Core concepts of SCM?

SUPPLY CHAIN MANAGEMENT In commerce, supply chain management (SCM), the management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain. Supply-chain management has been defined as the "design, planning, execution, control, and monitoring of supply-chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.” For more explanation visit: https://www.youtube.com/watch?v=Mi1QBxVjZAw LOGISTICS Logistics is generally the detailed organization and implementation of a complex operation. In a general business sense, logistics is the management of the flow of things between the point of origin and the point of consumption to meet the requirements of customers or corporations. The resources managed in logistics may include tangible goods such as materials, equipment, and supplies, as well as food and other consumable items. The logistics of physical items usually involves the integration of information flow, materials handling, production, packaging, inventory, transportation, warehousing, and often security. For more explanation visit: https://www.youtube.com/watch?v=Vu3o2-3uSKE CORE CONCEPTS OF SCM Shortly after your alarm clock goes off and the coffee maker kicks on, the aroma of your favorite coffee fills the air. The supply chain is responsible for getting those coffee beans across the world and to your kitchen. Something so common in every household, takes a great deal of planning, demand forecasting, procurement, and logistical expertise to move those beans to local sellers while still fresh. Without a strong supply chain in place, your caffeine-fix options would be severely limited. SCM involves a series of key activities and processes that must be completed in an efficient (fuel-conserving, cost-reducing, etc.) and timely manner. Otherwise, product will not be available when needed by consumers like you. The Seven Rights of Fulfillment The ability to meet customer requirements, for everything from coffee beans to Crocs, is built upon the expectation that everything is done correctly in the supply chain. And that means doing it right the first time – no mulligans, no mistakes are allowed. In the quest to provide quality service and satisfy customers, world-class companies along the supply chain are guided by the Seven Rights of Fulfillment. If you think about it, every order needs to be executed according to these seven goals. You must attempt to deliver a “perfect order” to every customer every time. Doing it right the first time makes the customer happy, saves the cost of fixing errors, and doesn't require extra use of assets. Thus, every part of the organization has a vested interest in pursuing perfection. A “perfect order” delivery is only attained when all Seven Rights of Fulfillment are achieved. To accomplish a perfect order fulfillment, the seller has to have your preferred product available for order, process your order correctly, ship the entire order via the means that you request, provide you with an advanced shipping notification and tracking number, deliver the complete order on time and without damage, and bill you correctly. A seller’s ultimate goal is to make the customer happy by doing the job right, which gives them a good reason to use the seller’s services again in the future. SCM Flows If the goal of SCM is to provide high product availability through efficient and timely fulfillment of customer demand, then how is the goal accomplished? Obviously, you need effective flows of products from the point of origin to the point of consumption. But there’s more to it. Consider the diagram of the fresh food supply chain. A two-way flow of information and data between the supply chain participants creates visibility of demand and fast detection of problems. Both are needed by supply chain managers to make good decisions regarding what to buy, make, and move. Other flows are also important. In their roles as suppliers, companies have a vested interest in financial flows; suppliers want to get paid for their products and services as soon as possible and with minimal hassle. Sometimes, it is also necessary to move products back through the supply chain for returns, repairs, recycling, or disposal. Because of all the processes that have to take place at different types of participating companies, each company needs supply chain managers to help improve their flows of product, information, and money. This opens the door of opportunity to you to to a wide variety of SCM career options for you! SCM Processes Supply chain activities aren't the responsibility of one person or one company. Multiple people need to be actively involved in a number of different processes to make it work. It's kind of like baseball. While all the participants are called baseball players, they don't do whatever they want. Each person has a role – pitcher, catcher, shortstop, etc. – and must perform well at their assigned duties – fielding, throwing, and/or hitting – for the team to be successful. Of course, these players need to work well together. A hit-and-run play will only be successful if the base runner gets the signal and takes off running, while the batter makes solid contact with the ball. The team also needs a manager to develop a game plan, put people in the right positions, and monitor success. Winning the SCM “game” requires supply chain professionals to play similar roles. Each supply chain player must understand his or her role, develop winning strategies, and collaborate with their supply chain teammates. By doing so, the SCM team can flawlessly execute the following processes: • Planning – the plan process seeks to create effective long- and short-range supply chain strategies. From the design of the supply chain network to the prediction of customer demand, supply chain leaders need to develop integrated supply chain strategies. Broadly, the typical sales and operations planning steps are: 1. Define Your Plan using demand planning and statistical forecasting generate a demand plan aligned with seasonality & product life cycle trends. 2. Agree on an Inventory Strategy to achieve desired service levels by defining statistical safety stocks and reorder point replenishment models. 3. Optimize Supply by rebalancing inventory across sites to resolve supply gaps. 4. Manage Your Constraints to ensure that there is enough capacity to fulfill demand increases and balance worker capacity with material levels 5. Make Decisions by evaluating financial trade-offs to maximize revenue and optimize inventory • Procurement – the buy process focuses on the purchase of required raw materials, components, and goods. As a consumer, you're pretty familiar with buying stuff! Procurement is just one of the many roles involved in a good supply chain. It should be considered a core component of a company’s corporate strategy. Proper procurement management is vital because an organization can end up spending over half of its revenue on purchasing goods and services. Procurement makes a huge difference between the success and failure of a business. The procurement process includes the following steps: 1. Identifying requirements 2. Approving the request for purchase 3. Finding suppliers 4. Making inquiries and receiving quotations 5. Negotiating the terms 6. Making a final selection of the vendor 7. Creating a purchase order and goods receipt 8. Shipping management 9. Receiving invoices and making payments • Production – the make process involves the manufacture, conversion, or assembly of materials into finished goods or parts for other products. Supply chain managers provide production support and ensure that key materials are available when needed. Production has following planning steps: 1. Sales Forecasting 2. Sales and Operations 3. Demand Management 4. Detailed Scheduling 5. Production: 6. Material Requirements Planning 7. Distribution – the move process manages the logistical flow of goods across the supply chain. Transportation companies, third party logistics firms, and others ensure that goods are flowing quickly and safely toward the point of demand. It is an overarching term that refers to numerous activities and processes such as packaging, inventory, warehousing, supply chain, and logistics. 8. Customer Interface – the demand process revolves around all the issues that are related to planning customer interactions, satisfying their needs, and fulfilling orders perfectly.

