Supply Ecosystems: Interconnected, Interdependent And Cooperative Operations, Supply And Contract Management 981322309X, 9789813223097, 9789813223073

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Supply Ecosystems Interconnected, Interdependent and Cooperative Operations, Supply and Contract Management

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Supply Ecosystems Interconnected, Interdependent and Cooperative Operations, Supply and Contract Management

Douglas Kinnis Macbeth University of Southampton, UK

World Scientiic NEW JERSEY

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BEIJING

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SHANGHAI

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HONG KONG

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TAIPEI

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CHENNAI

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TOKYO

Published by World Scientiic Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA oice: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK oice: 57 Shelton Street, Covent Garden, London WC2H 9HE

Library of Congress Cataloging-in-Publication Data Names: Macbeth, D. K. (Douglas K.), author. Title: Supply ecosystems : interconnected, interdependent and cooperative operations, supply and contract management / Douglas Kinnis Macbeth (University of Southampton, UK). Description: New Jersey : World Scientiic, [2018] | Includes bibliographical references and index. Identiiers: LCCN 2018012720 | ISBN 9789813223073 (hc : alk. paper) Subjects: LCSH: Business logistics. | Production management. | Industrial procurement--Management. | Industrial management. Classiication: LCC HD38.5 .M33 2018 | DDC 658.5--dc23 LC record available at https://lccn.loc.gov/2018012720

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

Copyright © 2019 by World Scientiic Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher. For any available supplementary material, please visit http://www.worldscientiic.com/worldscibooks/10.1142/10521#t=suppl Desk Editors: Anthony Alexander/Karimah Samsudin Typeset by Stallion Press Email: [email protected] Printed in Singapore

About the Author Douglas Macbeth recently retired as Professor of Purchasing and Supply at University of Southampton Management School. He has worked in two other UK universities and has taught in Europe and America. He is the Founder of the consulting firm SCMG Ltd., which commercialises early research into buyer–supplier relationships. He was also the deputy director of the Southampton Marine and Maritime Institute collaborating across many disciplines. He takes an applied view of academic research and has always worked actively across the academic/practitioner boundary. He is a Lead Academic on FutureLearn Massively Open Online Course (MOOC) on Contract Management: Building Business Relationships, commissioned by UK Cabinet Office and partnering with Civil Service Learning and IACCM, which runs twice a year for 15,000 learners. He is the author of six books, numerous articles and lead or co-lead in many consultancy and research projects and is a supervisor for a number of successful PhD candidates.

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Acknowledgements This book is dedicated to Ann, Graeme, Chris and Lisa. Ann has supported me and my career in ways too numerous to list, but sincere thanks are due. World Scientific Publishing have been a joy to work with. I have also worked with many interesting people both as colleagues in academia and in business as clients and as co-investigators in research and teaching projects as well as international students in a variety of settings. I learned from them all and also owe them a great debt of gratitude for allowing me to share my experiences. Some of that learning is captured in this book, and I hope it properly reflects what I learned from these interactions.

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Contents v

About the Author Acknowledgements

vii

List of Figures

xiii

List of Tables

xv

Introduction

xvii

Chapter 1

Global Business Context 1.1 Financial and Strategic Objectives 1.2 Business Life Cycle 1.2.1 Start-up 1.2.2 Existing 1.2.3 Static 1.2.4 Under threat 1.2.5 Time horizon 1.2.6 Short-term survival 1.2.7 Medium-term growth 1.2.8 Trade sale or Initial Public Offering (IPO) 1.3 Ethical Stance 1.4 Citizenship 1.5 Political Sensitivities 1.6 How to Compete

ix

1 1 3 4 5 6 7 9 10 10 11 13 15 16 17

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Contents

1.7 Order Winners and Qualifiers 1.8 Core Competence 1.9 Price 1.10 Design 1.10.1 Design for function 1.10.2 Design for process and quality 1.10.3 Design for sustainability and recycling 1.10.4 Design for procurement and supply chain 1.11 Quality and Value 1.12 Delivery 1.13 Integration Across Boundaries 1.14 Data and Analytics 1.15 Corporate Social Responsibility (CSR) 1.16 Background Theory 1.17 Transaction Cost Analysis (TCA) 1.18 Resource-based Theory 1.19 Network 1.20 World Trade and Globalisation 1.21 Commodity Demand 1.22 Communication Links 1.23 Government Support to Inward Investment 1.24 Locational Advantages and Disadvantages 1.25 International Business 1.26 Evolution or Born Global? 1.27 Market Imperatives 1.28 Value Proposition 1.29 Value in Use or Transfer 1.30 Goods and/or Services 1.31 Make or Buy (Products) and Do or Trade (Services) 1.32 Location 1.33 State-of-the-Art Innovation 1.34 Product Range 1.35 Order Mix 1.36 Competitive Threat

19 21 22 24 25 27 29 30 31 33 35 36 37 39 40 42 44 45 48 49 50 51 52 53 54 54 55 56 58 59 60 60 63 65

Contents xi

Chapter 2

Operations 2.1 Design 2.2 Packaging 2.3 Quality and Cost Influence 2.4 Modularisation 2.5 Platforms 2.6 Cost and Reputation Risk 2.7 Tracking Customers 2.8 Quality 2.8.1 Quality and design 2.8.2 The voice of the customer 2.8.3 Standards 2.8.4 Service quality 2.9 Operations Management 2.9.1 Managing resources 2.9.2 Role of inventory 2.9.3 Role of information systems in operations 2.9.4 Performance metrics 2.9.5 Lean

69 69 69 71 71 72 74 74 76 76 80 82 83 85 87 88 89 90 91

Chapter 3

Supply 3.1 Buying and Trading 3.1.1 Offset 3.2 Customer Supply Chain Segments 3.3 Supplier Selection 3.4 Supply Side Infrastructure 3.5 EU Procurement Rules 3.6 Role of Procurement 3.7 Support Systems 3.8 Logistics 3.9 Organisational Buying Behaviour

95 95 97 100 105 108 112 115 126 130 135

Chapter 4

Contract 4.1 Context 4.2 The Contract Life Cycle 4.2.1 Initiation and implementation into operation

141 141 142 144

xii Contents

4.3 4.4 4.5 4.6 4.7 4.8 4.9

4.2.2 Contract monitoring and improvement 4.2.3 Contract end game options 4.2.4 Contract de-brief and capture of lessons learnt Law, Intellectual Property and Negotiation Ethics and Corruption Risk Measurement Business to Business Relationships SCMG Ltd Contract Management Benchmarking Framework People Skills

146 149 150 150 154 155 158 160 161 161

Chapter 5

Possible Futures 5.1 Global Warming 5.2 3D Printing 5.3 The Internet of Things 5.4 Robots 5.5 Blockchain 5.6 Artificial or Computational Intelligence 5.7 Job Displacement 5.8 Universal Basic Income

163 163 164 165 166 168 169 171 172

Chapter 6

Supply Ecosystems and Competitive Advantage

177

Appendix A The RED/BLUE Game Objective Playing the Game

181 181 181

Bibliography

185

Glossary

187

Index

219

List of Figures Figure 1.1 Figure 1.2

Costing Approaches Costing Impacts of Decisions and Consequential Spending Figure 2.1 The Relationship between Design Tolerance and Rejects Figure 2.2 Process Variations and Sigma Figure 2.3 House of Quality Generic Model Figure 2.4 The SERVQUAL Model (5 Gaps) Figure 2.5 Basic Operations System Diagram Figure 3.1 Gattorna’s Behavioural Logic of Supply Chains Figure 3.2 Gattorna’s Market Logic of Supply Chains Figure 3.3 Gattorna’s Strategic Logic of Supply Chains Figure 3.4 Gattorna’s Cultural Logic of Supply Chains Figure 3.5 Life Cycle Supply Requirements Figure 3.6 Customer’s View of Suppliers Figure 3.7 Supplier’s View of Attractiveness of the Customer Figure 3.8 Relationship Portfolio Possibilities Figure 3.9 Different Relationship Types Figure 3.10 Logistics Hub and Spokes Figure 3.11 Types of Products and Services Figure 3.12 Product Definition

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23 26 77 78 81 84 86 101 102 103 104 107 118 120 121 124 133 136 137

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List of Tables Table 3.1 Table A.1 Table A.2

Organisational Location of Purchasing Activity Red Blue Payoff Matrix Red Blue Game Scores

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110 181 182

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Introduction Business is about customers who demand goods and services and the associated supply systems, which can be coordinated to meet the demand by supplying the requirements to specification, on time, to the agreed quality and at an acceptable transfer price that provides relatively satisfactory outcomes to both sides. It is about understanding all of the features, activities, constraints and opportunities on both sides of the supply/ demand interaction. However, while businesses recognise the need to manage the complete, but complex, business process they often feel the need to disaggregate this into a series of narrower specialisms and to structure their organisations around these sub-divisions. This however runs some performance risks since, if not managed from the overall business effectiveness viewpoint, there is a real danger of sub-optimisation. This is the situation in which some action that can be seen as optimum as seen from the narrowly specialist point of view is actually less so (that is, sub-optimum) from the overall business viewpoint. This problem in business is compounded in academic life where in organisation, teaching and publishing, the experts become more and more narrow and less and less aware of, or concerned with, the larger business effectiveness view. There is an inherent logic to these long-standing processes of division of labour (since Adam Smith in 1776 in terms of published work but long beforehand in terms of medieval guilds for example), but they are predicated on a scarcity of capability or resources to take a more integrated xvii

xviii Introduction

view and this is changing as intelligent software solutions spread further into our normal operational areas of activity. This software-driven capability is likely to mature in advance of organisational change, and that is another challenge. As a student, professor and consultant, I always found these subdivisions stressful as I tried to see beyond the narrow view to understand the extensive range of input data to consider as well as the impact of decisions made in one area with their consequential ripple effect across both the focal organisation and out to their customer and supplier networks and into the wider environment. This book is an attempt to consider the extensive ecosystem which forms the supply side of business markets as a step towards a more holistic worldview. However, it makes no sense to ignore the demand side since without customers there is no business, but the focus will be to recognise the supply implications of customer demand and the ways in which the supply side can support existing customer satisfaction and provide opportunities to refine or re-define what supply solutions can be possible for current demand (or a newly created future one). Please note that the writing style avoids an excessive use of referencing. Key sources are identified and current URLs listed, but one of the major developments in all areas of knowledge discussion and creation is the use of the internet facilities of search engines and Wikipedia sources to start off enquiries. While the academic will always suggest going back to the original sources, it is now much easy to generate some search paths where once we depended on long lists of references in each set of resources we read. Ideally of course, we want to integrate both supply and demand and to some extent we will do elements of this in this book since the customer is the start of everything we need to do; however, we will not address the details of sales and marketing here. In similar fashion, we will discuss finance and strategy but again from the viewpoint of the challenges that emerge from them to which the supply side must react and hopefully influence. This sequencing is important. There are business drivers which form a framework and often a set of constraints to the supply side choices discussed here. No business succeeds if it fails to recognise the role of

Introduction xix

customer demand and satisfaction and the effect that managerial choices have on how successfully the organisation can meet its trading or service objectives. The book is structured into 6 chapters. Chapter 1. This chapter looks at the general background of the Global Business Context. It includes discussions about: Financial and Strategic Objectives over a business life cycle since, clearly, these issues affect the supply solutions possible and desirable; Order Winners and Qualifiers allows a strong bridge to be built from the demand side to the supply support activities that are therefore necessary; Background Theory allows the examinations of some of the academic theory most relevant to these considerations; Globalisation is considered both for its long-terms benefits and challenges as well as the recent political backlash from those communities “left behind” in the process of technical change, outsourcing to cheaper labour regions and the political challenges of growing supply and market opportunities away from the original capability locations; finally, we examine what the market imperatives are in terms of what the offer to the market can be and how to make a decision about what supply options make business sense. Chapter 2. This chapter sets out the operation dimensions and critical features, and while much of this is built from understandings first developed in manufacturing goods, we will argue that much of the thinking is transferable (more or less readily) into the production and delivery of services. Indeed, many offerings to customers are a mix of both goods and associated services, so it is much better to think of this as a complex basket of offerings. We start by looking at the fundamental and crucially important phase of Design as it applies to all aspects of the offer creation process and across all boundaries. Next, we look at the equally cross-boundary importance of Quality (but very widely defined and applied) before considering how the Operations Management choices are recognised and justified in light of the chosen supply strategy. This chapter concludes with a discussion of the Toyota Production System or Lean Production as it can be

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Introduction

called as the complete challenge to the received Western perception of what manufacturing was all about. We cannot in any way downplay the importance of what Toyota taught the world about ways of thinking and organising, and to this day we are still reflecting on what can be possible by learning from this example. Chapter 3. This chapter starts with general background topics beginning with the boundary of the firm discussion of whether an activity should be done through ownership of the resources or through purchasing the outcome of another organisation’s resources — the Make or Buy decision. From there, we discuss customer segmentation and supplier selection. We will deal here with managing services as a special or potentially more fundamental consideration, as more business activity moves in this direction. We then move into more operational areas as we look at the choices around supply side infrastructure and support systems. This latter will include discussion of the effects of new technology and the changing people skills needed to make all of this integration more feasible. We also need to understand something of the nature of organisational buying to understand the challenges of being a supplier, and of course goods need to be moved, so the activities of logistics need to be built into our complex world. Chapter 4. The nature of the contract life cycle begins this chapter as we need to understand the scope of the considerations and stakeholders involved. Fundamental to all business activities will be contracts in law and in more informal agreements; so we need to understand these issues with their challenges, constraints and opportunities. Aspects of ethics, sustainability, risk identification and mitigation will all affect the contracts we negotiate and our freedom to act in normal and stressed situations. However, contracts are in some senses just a formalised definition of what the business-to-business relationship is intended to achieve, and there are other ways we should consider and manage relationships. We will also highlight a particular form of best practice guidance developed in association with the Royal Bank of Scotland as a possible checklist for business behaviour.

Introduction xxi

Chapter 5. In this chapter, we will speculate on perceived current trends in science and technology and where they might lead as an extension of the earlier discussions of new technological processes. There is an increasing perception that we are fast approaching a cusp where Artificial Intelligence, Robots, Autonomous Vehicles and Additive Manufacturing have the potential to dramatically affect much of what has been discussed here, and as genome research matures, perhaps whole new industry sectors will evolve in the pharmaceutical world to develop individually optimised treatment regimes. Political and trade-related issues and climate concerns are also likely to need careful consideration, and alternative scenarios are worth exploring. Chapter 6. This chapter draws the discussion threads together and highlights how dealing with the three aspects in a holistic way meets all of the requirements of competitive advantage given the appropriate goods or services. Integration of practice or at least consideration and the business understanding that it produces is inherently inimitable, while the skills developed in working in these ways are readily applicable to other business contexts. This has enormous strategic potential therefore. Appendix A. The RED/BLUE Game. This game has been used for many years to draw out the lessons of competition and collaborative behaviour. It is structurally simple to administer but can provide powerful learning. This appendix will describe the game and set out the process of playing it. A more detailed guide to the key issues and points of management and control, as well as pointers to the possible learning outcomes, can be provided on application to the author for tutors or facilitators planning to use the game in helping their groups to gain most understanding and insight from the game experience. People in these categories are encouraged to email the author at [email protected], for these materials.

