers’ special orders, demand for variety, and/or for innovative products.  A manufacturer could also increase its responsiveness by locating large amounts of finished-goods inventory close to its customers, or a manufacturer with centralized inventories could ship direct to end customers or accommodate customer pickup at the factory.

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master ofBusiness Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

Supply Chain Collaboration Analysis

Supply Chain Collaboration Analysis

by Jimmy Alyea

Problems that can arise when each part of a supply chain focuses solely on its own profits when making decisions:

The goal of maximizing only company profits, rather than those of the supply chain, can result in different members of a supply chain working at cross-purposes. For example, a company that makes a minor price cut at the distributor level to increase its profits may cause a major problem for vendors supplying raw materials as small changes are magnified at each level of the supply chain. Or, a company with an intracompany interfunctional view may pressure another partner in the supply chain to hold inventory in order to reduce the dominant party’s costs without regard for where inventories are best held.  If the parties in such a situation do not collaborate, one may respond to implied uncertainty by increasing inventory levels (and costs) unnecessarily, thus reducing supply chain surplus.  Because of the complex interrelationship of inventory held at various sites, the companies should work together to manage inventory throughout the supply chain effectively.

Actions that can help a retailer and a manufacturer work together to improve their overall performance:

Actions that enable a retailer and a manufacturer to work together to improve overall performance include the retailer’s sharing meaningful point-of-sale data, its sales forecasts and methods, and in-store and warehouse inventory.  The manufacturer with this information is better able to improve the production process by reducing material costs, determine quantity based on total supply chain costs, avoid stockouts, and respond quicker to changing customer demand and market changes.  Retailers, who have access to similar types of information from the manufacturer, can also make decisions that more positively affect the supply chain, such as the timing of sales promotions.   Collaborative forecasting and coordination, rather than independent forecasting by a retailer and a manufacturer based on the individual cost structure of each, increases supply chain efficiency and competitiveness.

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

How a Supply Chain Affects the Profitability of a Major Company

How a supply chain affects the profitability of a major company

by Jimmy Alyea

The primary objective of a supply chain is to satisfy customer needs while also generating profit for itself.  There is only one source of revenue for any supply chain:  the customer.  The key to success of a supply chain is achieving strategic fit between a firm’s competitive and supply chain strategies.  A company may fail if the supply chain design and all of the core functional strategies are not aligned with the firm’s overall competitive strategy to achieve strategic fit.  A lack of strategic fit can result in conflicts regarding different customer needs and priorities within the firm or across the supply chain, which leads to reducing supply chain surplus and decreasing supply chain profitability.  As stated in the text, in today’s world a company is intimately linked to its supply chain, and “a company’s partners in the supply chain may well determine the company’s success.”  

A company needs to find a balance between having a responsive supply chain and an efficient one.  This balance ultimately comes from the customers’ needs. An efficient supply chain lowers cost by eliminating some of its responsive capabilities.  For example, an efficient supply chain may carry less inventory and maintain a level load on the warehouse to lower picking and packing costs.  The responsive supply chain responds quickly to customers, and offers higher margins because price is not a primary concern.  The failure to achieve a strategic fit by finding the right balance between efficiency and responsiveness of a supply chain is a main reason companies fail to succeed.

Copyright 2012 James L. Alyea. All Rights Reserved.

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L.Alyea) on LinkedIn, Twitter, or Blog.

The Pros and Cons of Outsourcing in Supply Chain Management

The Pros and Cons of Outsourcing in Supply Chain Management

by Jimmy Alyea

 “Outsourcing,” the practice of one firm hiring another to perform tasks that were originally performed in-house, is often viewed a way of maintaining or increasing a firm’s competitiveness.  With a general goal of lowering costs and/or streamlining workflow, a firm is able to concentrate on strengthening its core competencies.   Others view outsourcing, both domestically and internationally, in a negative light, questioning its effect on America’s workforce and economy.  Weidenbaum’s emphasis in the above-titled 2005 article is on the pros and cons of the overseas outsourcing of the activities of a firm, which has become a controversial issue in the U.S. and is becoming more so in light of the upcoming 2012 presidential election.

           

Why companies began outsourcing.  