Demand Management?

Demand management is a planning methodology used to forecast, plan for and manage the demand for products and services. This can be at macro-levels as in economics and at micro-levels within individual organizations. For example, at macro-levels, a government may influence interest rates in order to regulate financial demand. At the micro-level, a cellular service provider may provide free night and weekend use in order to reduce demand during peak hours.

Supplier Relationship Management?

Supplier relationship management (SRM) is the discipline of strategic planning for, and managing, all interactions with third party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions. In practice, SRM entails creating closer, more collaborative relationships with key suppliers in order to uncover and realize new value and reduce risk of failure. Supply chain management (SCM), the management of the flow of goods and services, involves the movement and storage of raw materials, work-in-process inventory, and of finished goods from point of origin to point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply the chain.

Sourcing & Purchasing?

Sourcing describes all those activities within the procurement process concerning identifying and evaluating potential suppliers, engaging with selected suppliers and selecting the best value supplier.The outcome of the sourcing process is usually a contract or arrangement that defines what is to be procured, on what terms and from which suppliers. Purchasing refers to the portion of the procurement cycle that is actively engaged in buying a product or service from a supplier. Think of purchasing as the transactional portion of procurement. If procurement is the subject, then purchasing is the verb. Tasks that directly relate to the process of how goods and services are ordered are purchased while activities such as strategic sourcing and vendor contract negotiation constitute procurement.

Quality Management?