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Chapter 1 Global Business Context 1.1 Financial and Strategic Objectives All businesses or organisations have objectives: things that they were set up to accomplish and on which they will be measured, primarily by the members of the organisation themselves but often by third parties like customers, competitors, lenders, investors, political masters or interested social groups. Often, these measures will revolve around some economic measures and monetary value, but this is a convenience in that society often tries to compare activities by use of the common denominator of money. We do need to remember that money is just a societal invention to make the processes of trade and exchange simpler. All societies start off with much simpler levels of exchange. One farmer or hunter has a commodity in excess of their immediate requirement and offers it for trade with someone who has a different commodity in excess. Then, the bartering and negotiation can begin as an attempt is made to equate a deer perhaps to a quantity of corn. From that simple scenario, most of what we understand as trade can be seen to begin. There are issues here about comparative advantage (the farmer is good at farming but not hunting), issues of trust about the true ownership of the resources that are being traded, the equivalence of the resources being exchanged, and so on. While this starts off being about things or goods, the same ideas apply to the provision of a service. How does the farmer value and agree a contract with a farm labourer for example so that the labourer exchanges his physical efforts in return for food, 1

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lodging and perhaps a wage? Does the contribution of the labourer generate a surplus of a farm commodity in excess of the cost of the wage package agreed and contracted for? So all businesses and organisations need to understand what they are trying to achieve and how they will know when this has happened. Other stakeholders (parties having an interest in the outcomes) will want to be able to monitor progress towards these objectives so that they can in some way influence the directions and use of resources to make the achievement more secure and maybe more rapid. Of course, competitors are also stakeholders but with an interest in the opposite direction. In the business world, economic benefit or profitable returns on the capital invested will be critical. In local governments, alternatively, it may be less about direct economic profit but could be a delivered social objective efficiently met under constraints of an allocated budget, but the general principles are similar. In all of what follows, we have the similar potential splits of goods or services and private or public sector ownership. Much of the history of thought in the areas we will discuss was developed in the manufacture of goods, but this sector is rapidly declining in western economies, especially in employment terms and in economic measures such as Gross Domestic Product, while the growth of service-based businesses has increased dramatically. However, people still need or want ‘things’ to use and will buy them from wherever they can, so we find that the locations of some aspects of productive industries move around the world in ways we will discuss later. Some services would seem to be driven by relatively finite demands. How often do normal families need to engage with the legal profession for their support and ‘opinions’, for example? Other services seem almost to have infinite aggregate demands in society, for health and social welfare for example. We also have to recognise a fundamental distinction however between the entrepreneur and the person we can describe as a functionary of a system. The latter can indeed be very principled and owe allegiance either to the system that employs them or to their professional competence and social standing, but they do not own the benefit of the achieved outcome in the same sense as those who have risked their own money (even when borrowed from others) to build the desired outcome. The entrepreneur is

Global Business Context 3

the essential risk taker in society who sees an opportunity to deliver a benefit to a customer group who are prepared to reward him or her by paying an excess over the entrepreneur’s cost of provision for the goods or services. This provides the profit, which motivates more activity to extend and develop the customer market demand which (s)he was creative enough to recognise and supply. This is also true for the provision of social services where such private ownership of the benefits of successful delivery is accepted. For example, even in the National Health Service in the UK the provision of care homes for the elderly can be done by profitseeking private businesses while other countries have much more active private businesses and insurance companies involved in the provision of services in support of individual’s health. So we are going to concentrate on the business processes and regard the public sector provision of services as the laggard in aspects of these developments. However, being second is often a useful position as it is possible to learn from the leader and improve the provision without the wasteful learning processes that are often involved in being a pioneer.

1.2 Business Life Cycle The analogy with the human life cycle is a useful one in many areas of life and business. There is a gestation period where the initial idea was considered and the reality conceived, birth, growth and development, maturity with some development and then decline and finally wear out, infirmity and ending. As individuals, so products, processes, markets, organisations (including businesses), nation states, civilisations and, if we are not more careful, planets. For the human, there is in many belief systems only one opportunity in this. However, in many other situations we should perhaps only talk of ‘first’ life as at the end of the first cycle, modifications in a variety of ways can allow for a form of continuity. So in the product world we can talk of reuse, repurposing, recycling and resource recovery. In this way, the finite resources of the planet can be used over and over again without needing to extract so much more out of the earth.

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Of course, the duration of a life cycle is very varied. The biblical standard was of three score years and 10 (i.e. 3 × 20 + 10 = 70) which is actually on the short side these days for the developed world at least. Life cycles of some electronic products are measured in months, while civil engineering structures can last hundreds of years. Religions and states can last for thousands of years, while some lifeforms complete their cycles in seconds, if that. So we will use the concept without being definite about the timings. We will simply argue that similar patterns are seen but often only recognised as such in retrospect. 1.2.1 Start-up An entrepreneur is often the first to realise that some people (the potential clients) either have a need which is not being met (either at all or not very well) and that the entrepreneur has an idea of how this nascent demand can be satisfied by some supply process that the entrepreneur can imagine or develop and for which satisfaction the clients will be happy to pay. There are many uncertainties in the above statements, and it is being comfortable operating with these uncertainties (in the belief that the ideas and solutions are possible and sound in themselves) that demonstrates the risk-taking approach of the entrepreneur. It is also at this stage that fundamental operating and ethical principles and philosophies are established, which we will discuss shortly. Sometimes these are short lived as the battle for survival focuses more on cashflow (remember that more businesses fail through not managing cashflow than fail because there is no demand). However, sometimes the ethical stance established at foundation endures for as long as does the business. For the business start-up, all of the above factors need testing and solutions measured against expectations and ability to reward the risk taking processes. Entrepreneurs often demonstrate a drive for success which seems to accept that there will be failures (from which learning can be drawn) before a final success is achieved. While financial rewards will follow, money does not in itself seem to be the driving force. Rather, it seems that the process of succeeding is the source of the entrepreneur’s self-evaluation and money is a welcome by-product and

Global Business Context 5

perhaps a means of keeping score and demonstrating the success as well as allowing reinvestment to aim for new goals. Start-up is therefore inherently risky, and many enterprises will fail long before all of the challenges can be overcome. In some cases, the imagined solutions cannot be delivered with the current level of technology or because of an incomplete understanding of the potential client demand. We can consider the start-up phase to be complete when enough of the challenges have been more or less solved so that there is a level of demand which is matched by a supply capability such that the clients are paying for the goods or services and providing an excess over the supply costs. At this stage, sufficient profit is being generated to maintain returns and support future investments and business developments into the future. In life cycle terms, passing the start-up phase can be likened to surviving the increased risk described as ‘infant mortality’. The business baby can then really begin to grow and develop. In human terms, threats to survival now come from more random events like accidents or severe acquired illness. In business terms, these same random or at least unexpected and certainly unplanned-for events can stress the business causing pain, change and hopefully learning and growth in capability and flexibility to respond and cope with new challenges. 1.2.2 Existing As the existing business grows, it begins to reappraise the contracts it established at its start up. Suppliers now have demonstrated their capability or not, and as the core business grows it might be that the first suppliers are not ready to grow in the same way or at the same rate. New customers will also need to be found to grow the business further, and so some supply chains therefore need to be modified and new partners found, inducted into the operating processes and new relationships established and built. This change in connection to the external environment can be a difficult and costly process. Internally, other big changes are often needed. The personalities and skills of the entrepreneur, so vital at start-up, are not the same skills needed as businesses grow. With growth comes the need for more

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controllable systems and procedures, more monitoring and control over a level of complexity that the start-up expert managed through innate skill and drive. Thus, at some stage in the growth cycle, managers as well as owners are needed. This raises the issue of the difference between the owner and the manager who acts as the agent of the owner. The agent is ideally almost a clone of the owner, acting and thinking in exactly the same way as would the owner, (or Principal), if they were taking the actions or making the decisions. However, in Principal and Agent Theory we recognise that there will in fact often be different agendas and motivations between the two parties and that sometimes the agent will make decisions which benefit the agent more than the Principal. (Jensen and Meckling, 1976). This issue is a factor in all such interactions and is especially the case when dealing in supply chains where one hopes the chosen supplier has the same motivations towards the final customer, as would the main provider or core company. So one scenario for the business is more of the same. That is to say, to roughly follow the same direction set at inception recognising that all things change to some degree so products, services, personnel and systems will evolve over time but essentially the same business model is still apparent even if the financial scale and maybe geographical reach is always growing. Such a business can have a long life, extending a number of generations past the lifespan of its creators and their early managers. This kind of business demonstrates the power of competitive advantage (Porter, 1985) whereby it operates with some set of characteristics with which a group of customers is happy to identify and with which they will continue to trade while the business demonstrates a set of capabilities which are in some ways better than their competitors and which are not easily replicable by them. 1.2.3 Static Not all businesses are driven by growth. For some entrepreneurs, the motivation seems to have more to do with being in control and not reporting to a superior, and often this attitude is extended to providing a safe and

Global Business Context 7

prosperous source of income to an extended family. Such businesses often treat employees as well as their own family and will support them in ways similar to the consideration given to their direct relatives. In this kind of business, the risk of growth can be seen as too large compared to the attractions of survival and continuity. In return, they expect and are often granted, a level of commitment and support such that the principal employs agents who do think like principals for truly what is good for the business is good for the individuals in the business. The inherent stability of such businesses is an attractive feature in a supplier, but by the same token we should not expect them to move far from their comfort zone into ventures seen by them as being ‘riskier’. Some business opportunities offered to them could thus be declined. These considerations might suggest that in certain circumstances, these suppliers are not the ones for new supply chain ventures into more uncertain territory. A newly selected supplier for the new venture might, if the venture is successful, be an attractive replacement for the original supplier even when in all other regards the original supplier has done nothing wrong. We can see in this discussion the threat that if one is not advancing then one is, in effect, retreating. The risk of growth is therefore somewhat balanced by the risks of not growing! This also indicates the truism that business strategy and partner selection are critical decisions much influenced by a changing environment. Business managers therefore need to be constantly evaluating the fit between current postures and future threats and opportunities. 1.2.4 Under threat As we discovered in the previous chapter, even doing nothing wrong can allow threats to future well-being to emerge. There are other things to be concerned with of course and they come from many directions. The first and constant threat is that customers change their demands and expectations in ways which make it unattractive for the business to continue to try to satisfy them. Even if the business can in theory change, the timescales required can often create insurmountable problems. Even without such major changes, customers can fail to live up to their

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obligations to pay for an agreed good or service or find ways to delay payment for spurious reasons. Formerly favoured customers then become problems, and the business will incur more costs in trying to recover the debts owed. The mirror image of these issues can happen with suppliers to the business. What once was a well-functioning supply chain becomes weakened, perhaps because one of your suppliers’ other customers becomes more attractive such that they get the support and response on which you once depended. If this close support cannot be recovered, a switch of suppliers might be necessary with all of the search and transfer costs that implies. These first two threats can arise from known connections with customers or suppliers, but there are another two possibilities which might be much more difficult to anticipate and perhaps react to. The first of these relates to the threat of new entrants into the market who can learn from the existing providers and offer a different combination of features to the existing customers and take their business away. If these new entrants have fundamentally different costing structures (for example, basing their business in low labour cost areas when the product or service is labour intensive), it is very difficult for the incumbent provider to fight back without replicating the move to the other region. This argument partly explains some of the offshoring arguments or the rise in global competitive capability from the more globally active businesses from the newly emerging economies in Asia or the Indian subcontinent or Latin America and soon perhaps Africa. Other kinds of new entrant might choose to compete in different ways. Perhaps the service element in the total package can be redefined such that the value perceived by the customer is so sufficiently changed that the choice is now biased in the new direction. We will examine some of these choices below. The second of the external threats can come from technological development of which the incumbents have no knowledge and actually no perception of its possibility and therefore are completely unprepared and unable to react quickly enough. The best example of this kind of technological change is the invention of the quartz digital watch which nearly wiped out the Swiss mechanical watch industry. The Swiss found it

Global Business Context 9

difficult to recognise the threat to traditional watch making technology, so while there were some early examples of Swiss watches pointing in the direction of the new approach they did not fully appreciate that all electronic circuits have to have a means of causing the system to step into its next state. In effect, electronics needs a clock to pulse to activate the incremental processes the circuits depend on. Thus, the digital watch was initially popularised by Texas Instruments, Fairchild and National Semiconductor from the USA as an offshoot of their core electronics businesses. Later of course, the Japanese producers entered the market before the Swiss fought back with their Swatch consortium. There are other technological developments which suggest the same potentially disruptive effects, which we will look at in Chapter 5 later. Of course, many businesses operate in situations where their customers have choices of which business they select to provide their needed goods or services. The nature of competition is such that there is always a threat that incremental improvements by a competitor affects the share of the available market any single business can achieve over a given time period. There is always the need to closely monitor what the competitors are doing by way of differentiation and to react or not, as current business strategy dictates. 1.2.5 Time horizon All businesses need to be aware of what the future might hold for them in terms of threats and hopefully opportunities and they need to be scanning the horizon for these situations appearing from increasingly diverse directions. Businesses do have the potential to outlive their founders, in some cases by many generations, but this must all be planned for ideally, or reacted to if not anticipated. Businesses move according to different statutory pulses. For example, the requirements for annual taxation returns, shareholder meetings, trade fairs or sales promotions, and so on. Shorter term there will be cashflow metrics from daily monitors to longer term forecasts. In the medium term will come loan repayments or expansion/restructuring plans, while in the longer term there can be globalisation, relocation and new market entry or exit from those markets no longer attractive.

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There are recognised hierarchies of plans, and their normal time horizons and other hierarchies of managerial level decision-makers and the associated data requirements and frequencies of collection and analysis, support these. 1.2.6 Short-term survival While there are many ideas about what causes a business to fail, one often quoted is the need to keep sufficient funds in a liquid enough form such that ability to pay staff and creditors is possible even when the demands come quicker than anticipated. All businesses need to manage their cashflow carefully so that their survival is not threatened in the short term before they can put other plans in place to cope with whatever has caused the cashflow problem. As before, the challenge can happen from either the market direction (loss of a key account for example) or from the supply side (a sharp increase in taxation or adverse currency fluctuations perhaps). The need to manage for survival can also put at risk longer term plans and intentions. In the supply chain world, this can mean that the need to survive supersedes other considerations such that there can be a changing of the level of support given to a key supply chain partner. Conversely, it can also be the case that a strong business-to-business (B2B) relationship can be used to mitigate cashflow problems in that the partner can extend their support in a variety of ways. Perhaps payment terms can be extended or invoices delayed and it is not unknown for customers to ask their own financial support provider(s) to provide loans or guarantees to their suppliers at the same lending rate that is provided to the customer. There are a variety of Supply Chain Finance providers offering such services. 1.2.7 Medium-term growth For the business that can avoid the short-term survival issues then, for reasons already discussed, the likelihood is that there is a level of growth built into their future plans. Such ambitions can involve more of the same sets of activities or transitions to new business models. Businesses in this category are probably best placed to react to new opportunities presented by their supply chain partners if they see them as

Global Business Context 11

supporting their growth plans. Just having such ambitions and the associated drive to make them happen can be an attractive personality trait for their business partners to work with and help direct. However, as always, there is another way of thinking and worrying about this. The business which is intending to grow is ambitious enough and trying to discriminate between opportunities it has created or identified and it may be that another business who wants to works with them and the current partner is simply not attractive enough in the longer term and so the supply chain will be disrupted at some stage as apparently ‘better’ options are recognised. We will return to this discussion later when we examine the options in the Portfolio Analysis discussions, in Chapter 3, for the key message is that in any two-party relationship then both parties need to want similar things and without such a meeting of minds there is nothing the unfavoured party can do to recover from a rejection. Such growth needs financing, and while some of it might be possible from retained earnings, often new tranches of support or indeed new sources of investment, can be sought. Commercial loans from existing lenders or calls to existing shareholders might be possible, but there can be limits to the risk appetite of such closely interested parties. It can therefore be the case that the business needs to look beyond its current funding sources. At times like these, the business might need to clarify its longerterm ambitions in order to make itself more attractive to new investors. 1.2.8 Trade sale or Initial Public Offering (IPO) The end state of the ambitious growth-based business can be continuity over some generations of owners and managers, or it might be that they aim to get to a point in size or age (of the owner perhaps), when they want to realise their investment and go on to new things. To realise their investment requires that they find a way to sell the business (in part or totally) while it is still trading so that the longer-term business prospects are attractive to a new owner(s) or investor(s). Such a trade sale allows for the complete or partial exit of the original owners and investors, but often these people represent huge tacit knowledge about the company and the market sector in which they operate and so it can make

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sense to retain some role for them going into the future. If they have sold all of their shares, then they can become employees or consultants, perhaps on a time-limited contract, to allow some knowledge transfer to take place. If they retain significant shareholding, it can be difficult to manage since they have less power and influence and perhaps not the same vision for the future. Emotionally, many entrepreneurs do not always find it easy to accept direction and control from others, so it can be a difficult process to manage. Rather than performing a full-sale and subsequent departure, the other option is to release funds by a massive increase in the value and number of shareholdings by taking the business from a private company basis to a public company whose shares are traded on one or more stock exchanges. This initial public offering or IPO can release enormous amounts of new money providing huge returns on the initial shareholdings. For some businesses in the social media space, the businesses do not even need to be making any current profit as long as investors believe that a number of subscriber transactions on their websites have the potential to be monetised, either directly in a pay to use sense or indirectly by generating revenue from advertisers to the user group. While there are real and large risks in this approach, it nevertheless has the potential to create billionaires more quickly than the incremental growth model we were discussing earlier. Thus, it is to these kinds of companies that two important investor groups are attracted. These are Business Angels and Venture Capital Funds. The first of these are individuals who have capital to invest in growth businesses and who often wish to assist the management of their chosen companies in a hands-on, active way. They are almost professional entrepreneurs who certainly will enjoy making more money but are sometimes driven by other agendas, including promoting entrepreneurship and transferable skills, as a business mentor. Venture Capitalists or funds can behave in somewhat the same way but are often accused of providing support in an overly IPO-focused way so that they can exit from their commitment and sell out when the company goes to the market. They also tend to have a relatively shorter time horizon to make the IPO happen or they might move on to another target for their treatment. They can be accused of making the company attractive enough to

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do well at the IPO but not to care how well the company can support its activities afterwards. They can provide a welcome source of risk capital funds to support an expansion plan and might be more inclined to support a riskier venture than perhaps are the company’s current investors or lenders. Allowing such new investors into a tightly focused and controlled family business can be problematical for the original stakeholders, and for some these stresses are simply not worth the possible benefits and this can also be a reason for the decision to become a static company as we discussed earlier. In effect, the owners can be ambitious to the point where they believe their survival is probable and then move into stasis or they can decide to freeze the expansion at the point before VCs get interested, so as to remain independent. Here again, the attitudes demonstrated can affect how such businesses are perceived as future partners by supply chain buyers or suppliers.

