Implementing Value Network Management

2. Chapter 22 Implementing Value Network Management

3. Key Concepts Background Leadership Transformational Training Strategic Planning The Vision Statement The Mission Statement Cost Quality

4. Key Concepts Technology The New Product Development Cycle Supplier Feedback Social Responsibilities Standardization Value Engineering and Value Analysis Organization and Staffing

5. Background Vice-president of Supply Management of Megatronics Base salary $450,000 per year Potential $450,000 per year bonus You may hire a maximum of 16 new supply management professionals You obtained authorization for a training budget of $3.25 million per year You will become a member of the executive committee

6. Background Obligations: Reduce the cost of purchased goods and services by an average of 5% per year Reduce incoming material defects from a current average of 1,000 ppm to 10 ppm over the next 5 years Improve cutting-edge technology inflow by 10% per year Reduce the average product development cycle by 20% per year

7. Characteristics of Successful Leaders Helps to establish a vision Helps to prepare for change Helps employees cope with change Motivates and facilitates adaptive work Energizes people Maintains focus in facing adversity Listens actively Communicates clearly and convincingly Knows how and when to disarm conflicts Functions as an empathetic mentor

8. Three Critical Skills of Supply Management

9. Implementing Strategic SCM

10. Destroying the Old Box World Class Supply ManagementSM requires more than just thinking outside of the supply management box The old supply management box was a set of artificially imposed constraints that limited proactive, strategic, and synergistic efforts WCSM calls for destroying the old box WCSM calls for creating a new vision where leadership capabilities and capacities are enabled and unleashed

11. Transformational Training During boom times, firms don�t have time for training During bad times � when they should be getting ready for the next upside of the cycle � they claim that they can�t afford it Training should be a vehicle of transformation

12. Burt�s 12 Golden Rules of World Class Supply ManagementSM Operate Supply Management as an integrated system including customers, operations, quality, demand management, supply management, logistics, and suppliers. Implement continuous improvement in all activities internally and externally. Apply strategic sourcing in the selection, maintenance and development of the supply base. Focus on the total cost of ownership, not purchase price. Train and educate supply personnel in world-class processes, leadership, and change management. Work in a cross-functional mode with internal functions and with key suppliers.

13. Burt�s 12 Golden Rules of World Class Supply ManagementSM Recognize and reward excellence, both internally and externally. Study and understand supply management�s business environment. Involve supply management and external suppliers in the earliest stages of new product development. Develop and manage appropriate supply alliances. Identify, verify, track, and control savings. Foster an environment of collaboration.

14. Organization Chart

15. Organization Chart Showing Purchasing Below Division Manager

16. Transformational Planning Supply management must develop and manage the firm�s supply strategy as an integrated whole instead of a series of unrelated strategies The corporation�s strategy is the key driver of the supply strategy The technology, marketing, finance, and production strategies are all inputs to the supply strategy Conversely, the supply strategy is an input to the corporation�s strategies for technology, marketing, finance and production

17. Megatronic�s Vision Statement �Supply management at Megatronics will perfect its worldwide process resulting in totally delighted customers and shareholders.�

18. The Mission Statement �We will design and implement necessary process and cultural changes to create a fully integrated customer driven supply management system. We will integrate suppliers into our business plans and processes in an environment of respect and trust, establish full cooperation throughout the enterprise, and establish supply management as a core competency.

19. The Mission Statement Continued We will improve the bottom line by facilitating increased profitable sales while minimizing the total cost of ownership of all materials, equipment, supplies, and services. We will ensure that diversity suppliers have opportunities to play vital roles in our supply base.�

20. Cost You proposed an overall savings goal for the first year of 10% on the costs of purchased materials, equipment, supplies, and services The team agrees that the focus must be TCO The problem is that price often rises when the focus is on TCO If we pay a price premium that is offset with a reduction in the total cost of ownership, we will document our analysis

21. Strategic Sourcing Criteria for Rating Suppliers Cost minimization Willingness to share cost data Incoming quality levels (ppm, if feasible) Current technology status: leader/follower Ability to meet Megatronics� technology needs in 3 years Potential to become an alliance supplier

22. Four Categories of Supplier World Class Suppliers who are acceptable and have the potential to be developed to world class status Suppliers who are acceptable and provide products and services where a supply alliance is not needed Suppliers to drop

23. Supplier Development Teams After assessing the suppliers the decision of whether to develop selected suppliers must be made Your management team decides to field four dedicated supplier development teams to start

24. Quality Development of clear and concise specifications by our internal customers, Quality considerations during sourcing, Development of a clear understanding with suppliers on all aspects of quality � both prior to, and subsequent to, award of a contract Identification of opportunities for supplier development, A comprehensive monitoring system, supplier certification, A motivational program addressing quality, cost, and service

25. Technology Inflow of technology is a function of two variables: The supplier�s investment in advancing its technological capabilities The supplier�s willingness to share its innovations with us Hire 12 individuals capable of developing and managing strategic supply alliances