Quality Management, the six Total Quality Management factors that are related to supply chain performance are leadership, strategic planning, human resources management, supplier quality management, customer focus, and process management.Strategic Supply Management initiatives include: Reducing supply bases and establishing closer relationships with their suppliers, Buyers are working closely with suppliers and potentially launching joint strategic projects, Earlier supplier involvement and joint problem-solving efforts, leading to the early discovery of quality problems ,Inter-firm production scheduling breaks down barriers between organizations, resulting in shorter production runs, and developing a favorable quality culture based upon top-management commitment to improving beyond organizational boundaries.

Introduction to Logistics Management?

Logistics management is a supply chain management component that is used to meet customer demands through the planning, control and implementation of the effective movement and storage of related information, goods and services from origin to destination. Logistics management helps companies reduce expenses and enhance customer service. The logistics management process begins with raw material accumulation to the final stage of delivering goods to the destination. By adhering to customer needs and industry standards, logistics management facilitates process strategy, planning and implementation.

Transportation?

Transportation is defined as the movement of people, animals and goods from one location to another. Modes of transport include air, rail, road, water, cable, pipeline and space. The field can be divided into infrastructure, vehicles and operations. Transportation is important since it enables trade between people, which in turn establishes civilizations. I find it an interesting point that transportation is an enabler of civilization, but this makes sense, as it enables the ability to trade and communicate.

Reverse Logistics?

Reverse logistics ae the set of activities that is conducted after the sale of a product to recapture value and end the product's lifecycle. It typically involves returning a product to the manufacturer or distributor or forwarding it on for servicing, refurbishment or recycling. Reverse logistics are sometimes called aftermarket supply chain, aftermarket logistics or retrogistics. The aftermarket processes that a product can undergo in reverse logistics are numerous and include: Remanufacturing, Refurbishment, Servicing, Returns Management, Recycling, Waste Management, Warranty Management, Warehouse Management.

Cold Chain?

The term cold chain or cool chain denotes the series of actions and equipment applied to maintain a product within a specified low-temperature range from harvest/production to consumption. A cold chain is a temperature-controlled supply chain. An unbroken cold chain is an uninterrupted series of refrigerated production, storage and distribution activities, along with associated equipment and logistics, which maintain a desired low-temperature range.

Inventory Management?

Inventory management is a discipline primarily about specifying the shape and placement of stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials. The concept of inventory, stock or work-in-process has been extended from manufacturing systems to service businesses and projects, by generalizing the definition to be "all work within the process of production- all work that is or has occurred prior to the completion of production".

Introduction to Warehouse?

A warehouse is a building for storing goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial parks on the outskirts of cities, towns or villages. They usually have loading docks to load and unload goods from trucks. Sometimes warehouses are designed for the loading and unloading of goods directly from railways, airports, or seaports. They often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets loaded into pallet racks.

Warehouse Process?

The six fundamental warehouse processes . Optimizing these six processes will allow you to streamline your warehouse operation, reduce cost & errors, and achieve a higher perfect order rate. They are : 1. Receiving 2. Put-Away 3. Storage 4. Picking 5. Packing 6. Shipping

Warehouse VAS?

A value-added service (VAS) is a popular telecommunications industry term for non-core services, or, in short, all services beyond standard voice calls and fax transmissions. However, it can be used in any service industry, for services available at little or no cost, to promote their primary business. In the telecommunications industry, on a conceptual level, value-added services add value to the standard service offering, spurring subscribers to use their phone more and allowing the operator to drive up their ARPU. For mobile phones, technologies like SMS, MMS and data access were historically usually considered value-added services, but in recent years SMS, MMS and data access have more and more become core services, and VAS therefore has begun to exclude those services.

MHE, Safety & Security?