1.3 Ethical Stance When a new business is being started, there are obviously key decisions to be made about product or service, capabilities of personnel, funding and a host of others, but it is also at this point that the owners should be taking a long look at themselves and their ambitions to decide on serious ethical issues. Of course, businesses have choices about whether they will obey laws of their locality or not. Even organised crime follows some principles of management so that they are choosing which norms of behaviour they are choosing to accept and which they are happy to abuse. Even businesses which are not explicitly illegal in their purpose still have choices to make in terms of adherence to some set of rules of behaviour informed by their culture and local laws, religion or family values. Thus part of the definition of the start-up business is about what they will do but also what they will not do. There will be decisions to be made in all aspects of business life. Many long-lasting businesses are very explicit about the norms they expect of all members of their communities. For example Walmart’s Sam Walton established the three basic beliefs of ‘Respect for the Individual, Service to our Customers and Strive for Excellence’. Rolls-Royce state that they are ‘Trusted to Deliver Excellence’.

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Some of these credos or corporate visions can actually run to many sub-categories as below for Johnson & Johnson. We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit. We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfil their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical. We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens — support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources. Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.

One of the most impressive examples is the Royal National Lifeboat Institution (RNLI) which is ‘The Charity that Saves Lives at Sea’. They operate around the coasts of the UK and Ireland and out to the Channel Islands and increasingly operate in flood rescue inland as well as overseas. 95% of their staff are volunteers, and they receive no government funding

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support. The vision is taken into every job description for all who are involved with them which all start the same… ‘I save lives at sea by……..’ With this kind of focus, the concentration of minds is clear and visibly effective. In business, there will be occasions when corporate and personal ethics will be severely tested, and it is a measure of the individual and personal integrity what reaction will follow. It can often seem to be attractive to forget some of these beliefs to obtain some short-term benefit, but the evidence would suggest that the longevity of an organisation is more dependent on doing the ‘right things’ more often than not. Failure to meet these challenges and subsequent public exposure can often result in catastrophic loss of reputation for the individuals involved and for their parent organisation. While some of these decisions will in effect be determined by the legal framework in their marketplaces (and can therefore vary by large amounts), there still is an obligation to define the organisation’s attitude to compliance or not as a minimum or to work to their internal and possibly ‘higher’ values. Potential involvements in slavery, bribery and corruption considerations bring this very much to the fore.

1.4 Citizenship One of the ethical dimensions to consider is how the organisation sees its role in its local and possibly global communities in which it operates. One of the considerations we will discuss later is in the definition of the system in which our business operates. It is easy to consider our business entity and its market objectives as something of a system complete in itself, but then we have to extend the boundaries to include our customers and suppliers. Then we have to think of the wider environment and legal frameworks in which we have to operate. Very soon, the real interconnectedness and interdependence becomes apparent. As a result, we need to think of our effect on the people we employ and the surrounding society. Can we afford to maximise our profits if it means our people are working in unsafe conditions or our products and services are inherently unsafe for use? Should we be allowed to pollute the water we use to clean our facilities and discard poisonous by-products into the water table? Again political

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and legal processes can be in place in some markets to control bad behaviour but is that enough for our ethical consciousness? Some free market economists would argue that the only obligation for shareholders is to maximise the profits from the business activities and governments have to look after the rest by legislative control, but surely this can only be short-term thinking at best and abuse of market power at worst? We will come back to these discussions when we talk about Corporate Social Responsibility (CSR) later.

1.5 Political Sensitivities Legislative frameworks are clearly one of the main constraints and sometimes opportunities faced by our businesses. However, we also need to recognise that political agendas can affect the decisions we have to make. Businesses have to consider medium- to long-term implications of their choices, but political agendas often operate on much shorter time scales. The length of the term of office of the local and central governments, the degree of openness of the democratic (if relevant) debate, whether we are located in a jurisdiction which is open to political parties and popular vote or are subject to diktat by a ruling elite or demagogue or dictator. In current times, the whole nature of what is truth and fact has become a political issue. Businesses have to deal with uncertainty and risk all the time, and such uncertainty offers downsides and upsides. That is to say, bad things can happen (the downside) but favourable outcomes, which were not anticipated, can also happen (this we call an upside risk but it is really an opportunity). In order to have some degree of confidence in their decisionmaking, businesses try to forecast these different possibilities and put some probabilities on their possible occurrence so that they can evaluate their choices in a more structured way. If there are no consistent patterns to feed into their probabilistic models, then they struggle to create meaningful future scenarios to use to evaluate their decision choices. The huge uncertainties brought about by the United (possibly for not much longer) Kingdom Brexit vote to exit the European Union and the unpredictability of policy by tweet demonstrated by President Trump in the United States of America, are proving very difficult to evaluate. Added

Global Business Context 17

to this, the effects of elections in parts of the EU bringing more narrow nationalistic parties into the mainstream might affect the future of the EU (in addition to the negotiations about how Britain exits from the EU). Some major organisations are having to contemplate duplication of effort (banks building up their presence and capabilities in other cities in the EU rather than wait to see if London is allowed to retain its ability to operate in the financial services market for EU customers), or relocate in advance to guarantee access but perhaps lose the synergistic benefits of operating out of London which is currently a major hub for such activities. In other parts of the world, the political situations can be very difficult to predict with local wars and rebellions based on politics and/or religion. In this chapter, we have begun to consider the challenges faced by organisations. Some of these will only apply to businesses with an international spread of some kind but most will require at least passing consideration. Some of them will be fundamentally important such that a decision made in good faith on the best of information and critical evaluation at the time might still prove to be wrong with the benefit of hindsight in the future. Some of these decisions should be revisited on a regular (not necessarily frequent) basis as part of the ongoing checking that they are still fit for purpose as new information and measurements become available. We now need to consider some more fundamental decisions about how to set up the business to have a chance to succeed in whatever market they are choosing to operate within. Such decisions are not linear. Often, a decision made in relation to one aspect has to be considered for its impact on earlier decisions as the new implications might affect the benefit assumed to be obtainable in the earlier decision. Here again, we see the effect of dynamic change in the business environment.

1.6 How to Compete All businesses require some spark of an innovative idea that propels the entrepreneur to start up the venture. In innovation studies, there are usually two routes which are suggested as possibilities and the entrepreneur can be informed by similar considerations.

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Market Pull describes a process where there exists a demand in the marketplace but there are perceived shortcomings in what is currently on offer. The entrepreneur can use this information to fill the gap in provision with her new market offering. The beauty of this route is that to some extent the demand is guaranteed if the new offer properly addresses the declared customer need at the right kind of price and so the customers are inclined to buy and the start-up has a chance of succeeding. One of the best examples of this is the unspillable baby cup, and the reference case study is well worth a look for an overview of some of the considerations in the process of imagining, producing and marketing the Anywayup Cup. (http://www.mandyhaberman.com/ case-study). Technology Push is the second route. Here, the drive comes from an inventor who knows something about a technology and its capability to create a completely new market offer that no current customer could ever imagine. The entrepreneur in this case is gambling on creating solutions to the technological challenges to create the product or service but also on her ability to persuade potential customers to realise the opportunity to fulfil a need they did not realise they had. Such products or services, while they have the potential to transform whole societies, are clearly of high risk and many of them fail for one reason or another. Sometimes the technology vision is just too far ahead of what customers are currently aware of possibly wanting or have to be priced at levels that customers are not yet prepared to pay and what they might pay is not enough to offer a return on the entrepreneur’s risk taking. Although the technology solution is a few generations old, fax machines failed to sell in the UK until there was a postal strike and suddenly the demand from customers went from zero to massive very quickly. The introduction of the digital watch we discussed earlier shows some aspects of this process. Sometimes the issue is not with the technology itself but with some other complementary technology where innovation is also needed in order to allow the first one to perform. The Apple iPod and later the iPhone, while technically capable of playing music, would not have been a market success without the innovation of iTunes to provide the means to sample and buy the music.

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In essence then, businesses need to have a vision of a product and/or service end point and recognise (or at least be prepared to deal with) the barriers that will make the innovation journey more challenging. The fundamental issue is that all businesses need customers who are prepared to pay for the good or service at a level which meets the requirements of the provider organisation. However, as the innovation discussion indicates, sometimes customers are not able to look into a possible future to imagine what is possible so someone else needs to do it for them. These pioneers take all the risks and sometimes they can be rewarded with huge initial market share and profits but having demonstrated proof of concept then the duplicators can appear and come to market quickly and gain market share without the same level of risk or start-up cost. James Dyson took 5 years and 5,127 prototypes to invent the cyclonic vacuum cleaner, and he has built a successful global business on the strength of that innovation. However, now he has to fight off competitors who, legally or not, try and work round his patents or challenge the efficiency of his solutions to try and pry some market share away from his business.

1.7 Order Winners and Qualifiers Most marketplaces with established providers have more than one possible source of the particular good or service to allow customers choice, so it is important to recognise why customers buy what they buy. A useful concept is that of Order Winner. This is the feature of the good or service or their combination in some way, which is sufficient to make the customer want to buy from one supplier rather than another. In effect, this feature(s) is enough for it to be perceived as ‘better’ in some way compared to a competitor offer such that the customer chooses to buy and the supplier wins the order. An innovative solution will be an order winner for a customer who likes to be up to date and at the leading edge of new ideas (the early adopter customer). Another customer might like the new technology but be concerned about the purchase or operating cost or service aspects, so these become the order winners for this type of customer.

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The importance of this concept is that by identifying the order winners properly, the whole business can be working to the same competitive plan. Marketing can emphasise these features in their messaging to potential customers and the supply side can design a system that will support and deliver these promises to the customer. However, to have a chance to be chosen you have to be considered by possible customers, and this is where the other concept comes into play. Order qualifiers are features where a minimum level of performance must be guaranteed or the customer will not go any further and will not even look at what you consider to be the order winners. Safety concerns are a typical example of this kind. A low-cost airline only makes sense if you believe that the low costs have not been created by reducing aircraft maintenance standards or of training of the pilots. Another example might be the market for electric drive vehicles where the technology is good if the distances are not great but if your journey is longer than the normal distance travelled before battery recharging is needed, then the availability of charging stations and the time to recharge the batteries on route becomes key considerations. Thus, order winners and qualifiers are dynamic and need careful review on a regular basis, but here one universal truth tends to emerge and that is, at the current level of technology, customers can change their minds and intentions more quickly than the supply side has the capability to respond. This is further complicated by the fact that customers are not uniform in their expectations, and so the marketing people consider markets as consisting of somewhat separate but internally consistent customer groups or segments. This reinforces the need to manage both the customer facing behaviour through sales and marketing with an aligned supply side through purchasing, operations and contract management so that the different customer segments are fully supported by an appropriately responsive supply side ecosystem. Here, we see a demonstration of why no one organisational grouping can be considered to be automatically more important than any other. For the innovative product perhaps there might be a pre-eminence for the technologists and marketing/sales have to promote what their technology system can produce. In other situations, marketing might be more important in demonstrating how the organisation delivers the order winners

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better than the competitors and so the supply side is subservient to them. Of course at all times, if the finances are not in control failure is likely. One of the great mistakes of the academic process is to forget these realities and teach inside functional silos. The business world meantime tries to operate across or ideally without silos, and that is also the intention of this book but not comprehensively since the focus is really on three interacting and interdependent areas. The real-world needs wider integration of consideration, and this is where managers need to think in a much more integrated way in which a much wider range of considerations come into play. However, no one individual can cope with all of the complexity and so there needs to be communication and coordination mechanisms to ensure that all relevant information is properly assessed and incorporated into the decision processes. In business, the business need is paramount and the role and internal structural or personal empire building should never overshadow the importance of the customer who usually is uninterested in how the business or indeed the supply chain is organised, that is until something goes wrong.

1.8 Core Competence This idea was first promoted by Prahalad and Hamel (1990) and is essentially what a business has to offer to a wide variety of markets by making a significant contribution to the benefits of the end product or service (as seen by the customer) and at the same time is difficult for competitors to imitate or replicate. This core competence is worth protecting and developing and is likely to also be at the core of the vision for the business. In order to fulfil this definition, it is more than likely that it can only be part of what is actually offered to the customer since most products and services are actually complicated mixes of various capabilities. For any such mix of capabilities, it is possible that the main focal business will not be the leader in that singular factor; however, the customer needs it to complete the whole mix. This, of itself, demonstrates the need for a supply chain since only by going to the supply market and contracting with another organisation to buy their goods or services can our focal organisation fill in the capability gaps for their customers. Like order winners, core

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competences and their fit to customer requirements can vary over time and circumstance, so another dynamically variable strategic question emerges, to develop new competences for existing customers or use existing competences but directed at new customer segments or locations. Thus, there was a belief that companies needed to focus on their core competences or to ‘Stick to the Knitting’ as Peters and Waterman (1982) outlined as part of the McKinsey 7-S strategic approach. Anything else, which was not regarded as core, would then be outsourced or bought from the supply market. Although much criticised by academics, the ideas still have traction with managers but there is also the tendency to see such things as more fixed than they need to be. In a changing world, the ability to recognise (better still to forecast and better still, to create) changes in a market and to take action to modify the business model to cope with the changes faster than your competitors will allow the organisation to stay ahead of the pursuing pack. Such ability might be the only real core competence in the modern world.

1.9 Price There is some confusion in business discussions about Price and Cost, with many seeing them as essentially the same thing. Nothing could be further from the truth. Price is what a customer is prepared to pay for something of interest to them and any good or service only needs one customer in order to make a sale. Price is determined in a marketplace where if a customer has a choice then the order winner(s) and the price will be considered together and a decision made. However, in a market there are competitors who exert their own pressures on the customer choice, and downward pressure by a competitor can affect the price that the customer is prepared to pay for largely the same performance on the order winners. Cost however has a different source and dynamic. We use money as a surrogate and common denominator shorthand for the totality of resources that we have used internally to produce the good or service. To a very large extent then, cost is an internal measure about the balance of choices we make in using the resources, what we paid for them from

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sourcing and how we have used them operationally. To a much greater extent than price, we are in control over our resource use or cost. Business is about realising a gap between the price that can be obtained in the marketplace and the resources used, that is, the cost of producing. If this gap, or margin, is positive then we are in profit and if negative, we have made a loss. Price is often the factor about which we negotiate in sales discussions and it is a very useful shorthand but we should never forget the driving factors and how much control, or not, we have over them. However, all other things being equal, the price is usually the deciding factor. Of course, the difficulty is in deciding if the other things truly are equal and to some extent marketing and sales try to persuade the customer that they are not equal and the advantage is in our favour. This difference in understanding and emphasis is one of the many lessons we have learned from Toyota. The traditional way of thinking in the western world is that Price is a result of adding a desired profit margin to our Cost or symbolically… Price = Cost plus Profit Margin desired. This is shown in Figure 1.1. If the traditional approach is taken, the negotiation usually follows a pattern where the customer will offer less than the cost value and the seller will reduce their price and this backwards and forwards process will continue until they meet somewhere in the middle of the pink zone where the seller’s profit margin is reduced but both sides are somewhat

– Agreed Profit Margin

Figure 1.1

Costing Approaches.