26. The New Product Development Cycle Utilize early supplier involvement (ESI) and early supply management involvement to improve new product development Reduce design cycle time Reduce costs of materials Improve quality Prequalify suppliers Create supply engineers

27. More Proactive Supply Management Initiatives Six Sigma program. Improve source selection process Ensure understanding of requirements before and after award of a contract Transfer responsibility for ensuring quality to the supplier Investigate certifying our major suppliers. Work with suppliers to correct root causes of problems

28. Social Responsibilities Create a diversity program Create a pollution avoidance program Assume responsibility for managing ethics

29. Standardization Create a Measurement and Standards Group Then develop and implement a standardization program Hire a standards engineer to help in the effort

30. Value Engineering and Value Analysis (VE/VA) Provide training in VE/VA Hire one or more value engineers for each division

31. Organization and Staffing Create a hybrid organizational structure for supply management Reap the benefits of centralization and decentralization Eliminate or reduce the number of reactive positions as the need for them is reduced Train/educate managers to assume more strategic activities

32. Goals for Year 1 Reduce average price on incoming goods and services by 5 percent. Reduce average incoming defects by 10 percent to 900 ppm

33. Initiatives for Year 1 Implement strategic sourcing, starting Q1 Document and obtain verification of savings, Q1 Initiate supplier development program, starting Q2 Implement a total cost of ownership program, Q3 Develop and implement a training program, commencing Q1 Initiate study of an operating resource management system, Q3 Conduct �Supplier Day� in Q1 and annually thereafter Develop or hire 8 individuals capable of developing and managing supply alliances, Q4 Identify supplier relationships which have the potential of progressing to alliance status, Q2 Train alliance champions, Q2 Enter into first supply alliance, Q4 Train and upgrade all staff so that they bring value to all processes, Q2 Promote and train several Megatronics engineers for supply engineering billets, Q2

34. Initiatives for Year 1 Hire supply engineers by Q3 Include supply engineers on appropriate new development teams, Q4 Initiate reverse auctions where appropriate, Q4 Increase emphasis on quality capabilities during source selection, Q1 Ensure understanding with all suppliers of their quality, time, and service obligations, Q1 Document all contract files on understanding issue, Q1 Initiate supplier certification program, Q3 Work with suppliers to correct root causes of quality problems, Q2 Collect and analyze feedback from suppliers on how �we� perform as a customer, Q4 Design, develop, and implement aggressive social responsibilities program, Q2 Hire a standards engineer to develop and manage a standardization program, Q2 Add a value engineer to each division�s staff, Q2 Increase compensation of supply professionals to reflect the increased value they provide, Q4 Study implications of purchasing Ariba, Q3

35. Improved Supply Management�s Impact Increased Sales: Faster to Market Improved Quality Pricing Flexibility Innovation Lower Total Cost: Acquisition Cost Processing Cost Quality Cost Downtime Cost Risk Cost Cycle Time Cost Conversion Cost Non-value Added Cost Supply Chain Cost Post Ownership Cost

36. Strategic Intent Our global supply chain will be unequaled in performance and one of Megatronics� greatest competitive advantages. Carrying out this strategic intent requires: An optimized, leveraged, and responsive global supplier base and an efficient supply chain Unequaled performance as measured by A.T. Kearney and as compared to competition and best-in-class A supply chain that creates new business opportunities for Megatronics by providing an outlet for marketing our best practices and by allowing us to bring suppliers� innovations to Megatronics� new markets.

37. Strategic Plan�s Basis To better serve the customer, there must be a shift from a traditional functional organization to an enterprise-focused SCM effort that is aligned with business processes. To meet business partner and supply chain requirements, we must understand customer requirements and improve our business processes. Besides our own processes, suppliers� processes must be integrated into the product delivery and order fulfillment processes

38. Goals for Year 2 Reduce average price of incoming goods and services by 5 percent Reduce average incoming defects by 50 percent to 450 ppm Reduce average time required to develop a new product by 10 percent Reduce production disruptions due to late delivery of materials by 50 percent Increase the number of new products based on supplier furnished technology by 10 percent Decrease the supply base by 15 percent Increase award of production contracts to diversity suppliers to 5 percent

39. Initiatives for Year 2 Develop a world-class information system, Q3 Document, verify, and track cost savings, Q1 Implement value engineering and value analysis programs, Q1 Develop or hire a cadre of 8 cost engineers, Q 2-3 Develop14 corporate-wide commodity teams, Q2-3 Expand strategic sourcing to all commodity classes, Q4 Initiate creation of a global supplier network, Q3 Open an Asian international procurement office, Q4 Develop an internal Megatronics-wide education program for understanding and managing supplier diversity, Q2 Develop a recognition program for suppliers embracing Megatronics� pollution avoidance program, Q3 Increase supplier development efforts, ongoing Develop four new supplier alliances, Q4 Increase integration of suppliers into the development process, ongoing