Many service companies began creating jobs abroad to gain access to overseas markets, many of which have grown quickly, while some domestic markets have become mature, if not saturated.  For example, approximately 60 percent of the revenue of American information technology markets originates overseas.  Leading firms in various industries, such as banking and consumer products, report that their foreign revenues exceed those of their domestic sales.  U.S. companies also began hiring specialized workers overseas in response to U.S. immigration limits that hindered their ability to find qualified workers, particularly in science and engineering.  In so doing, many companies became accustomed to using modern technology to shift the location of work, as well as to the benefits of lower operating costs and pay scales in foreign countries.  Additionally, telecommuting paved the way to extend the process of shifting work to new suppliers, both at home and abroad.  Overseas outsourcing has accelerated in recent years due to globalization and to technological changes, primarily in the telecommunications and transportation sectors.

Advantages of outsourcing. 

Fundamentally, businesses that outsource are able to focus resources on core business processes in order to operate efficiently in an increasingly competitive global marketplace.  Expertise can often be acquired at a lower cost than hiring in-house when tasks are outsourced to vendors with special equipment and knowledge.  In addition, outsourcing certain parts of a company’s business process to a specialist facilitates risk-sharing and better analysis of risk-mitigating strategies.  Cost reductions can generate new market opportunities for U.S. companies and thus generate additional jobs domestically.   Large software companies such as Microsoft and Oracle have simultaneously increased outsourcing and their domestic payrolls.  Other advantages include the ability to provide constant coverage for consumers who require 24-hour support, especially when foreign and domestic competitors are doing so.

Limits and dangers of outsourcing. 

Companies who join the “outsourcing” bandwagon may be surprised by unexpected costs and complications, particularly in the overseas arena.  Research reveals that almost one-half of outsourcing agreements end up being terminated for a variety of reasons (Lutchen, 2004).  Some overseas vendors encounter financial difficulties or are acquired by firms with different procedures and priorities.  Unreliable suppliers may put current work aside when a more important client is gained, or they may have rapid turnover of skilled employees who find jobs with more desirable firms.  Typical Indian operations in business processing often lose 15 to 20 percent of their workforce annually.  Moreover, overseas managers often do not understand American business practices such as high quality-control and expectations for prompt delivery of goods and performance of services.  Dell, for example, moved its customer-support call center back to the U.S. in 2003 after consumers revolted against receiving vague, hard-to-understand answers to technical questions from non-native English speakers (Morphy, 2006).  Boeing’s 2007 scheduled release of its 787 Dreamliner aircraft was delayed more than three years by problems caused by a complex supply chain of over 50 global suppliers and a splintered international engineering team (Peterson, 2011).

U.S. firms may also encounter a variety of unanticipated difficulties in foreign nations such as arcane legal systems, theft of intellectual property, requirements of tax and regulatory agencies, and political upheavals such as the riots that accompanied the overthrow of Indonesia’s president in 1998.  Furthermore, they may encounter corrupt officials in the public sector.  In the mid-1990s, officials of a Halliburton subsidiary were involved in a Nigerian joint venture project that resulted in a decades-long bribery scheme to secure contracts in Nigeria (Olorunyomi & Mojeed, 2009).  Other costly complications and hidden costs may arise such as a lack of reliable sources of electricity, transportation networks that need to be upgraded, or business customs that must be observed.

Net effect on the U. S. 

Over the years, far more new jobs have been created in the U.S. than have been outsourced.  The current debate on overseas outsourcing frequently focuses on short-term job losses  in industries such manufacturing, while ignoring long-term benefits to consumers and businesses.   Outsourcing helps companies stay competitive, resulting in more investment and, in turn, the creation of new or better jobs.   In the long run,  outsourcing is not a zero sum game, but rather one where net gains are positive.

Copyright 2012 James L. Alyea. All Rights Reserved.

References:

Introduction to the outsourcing & offshoring industry. (2011).  Plunkett Research, Ltd.  Retrieved from http://www.plunkettresearch.com/outsourcing-offshoring-bpo-market-research/industry-overview

Lutchen, M. D. (2004, May).  Outsourcing IT headaches is no answer.  Chief Executive.  Retrieved from  www.thefreelibrary.com/Outsourcing+IT+headaches+is+no...