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happy but wondering if they could have done better, somehow. In this process, nothing has been done about the costs at all, they have not been looked at. The target cost approach starts from the other direction. It accepts that the price is set by the market and they will forecast this and then work backwards to subtract the profit margin (which both sides find acceptable and about which they may negotiate) and then what is left is the Target Cost. The equation here is Market Price – Agreed Profit Margin = Target Cost. The target cost is therefore the financial number which must be achieved in order for the seller’ profit margin to be achieved while going to the market at the planned price. In this model, what is attacked is the cost structure, but the best customers working in this way also recognise that they share the responsibility with their suppliers for the cost of creating the good or service and so share the responsibility of finding ways to reduce the use of resources and the cost build up between them. In many marketplaces, the effective market price will reduce each year (in the automotive sector around a 5% reduction per year is built in), and so there is continuous pressure to reduce the real cost of doing business and reduce the target costs to provide the margin which will allow for the supplier to remain an effective partner for the customer. In such a market, a traditional costing model simply reduces the margins for the supplier, and so over time they must fail, as there is not enough income to continue to invest and develop.

1.10 Design Earlier we discussed how to compete through innovation but in that process having the innovative idea is not enough, the idea must be translated into complete definitions or designed so that the idea can be made real, created, marketed, sold and from which sufficient financial return generated to meet the objectives of the organisation. Design is of huge importance and while it might be best understood in physical products the need is no less for service or more intangible client interactions.

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Again, as above, the driver for the innovation exerts an influence. If the idea is incremental, then there will already be existing designs which can be improved upon to provide the new requirements. The truly new innovation has however to be completely thought through and possible solutions tested, evaluated and either incorporated into a new design specification or rejected and different options considered. 1.10.1 Design for function Design for Function is the first consideration. This really translates the concept into something that will deliver the customer benefits first envisaged in the innovative idea. Then, we need to think about how the product or service will be produced so now we need to design for Process and Quality. In a world in which sustainability and the availability of scarce resources is increasingly important, we also need to design for Sustainability and Recycling. One newer consideration is to design for Procurement and Supply Chain since many aspects of the product or service will require the input of external organisations acting in a coordinated supply chain. With the consideration of Design for ‘X’ (replace X with any of the above highlighted words), it becomes clear that there will be a large number of circular considerations as a decision in one of the design domains affects and might cause a complete redesign in another domain. For example, a requirement for a more powerful display in a mobile phone might require the redesign of a power supply and likely some wiring or connection changes. An example from the service sector might be that the requirement for more space for business- or first-class passengers in an airliner might cause the redesign of the economy seats to squeeze more paying passengers into that part of the aircraft. It also becomes crucially important to realise this ripple effect and the importance of getting this right from the very start as indicated in Figure 1.2. In Figure 1.2, we see two main parts of the chart. Along the bottom, we have the life cycle of the product or service but excluding for the time being the recycling issues at the end of the first life of the product or service. The research and development (R&D) stage is where the design decisions are being made and evaluated. We then move into Design and

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Committed Cost

£ Actual Spending Profile

Operations & Support Design and Manufacture R&D

Time Figure 1.2

Costing Impacts of Decisions and Consequential Spending.

Manufacture if a Product or Delivery if a service, and then we finally have the extended lifetime (hopefully) of customer usage or operation and support. The two curves at the top of the figure represent the decision processes and the spending impact of those decisions. The blue curve at the top represents the designers sitting in front of their blank pieces of paper or computer screens starting the process of converting ideas into definitions. This is relatively a very cheap stage since lots of ideas can be tried out and discarded with little consequential cost. However, the decisions being made are committing someone else, later in the life cycle, to actually spend money as the product or service evolves towards being market ready. Thus the lower red curve shows a slow build-up of actual spending, which accelerates later. The blue curve indicates a concept from engineering which is Degrees of Freedom. The blank piece of paper or computer screen has effectively an infinite number of degrees of freedom to make a decision, but every time a decision is made it reduces the choices that can be made at the next step, that is, we have removed one degree of freedom with that first decision. The blue curve shows that we remove degrees of freedom very quickly at the early stages but at no actual cost since the

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decision relates to an actual spend which will come later. As we progressively make decisions, the number of degrees of freedom diminishes so that near the end of the process there are few options left to evaluate and choices to make. The actual spend curve follows an inverse path since little is really spent at the beginning, but everything must be spent by the end of the process, and so it builds up as we approach the end of the life cycle. Another way to think about the effects of degrees of freedom is to think of it like a decision tree. Making a decision determines which branch of the decision tree we are on and we need to continue along it to design and specify all of the choices. This indicates another potential problem in that if, as the design and spending process continues to the right in the figure, we then find out that there is a problem, we effectively have to retrace all of the design steps back along the tree branches towards the beginning before we can change the crucial decision which has only now been proven to be wrong. This is clearly very expensive in terms of wasted resources and time. Thus, we can see that the role of design is indeed crucial. If the correct thinking is not captured at this stage, then all that can happen later is that more waste will be realised. This is not to say it is easy. The designer sitting in front of their computer screen will have information systems a click away, but often this is only about historical solutions to technical issues at the functional and maybe process levels. It is not common to have linked databases to the information about the other factors, many of which need to be more real time, for example, real-time purchase price information or existing contract agreements for a sourcing decision. As we shall argue later, the role of Artificial Intelligence and Data Mining in this field could be a game changer. 1.10.2 Design for process and quality While the Design for ‘X’ argument suggests a degree of linearity, the real decisions are much more circular as we have to circle back round to reconsider some decisions as a result of a later and maybe more constrained choice. However, next in the linear sequence is design for Process.

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Knowing what we need to deliver to meet the design for function intention requires us to decide how it can be done and who is best placed to be part of the production or delivery process. For an incremental change then, we might be happy to extend existing choices into the new requirement, but for radical changes often we need radical new processes as well. In electronics, for example, the process innovations about how tightly electronic circuits could be packed onto a silicon chip were the constraints on faster, smaller and more reliable product designs. All processes have inherent variability and those with human actors even more so because human variability vastly exceeds those of well-engineered physical processes. Variability is the enemy of consistency and often quality as well, but at the very least we need to know the boundaries of the variability inside our chosen processes so that we can then match the functional requirement with that of the productive processes intended to deliver the functional capability. Designers need to know the variability of their possible process choices so that they can match that capability with the range of acceptable functional requirements. Designers then match an acceptable range of functional status with the most economically capable processes that are able to control their variability inside the specified ranges. The designers therefore specify the functional requirement with an acceptable range, in the form of a target value plus and minus an acceptable value of tolerance in the metric, around the target value. This matching approach is also key to the creation of quality of output as we shall see later in the Operations chapter. Where people are part of the production process, we have greater inherent variability and less inherent control from outside of the processes. This is why the attitudes, training and motivation of the key personnel interacting with clients in a service encounter are so important, since reliability and quality are dependent on how the individual performs at each service interaction. Of course, in an extended supply chain with multiple players involved in the different value-adding stages, the design for process and quality consideration needs to cross organisational boundaries and is consequentially more complex. We should never forget the old computing phrase ‘garbage in garbage out’, so visibility of the variations across all of these boundaries requires higher orders of design awareness and specification,

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and even if the other parties are ultimately responsible for their own detailed designs, they should be working to a coherent, integrative and well thought through scenario. Of course, one of the drivers for more automation in hardware or software is to reduce the variation and increase the consistency of the process, and this is why the drivers for more automation and artificial intelligence applications are so keenly felt. 1.10.3 Design for sustainability and recycling While some people are still climate change deniers, there can be little argument that our planet has a finite store of resources. These resources are not uniformly distributed nor equally easy and economical to harvest or extract, and so increasingly the argument is that having once incurred the cost of extraction say and further processing into some useful commodity the last thing we should do is simply throw the thing away at the end of its first designed life and dig more of the basic resource out of the ground. Sustainability is a huge subject crossing all sorts of product and service boundaries from consumer products, building structures and infrastructures to service and leisure systems with all the associated energy and distribution systems’ impacts associated with these. Some of the key principles include: using low-impact materials which take little energy to process or have already been recycled; materials which come from renewable resources which are efficient in their own energy use (for example, bamboo for clothing fibres and flooring); designing to allow long-term use and emotional attachment to avoid the worst aspects of a disposable consumer culture; changing the nature of provision from ownership of a good with infrequent use to one of using without owning, for example, car sharing instead of ownership or replacement of individual transit with equivalently convenient public transportation. For the product and service designer involved to some extent with tangible products, sustainability raises new issues in terms of initial design. Instead of just considering how best to satisfy the initial functional requirement (but now to include aspects of environmental impact), she must now think about the end of first life considerations. If we truly have

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moved from the old concept of planned obsolescence (aimed at selling replacement products to improve earnings from customers over time) to one of reuse, repurposing or recycling, then the process of creation (which often involves the assembly of component parts into the finished product) must now consider how to disassemble the product to enable the recycling processes to have a chance of success. This raises further complications. For example, many plastic products can be designed to click together in assembly, but getting them ‘unclicked’ for disassembly is altogether more difficult so the efficient click process might have to revert to some means of fastening together where the fastening is reversible. This sounds to be more expensive in the narrow focus of the product designer even if better for society, but who is paying the designer to produce a more expensive solution for her immediate product design? Even identifying materials being used is a challenge since again, using plastics or polymers as examples, it is almost impossible to know what kind of polymer is being used by inspection, and so a system of material identification needs to be designed, agreed and fully implemented by all producers to allow the disassembly process a chance of making the correct economic recycling decisions. Add the complexities of global supply chains with different local efforts at standardisation and control, and the problem is significant. A further emerging issue relates to 3D printing technology. This avoids assembly by printing physical parts, microscopic layer by layer, using polymer or cellular materials such that the finished part is a complete 3D artefact including moving parts but which avoids any means of joining and therefore no possibility of separation of different parts…there are no different parts! Such an artefact can only be recycled by returning the artefact to its base materials, if possible, to be reprinted as something else. However, we need to be very clear about the material composition used so that the recovery process can be achieved. 1.10.4 Design for procurement and supply chain If we work from the not unusual assumption that not all that one organisation offers its immediate customers is made or provided by their own internal resources then we must be thinking in terms of a supply chain of

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interlinked and somewhat interdependent operationally, but legally independent, other organisations. However, add the global supply market into the mix and we can now see major difficulties in providing our designers with enough data about what is available, economically attractive and functionally capable of satisfying at least some of the core customer requirement. The major current difficulty is that the data about the supply market will not be held, managed or understood by the design function. At best, it will be through a procurement or buying activity inside the business structure, but historically this data will contain more commercial information than technical details and so is of limited use to the technically driven designers. The potential for miscommunication between what the designer is looking for and what the Procurement function currently know about or are capable of searching for, is very large and normally suggests a sub-optimal process where the designer creates the specification and the buyer goes out to match that requirement with little understanding of any information coming back from the supply market as to alternatives that could have been fed back to the design process to improve the overall solution. Even for standard requirements, the commercial market effects might result in a request being impossible to satisfy because of delivery problems in the supply chain. In essence, what we need is a comprehensive and interconnected database of all relevant information to be in the design system so that the creative designer can really do a ‘what if’ analysis across all of the decision boundaries. That is still in today’s future, but we will return here in Chapter 5.

1.11 Quality and Value While we have discussed some aspects of quality in the previous chapter, it is worth spending some time to really understand its importance and to learn how the same set of data can be interpreted in different ways if one is creative enough. The two concepts are linked here because of their common features, which are that they are both relative measures and that they are only really evaluated and decided upon by a customer. That customer is the only important one, that is, the one who buys from you. All the rest are only potential customers and what they think in the aggregate means much less than those who actually spend money.

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They are relative measures in that they are evaluated by comparison with other possible choices for spending the money either with a similar product or service or in completely different ways. We discussed some aspects of this when we talked of the Order Winning Criteria earlier. The two concepts are very similar in that the quality evaluation compares physical and service-related features to decide which is best while the value calculation puts a monetary value on the satisfaction to be obtained by a decision to purchase this offer rather than an alternative. Because they are comparative concepts, there are no limits to the actual measures since as one supplier innovates they create new order winning criteria, which have to be at least matched if not surpassed by their competitors. Quality is then described as a journey or a process rather than a destination, and the idea of continuous improvement in the performance metrics is now inbuilt into customer expectations and should also be embedded in everything the provider does. It was not always thus. Before the western companies were reeducated by the best Japanese practice, quality was seen as a process of diminishing returns. In other words, to improve quality it was necessary to spend more and more resource such that at some stage the incremental quality-level improvement could not be justified by the expense of obtaining it. What was wrong was that the quality improvement process in this scenario was based on an inspection process in which good output was progressively identified by more and more expensive inspection processes which allowed good products to pass and filtered out failed products to be discarded to waste or rework (which increased costs as well). Best Japanese practice from Toyota and Honda and the like, demonstrated that by gaining full control of the productive processes so that errors were not made, then failures could be reduced or eliminated so that bad product was not produced to be passed on to customers. This provided a two-fold benefit. High quality became an order winner so revenues rose and market share increased. As such, the competitors had to follow the new order winner and compete on quality. The Japanese advantage however came that while the Western companies were spending more resource to achieve the higher quality, the Japanese were saving resources by not wasting them in errors and failures.

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The western approach depended on extensive controls to identify variations as they occurred provided by expensive, after the fact, inspections. The Japanese only needed a sample size of two. That was one at the beginning and one at the end to know that the process had not strayed from their control parameters. (We will examine later how the design process and knowledge of process capability metrics can avoid the possibility of ever producing rejects.) Another way in which redefining the order winner came from a different approach in automotive production, but this time it was around value. Typical western practice (still in evidence in some product lines) is to offer a basic-level model and then sell a vast range of additional features as add-ons to the purchase. In some ways, this allows the customer to ‘customise’ their purchase; however, it means the provider now has to stock, manage and modify their product to the customised requirement of the individual customer. This increases the complexity and therefore cost of provision. By ‘bundling’ more features into the car package at no extra cost, this changed the perception of value in the new enhanced package. However, again this has a two-fold benefit as the sales increase comes from the perception of the enhanced value while by reducing the complexity of all the option choices it actually reduces the cost of providing the more featured car. These two examples around quality and value demonstrate the need to think in more inclusive ways and also to pay close attention to what decisions the competition are making and to learn from best practice wherever it can be found.

1.12 Delivery One of the major differences between products and services is the opportunity to separate production from consumption of products. Pure services are consumed as they are produced. Delivery therefore has slightly different features in the two sectors. A service encounter puts consumer and producer in contact over the period of the service delivery. There may have been intermittent contact prior to this to set up the understanding of what service is to be provided

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perhaps, but the production and consumption processes are coincident in time and place although it is increasingly possible to deliver the service from another place, for example, surgeons in one country can deliver the service of the surgical procedure by controlling a robot surgeon operating on the patient. Delivery of the service is then more about scheduling when both parties can be in the same (or coordinated and interconnected remote) locations at the same time, ready for their interaction. Difficulties in mutual timetabling might therefore impact the perception by the customer, of service delivery performance. The product world is different in that product can be produced in advance of actual demand if required and stored somewhere until the demand is realised. Even if not produced in advance of a customer order, the separation of production and consumption means that there is some degree of time delay between these two events. This separation creates important considerations in the three dimensions of place, reliability and speed. The customers can have discretion as to where they want their product delivered (this might also be an order winner or qualifier). As a result, means, timing and payment for distribution efforts come into play. In a similar fashion, the product might need to be made ready for use at the customer location, and who can do this, the customer or a specialist installer? In this way, the product and the associated services in support of it become part of a product/service package allowing more differentiation in the supply market. Whatever the complexity of these requirements, we then need to recognise a wider consideration in that most business transactions are with other businesses and these types of customers have customers of their own to whom they must respond and whose demands they need to satisfy. Every customer order in this scenario is therefore part of an interdependent chain of events, and every promise made to deliver in one link of the chain must be achieved to allow subsequent links to also deliver their promises. In this sense, the reliability of the delivery promise (assuming the product meets the quality requirements) is the most important performance factor to avoid a compounding wave of failed deliveries along the chain. In some circumstances, speed of delivery also becomes important, but even here the promises have to be met or chaos and cost results.