Material handling equipment (MHE) is mechanical equipment used for the movement, storage, control and protection of materials, goods and products throughout the process of manufacturing, distribution, consumption and disposal.The different types of handling equipment can be classified into four major categories:transport , positioning , unit load formation , and storage . MANAGING WAREHOUSE SAFETY AND SECURITY There are many warehouse management procedures you can adopt today to better cultivate industry-leading safety and security. They are : Risk Assessments, Electric and hydraulic safety circuits within machine, Safety fencing and zoning ,Additional warehouse safety guarding.

E-Commerce?

E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. Electronic commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems, and automated data collection systems. E-commerce is in turn driven by the technological advances of the semiconductor industry, and is the largest sector of the electronics industry.

ERP & TMS?

Enterprise resource planning refers to a type of software that organizations use to manage day-to-day business activities such as accounting, procurement, project management, risk management and compliance, and supply chain operations. A complete ERP suite also includes enterprise performance management, software that helps plan, budget, predict, and report on an organization’s financial results. A transportation management system is a subset of supply chain management concerning  transportation operations and may be part of an enterprise resource planning system. A TMS usually "sits" between an ERP or legacy order processing and warehouse/distribution module. A typical scenario would include both inbound (procurement) and outbound (shipping) orders to be evaluated by the TMS Planning Module offering the user various suggested routing solutions.

VMI?

Vendor Managed Inventory (VMI) and Collaborative Replenishment is a proven approach to streamlining inventory management and order fulfillment that improves collaboration between suppliers and their distribution partners by aligning business objectives and optimizing operations for all participants. You may be asking, what is the difference between VMI and Collaborative Replenishment. It’s simple, Collaborative Replenishment is an evolution of VMI that includes trading partners working together to ensure an efficient inventory management program. It goes far beyond the capabilities of what traditional VMI is thought of including things like truck building, available to promise and more. It offers companies more choices by enabling orders to be launched by any trading partner, offering multiple routes to market, and utilizing various types of demand signals. In all, collaborative replenishment is a more flexible approach to supply chain management, but at is core Collaborative Replenishment includes VMI and all its benefits.

VISIT?

As part of the Warehousing module on both the Logistics and Supply Chain Management MSc and the Procurement and Supply Chain Management MSc programmes, students have the opportunity to visit a choice of warehouses in the local Milton Keynes area. By visiting the warehouses, students are able to experience the processes and operations within a warehouse first hand and see the practical application of knowledge and skills developed on the course.
Demand Management_Simple

DEMAND MANAGEMENT

Demand management is a planning methodology used to forecast, plan for and manage the demand for products and services. This can be at macro-levels as in economics and at micro-levels within individual organizations. For example, at macro-levels, a government may influence interest rates in order to regulate financial demand. At the micro-level, a cellular service provider may provide free night and weekend use in order to reduce demand during peak hours.

Demand management has a defined set of processes, capabilities and recommended behaviors for companies that produce goods and services. Consumer electronics and goods companies often lead in the application of demand management practices to their demand chains; demand management outcomes are a reflection of policies and programs to influence demand as well as competition and options available to users and consumers. Effective demand management follows the concept of a “closed loop” where feedback from the results of the demand plans is fed back into the planning process to improve the predictability of outcomes. Many practices reflect elements of systems dynamics. Volatility is being recognized as significant an issue as the focus on variance of demand to plans and forecasts.

Demand management as a business process

Demand management is both a stand-alone process and one that is integrated into sales and operations planning (S&OP) or integrated business planning (IBP).

Demand management in its most effective form has a broad definition well beyond just developing a “forecast” based on history supplemented by “market” or customer intelligence, and often left to the supply chain organization to interpret. Philip Kotler notes two key points: 1. Demand management is the responsibility of the marketing organization (in his definition sales is subset of marketing); 2. The demand “forecast” is the result of planned marketing efforts. Those planned efforts, not only should focus on stimulating demand, more importantly influencing demand so that a business’s objectives are achieved.