Morphy, E. (2006, January 30).  Dell pumps up Indian outsourcing operations.  CRM Buyer. Retrieved from http://www.crmbuyer.com/story8579.html

Olorunyomi, D. & Mojeed, M. (2009, May 1).  The Halliburton bribe takers.  234next.com. Retrieved from http://234next.com/csp/cms/sites/Next/News/5395403-147/The_ Halliburton_bribe_takers_.csp#

Peterson, K. (2011, January).  A wing and a prayer:  outsourcing at Boeing.  Reuters.  Retrieved from http://graphics.thomsonreuters.com/11/01/Boeing.pdf

Weidenbaum, M. (2005,  July-August).  Outsourcing:  pros and cons.  Business Horizons.  Retrieved from hbr.org/product/outsourcing-pros-and-cons/an/BH127-PDF-ENG

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L.Alyea) on LinkedIn, Twitter, or Blog.

Supply Chain Analysis of Off-Shoring and Outsourcing

Supply Chain Analysis of Off-Shoring and Outsourcing

by Jimmy Alyea

“Outsourcing,” the purchase of a value-creating activity from an external supplier, can refer to work provided by companies in the U.S. or in other countries.  It may be viewed as a strategy by which a firm achieves desired results by collaborating with other firms.  “Offshore outsourcing” (off-shoring) is a special case of outsourcing in which a firm sends an activity to be performed by a business in a foreign country.  The authors describe outsourcing as “the result of a deconstruction of the value chain” that was developed in the 1990s by researchers to explain  strategies used by successful companies to achieve competitive advantage, whereas off-shoring is described as based on the idea of comparative advantage, a nineteenth century concept related to specialization within a country.  With the digitalization of production, a process by which a firm can break jobs into smaller pieces, outsourcing may also be based on comparative advantage.

Outsourcing is a business practice used to lower costs by many Fortune 500 companies, such as Microsoft, IBM, Hewlett-Packard, and AT&T.  Firms also undertake outsourcing because they do not have the resources and capabilities of carrying out all activities better than competitors.  By outsourcing those activities in which they do not have a competitive advantage, firms can concentrate on building core competencies to achieve a strategic advantage over competitors in delivering new products and services.  Dell, for example, outsources most of its manufacturing in order to concentrate on online sales, an activity in which it has a core competency.  Software giant Microsoft and Netscape Communications Corp. have outsourced “rote work” everywhere from Ireland to India (Madigan, K. & Mandel, M., 2003). 

Today, with the pervasiveness of new technologies and reduction in telecommunications and transportation costs, almost every function or activity in a firm’s value chain can be performed at various worldwide locations.  For many companies, only a few jobs may need to be done on-site.  This has led to a sharp increase in outsourcing and off-shoring of manufactured goods as well as of certain types of business services such as information technology, accounting, technical/customer support, medical billing, and human resources functions that are routine in nature.  Factors leading this increase have been the opening of a number of developing countries, worldwide improvements in productivity, and a fall in the costs of logistics and of the transaction costs of exchanging information with other entities.  For manufacturing, China has emerged as the clear leader in attracting off-shoring activities of foreign companies, while India is currently the leader in the case of services.

Despite outsourcing’s overriding benefits of lowering a firm’s cost structure and enhancing its ability to achieve a competitive advantage in an intensely competitive global marketplace, much fear about the effect on the U.S. economy of lower wages and the loss of jobs to off-shoring  has been generated by critics.  In response, the authors state that “fears about job losses may be somewhat exaggerated.”  They point out that most job losses from 2000 to 2004 were due to a recession, not off-shoring, and that according to government statistics, off-shored jobs are responsible for well under one percent of official unemployment statistics (qtd. from The Economist, Mar. 13, 2004).   Additionally, studies in 2003 and in 2004 are cited to support the claim that off-shoring could result in a net gain for the U.S. economy.  In reviewing more recent studies, I found that the above data is outdated in light of the rapidly accelerating pace of off-shoring and thus merits further study.  Nonetheless, living standards around the world are rising, in part, because of offshore outsourcing:  overall, workers in emerging and in developing nations are gradually obtaining new and higher-paying jobs, while U.S. consumers are able to buy products  and services that are cheaper than if they were made or provided domestically.