40. Initiatives for Year 2 Continued Develop web-based applications to link suppliers with Megatronics, Q1 Analyze supply management skills systematically Conduct training to upgrade personnel to required levels, ongoing Develop leadership from within, ongoing Implement a college recruiting leadership program, Q1 Recruit best candidates to fill entry-level and mid career openings, ongoing Ensure clear employee performance goals, Q2 Provide career development opportunities, ongoing Implement rewards and incentive plan for members of supply management system, Q2 Ensure retention of promising employees, ongoing Integrate supply management, logistics, and demand management, Q3 Increase compensation of supply professionals, Q4

41. Goals for Year 3 Reduce average price of incoming goods and services by 5 percent Reduce incoming defects by 50% to an average of 225 ppm Improve forecast accuracy to ? 5 percent for 30 days and ? 10 percent for 30 � 120 days

42. Initiatives for Year 3 Develop 10 new supplier alliances, Q4 Document, verify, track, and control savings, Q1 Increase purchases from diversity suppliers to 6 percent of production materials, Q2 Initiate one supplier family (a la Toyota) by a key first tier supplier, Q3 Initiate 20 quality teams, four operating groups, Q4 Develop 16 new commodity teams, Q2 Integrate inbound and outbound traffic, Q3 Upgrade order and fulfillment processes, Q1 Go global on all aspects of supply chain management, Q1 Introduce �lean� into Megatronics� supply chain, Q2 Optimize use of the Internet, Q3 Increase emphasis on contract and relationship management, ongoing Provide ethics training to all in-house members of supply chain management system, Q2

43. Initiatives for Year 3 Continued Focus negotiation training on synergy with suppliers, Q2 Conduct debriefings addressing �lessons learned� on all negotiations, Q1 Study implications of employing other than firm fixed price compensation, Q2

44. Goals for Year 4 Reduce total cost of ownership on incoming goods and services by 5 percent Reduce average incoming defects by over 50 percent to an average of 110 ppm Develop 17 new supplier alliances Increase purchases from diversity suppliers to 6.5 percent of production materials

45. Goals for Year 4 Continued Increase number of firms embracing Megatronics� pollution avoidance program to 53 Globalize pollution avoidance program Add 2 supplier families Improve forecast accuracy to ? 4 percent for 30 days and ? 8 percent for 120 days

46. Initiatives for Year 4 Champion the firm�s pursuit of the Malcolm Baldrige Award by developing a three year plan, Q2 Develop and deploy a new metric measuring institutional trust, Q2 Implement a program of integrated financial transaction work flows coupled with tax effective supply chain management practices, Q3 Develop and implement supply chain scorecards, Q3 Implement an aggressive publicity program, both corporate-wide and including suppliers, Q4 Reward 50 percent of savings documented from VA programs to suppliers, Q1 Replace longwinded contracts with short ones whose intent is to promote teamwork, ongoing Experiment with allowing suppliers to construct their own contracts on our website, Q2 Establish supply management as a recognized competency corporate wide, ongoing Integrate supply chain management planning tightly with other systems at all levels, ongoing

47. Initiatives for Year 4 Continued Align Strategic Sourcing strategies across the enterprise, ongoing Optimize global logistics operations (inbound and outbound), ongoing Develop a globally integrated order fulfillment process, Q1 Set consistent performance standards, Q2 Communicate expectations and feedback results to suppliers, Q2 Expand Megatronics� supplier network around the globe, ongoing Enable suppliers to interact seamlessly within Megatronics, ongoing Support strategic sourcing, supplier integration, product delivery and order fulfillment processes with timely and effective cost/financial information, Q3 Utilize supplier development to transform the supply chain towards lean manufacturing, maximum flexibility, reduced cycle times, improved quality and reduced overall total cost in the supply chain, ongoing

48. Initiatives for Year 4 Continued Integrate the supply chain into the technology delivery process, ongoing Integrate e-Commerce II processes with all the key processes to enable better integration and strategic planning, Q3 Develop worldwide purchase data gathering and sharing capabilities, ongoing Provide needed education and training, globally, across the enterprise and enable distance learning, ongoing Provide meaningful work, challenging assignments, and development opportunities, ongoing Develop individual development and succession plans, ongoing Identify common activities and roles where redundancies can be eliminated, ongoing Identify and optimize synergies across the supply chain, ongoing Identify and develop business marketplaces enabling supply chain leverage and synergy, ongoing

49. 2012 It�s January, 2012, four and a half years since you were hired Megatronics� stock has increased 5-fold You enter your new office and get a thrill out of the sign on your new door: Office of the President and Chief Executive Officer

50. Megatronics Corporation: Representative SCM Organization

51. Corporate Level (Expanded View)

52. Division Level (Expanded View)

53. Concluding Remarks Implementing Value Network Management is as much about leadership and management as it is about supply management concepts and practices Based on it�s integrative, relationship, and boundary spanning nature, there is no question in our minds: �World class supply managers have the essential skill set to become Chief Executive Officers!