The components of effective demand management, identified by George Palmatier and Colleen Crum, are: 1. planning demand; 2. communicating demand; 3. influencing demand and 4. prioritizing demand.

Demand control

Demand control is a principle of the overarching demand management process found in most manufacturing businesses. Demand control focuses on alignment of supply and demand when there is a sudden, unexpected shift in the demand plan. The shifts can occur when near-term demand becomes greater than supply, or when actual orders are less than the established demand plan. The result can lead to reactive decisions, which can have a negative impact of workloads, costs, and customer satisfaction.

Demand control creates synchronization across the sales, demand planning, and supply planning functions. Unlike typical monthly demand or supply planning reviews, demand control reviews occur at more frequent intervals (daily or weekly), which allows the organization to respond quickly and proactively to possible demand or supply imbalances.

Time fences

The demand control process requires that all functions agree on time fences within the planning horizon, which should be no less than a rolling 24 months based on integrated business planning best practices. A time fence is a decision point within a manufacturer’s planning horizon. Typically, three established time fences exist within a company:

  • Future planning zone – Supply is managed to match demand
  • Trading zone – Demand is managed to match supply for production
  • Firm zone – Demand is managed to match supply for procurement

Demand controller

A demand controller is established when a company implements a demand control process. Unlike a demand planner who focuses on long-term order management, the demand controller is responsible for short-term order management, focusing specifically when demand exceeds supply or demand appears to be less than planned, and engages sales management in both situations. The demand controller works across multiple functions involved in the supply and demand processes, including demand planning, supply planning, sales, and marketing.

 

Mastering Demand Management Across Your Organization’s Processes

Most supply chain professionals have developed reliable strategies for supply chain planning and inventory management. But relatively few have mastered demand management. In fact, it’s a term that doesn’t get much discussion in supply chain circles.

To put it simply, demand management is a discipline that analyzes the supply chain from the customer’s point of view and then orients all processes to meet the customer’s needs. It can involve a wide range of disciplines, depending on the unique processes of your organization. More than likely, it will encompass:

  • Forecasting. Successful forecasting is more than just loading data into a spreadsheet, forming a basic view of projected sales based on that data, and then adjusting the business plan to work towards the forecast. It should involve multiple scenarios, so that your company can be prepared for virtually any unexpected twist or turn.
  • Supply planning. It’s an ever-changing marketplace out there—one in which new suppliers continue to spring up around the globe even as your old, trusted supplier in the next town goes out of business. But if you merely react to these changes, you’ll always be one step behind your competitors who anticipate and prepare for them. By maintaining deep visibility into the capabilities and business health of all your suppliers, you’ll position your organization for continued success no matter what happens in the global business climate.
  • Demand analysis. Your decision-makers may believe that your greatest spike in demand occurs in July of every year. But dig deeper. If you’re basing your decisions off of sales data, you may not be getting the full story. Most ERP systems record sales based on when a product shipped—not based on when it was first ordered. Only by keeping an accurate view of order history can you paint a realistic picture of your company’s demand—and then work to meet that demand year after year.
  • Sales and operations planning (S&OP) or Integrated Business Planning (IBP). The idea that the supply chain organization can operate in a silo, free from the input of executives, is long gone. Over the past 20 years, organizations that make and sell products have embraced S&OP as a way to involve a wider range of stakeholders in every supply chain decision—and to incorporate supply chain information and needs into every business decision. More recently, IBP has emerged as an improvement to the S&OP process. When executed effectively, the outcome of IBP or S&OP is a better bottom line.

A Five-Step Approach to Effective Demand Planning Implementation

Good handling of market demand data is one of the most vital concepts in any supply chain. The correct management of demand information can greatly influence the level of integration and responsiveness and has a direct impact on customer service and inventory levels. If customer demand is the activating element in the supply chain, it’s quite clear that a multi-step operational supply chain management process to create reliable demand forecasts can play an active role in improving supply chain effectiveness. But how to create powerful demand planning implementation? The five-step approach outlined below provides guidance.