Copyright 2012 James L. Alyea. All Rights Reserved.

References:

Kahai, S., Sara, T., & Kahai, P. (2011, January-February).  Off-Shoring and outsourcing.  Journal of Applied Business Research, 27 (1), 113-121.  Retrieved from http://journals.cluteonline.com/index.php/JABR/article/view/915/899

Madigan, K. & Mandel, M. (2003, August 18).  Outsourcing jobs:  is it bad?  Business Week,

3846, 36-38.  Retrieved from http://web.ebscohost.com.ezproxy.uhd/edu/ehost/delivery?sid-d7c74…

Maughan, A., Ford., & Stamp, N. (2011,  January).  Global sourcing trends in 2011.  Morrison & Foerster Global Sourcing Group.  Retrieved from http:www.mofo.com/files/Uploads/Images/110118-Global-Sourcing-Trends.pdf

Ottaviano, F., Peri., G., & Wright, G.  (2010, November 18).  Immigration, offshoring, and US jobs.  Vox.  Retrieved from http://www.voxeu.org/index.php?q=node/5815

Overby, S. (2010, December 20).  11 outstanding trends to watch in 2011.  www.cio.com.  Retrieved from http://www.cio.com/article/print/647965

“Statistics related to offshore outsourcing.”  (2010, November).  Rttsweb.com.  Retrieved from http://www.rttsweb.com/outsourcing/statistics/

About Jimmy Alyea:

Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree.  Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.

A Supply Chain Case Study on Thriving in a Networked World

“The Fire That Changed an Industry:  A Supply Chain Case Study on Thriving in a Networked World”

by Jimmy Alyea

On March 17, 2000, lightning hit a power line in Albuquerque, New Mexico, and caused a fire at the Philips (Philips Electronics, NV of the Netherlands) radio frequency chip manufacturing plant.  Although the fire was extinguished within ten minutes, millions of microchips were damaged, which triggered  a far-reaching chain of consequences for two of Europe’s largest electronics companies:  Nokia Corp. in Finland and Telefon AB L.M. Ericsson in Sweden.  The damaged chips were crucial components in the mobile phones that both companies sold worldwide.  Their dramatically different responses to the disruption in the flow of chips inspired one Norwegian supply chain researcher to title the incident “Ericsson versus Nokia – the now classic case of supply chain disruption,”  a clear illustration of how to and how not to handle supply chain disruptions h(Husdal, 2008).  

           

Philips’ response. 

Philips’ first action was to notify its 30-plus customers that would temporarily be affected by delays in chip production.  The fire had been minor, and key personnel projected that the cleanup would take about a week.  Three days after the fire, both Nokia and Ericsson received the same phone call from Philips about the disruption to its shipments.  Since Nokia and Ericsson accounted for 40 percent of the plant’s shipments, Philips also decided these two companies’ orders would be filled first when the plant resumed operations.   However, it took Philips six weeks to restart production and months to catch up on its production schedule.  With the cell phone market growing at over 40 percent annually, this was a delay which neither company could afford.

Nokia’s response.   

Even before the call from Philips about the problem, Nokia’s Chief Component Purchasing Manager had noticed a problem with Philips’ shipments.  In a culture that encouraged bad news to travel fast, he promptly notified the company’s senior officials (DeAngelis, 2010).  Nokia’s production planner began a daily check of the production status of the parts needed from Philips instead of the customary once-a-week check required by Nokia’s advanced monitoring process.  Nokia was scheduled to roll out a new generation of four million handsets that depended upon Philips’ chips (Sheffi, 2005).   As soon as it became apparent that the delay would be prolonged, Nokia implemented the response routines it had developed for such situations, and a team of 30 supply chain managers and officials was assembled to spread out over Europe, Asia, and the U. S. to work the problem.