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1.13 Integration Across Boundaries In modern marketplaces, very few organisations have the current capability or investment ability to remain at the forefront of all of the technological features of leading-edge goods or services. Because of this, the option to be vertically integrated and to own all of the factors of production necessary to supply increasingly demanding customers is not feasible. Organisations therefore have to decide what they will concentrate on and keep it in-house, and all other elements of the complete package then have to be purchased from a supply market that is increasingly global in scope. This is the basic premise of the supply chain concept we have already been using. However, the separation between activities performed in-house and those outsourced from the marketplace is not one that is either very visible or of much importance to customers. Customers care about the organisation they deal with in their marketplace and usually do not much care where the component parts of the goods/service package they purchase are actually created. This is not the case of course when provenance is important. If you wish to buy authentic Swiss cheese, you do not want to settle for a local version in another country. In another example, Champagne can only come from that region in France, and so similarly produced wines need to have different names and identifications. The need for rules of origin arises from the control of copying and protection of brands whose recognition has been built up over many years and whose owners do not want the unfair competition which comes from an alternative provider ‘passing off’ their own version as the same as the original brand. This is also important for taxation and import and export charges so that there are no unfair advantages being taken in the market and government can take what they regard as their due share of the business benefit. This is different to counterfeiting where the counterfeiter is pretending that they are providing the actual product when in fact they are producing a copy, which may or may not function almost as well as the original one. Customers however can change their attitudes very quickly. While they might not care about where and how some product is produced, once it is brought to their attention that, for example, child labour is being used in the factories which are themselves dangerous and not up to the

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equivalent standards in the customer’s home market, then suddenly they can become concerned and put pressure on the brand company they deal with (not the distant and abusive factory owner). Thus, the brand owner is the interaction point with the customer and is ultimately responsible for everything that goes on in their supply chain. Reputational risk is an inherent threat in any deal to buy from another party who you cannot control in the same way you think you can control your own business. The logic of the supply chain is therefore that customers do not need to know what is internal to the first (or brand) company they deal with as long as all of the promises and standards for which they are paying are met when the product or service is delivered. The brand company has chosen not to own all of the factors of production but needs to coordinate these disparate organisations as if they were all part of the same enterprise with the same objective of satisfying the brand company’s customers. Of course, these are disparate organisations with their own shareholders and stakeholders and are often operating in very different circumstances in different parts of the world and in multiple markets with many other customers who all expect to be dealt with as very important. The challenge for all brand companies then is to appear to integrate these different organisations (without ownership control) into one effective supply chain so that their customer is happy that all is well in their interaction with the brand company. Integration across all of the organisational boundaries is a virtual process through information, systems interactions and management processes. Virtual integration is difficult to manage in real time but makes it easier to change counterparties if things go wrong and can avoid being ‘locked into’ owned assets and sunk investments. In theory, the brand owner can walk away, find another company to work with and keep active in their market. The reality is more complicated however, as we shall see later, and walking away comes with its own costs and difficulties.

1.14 Data and Analytics We have already discussed the need for more integration in the variety of business data that is needed to inform a more integrated design decision,

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but this situation is the norm in business at the present time. The fundamental nature of organisational structures with semi-independent management driving their own agendas to look good corporately, who often are using incompatible or legacy systems which do not share any real communications with other systems, creates a level of complexity which is not helpful to corporate control and direction setting. As costs of computing decline relatively, while capability increases massively, we are approaching a situation (especially with the help of software agents, of which more later) where the constraint on analysis and control will not be driven by our technical systems but our management imaginations. The information requirements of a business embedded in both a supply and possibly customer marketplace are very extensive when seen in the light of optimising very fast-changing, real-time information. Having a connection to all parts of a global supply and delivery system so that planned progress can be monitored or real time switches of decisions to cope with unforeseen events will increasing be seen as necessary for all businesses who want to compete in this market. At the moment, we still have a split around functional lines where the marketers perform their web analytics of how customers are interacting with them online while the operations and supply people use their enterprise resource planning (ERP) suites of programs to manage their current horizon purchasing, operations and distribution processes. We have already described how the designers talk to other designers about technical issues without full knowledge of more commercial and supply issues. Meanwhile, corporate strategy people are trying to make sense of all of the disparate information flows to see if high-level plans are still appropriate and achievable. Something has to change, and it will mean much more complex and integrated systems and software support. The need is there, the capability is emerging and the early adopters or creators will gain such an important lead in their markets that it will be hard to catch up to them.

1.15 Corporate Social Responsibility (CSR) We have already discussed how customers mostly do not care about the brand company’s supply chain until something goes wrong. It is as if they

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have tightly drawn picture in their heads in which only they and the brand company are included. However, once there is the realisation that others need to be included in the consideration set in their mind map, then their behaviour can change quickly, and often this drives pressure to make legislative change as well. For example, the Modern Slavery Act 2015 in the UK can be considered an example of this more complete mindset being realised in law. This is one example in what is called CSR. This is a widening of the concept of sustainability which was defined by the Brundtland Report (1987) as follows: ‘Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs’. This has the virtue of a nice form of words which recognises the heritage issues that what we do now really impacts the future more than the present and it does highlight our responsibility as inhabitants of the same Earth to think of others in everything we do in development terms. Some have criticised the definition for placing too much emphasis on the development aspects rather than the environmental since without environmental sustainability nothing else is possible. Thwink.org therefore argue for a more balanced approach defined as follows: (see http://www.thwink.org/sustain/glossary/Sustainability.htm) Environmental sustainability is the ability to maintain rates of renewable resource harvest, pollution creation, and non-renewable resource depletion that can be continued indefinitely. Economic sustainability is the ability to support a defined level of economic production indefinitely. Social sustainability is the ability of a social system, such as a country, to function at a defined level of social well-being indefinitely.

Of course, even these definitions raise questions about fairness across the globe where developing countries want some of the development achieved by the developed world in their non-sustainable past without imposing new standards of behaviour which will make it more difficult to achieve economic development for those countries trying to ‘catch up’ with the western polluters of old.

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Adding Corporate to the front of the definition simply recognises that economic actors have a newly defined responsibility to their stakeholders and the wider world and its peoples to behave in ways consistent with this realisation of responsibility both currently and far into the future. Accepting this kind of thinking as a necessity forces corporate entities to also recognise that what goes on inside their extended supply and value chains through to initial customers (and subsequent customers in the recycling process at end of first life), really creates a more holistic and interdependent world view where all things are sub-systems within other larger systems and that the thinking scales both up and down. Systems thinking and the concept of Ecosystems, which are interconnected, interdependent and cooperative, is inherent in everything we consider in this book and should be a mandatory feature of all managers’ learning processes. In this chapter, we have discussed the business variables which have to be considered in practice and how the effects of dynamic changes impact some of the needed decisions. The list is extensive and the managerial pressures can be great, and while experience is very useful, it is also worth considering a more thoughtful and theory-based approach to some of these issues.

1.16 Background Theory Management has grown up from experiments by managers and then scientists of the social and applied types only later, and as a result there is still somewhat of a debate between the art and the science aspects of the subject. Traditionally, science-based people feel that the art part of management is less important than their definition of evidence and data and so tend to reduce the importance of the more intangible aspects of the subject. In refuting that, I would argue that actually what is needed is not to pretend that any one field of human endeavour is more important than others or a particular research method is always superior. The increasing complexity of the world suggests to this author that what we need is a much more integrated and holistic view where we can look for utility and results from wherever there is some practice to observe, some test to evaluate and data to be gathered and analysed by some agreed methods

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based on achieved results. In addition, a questing and experimental approach to look for the next improvement is always needed. So, the theoretical background to these fields of study draws on a variety of sources and cognate areas of study. What follows are some selections of useful approaches. Some have come from academics asking interesting questions and some from observation of practice and theory developed out of the subsequent analysis.

1.17 Transaction Cost Analysis (TCA) Many approaches in the areas of work covered in this book draw on elements of TCA which has been developed over many years and has had an impact on many areas of study (see Rindfleisch and Heide (1997) for a wide review). In particular, the supply chain and contract law and management areas look at many of these issues. The work grew from the initial discussions of Coase (1937) who was searching for the reasons why ‘firms’ existed. That is, what were the reasons that firms or business entities grew to have a separate existence from people trading with each other in marketplaces? His argument had much to do with the governance structure of the firm as a means of control and management of uncertainties which were in the marketplace (for example prices, availability, trustworthiness of counterparties affected by frequency of transactions) which, if large enough, created unacceptable Transaction Costs such that the activity was better brought under internal or hierarchical control through ownership of the resources. This result was Vertical Integration, or what is called nowadays in-sourcing. Williamson (1975) started a long series of developments to take these ideas forward, and both received Nobel Prizes in Economics for their work. Although there still remain questions and some lack of hard evidence for some of the features, a number are now in the lexicon of management in a number of cognate fields and are discussed here. Williamson contributed in particular two assumptions about human behaviour which are bounded rationality and opportunism along with three dimensions of the transactions which are asset specificity, uncertainty and transaction frequency. Like many traditionally trained

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economists, the behavioural assumptions focus more on individual propensities to maximise individual benefit rather than consider a wider set of interacting economic actors. Thus, the economic person is assumed to make decisions on the basis of maximising their personal economic return, and this is assumed to be the rational and normal thing to do. However, people have limited cognitive ability, and so in complex situations they find it difficult to allow too many factors into their consideration set and as a result the rationality they desire to exhibit is always limited or bounded in some way in practice. Assumptions about maximising are therefore flawed to some extent. The other behavioural assumption follows on from the maximising personal benefit driver. This is that, when given an opportunity, individuals will take any personal benefit they can even to the distinct detriment of the other party’s situation and outcome. They are ‘self seeking with guile’ in Williamson’s words. That is, they will employ deceit and trickery to gain an advantage over the other party. If one party believes the other party is inclined to this behaviour, then it makes sense for the first party to take precautions in advance or in monitoring behaviours to try and prevent the opportunistic activity taking place. However, this increases the costs in the transaction, and so this might be another reason to internalise the activity to avoid or reduce such propensities. TCA also is based on single transactions, whereas most B2B activity is repeated over a number of transactions. The thinking then can be different since the opportunity issue is spread over the future transactions rather than the singular one. It can be in a party’s interests therefore to factor in the future value into the personal benefit calculation, and so this shadow of the future comes to reduce the incentive for short-term opportunism. This is inherently what drives a good supply chain B2B relationship and much of relational contracting. Of the transaction dimensions, one of great importance is Asset Specificity. The argument here is that once an asset (like a machine, a person, a process, a contract, a knowledge base or a relationship) is specific to one other party, then it loses its utility for another party. So if I, as a customer, approach a supplier and ask them to buy a new machine to be used only for me on a particular supply contract, then that asset becomes specific to that particular contract. The supplier has no other customer looking

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to use that machine so cannot recover their costs other than through the first customer. However, the customer has no other supplier with the machine capability to supply the contracted services or goods. Both parties are in effect ‘locked-in’ to their mutual dependency relationship. Lock-in can be good and can potentially be bad. Good, because both parties have acceptable current relationships and avoid the need to find a new business party to meet their needs. It can be bad as well if the initial choice of party or asset is proved to be a wrong choice in some way or if some better solution emerges and the costs of terminating the current relationship are too high. Uncertainty is inherent in business and the sources can be very diverse and, in particular, difficult to forecast. The main costs to consider are search costs to anticipate problems and possible solutions and communications problems associated with finding and changing the assets and the partners. In contract terms, this raises issues of how much fixed detail you need to incorporate into contracts and to what extent change processes can be made flexible enough to continue the business relationship without incurring the search and replace costs. Frequency is one of the dimensions discussed but about which evidence is more limited. Williamson argued that if a transaction in the market took place very frequently, this might be an argument to avoid the market transaction costs altogether and bring the activity in-house, (in-sourcing again). Overall then, TCA has contributed much and certain of its precepts have come to be the base for many aspects of organisational design and management practice.

1.18 Resource-based Theory Resource-based Theory is much debated by management scholars, and like many theories it has its critics and detractors. To the manager and less-expert reader, there is much that is useful in the concepts presented. Many authors have contributed to its development. The original works by Penrose (1959) and Barney (1991) were concerned to look for ways in which business entities could find a way to be competitive in their marketplaces over an extended period of time.

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The resources concept has been developed to include resources which can be found, developed or purchased as well as capabilities (to include individual and corporate abilities), to perform certain activities. These resources must provide value to the using businesses in satisfying their customers, but remember what we have already said about value…it is in the eye of the customer. Resources must also be rare in the sense that not all competitors would be able to access them. This is less likely with purchased resources but could be very important for developed organisational and interorganisational capabilities. These resources must also be difficult to imitate (or any advantage would be short lived) and not be able to be substituted by another form of resource providing the same value creating potential. It is of course difficult to amass these resources and retain then at an effective level over time and through dynamic changes in the business environment. Here again, effort is needed on a more or less continuous basis to scan the competitive horizon and make sure that current practice and development paths are consistent with strategies for success and customer satisfaction. In the context of this book, it is worth noting that critical resources can be owned and controlled by one of the other parties in the supply chain, making access to them even more important and that the capabilities included in that environment are likely to include how businesses build the capability to work together in mutually supportive ways. Another aspect of the resource-based view relates to the essential question of how one finds new customers and products and/or services to offer them. One approach, the marketing-based one perhaps, is to find an unfulfilled need from a group and then build a capability to satisfy them. This is attractive in some ways, but the risks of investing in the new capability building process, in the belief that the customer need has been properly identified, might be seen as too risky for some. The alternative is to recognise the resource-based capability already generated for current business customers and build on that existing capability and go and actively look for new customers who want what we currently do but who do not know about us yet. There can be risks here as well of course, but we will not have complicated our capability portfolio by trying to go in completely new directions.

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This approach worked well with a supply chain partnership project in the UK continental shelf oil business. Having developed a multi-company solution to a local problem, the supply chain grouping then actively searched together for customers in other oil production regions of the world to offer them the same solution that had worked in their local market.

1.19 Network From the origins of capitalism through Adam Smith (1776) and others, the emphasis has been on individual actions to maximise their immediate benefit, sometimes, and maybe too often, at the expense of other people’s interests. This individualistic focus seems to be very much the stereotype of the American and Anglo-Saxon approach to business and commerce. I was reminded of this by a French MBA student who pointed out that France and much of Europe had never taken this extreme view, practising instead a more considerate form of capitalism in which the interests of a wider community needed to be considered. It is this more socially informed form which this book advocates. A network view is also one recognised by the International Marketing and Purchasing (IMP) Group which was based on collaborative research in the 1970s in a variety of countries but much influenced by the Nordic countries where social conscience and societal impact is a recognised feature of business life. The work focused on buyer–supplier relationships and saw these as embedded in a social and commercially connected network of businesses. Core references are Hakansson et al. (2009) and Ford et al. (2011). This is the early demonstration of a more all-inclusive view of businesses which argues that relatively few organisations sit at the top of a pyramid of suppliers more or less dependent on them. In fact, most businesses are suppliers to other businesses in the B2B model of the market, and the relative importance of their different customers and suppliers changes over time and activity. So the focus on buyer–supplier relationships (the so-called dyad) is important, but we need to recognise that these companies have connections of their own out to other customers and other suppliers. We cannot therefore conceive of the dyad and the relationships

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between these two players as the only important factors. Rather, the dyad is embedded in the extended network downstream towards multiple customers and back upstream towards other suppliers. The logic that we have already examined of complimentary resources and interests is demonstrated in these extended networks which enable players to access resources elsewhere in the network, through their dyadic partner, to companies they might have been unaware of without the dyad working properly. However, any choices made mean that other choices are not possible and so along with the enabling access feature of the network connections we also have constraints since we cannot easily find alternative partners outside of the existing networks (another example of lock-in but on a larger scale). A further feature of a network approach is that no one company is seen as more important than any other, continuously over time. Any one company therefore has a limited opportunity to operate in command and control mode demanding service and best pricing since another player might come to be more important as the dynamics change. Force cannot work in this environment, and so behaviour and becoming a good partner is more important as companies try to influence, rather than control, others. This is seen in large measure when trying to promote innovation where the innovators are more free to supply others in the network, and so if this innovation is of value to one of their customers it is incumbent on the customer to become the preferred customer of that supplier (at least in the immediate future). A customer trying to demand innovation is more likely to stifle the innovation, whereas if they allow the supplier some freedom to do their own thing free from control pressures, they are likely both to produce something of value and to offer it to the customer who gave them that space to innovate.

1.20 World Trade and Globalisation Trade across national boundaries has been taking place for hundreds of years and often over considerable distances. The Silk route for example had traders travel between European countries and China, exchanging a range of goods along the way.