 

How to Create a Demand Planning Process

1.      Start with a demand analysis

It’s an old saying: ‘garbage in, garbage out’. Any forecasting process starts with analyzing and understanding your sales history and cleaning up your dataset. In addition to the typical data cleansing tasks, it’s also important to establish a focus for the forecasting process: which items do we need to review?

Doing a customer-product segmentation prior to the demand planning implementation is a great help in this respect. Additionally, opting for a separate forecast for the recurring items and promotional, project or tender items will sharpen your focus. High-volume, fast-moving items that can be forecasted accurately based on statistics should be left to the automated forecast of the demand planning tool. However, you should always incorporate an exception-based review list.

2.      Rely on a quantitative baseline forecast

Statistics should always be your starting point rather than the finishing post. This not only makes life easier for Sales but also helps to remove bias from the forecast because people have a natural tendency to over-forecast. Furthermore, it will free up extra time for your sales team to focus on lumpy and erratic figures.

At the same time, you should be very careful with statistical forecasting. In general, the forecast statistics are too complex and often poorly understood. If you have an effective process and a good tool, statistical forecasting can easily generate 30-40% more efficiency. If the results applied incorrectly, however, the only outcome will be frustration. So look for a knowledgeable partner who can help you select the right level of complexity for your business and ensure you benefit from improved performance as a result.

3.      Strive for a collaborative demand planning implementation process

We can’t overemphasize the importance of gaining extra input for the statistical forecast from the right people, both from within the company and from key customers and distributors. Demand can be influenced by a myriad of factors, and way more than any statistical model can currently handle, so, statistics alone can’t do the job!

You have to rely on a collaborative process within and beyond company, boundaries to receive the additional, crucial demand information such as about product launches, substitutions, and end-of-life products, for instance. Other types of relevant information include promotions, price changes, and marketing campaigns, and projects and tenders could also be a disruptive factor in your supply chain. This extra demand information is typically managed via reviewing lists. Besides these, it can be very useful to ask your sales team to validate the statistical forecast, which is often easier to do on an aggregated level.

But it doesn’t end with your sales team’s contribution. You should stop trying to guess what your most valuable and important customers will buy. Instead, go and talk to them and set up a collaborative forecast approach. Do the same for your other important channel partners too.

4.      Invest in performance management

The numbers tell the tale! In return for all your efforts to improve the forecast, you should also be able to measure your progress. Reducing the forecast error will improve service while lowering cost and inventory, so it’s worth ensuring that the forecast accuracy is monitored effectively.

In a typical situation, Supply Chain will generate the statistical forecast, Marketing or Product Management will add information about promotional campaigns, new product launches, and end-of-life products, and Sales will add customer data. Ensure that your tool enables you to check the added value of each of the different forecast versions and include a feedback cycle.

At the very least, follow up on these three key metrics: the mean percentage error, the mean absolute percentage error (MAPE) and the stability of the forecast accuracy.

5.      Hold a demand review meeting

The final step in demand planning implementation should be a demand review meeting, led by the demand manager or the S&OP manager. Supply Chain is the only department that can be regarded as being ‘neutral’ with regards to Sales, Operations, and Finance and hence is in the best position to chair demand review meeting

The 8 Major Barriers to Effective Internal Demand Management

Buyers are frequently faced with significant obstacles before the appropriate sourcing option can be pursued. As is often the case, internal demand constraints act as effective barriers to the appropriate choice of reactive or proactive supply management.

  1. Product or service over-specification

In many organisations, the buyer’s internal client often seeks to over-specify the product or service required. This is often referred to as the “gold-plating” of requirements, where the product or service is specified in a way that exceeds the organisation’s requirements. This can be in terms of technical requirements and/or commercial considerations. Subsequently, the internal client’s (and buyer’s) requirements are far more difficult and/or costly to service.

