EPILOGUE: IMPLEMENTING WORLD CLASS SUPPLY CHAIN MANAGEMENT

1. Chapter 28 EPILOGUE: IMPLEMENTING WORLD CLASS SUPPLY CHAIN MANAGEMENT

2. Background VP of Supply Management for Megatronics Base salary $450,000 per year Potential $450,000 per year bonus You may hire a maximum of 50 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

3. 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 50 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

4. 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

5. Three Critical Skills of SM

6. Destroying the Old Box World Class Supply Management 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

7. 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

8. Burt�s 12 Golden Rules of WCSM Operate SM as an integrated system including customers, operations, quality, demand mgmt, supply mgmt, logistics, and suppliers Implement continuous improvement in all activities internally and externally Apply strategic sourcing in the selection, maintenance & development of supply base Focus on TCO not purchase price Train and educate in world-class processes, leadership, and change mgmt Work in a cross-functional mode with internal functions and with key suppliers

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

10. Organization Chart

11. Purchasing Reports to Div. Mgr.

12. Supply management a core competence Strategic sourcing Monitor supply environment Develop and implement commodity strategies Supply base by design Develop and manage alliances and networks Time based competition Virtually defect free materials and services Leverage supplier technology Integrated supply strategy Manage risk Emphasis: total cost relationships Relationships: transactional, collaborative and alliance Bottom line impact: increase shareholder value Reporting: member, executive group Data: facilitates strategic planning Understand key supply industries E-Commerce II The Progression to WCSM

13. 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 Strategic Planning

14. 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 Improving SM�s Impact

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

16. �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. The Mission Statement

17. 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.� The Mission Statement

18. 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 Cost

19. 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 Strategic Sourcing

20. 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 Four Categories of Supplier

21. 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 Supplier Development Teams

22. 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 Quality

23. 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 Technology

24. 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 The NPD Cycle

25. 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 More Proactive SM Initiatives

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

27. Create a Measurement and Standards Group Develop and implement a standardization program Hire a standards engineer to help in the effort Standardization

28. Provide training in VE/VA Hire one or more value engineers for each division VE / VA

29. 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 Organization and Staffing

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

31. Implement strategic sourcing 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 training program Q1 Initiate study of operating resource mgmt system Q3 Conduct �Supplier Day� in Q1 and annually thereafter 8 to develop & manage suppy alliances Q4 ID supplier relationships to progress to alliance status Q2 Train alliance champions Q2 Enter into first supply alliance Q4 Train and upgrade all staff to add value to all processes Q2 Promote and train 2 engineers for supply eng. billets Q2 Initiatives for Year 1

32. Hire supply engineers by Q3 Include supply engineers on NPD teams Q4 Initiate reverse auctions where appropriate Q4 Increase emphasis on quality during selection Q1 Ensure understanding quality/time/service obligations Q1 Initiate supplier certification program Q3 Work w/ suppliers to correct root causes of problems Q2 Collect and analyze supplier feedback Q4 Develop & implement social responsibilities program Q2 Hire standards engineer for program Q2 Add a value engineer to each division�s staff Q2 Increase compensation SM pros Q4 Study implications of purchasing e-Proc system Q3 Initiatives for Year 1

33. 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 Strategic Intent

34. 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 Strategic Plan�s Basis

35. Reduce average purchase costs by 5% Reduce incoming defects by 50% to 450 ppm Reduce average NPD time by 10% Reduce production disruptions due to late delivery of materials by 50% Increase the number of new products based on supplier furnished technology by 10% Decrease the supply base by 15% Increase award of production contracts to diversity suppliers to 5% Goals for Year 2

36. Develop a world-class information system Q3 Document, verify, and track cost savings Q1 Implement VA / VE programs Q1 Develop or hire 8 cost engineers Q 2-3 Develop14 corporate-wide commodity teams Q2-3 Expand strategic sourcing to all commodities Q4 Initiate creation of a global supplier network Q3 Open an Asian int�l procurement office Q4 Develop an education program for supplier diversity Q2 Recognize suppliers embracing pollution avoidance Q3 Increase supplier development efforts, ongoing Develop four new supplier alliances Q4 Increase integration of suppliers into NPD process, ongoing Initiatives for Year 2

37. Develop web-based applications to link suppliers Q1 Analyze supply management skills systematically Conduct training to upgrade personnel, ongoing Develop leadership from within, ongoing Implement a college recruiting leadership program, Q1 Recruit best candidates, ongoing Ensure clear employee performance goals Q2 Provide career development opportunities, ongoing Implement rewards and incentive plan Q2 Ensure retention of promising employees, ongoing Integrate SM, logistics, and demand mgmt, Q3 Increase compensation of supply professionals, Q4 Initiatives for Year 2

38. 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 Goals for Year 3

39. Develop 10 new supplier alliances Q4 Document, verify, track, and control savings Q1 Increase diversity suppliers purchases to 6% of total Q2 Initiate one supplier family (a la Toyota) 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 & relationship mgt, ongoing Ethics training to members of SCM system Q2 Initiatives for Year 3

40. 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 Initiatives for Year 3

41. Reduce TCO on incoming goods/services by 5% Reduce avg incoming defects by 50% to 110 ppm Develop 17 new supplier alliances Increase purchases from diversity suppliers to 6.5 percent of production materials 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 Goals for Year 4

42. Champion pursuit of Malcolm Baldrige Award Q2 Develop & deploy new metric measuring system Q2 Implement program of integrated financial transaction work flows coupled with tax effective SCM practices Q3 Develop and implement supply chain scorecards Q3 Implement an aggressive publicity program, both corporate-wide and including suppliers Q4 Reward 50% of savings from VA programs to suppliers Q1 Replace long w/ short contracts - teamwork intent, ongoing Experiment allowing suppliers to construct their own contracts on website Q2 Establish SM as recognized competency, ongoing Integrate SCM planning with other systems, ongoing Initiatives for Year 4

43. Align Strategic Sourcing strategies across enterprise, ongoing Optimize global logistics (inbound/outbound), ongoing Develop a globally integrated order fulfillment process Q1 Set consistent performance standards Q2 Communicate expectations / feedback to suppliers, Q2 Expand supplier network around the globe, ongoing Enable suppliers to interact seamlessly, 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 Initiatives for Year 4

44. Integrate SC into technology delivery process, ongoing Integrate e-Commerce II processes with 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/succession plans, ongoing Identify common activities / eliminate redundancies, ongoing Identify/optimize synergies across supply chain, ongoing Identify and develop business marketplaces enabling supply chain leverage and synergy, ongoing Initiatives for Year 4

45. 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 5 Years Later

46. Megatronics: SCM Organization

47. Corporate Level (Expanded View)

48. Division Level (Expanded View)

49. Implementing WCSM and World Class Supply Chain Management is as much about leadership and management as it is about 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!� Concluding Remarks