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Trade is, as we have discussed before, a process of exchange where some party has a good (more often than a service) which they want to exchange for some other commodity (including money) held by the counterparty and where a basis for the exchange can be agreed. In practice such trade helps both ends of the supply chain achieve something of value to them. Money is exchanged, lessons are learned and transferred (sometimes to the detriment of the original holder of the knowledge), people are employed directly and indirectly in support of the trade, and associated transport of goods and travellers and hospitality has to be provided and paid for along the route. Often, the need to provide forms of security required building supporting social institutions along the route, and this created the need for political mechanisms and forms of law enforcement as well. Thus, the British Merchant Marine transportation systems predate the formation of the British Royal Navy, which was developed to protect the merchant ships from piracy on the high seas. Of course, access to areas with valuable goods to trade became attractive to governments, and so we had the developments of various empires and wars to prevent competitors into these lucrative supply or customer marketplaces. Britain, for example, fought two wars in the 19th Century with the Chinese to control the opium trade! As more and more countries developed their capabilities and economic ambitions, the urge to trade and take more control of the processes they could access allowed the expansion of world trading activity. Globalisation is the extension of these trade activities to a wider and ever more inclusive set of trading parties for which global agreements about the ways to undertake a fair set of business practices became increasing important. Along with this came agreements to create special status agreements between regions to simplify and control the exchange processes and simplify the gathering of any due taxes. To some extent, globalisation follows traditional economic logic about comparative advantage which says economic activity is best located where it is most efficient to be performed and access to the fruits of that activity will be enabled by the globalisation of the international and, sooner or later, world trade. Most countries develop over time from a predominantly agrarian base to an industrial one to a service economy, and for many years this was

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seen as completely normal and to be expected. The effect of this was that the more developed countries were further along this path and so tended to de-industrialise in the belief that they would now be able to trade for the goods they formerly produced themselves. Other, developing, counties would take up the manufacturing burden and then trade these goods with the service-based economies who still wanted the goods and had the money to pay for them. This has undoubtedly worked for the developing countries of China and Asia generally so that people now talk of China as the workshop of the world (a title once held by the UK at the time of the first industrial revolution based on coal and steel). However, the economists who argued for free trade deals in the belief that all would benefit through overall world trade growth failed in the main to recognise the effects on society and on workers displaced as manufacturing was outsourced to other countries. Globalisation as currently carried out has not delivered uniform benefits across Western outsourcing communities. The so-called elites have been amassing more economic benefits and wealth from the world trade processes (this includes the financial services industries which have enriched themselves by gambling with investors and latterly, taxpayers’ moneys at little personal risk). When the financial crash happened around 2007/2008, the same disadvantaged investors had to provide more money though government support which allowed these same gamblers to continue (with some more controls), which affected the ability of businesses to invest in their own recovery. While it is true that many traditional manufacturing jobs have been lost through automation and new technology rather than direct outsourcing, nevertheless large numbers, often men, (who were either too lowly skilled or too precisely trained for obsolete processes) simply lost their jobs, their livelihoods, their place in their families and communities, and many such people have seen their standards of living decline in real terms over very many years. Neither the companies who once employed and valued their contribution nor the governments they voted into power to look after their interests took any concerted efforts to reskill them to make them ready for new work opportunities. It was seen as a natural consequence of the global trade forces, and they were expected to simply accept the new reality. The UK vote to exit the EU and Trump’s election to

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President in the US seems to have been, to some extent, the result of these communities expressing a view that globalisation was not working for them and almost anything else was better. Some form of world trade is inevitable since the resources, capabilities, support infrastructure and demand are not uniformly distributed. Perhaps we are beginning to realise that we need a more integrative and networked view of the processes of global trade but one that considers more than just the immediate trading parties’ benefits and recognises that there can be a more limited economic benefit of that trade for the communities involved along the global supply chains. We need to find a way to share the benefits more uniformly while recognising the returns needed to support entrepreneurial behaviour. We will return to this discussion later. For the time being, let us accept that globalisation is a process which has brought new wealth to huge numbers of people in the newly developed world and has created a recognition that trade is important for human development and indeed to the creation of new markets as these people spend their new wealth. While there are problems of a variety of kinds with globalisation, no other system has allowed human and economic development on this scale to spread across the globe.

1.21 Commodity Demand As we have alluded to above, commodities are not universally distributed across the globe and this fact has driven international trade for centuries. From the raw materials extracted from the ground through to the kinds of crops that can be grown in certain geographical conditions, we have limits of capacity at the beginning of many supply chains. People and investment capabilities are different in that, given the will and time and commitment, many features of the manufacture of goods are relatively mobile. In electronics assembly operations, for example, the huge sub-contract producers who make most of the actual products can move their factory provision across national borders and be up and running again in a matter of weeks. The finite earth argument recognises that the planet itself is an inherent limit to availability in that base resources have to find locations where

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exploitation is technically and economically feasible and where appropriate infrastructure and socio-political mechanisms can be counted on to support the commercial activity. Many of these situations demonstrate extreme conflicts of interest between developers and indigenous peoples and their well-being and cultural survival. In the past, these economic benefits to the developers were sought regardless of local impact, and while this is certainly a continuing feature in many parts of the world, here again the growing awareness of the social cost of development means that some of the developments are moved forwards in less exploitative, short-term ways. There is also great scope for political action around the availability of resources especially if the geographical locations are limited. All electronics (including many defence applications) depend on the use of rare earth materials, but at the moment the main sources are in China and since the Chinese costs were much lower, most companies sourced from China. However, during the ongoing dispute about rights over the South China Sea and in a disputed incident in Japanese waters, China declared a stop to the export of the materials in 2010 causing an urgent move to reopen second sources around the globe. The Chinese declared that the limiting of exports was so that they could build strategic reserves of the materials for their own industries, but with then 95% of the global market it looked to many observers as a political rather than business-driven decision.

1.22 Communication Links Of great importance in opening up the global trade opportunities have been the developments of high-capacity (or bandwidth) fibre optic communications data links which now circle the world. This has allowed for almost instantaneous communications links to enable the exchange of trade information and logistical instructions to flow to almost all parts of the world. However, the instantaneous flow can also spread bad news very effectively as well. Part of the problem of the financial crash of 2007/2008 was how rapidly the financial markets moved from belief in a positive future in which financial instruments were traded in milliseconds around the world to a situation when one institution ran into problems with debts they could not cover and this changed the perceptions of investments at

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risk and caused the banks to stop lending money until they could figure out how to value the so-called investments that they held in predominantly American markets, now seen as unsecured. The communication technologies have made good and bad things happen and have made remote working and outsourcing of service operations a possibility in ways that open up new possibilities but also possibly accelerates the concerns for the ‘left behind’ workers. The fibre optic cables that circle the world are now seen as potential targets of aggressive foreign countries since breaking these links would cause massive disruptions to economic activity and defence coordination.

1.23 Government Support to Inward Investment Businesses have a variety of reasons to locate some of their activity in countries away from their start-up locations. Sometimes it is to chase the low-cost labour, where this is an important factor in a process; sometimes to locate close to the origin of some commodity; and very often, and often the most important reason, is to be seen as a local provider for a newly emerging marketplace. Whatever the reason, such businesses are making an inward investment (foreign direct (inward) investment FDI) into that country which brings jobs and opportunities for the local economy and will attract other support agencies to follow them. The local governments can see the opportunities for their communities and for the tax raising opportunities from the investor and their local employees. There is of course a tendency for such investors to use the various possibilities of legal tax avoidance to limit the local benefit, but nevertheless the balance is that they are still attractive to the local governments who then compete with each other to make it attractive for the FDI to choose their location. Incentives around tax breaks, support to investment decisions and infrastructure development and training costs can all be provided and the need for innovation in the support packages drives this competition onwards. The advantages can be relatively short lived. For example choosing a location on the basis of lower labour costs is time limited as the local people become more skilled and expect better conditions as follow on

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competitors try and attract away the staff from the first mover companies. Such companies often move around the globe to make relatively small margins of improvements in their operating costs. This is especially the case as any time-limited benefits near their end of life. Part of the attraction of the FDIs to local governments is the opportunity for local employees to learn new skills which they can then transfer to other employers in the local community building up capability and hopefully new companies to compete in world markets. For the FDIs, this is a threat as they are in effect training their future competitors and so they might try and limit the opportunity to learn the complete range of skills that would be needed to compete. There is always therefore a tension between the reasons to be in the country and the risks inherent in transfers of knowledge that will happen.

1.24 Locational Advantages and Disadvantages Access to commodities and markets under favourable conditions are clearly advantages supporting the decision to locate in a foreign country, but there are clear disadvantages as well. By definition, the local people will not be experienced in the work being brought into the country, so there will be training costs. To support the learning process, a number of experienced personnel at all levels will need to move to the location sometimes over extended timescales to support the developing operational processes and operator development. Quality is always a major concern as the new workers have no prior experience or understanding of modern quality approaches and procedures. This means that quality monitoring, control and troubleshooting can require more investment than might have been anticipated. All of the expatriates that are brought to the country will expect their conditions not to deteriorate and additional costs for accommodation, children’s schooling and flights home as well as financial incentives for the disruption to their lives, will all increase the costs of doing business in the new location. Some of these costs are difficult to fully anticipate, and so they might not have been fully included in the cost–benefit calculations. Other disadvantages follow from working in a different time zone, culture and political and, possibly, religious environment. Even attitudes

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to women workers, holidays and the need to provide transportation for workers in remote areas can introduce new factors and costs to manage. For goods-oriented FDI’s the infrastructure of highways, trains, ports and airports become important along with any customs duties and controls to be negotiated while the bureaucratic processes and attitudes about corrupt practices can be challenging. Perceived political stability and the local attitude to repatriation of earnings or attitudes to taxation processes can also be of great importance and increasing in focus as populations round the world realise how little corporate tax big corporations actually pay to the countries who host them and in whose markets they generate their sales figures.

1.25 International Business We saw above that there are many reasons for businesses to become FDIs, but what happens before then? Most companies see a market and build a business around that market. Often, it will start out as being very locally based but over time the business grows and the local opportunities are largely satisfied. To continue to grow, they need to expand further and this eventually means that they will need to trade across national boundaries. Initially for goods producing companies, this will be by exporting their product into new market areas. As this succeeds, they are likely to need to have local marketing and sales expertise based in the country and sometime later they might need to locate production in the new country to support the growth of the new market. All of this is incremental, trial and error and knowledge building especially in networks of customers, suppliers and local regulators and government departments. The timescale is often measured in tens of years and is very evolutionary. Bartlett and Ghoshal (1989) described this process as a four-option framework with the two pressures the business faces of control or integration across multiple locations with the need (or not) to respond to local markets and to offer a tailored solution in response to local demands. The other axis of consideration is whether to focus on the product or the geography of the markets. This gives a four-stage choice. The first we have discussed which is going international through exporting. This needs low

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levels of integration and low or no responsiveness to the market — they get what they are offered without changes. If we follow the product axis but now with a need to greater integration, then we have a global strategy demonstrated by the world car which is the same wherever it is built or sold. If the need is perceived to respond and change the product according to local demands, then we can move to a multi-domestic strategy. Here, we effectively clone all of the systems of the home systems and simply transplant them into the new geography and offer locally specialised products which we might export to other territories as specials. Organisations trying to be all things to all people in an integrated and mutually supportive way are the transnationals, and it is this kind of organisation who truly behaves as if the market is fully global but learns from and adapts to all inputs from the different marketplaces. These organisations are often huge corporations and can have financial turnovers greater than some nation state’s Gross Domestic Products and perhaps more influence or power than the local governments where they operate.

1.26 Evolution or Born Global? While demonstrated over some years, the above incremental model does not fit all cases. In particular, there are certain types of businesses who see from their very beginnings that their opportunity and perhaps obligation to succeed requires them to think of the whole world as the marketplace. Rather than evolving as described, they are described as Born Global. Perhaps the best example, although not yet realised, would be if some company developed a cure for cancer or AIDS. If they were to take an incremental view of their opportunity it would take so long, that apart from denying product to many who desperately need it, their competitors would see the opportunity and try to develop a patent busting way to introduce their own products and compete. The innovator would fare far better to aim for a global market reach and probably multiple supply chains to target all marketplaces at the same time. The best real examples come from the market for software apps where the value is to get a huge user base even without or before there is any real income generation and then sell to someone else who has the financial capability to turn users into paying customers.

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1.27 Market Imperatives We have discussed some aspects of what makes customers buy, and here we develop some more themes to demonstrate how choices have to be made and changed over time in order to allow for customers to be satisfied at a cost to provide the service (goods or purer service) which allows the supplier to make a sufficient margin to reward their stakeholders and continue the business into the future.

1.28 Value Proposition Customers sometimes do not know or cannot articulate what they want or will value, and so this highlights the fundamental difficulty facing a supplier, which is, ‘What do I produce or what service should I offer to these customers’. The key word is offer since there is no transaction until the customer recognises the offer, evaluates it (often against competitors’ offers) and decides to buy. Thus, the supplier offers a Value Proposition to the customers which indicates what value the good and/or service will provide to the customer, and it is this value proposition which is then evaluated and a decision made to buy or not to buy. Only if the buy decision is made can we begin to think of customer satisfaction and an acceptable trade. Even if products are not on offer, the customer (or client) of a servicebased value proposition performs a similar evaluation of what value they perceive to receive through the trading transaction. In public sector or charity situations, even if money is not exchanged, there is nevertheless an evaluation of the value proposition so that for example a patient can evaluate the service provided by an emergency room in a hospital. However, as we will see shortly in the quality discussions, how to perform these evaluations, and against what benchmarks or standards, is often far from straightforward and, especially for services, much dependent on the client/patient experience and expectations, and these can vary widely across such populations. Of course, difficult as it might be, the key to success for a supplier in these situations is to fully understand what their customers or clients actually want even if they are not quite sure themselves. Once customer

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expectations can in some sense be fixed, then we can build a supply system which has a chance of providing the right value proposition. Without such an understanding, we are risking more than is sensible.

1.29 Value in Use or Transfer We also have to consider different kinds of value as demanded by the customer groups since we have largely been talking of only one of the options through trading or exchange. The basic exchange process is actually a transfer of ownership situation. The supplier has something of value to the customer who is prepared to exchange some of their assets (money probably but not exclusively) in order to take possession of the valued item or service. This is Value in Transfer, and the customer now has control and responsibility for the asset to use as and when they like. So a customer might buy a lawnmower to cut their garden grass. If we think in value terms, however, the product, the lawnmower, is really a means to an end. The end is better described as ‘grass cut’ and the customer could have this value delivered to them without ever owning or using a lawnmower. Instead, they contract with a garden service company for them to use their own assets to produce the same value to the customer. There are of course arguments for the benefits of both ways of working. Ownership means the investment in the lawnmower is not available to be spent in other ways but the work can be done at any time the customer chooses and quality of the work is in their control while the asset may have some resale or trade-in value if changes are wanted. Value in use avoids the capital buying cost, but each mowing of the grass comes at a new cost and is now subject to scheduling impacts as the garden service company tries to manage multiple client demands. Quality performance is now part of the contract negotiation and monitoring cost. Updating of equipment is the supplier’s problem, but may be reflected in new service charging structures. However, the trend to value in use agreements is increasing. In the airline sector, the pioneer was Rolls-Royce Aero Engines Division whose trademarked ‘Power by the Hour’ approach guaranteed that whenever the airline wanted to fly there would be Rolls-Royce engines maintained and ready to operate. The airlines avoided the upfront purchase investment in

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buying engines and all of the associated spare parts for their maintenance at a fixed cost to operate the contract over an extended time. Incidentally, since the costs of maintenance now fall on the service provider rather than the airline in this scenario, there is also pressure on the design team to reduce the costs of maintenance now since it is incurred by Rolls-Royce rather than providing an opportunity to that company to sell the spares to the airlines. The cost–benefits on both sides need careful calculation. City Car variants follow the same logic allowing access to rental cars in a convenient way as and when needed and it is argued also reducing congestion and parking issues at the same time. The ultimate end point of this argument is the provision of a local transportation solution offering the perceived convenience of car ownership to manage flexibility of routes and destinations. How this is paid for and who manages it is clearly a difficult additional decision.