  1. Premature establishment of the specification

If internal clients build a supplier’s offering into their design before the organisation has had an opportunity to negotiate with the supplier, the buyer may become locked into the supplier. If the buyer’s purchasing team starts to negotiate with the supplier after the organisation has accrued significant sunk costs in their solution, then it will be negotiating with a supplier that effectively has a monopoly position.

  1. Frequent changes in the specification

Organisations that procure complex services often experience a problem associated with the potentially high level of specification change because of the level of uncertainty that surrounds such purchases. However, these pre- and post-contractual problems may be exacerbated by internal client behaviour. The resulting frequent changes to the specification, again after it has built up significant sunk costs in the supplier’s solution, will leave the organisation vulnerable to opportunistic behaviour, even at the pre-contractual stage. Furthermore, the supplier may have to make costly, last-minute alterations to their processes in order to accommodate the changes, thus increasing the nuisance value of the customer to the supplier.

  1. Poor demand information

A significant demand management problem relates to the inability of the organisation to access (and analyse) accurate demand information. Poor demand information leads to supply chain players keeping high levels of inventory as insurance, which is against the principles of lean supply. Furthermore, the late placing of orders due to poor demand information makes it difficult for the supplier to pre-plan its production activities and may require the supplier to pay a premium for its own inputs, which it will seek to pass on. Poor demand information clearly puts the organisation in a poor negotiating position in relation to the supplier.

  1. Fragmentation of spend

This is a very common demand management problem. Most organisations buy ‘equivalent’ products from a large pool of different suppliers, often through small quantity orders placed at frequent intervals. This situation is often due to internal clients having their own personal preferences for certain products and having their own favourite suppliers. Each separate transaction is of limited value, thus increasing product costs, and the multiple interactions will also lead to higher transaction costs. Leverage opportunities are not possible and the attractiveness of the buyer to the supplier is significantly reduced.

  1. Maverick buying

In most organisations, there is a fairly high incidence of internal clients, either buying outside the contracts that have been set up, or buying using procedures that are not compatible with optimising value for money. Therefore, the maverick buyer is unlikely to have access to the requisite supply market information and will not possess the necessary competence in contracting and negotiating. As a result, there will be a further fragmentation of the organisation’s spend, resulting in loss of commercial leverage and the organisation being faced with higher prices. Maverick buying diminishes the relationship between volume and value that underpins the agreements with approved suppliers, thereby destroying the credibility and relative power of the buyer.

  1. Inter-departmental power and politics

Individuals or departments will have power resources, which can be drawn upon to either help, or hinder, change within an organisation. At the heart of this is the concept of the principal-agent problem. Managers within departments may have conflicting loyalties when working within organisations. They have loyalty to the organisation, which pays their wages, but also to their department, themselves and their careers. When these loyalties are in conflict, most managers will take action that favours the latter. Internal clients will often, therefore, make sourcing decisions that will secure their own personal advantage rather than furthering the wider interests of the organisation. When the person or department has a high level of intra-organisational power, they will have the ability to obstruct any drive to improve internal demand management, if they so desire.

  1. Risk adverse nature and culture of an organisation

The very nature and unique culture of an organisation may act as a further barrier to more effective demand and (subsequent) supply management. Organisations, which tend to be highly risk averse, may find it difficult to adopt the necessary organisational changes required to overcome some of the internal demand problems highlighted thus far. Although not necessarily a direct cause of ineffectual demand management, an organisation’s overriding culture can still act as a serious barrier to change.

In summary, the existence of these barriers often reduces the attractiveness of the buyer to the supplier. Depending upon the specific market conditions, the existence of these barriers can increase the leverage that the supplier has over the buyer. Subsequently, the buyer may be unable to achieve the desired outcomes (value for money) from the relationship.

In order to maximise value for money, organisations must first overcome internal demand problems discussed and then select the appropriate sourcing option to maximise their ability to leverage suppliers.