Within two weeks, Nokia had taken three key steps.  Nokia first tied up spare capacity at other Philips’ plants and every other supplier it could find.   Within five days, two of Nokia’s current suppliers of other parts had responded.  Secondly, because Nokia’s cell phones were based on a modular product design concept, it was able to reconfigure its basic phones to accept slightly different chips from other suppliers in the U.S. and Japan.  Lastly, a team of Nokia and Philips engineers collaborated to develop alternative plans.  As Nokia’s top trouble-shooter stated, “For a little period of time, Philips and Nokia would operate as one company regarding these components” (DeAngelis, 2010).  Nokia was thus able to maintain production and satisfy customer demand.  By year end, its profits had risen 42 percent, and its share of the global market had increased from 27 to 30 percent (Sheffi, 2005).

Ericsson’s response. 

Ericsson was not so fortunate.  Ericsson’s managers had not noticed any discrepancies in Philips’ shipments prior to its phone call, and lower-level employees did not communicate news of Philips’ problem to their bosses.  They assumed Philips would ship the parts after a one-week delay and did not investigate further.  Even when Ericsson realized the seriousness of its problem at the end of March, the head of the mobile phone division did not get involved until early April.  By then¸ the company had few options.  Nokia had tied up Philips’ and other suppliers’ free capacity.  Ericsson had no other source of supply because several years earlier it had decided to buy key components from a single source to cut costs and to simplify its supply chain.  As later stated  by Ericsson’s Marketing Director for Consumer Goods, the company did not have a “Plan B” (DeAngelis, 2005).   The impact of Philips’ shutdown took more than nine months to resolve.  At the end of 2000, Ericsson reported a US $2.34 billion loss in its mobile phone division (Sheffi, 2005).  The following year, the company announced plans to begin withdrawal from the mobile phone production market, and it eventually merged with Sony in order to survive.

End result. 

Lost sales amounted to most of the financial hit suffered by Philips because direct damage to the plant was covered by insurance.   The impact to Philips was relatively minor compared to the impact on its customers.   Ericsson bore the brunt of the disruption because it did not have alternative suppliers, and it did not proactively manage supply chain risk.  Ericsson subsequently signed on secondary suppliers for key parts  and now has a completely different supply chain risk management system in place.  Nokia demonstrated a classic textbook solution to the supply chain disruption, not only surviving  but also emerging in a much stronger market position than before the fire.

Copyright 2012 James L. Alyea. All Rights Reserved.

References:

DeAngelis, S. (2010).  The split second disruption to the supply chain.  Enterra Insights.  Retrieved from http://enterpriseresilienceblog.typepad.com/enterprise_resilience_man/2010/12/the-split-second-disruption-to-the-suppy-chain.html

Hopkins, K. (2011, December 21).  Value opportunity three:  improving the ability to fulfill demand.  Bloomberg Business Week, special advertising section.  Retrieved from http://www.businessweek.com/adsections/2003/ptc/ptc_10.htm

Husdal, J. (2008).  Ericsson versus Nokia – the now classic case of supply chain disruption.

Husdal.com.  Retrieved from http.www.husdal.com/2008/10/18/ericsson-versus-nokia-the-now-e…

Latour, A.  (2001, January 29).  Trial by fire:  a blaze in Albuquerque sets off major crisis for cell-phone giants.  Wall Street Journal.  Retrieved from http://web.mit.edu/course/15/15.795/WSJ_Nokia%20HandlesSupplyChainShock.pdf

Mukherjee, A. (2008, October 1).  The fire that changed an industry:  a case study on thriving in a networked world.  Financial Times Press.  Retrieved from http://www.ftpress.com/articles/printerfriendly.aspx?p=1244469

Sheffi, Y. (2005).  Big lessons from small disruptions.   The resiliant enterprise.  Retrieved from http://resilient-enterprise.mit.edu/public/res_ent_chap1.pdf

Tang, C. (2006, March).  Robust strategies for mitigating supply chain disruptions.  International Journal of Logistics Research and Applications, Vol. 9, Issue 1.  Retrieved from http://www.scribd.com/doc/3961976/Robust-Strategies-for-Mitigating-Supply-Chain-Disruptions

About Jimmy Alyea (James Alyea):

JimmyAlyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of BusinessAdministration degree.  Follow JimmyAlyea (James L. Alyea) on LinkedIn, Twitter, or Blog.