1.30 Goods and/or Services In their purest forms, the difference between Goods and Services is the absence of or requirement for customer interaction at the point of product creation or service delivery Vargo et al. (2008). Goods can in theory be completely designed and manufactured without any direct customer involvement. For flat pack furniture, the assembly process and often the delivery to the home is at the customers’ costs and not the producers, but the customer just chooses, they do not have any input into aspects of design. The output can be stored until a customer appears to request the goods from store and the transaction and delivery can take place. Storing or holding goods in inventory is a way of separating production and consumption and is in effect storing capacity to satisfy future customer demand. It also allows for different demand patterns on the supply and demand side since the inventory acts as a buffer between the two processes, allowing the goods side to operate with some efficiency as the inventory absorbs some of the fluctuations in patterns of demand and production. Pure services require a direct interaction between the customer or client and the provider of the service. There has to be some element of predesign in that the supplier decides what range of service they are prepared

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to offer the customers, but the provider does not know what will be required until the customer appears and a discussion starts as to what they want. This is a process referred to as Co-creation in which the interactive, request–suggestion–modification process is one where customer and supplier/provider are both involved in the design and the delivery process and are in interactive contact all through the service encounter. Services in their pure form have to be delivered at a location where both provider and client are present, even if this is a virtual location. For example, the provision of health advice over radio links in remote regions still has the coincident time for service delivery even if the parties are geographically separated. Since services cannot be stored, the benefits of inventory cannot be achieved and there is a more difficult exercise of trying to anticipate or control customer demand and match it to delivery capability. Retail is the best sector to see how this works in practice. The retailer has to guess or forecast possible demand patterns and has to decide when to open the store and crucially when to have people in it to serve the customers when they appear. In the UK, this has led to the operation of Zero Hours Contracts where the retail sales person has no guaranteed hours per week but is called into the store as and when the store manager believes there to be a need. For the people on this kind of contract, there is no pattern to build their lives around (since they are effectively always on call) and no guarantee of enough paid work hours to make it easy to raise mortgage finance for example. It also has the effect of disguising the true unemployment statistics as while they are technically employed they are not always earning and also they are not free to take other employment. This limbo like situation solves the managers’ problems in scheduling staff, but can hardly be seen as an attractive option to all employees. It does seem to work for people who do not want full-time work (students perhaps) or need the flexibility to react to family circumstance in child or elder care for example. Of course in many cases, products need to be supported by services and services are often dependent on goods in some form to support service delivery. The reality is that we need to think of a product/service package which is the value proposition offered to the customer group. In many cases, this also includes complementary products since products

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often need operational materials (printers need paper and ink and actually it is the ink cost which is the real driver of the cost of ownership), mobile phones are often sold with headphones or covers. In these markets, it might be worth the product provider also facilitating the supply chain of the support products as well as finance or insurance products so that the complete bundle of items and services can be presented as one, easy to buy, offer.

1.31 Make or Buy (Products) and Do or Trade (Services) Our early examination of TCA highlighted the question of the time which was ‘why do firms (or businesses) exist’? Once we understand that issue, the follow-on question is ‘Where should the boundaries of the firm be located’? This idea of the boundaries of the firm involves the basic decision about what part of the total set of customer satisfaction activities do we need to own, that is manage internal to the firm’s boundaries, and what is it better to leave outside and transact with an external marketplace when we need to? In the language we have already used, what needs to be in-house and which outsourced? In the product world, this is described as the Make or Buy decision or the service equivalent is Do or Trade. The transactional cost analysis discussion largely covered the features of this decision choice, but it is of a high strategic importance for a business to define its boundaries as what activity is kept in-house has to be developed, supported and fully valued in the ambitions for particular markets and customers. Make and Do decisions create internal assets, and these will appear in the financial reports and controls of the business. Investments made in these resources are not easily reversed if they turn out to be less than optimal and may be difficult to liquidate in the final stages of their lives. These assets will be required to create innovation to increase and improve the value propositions and to reduce operational costs, so the choice is really important. Buy or Trade decisions are to leave these assets outside the boundary of the firm in the supplier marketplaces. This avoids the fixed and sunk costs of ownership and is inherently more flexible, allowing a perceived easier process of contract

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termination and subsequent re-sourcing for a different set of assets and capabilities through market transactions. As we point out at various points in this book, such re-sourcing or supplier switching is not without difficulty and cost of its own, so neither of these options is either clear cut or indeed static in attractiveness and of support to the value proposition. Another of the terminologies used in the choices involved here is the term off-shoring where the other party is across some national boundary even if it is land based rather than coastal. This can also apply when the same company’s employees are used but in a different location because of some local market attractiveness (often labour cost based). These people are technically an off-shored resource but are not outsourced.

1.32 Location The separation of production and consumption in the market for products allows for different locations and different timings for each activity and therefore the ability to engage in global trade where they may be many weeks between the two ends of a supply chain. However, for pure service delivery we need an interaction which is coordinated in time (if not always in location) of the service delivery person and the client who consumes as the service is delivered. The ability of a service to be delivered at a distance also allows for a separation of the service delivery function and the consumption activity. The differences between the physical product and the more ethereal service have major consequential impacts on system construction and operation. The physical product requires lots of hard infrastructure in manufacturing operations, transportation and import/export considerations, storage as well as recycling and waste management of packaging and end of life products. A service process might require premises to perform the interaction, a hotel for example or a lawyers’ office, but may only require a good internet connection and reliable software at each end of the connection between the interacting parties and any support teams that might be needed. With the rise of advanced robotics, even a surgery service can be done at great distances with the right surgeon operating one robot and an

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equivalent robot actually doing the operation on the patient with presumably a team of support staff at the patients side at present but for how long will they be needed?

1.33 State-of-the-Art Innovation In all product and service markets someone had to be first. Sometimes the market leader has had the original idea and invested a lot of time and effort to realise the dream the entrepreneur had, and by being first gets so far ahead of the chasing competitors that they retain their leadership in the market for many years. Sometimes, in contrast, the person who provides proof of concept in the product or service and identifies that there actually is a market for the innovation is not the one who is successful in winning the battle in the marketplace. It seems that in innovations being first and demonstrating that something is possible seems to release creativity in others who find a way around any patent protection set up by the first innovator to develop their own offer to the market and then organise better and faster to win the market dominance as the market follower. Often, the follower will not have had to spend so much money and time on the dead ends in the search for the solution because of the guidance they received from the leader’s success and so has more money to develop the market and win the customers’ support. Another strategic decision therefore is how much investment do we want to make in becoming a leader in our various marketplaces? Is it better to keep watch on what the competitors are doing and be ready to move into ‘copycat’ mode rapidly when proof of concept is demonstrated by another business?

1.34 Product Range Some products have to be produced in a range of sizes either to cope with for example different physical dimensions in human populations (clothes or shoes for example) or where essentially the same product needs to be in different sizes because the forces under which they operate are different. (Fastenings, nuts and bolts and screws for example.)

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However, in many other markets, product range is another managerial choice about what kind of offer they will take to the market. The choice is three fold. The first is, do we offer a standardised product, even if it is part of a range, to all customers wherever they are or do we allow the customer to become involved in deciding what it is that they will buy from us. Service similarly can be standardised, for example, a vehicle maintenance service based on distance travelled or time since last service. Services by their nature are often much more interactive and need customer input to define what the service is to be. A hairdresser, for example, needs information about what style and what length to cut the hair and perhaps in what colour with what additional treatments and so on. The hairdresser still had to make a strategic decision about how much customer choice they were prepared and competent to offer. So the first choice is in theory standardised or variable according to customer choice and input that is customisable. Standardisation is often seen as allowing for specialisation in equipment and people training and repetition allows for a learning effect to take place where repetition allows for a reduction in unit costs of production as the skills are developed and little improvements are made in the processes. The example of this, which may be apocryphal as well as the possible reason, is Henry Ford’s mass produced Model ‘T’ car which customers could have ‘in any color as long as it is black’ and the reason… because black paint dried quicker and so the production line could run faster. In the discussion earlier about world trade, we discussed the strategic choices of Bartlett and Ghoshal (1989) where the product focus was about standardisation while the geographical orientation was about allowing customisation in the local markets. The second choice is, if we are going to allow customisation how far are we prepared to go, will we limit it in some way to try and retain some of the economic benefits of bigger volumes? This creates a series of options which define at what point the customer becomes involved in the production process, which is sometimes referred to as the Order Penetration Point. This is really the third big choice which is, at what stage do we allow the customers to express their views and exert their influence to effect a change in our processes? Every time a process is interrupted by some

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change being made, then that process is not running at its optimum speed and someone has to pay the cost of that disruption! With minimal customer involvement, except to buy the standard product, we can talk of Building to stock and the customer simply transmits or collects a standard order. Assemble to order is where the product is designed as a number of interchangeable parts and the customer specifies the collection of choices they want and the factory then assembles that particular combination. The Just in Time system developed by Toyota is essentially an assemble to order process. Make to Order avoids any risk to the supplier since they do not begin to spend money in purchasing or production until the customer has made their choices and probably paid their money even if part of a stage payment process in for example house building. Design to order reduces the producer risk even more since the customer commitment is all at the beginning and the co-design process ensures the customer is satisfied. Superyachts often fall into this category, and the builders often have to make major changes in the middle of construction when the customer (who by definition does not care about the cost) asks for a modification with consequential redesigns needed to accommodate the change. One can imagine the effort needed if the customer decides to extend the size of the swimming pool or wants to land a larger helicopter on board! In a different sector, a bespoke wedding dress would show the same production management features. In some sectors, it is really difficult for customers’ demand to be known at the point when production decisions are being made. For example, the oil industry has to make processing decisions about what product stream to move the raw materials through in order to make different kinds of oil-related products as liquids or polymers. This means that they have to forecast all of the possible customers’ demands across very many product categories, many months in advance of the actual demand being realised. The processes are so long that they cannot respond to demand changes mid-stream. A similar problem occurred in knitted garments where the technology would only allow for colouring of the yarn to take place more than a year before actual demand. For fashion goods, it is extremely difficult to forecast what colours will be seen as desirable that far ahead. Benetton got

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round this problem for some of their goods by inventing a way to colour dye a complete knitted garment. This allowed them to respond to actual customer demand by rushing orders through to the garment dying operation and then rushing them into their stores to catch the current customer preferences. In all of these situations, the other major dimension is time, especially how long a customer is prepared to wait for their goods. Zero customer wait time has, in the physical product world, to be provided for by holding stock in anticipation of the demand actually appearing. If customers are prepared to wait and pay for any changes, then the production system can be operated more efficiently. In the virtual world, wait time can be reduced to the download speed of the internet connection device the customer is using. Changing output for many physical production systems creates problems and relative inefficiencies since so many of the assets employed, including people, are indivisible and so output changes move in discrete steps (one more worker or machine in operation), but to match output levels with changing demand patterns really needs the resources to vary in a continuous manner not the discrete, step change way which is the current normal pattern.

1.35 Order Mix Once we, as a supplier, have determined what range of interactions on product design specifications we wish to offer our customer groupings, we also need to recognise that we also have to deal with ranges of volumes from the unique superyacht at one extreme to the mass production of single product types at the other. In between, we might have a mix of product variety and volumes from any one customer. This massively increases the complexity of the management challenge inside the operational unit and its, perhaps many, supply chains feeding materials into the system. We have another concept to work through as well, this time looking into the future. This is described as the Order Visibility Point. This reflects how much notice the supplier gets of an actual order from a customer. If there is no notice and the customer just appears and places the order, then the supplier has no response time and must rely on forecast demand

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planning and stockholding to satisfy the demand. As suppliers and customers get closer together, there can be more sharing of future plans by the customer, thereby allowing the supplier to make appropriate plans. With closer relations still, customer and supplier order planning and production planning systems can be linked and coordinated and the supplier can make even better informed decisions. Ideally, the demand signals the customer is receiving from their own customers can be relayed back in the supply chain so that all have good visibility into the future and might actually be in a position to suggest some changes to improve the flow of goods to final consumers. Sometimes the challenge is not just having the materials available but being able to distribute them, in different part orders, to a variety of required locations. Large customers might, for example, have a number of intermediate processing sites to be supplied in different locations based on the geographical spread of their own customers. The final variable is that different customers at different times might need to have separate agreements on the service level they need from their supplier. Service-level Agreements are sub-contracts that specify all of the details of the order in all of its complexity but adding in response times for supply of products or service. For example, a similar product, a computer say, might be in a very critical situation to support a customer’s business offer and so if anything happened they might need a service response measured in minutes for online support or hours for a physical response to fix a problem. The same computer product might be used for another customer or another part of the same customer’s operation where a failure is not so time critical and a response measured in days might be adequate. Clearly in these different scenarios, the cost to serve the customer, the skill sets of the supplier’s people and the business consequences of a failure to respond are quite different and therefore drive the setting (and pricing) of different service-level agreements. Overall then, there is the potential for a very complex and changing mix of requirements which a supplier and of course their supply chains need to recognise, decide on their offer and then manage successfully. It is no surprise therefore that suppliers try and divide up their customers into groups with similar supply expectations and try and design a supply chain system(s) to match the needs of these groups. This is usually a more

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complex picture than might be expected if we think of marketing dividing up the customer base on principles of spend, attractiveness or similar criteria. Marketing and operations need to coordinate very well in this area to avoid promises being made to customers which the extended supply chain just cannot support.

1.36 Competitive Threat Most of the above describes a situation where relatively everything is known but it is still very difficult to manage in any way optimally. However, in all open markets where there are alternative providers then the logic of the marketplace is that whichever supplier can persuade the customers that their offer is in some way better than their competitors then they will win the business. For this reason, all businesses need to try and stay up to date with everything that their competitors are doing and even better if they can also find out what their competitors are planning for the future. Without resorting to illegal means of industrial espionage, there is still much that can be learned from public or slightly devious means. Most companies provide a lot of this kind of information in their marketing presentations, or in presentations to stock market investors. If products are involved, then these can be bought in the marketplace and then the engineers dissect the product to find out how it works, what it is made of and ideally what it would cost to create. Even with services, it is possible to act as a true customer to experience the performance of the service and to do the same kind of reengineering but this time on the people processes being used and possibly the training that they have been receiving. Less ethical is the process of pretending to offer an employment opportunity in the hope that someone from the competitor organisation applies. The interview then becomes less about the skills of the person and more about what they will be persuaded to reveal in the interview about the company processes while believing they are impressing the recruiter with their own abilities. Sometimes, consumer organisations or industry bodies perform benchmarking exercises from which all participants can learn something of value in terms of their ranking in their market and perhaps what they

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can do differently, having studied their competitor’s results. Benchmarking is a planned exercise where interested parties agree to share information to see if another sector has process lessons which can be transferred into another sector. These exercises often will not provide direct comparisons to immediate competitors so while they are good in themselves they do not usually fulfil the objective of gathering competitive information. In all of these exercises, it is often much more difficult to measure the more intangible aspects of a competitor’s abilities and competitive threat so the secret shopper type of approach may be the only way of getting meaningful information. However, in services we are so dependent on the capability and motivation of the service delivery person that it can be difficult to get meaningful data unless the sampled numbers of service episodes is statistically large enough. A big risk in all marketplaces is the complete removal of demand for a good or service because a new offer appears in the market which customers fall in love with and immediately switch to. This can come about in two main ways. The first is where a competitor finds a substitute which offers essentially the same kind of functional capability but with much higher perceived value-added or possibly less serious environmental or social damage concerns. An example of the first might be a newer entrant to the automobile market who offers much the same functionality as the major brand but without the brand pricing. An example of the second might be a realisation that the environmental impact of using animal furs for clothes or furniture is socially unacceptable and so customers switch to alternative materials (even though the real cost of alternatives might actually have a different and more serious environmental impact if they are derivatives of the oil industry and thus contributing to the depletion of fossil fuels and increases in carbon-related emissions and thus to climate changes). All of this is compounded by the impact of new technology, but here whole industries might be replaced, not just some businesses. We already discussed the example of the Swiss mechanical watch industry which was nearly replaced with digital watches. Currently, we are in the midst of moves away from carbon-based fuels for automotive power systems to be replaced by electrical battery systems. The old brand companies who

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built the industry based on fossil fuel power systems are now in a race with new entrants who have been battery based from their inception, for example, Tesla. All of this requires businesses to be alert and scan their horizons for possible threats but as we already discussed in the innovation chapter above it is really very difficult to know where to look. This brings focus on what Donald Rumsfeld described as the ‘unknown, unknowns’ These are things of which we are completely unaware that they exist far less their potential impact, but these are the situations which can change whole life circumstances. By definition, these cannot be forecast since we cannot know about them. These ideas are also related to what Taleb (2007) described as Black Swan events (The logic for the Black Swan label is that until Black Swans were discovered in Australia in 1697 the rest of the world had only seen white ones so did not believe they could come in a different colour). Taleb describes them as events which were completely unforeseeable, have huge impact and somehow can be partly explained by people in retrospect as if there were available logical projections…but no one predicted them! Taleb also argues against an overdependence on the Normal distribution in which the Black Swans inhabit the extremes of the tails of the distribution and are largely ignored by many using statistics to inform their decisions or insights. Given such uncertainty, in what is a very critical area of future proofing a business model, perhaps the only sensible response is not to try and forecast the actual event but to build an inherently robust supply chain system and strong intercompany relationships such that when the unexpected happens, all in the chain can pull together to find a solution to cope with the new situation. This chapter has set the business task in a wide context in which the complexity of the choices to be made and the systems to be designed and managed is very real and dynamically changing through local and international changes and in the rapid deployment of new competitors and new technology in increasingly global marketplaces. Some of the managerial approaches we will discuss are very old, some less so but overall we will look at the choices and decisions as ways of providing an extensive set of tools with which managers can craft sets of relationships, contracts and

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business processes to meet their business objectives in a robust, flexible and responsive way to satisfy their customers and their evolving needs and wants. We will now begin the process of establishing how to build robust supply chains through looking at aspects of Operations, Supply and Contract Management and the impact of Technology in each of these areas.

Chapter 2 Operations 2.1 Design As we discussed earlier, design is at the beginning of everything. It sets the standard against which the output is measured and success depends on the two aspects of how well the customers’ actual requirements were understood and translated into specifications for operations resources to be trained and for them to be used to effect delivery.

2.2 Packaging One design issue not discussed so far relates to discrete goods and how they are packaged. This is also very important when we discuss logistics later as the volume of the product is much increased when we also allow for the packaging of that product and logistics costs depend on volume and weight among other factors. Packaging design has to consider a number of related issues. The first is perhaps the need to protect the product from damage in transit from the end of the production process until delivered to and unpacked by the customer. Potential damages can be from dropping, impact with or by other items, degradation through environmental effects of rain, sea water, heat or cold as well as vibration in the transportation method. Thus design has to accommodate international standards for materials, construction techniques, sealing and the associated processes to produce these results. Often, the packaging has to carry crucial information for safety reasons or 69

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for import and export documentation as well as advice about how to lift and stack the goods in bulk. Other aspects of packaging relate more to market image if for example the good is to be displayed in stores to allow customers to view and select them. The transparent bubble packs we often see provide this level of visibility while providing protection against damage, and the robustness of the packaging makes it much more difficult for anyone to tamper with the product. Tamper-proof seals also work against potential theft of contained liquids or indeed the introduction of poisons into the liquid product by criminals for extortion purposes or as terrorist attacks. While all of these packing solutions serve a purpose in getting the product to the customer, we then have another issue of what to do with the packaging once the product is removed from it and put into use by the customer. The recycling of packaging material is a large issue for the planet as too much plastic waste ends up in rivers and oceans and into the food chain through fish and mammals ingesting the smaller waste while larger waste can cause death through animals becoming entangled in the plastic mess. All of this reinforces the earlier points about getting as much representation of key issues involved in the interconnected design issues from all stages of the product’s life cycle. For the operations area, packaging is another issue of mix and variety that has to be managed. Let us consider the example of Scotch Whisky. The product is a liquid, which for each brand type does not vary. However, it can be packaged into different bottle sizes, with different brand labels, different tax labels depending on country of delivery and might need different types of bottle cap depending on country requirements. They then might have to be packed in different box sizes, and these boxes might also have different marketing features on them. So what starts as a standard product, the liquid, ends up having a multitude of versions all of which have to be procured or produced according to a sales and bottling schedule in time for transportation to a distant customer. This is the essential nature of the operations management problem. Simple, standard products can be produced efficiently in volume but the

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more variety that is introduced, the more time it can take to change from one requirement to another, losing time, output and efficiency, thus affecting delivery promises. In addition, if any of these extra materials have to be sourced outside the company, then we have to add the supply chain complexities into the calculation as well.

2.3 Quality and Cost Influence All of the potential steps in the overall process are hopefully adding value as seen by the customer. Each one is a potential threat if the quality performance is not as planned and if the costs of the operation increase above plan. All design decisions involve trade-offs between the different possible solutions, and such a multi-dimensional calculation is very challenging. A trade-off recognises that often getting a good result against one factor means that another factor has to use a less satisfactory choice. The design and operations areas are clear examples of this in action. Trade-offs are sometimes more in our minds than forced by unchangeable circumstances. Sometimes technology allows for new solutions or a challenging brain reformulates the questions in new ways and applies new thinking to change these choices and design has had this effect in a number of areas.

2.4 Modularisation It is too easy for designers to keep introducing new versions, often because their systems are not intelligent enough to inform them of something that would perform the task just as well but is not identified in a way that allows the designer to find and evaluate it. The problem is what the mathematicians call the combinatorial explosion. If we consider a typical automobile, there will be choices of engines, transmissions, body shape, paint colours, interior trim and wheels even before we add electronic choices. To simplify, suppose we say we have 4 engines, 2 transmissions, 3 body shapes, 8 colours, 4 trim levels and 4 wheel sets. The combination of all possible choices is found by 4 × 2 × 3 × 8 × 4 × 4 = 3072. The real-world choices are much more of course, so the problem is obvious.

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The Mercedes Maybach, even at its launch in 2002, offered more than 2 million combinations, and this number has increased since then. This variety costs money to create and can perhaps only be justified to create a truly unique car at the highest end of the price market. For more ‘normal’ customers, it is both difficult to choose when there is too much choice and if they cannot justify the expense of paying for all of the variety. For the producers, this complexity creates its own costs in the management of operations. One approach, which is successful in many industries, is to rethink the product design so that relatively few standard modules can be combined together in a variety of ways so as to produce what appear to be different end products. This is the Lego brick concept. When this process of modularisation is well thought through, we can construct an operational system which allows the manufacturing process to be relatively efficient in producing the standardised modules which are then combined together in a responsive process driven by actual customer demand so as to offer apparent variety to the marketplace. It is only apparent variety however since the particular version of a Toyota Prius for example is still recognisable as a Prius although the customer gets everything they asked for their, somewhat, unique version.

2.5 Platforms Another version of this kind of thinking is to look at how similar but distinct product families can share common components or even processes so as to produce the same balancing act of efficient operations and customer variety. Automotive again shows lots of examples where corporate groupings offer a number of distinct brands to their customers. For example, in 2017 Volkswagen’s PQ35 platforms is used in 6 VWs and is shared in models by SEAT (3), Audi (2) and one Skoda. Other major groups follow the same path. In addition to the economic benefits from both cost and sales aspects, another feature is that innovation efforts can be focused on the platform so that resultant benefits are shared over more end products. Many products go on the market with inherent safety issues which were not realised at the design stage and when discovered by the producers or after complaints from consumers or trading standards personnel in the marketplace, then they have to be recalled. An example would be the line

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of children’s toys which had inbuilt small magnets. What was not foreseen at the design stage was that if these magnets became detached from the toy, children could swallow them with dire consequences. Once more than one magnet had been ingested they have a tendency to join together even through soft tissues causing internal organ damage, ruptures and consequential medical problems. Many batteries are inherently poisonous as well, so the threat to a child’s health is major. A product recall is easier if there is a connection between the supplier and the user through for example completing a registration or warranty card. Such customers can be contacted and informed of the dangers and the proposed remedies (replace or reimburse the buying costs perhaps). However, tracing the children who end up using the toys is much more difficult since so many will have been purchased by others so there has to be a general recall that has to be advertised and managed. Products like automobiles are much easier since the connection between supplier and customer is likely to be direct and often minor recall issues can be dealt with at annual services for example and the customer might not even know it has happened. Safety critical issues need much more urgent action however. Other causes of recalls relate more to the operations processes employed in the manufacturing process, especially where food is concerned. The infamous Chinese milk scandal in 2008, where adulterated milk products killed some children and affected tens of thousands of others had a global impact and some guilty participants were executed for their part in what was both a corruption and well as a safety scandal. Although the problem originated in China, its impact was felt around the world through the global coverage of food supply chains. A report by Stericycle Expert Solutions in 2017 listed some issues from the automotive sector according to their country of origin. (http:// www.stericycleexpertsolutions.co.uk/wpcontent/uploads/2017/08/ Index-). In that year, the number of automotive sector recalls were: from Germany 42, France 24, China 11, Italy 9 and the USA 7. The biggest problems were related to injuries and airbags. In Consumer Goods, toys were the biggest category with 170, with Clothing and Textiles at 51 and Electrical Appliances and Equipment at

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33 recalls. The country with the largest number of reported incidents was China where injuries and burns were caused by choking hazards and electric shocks as well as chemical related problems, in a variety of goods. In Foods and Beverages, the focus switches a bit with Poultry Meat causing 223 recalls, Fish causing 132 and Nuts 112. The countries involved were Brazil with 184 recalls, Spain 70, India 68, Turkey 60 and China 51. Globalisation makes all of this more likely and a bigger problem because of the need to track and trace and investigate across country and market jurisdiction areas where the possibilities for corrupt activities compounds the problem. We will discuss corruption in Chapter 3, Supply, later.

2.6 Cost and Reputation Risk Major incidents like a product recall of course takes much effort from very many people and organisations to find the extent and source of the problems and then to introduce robust solutions which will cost money to rectify the problems and will also cost money as actions are taken, in some way, to try to retain the customers who have been affected. However, the real cost is less direct and that is to the reputation of the brand which is identified with the problem. Reputation Risk is very hard to quantify as some of the effects of a loss of reputation will be immediate (some customers do not buy anymore), or it can be more indirect in that future possible customers do not even consider you. In terms we used earlier, the brand company is no longer ‘qualified’ to be in the market and consumers will never buy from them. We can see therefore why the design effort on product and process is so important from the safety and reputational risk point of view. Getting it wrong at the design stage will always produce a bigger problem which will cost more to solve when the worst happens.

2.7 Tracking Customers As indicated above, knowing who is buying from you is a great advantage if you need to contact them for recall reasons, but ideally customers

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will return to buy from you again and so it makes sense to build some form of linkage so that you can keep in contact and let them know when new offers are going to be brought to the market. The Japanese car makers learned this early on. Partly, it was driven by their sales approach which did not build big sales premises or car lots for customers to visit to select and purchase their car. Rather, they employed sales people to visit customers in their home and really get to know them, what their needs were and when they might change, for example as the family size increased. In effect, they had learned from western academics that it costs a lot more to find a customer than to retain an existing one and they were simply putting this into practice and developing it further. In more recent years, the growth of customer reward cards performs the same kind of function. The sales company gets lots of information about spending patterns and product preferences and can tailor marketing and product development to meet this opportunity if there are sufficient other customers of the same inclinations to form a customer segment. Such customers can also be used in marketing to test out new product or service ideas before the supplier commits to great expense in product development. The best customers can also be used, by the designers, to help evaluate the choices the designers are making. In traditional western companies, this is often frowned upon as the marketers see the customer as their property and do not want designers to get too close to them in case they (being often less commercially aware) give away business secrets. In contrast, the lead designers in Japanese car companies often follow a new product into the market to see what the customers really think of what is right or less satisfactory on this design iteration. As the next version is being developed later, the designer has their own insights into customer requirements without it being interpreted by less technically capable marketers who also have to try and translate their understanding of the requirement to the designers. As we discuss later, the voice of the customer is listened to by the design decision-makers themselves, with fewer intermediaries from other functions and without the need for complicated information translation systems. They still have to make the trade-off decisions however.

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2.8 Quality According to the American Society for Quality, there is no one universally accepted definition for quality. Their website says that it is ‘A subjective term for which each person or sector has its own definition. In technical usage, quality can have two meanings: 1. the characteristics of a product or service that bear on its ability to satisfy stated or implied needs; 2. a product or service free of deficiencies. According to Joseph Juran (2010), quality means “fitness for use;” according to Philip Crosby (1979), it means “conformance to requirements.”’ Both Juran and Crosby are significant thinkers in the field, so if they cannot agree we can see what the problems can be. Others have described it as: innate excellence, making or providing error-free products or services or in terms we have referred to in relation to value as seen by the customer. While the history of quality in the west has been about inspecting the output of processes to determine if they are good enough to pass to customers either as an attribute (i.e. good/bad) or a point on a continuous scale (e.g. length of a piece of cloth), the Japanese took a different approach when they were taught about quality after the second world war by W. Edwards Deming. He was a statistician who had worked on quality as part of the war effort and helped make the American industrial complex so overwhelming. The Japanese managers listened, thought, applied and improved on the American thinking so that in a relatively short period of time they were teaching everyone else how to do quality in a much more inclusive and effective way. 2.8.1 Quality and design Fundamental to all of this is a recognition that when we talk of quality we are actually working with two quite separate and independent processes both of which recognise that just about everything in life can be described as being part of a distribution of continuous variables rather than a single point. One of the most frequently used is the Normal Distribution, of which we will talk more. The first process is design, which again demonstrates its importance. Designers know that when they design things they must accept that the processes which will be used to realise their design are inherently variable

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and this must be recognised in the design specifications which then have to be defined to accept some variability. Thus, even if the designers specified a single point as the desired result they know that no manufacturing process or even less likely a human service process could guarantee achieving that single value. Worse still, no measurement process could guarantee identifying it correctly. And so the designers work on the basis of a desired or nominal value with an allowance or tolerance of different values on either side of the nominal. In doing this, they are saying that any result which falls within this zone of tolerance, will work as an acceptable result. That is to say, inside the tolerance is good quality and outside of this zone is bad quality or reject performance. The designers are effectively determining what quality is and is not, based on their choice of nominal and tolerance values. The other process, as hinted at above, is the manufacturing process which produces outputs according to a normal distribution. This is useful since the normal distribution is completed defined by two measures, the mean value and the standard deviation around the mean. This also allows us to create control charts to monitor our production processes as the distributions change and approach a situation where we are not recognising random variations inside the starting distribution but actually looking at a distribution which has changed location or shape or indeed done both. We can then stop the production process and reset it to get back into control. Figure 2.1 demonstrates the relation between tolerance and process variation as a normal distribution.

(a)

(b)

Figure 2.1 The Relationship between Design Tolerance and Rejects.

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The figures show the design tolerance set as a Lower Specification Limit and an Upper Specification Limit as seen in Figure 2.1. In Figure 2.1(a), the design tolerance creates the situation that rejects will always be produced as shown by area under the curve in the red boxes. In Figure 2.1(b), this is worse since the tolerance band is tighter and proportionally more of the distribution results fall into the failure or reject zones. We can now understand why the designers are effectively determining what is good and bad quality. We can see other aspects of this in Figure 2.2. In Figure 2.2(a), we have the tolerance band (between the Upper and Lower Specification Limits) being set at the practical limits of the distribution at plus and minus 3 sigma. In this scenario, there will be effectively no rejects, although technically the curve is asymptotic to the x-axis which means it approaches but never touches the line. In theory, therefore, we can get a valid result from the distribution which is outside the 3 sigma distance but the probability is very small. This interplay between tolerance and process variation is not a great result for the producers since any small change in the distribution location or shape will cause the numbers of rejects to increase. In Figure 2.2(b), we have a much better situation. Here, the distribution is relatively tightly focused compared to the tolerance band. In this situation, the shape would have to spread by a lot and the distribution location to move by at least 3 sigma before there would be any likelihood

(a)

Figure 2.2

(b)

Process Variations and Sigma.

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of rejects or defects being produced. The numbers indicate that the expectation of rejects is only 3.4 for every million times the process is used, pretty close to perfection for most purposes! We can use the measurement of Process Capability to measure the relationship of the two processes and this also makes it feasible to talk of zero defects in high Process Capability or more accurately high Cpk situations. Please visit http://elsmar.com/Cp_vs_Cpk.html for a great animation of how these processes interact. Of course, one issue that emerges from a very high Cpk is whether the tolerance band is wider than the product actually needs since in every variation there is a cost and often one variation makes some other feature more difficult to achieve. This is the argument put forward by Genichi Taguchi (1993) who argued that any variation away from the nominal carried a cost to society in some form and so it is better to aim for the nominal value in many cases. He built this idea into a Quality Loss Function to highlight how designers could target the nominal more closely and also to make sure that the processes were controlled inside the 3 sigma limits. He also argued that a form of statistical design of experiments can be used to find out the key variables that must be controlled to provide quality output and to reduce the effect of other ‘noise’ variables so that they would not impact the results. This is called Robust Design. Costs of quality is a key concept in all of this. These are usually described as: (1) Appraisal (internal measurement of whether the processes have produced any defects; (2) Prevention (perhaps through design changes); (3) Internal Failure (where defects are caught after they are produced or forced to fail by stress testing before sale); and finally (4) External Failure which is the worst-case scenario when the failure occurs in the customers’ hands and is then subject to complaints, warranty claims or re-calls with all the attendant costs and bad publicity leading to damage to corporate reputation. By putting more effort into prevention, the failure costs are reduced and the total cost will be reduced over time. This is the logic of the continuous improvement thinking where every repetition of a process offers the opportunity to make it better than the last time. Sometimes this is through a learning effect when humans are

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involved, but can be an actively promoted process where the people involved in the process are empowered and trained through the use of extensive creativity and quality improvement ‘tools’ (see the ASQ website for details) to challenge ways of thinking and doing the process and to measure, experiment and trial new ways of working so that by a sequence of small changes a large gap in capability is opened up compared with competitors who are content to stay with the initially specified instructions. 2.8.2 The voice of the customer We have said that the level of quality is determined by the consumer, who purchases and uses the good or service when delivered to them, and that sometimes customers do not know what they want in detail, or even in concept and can only recognise it when it is presented to them as a finished item. However, in all situations a designer must make detailed specification decisions which s(he) hopes will meet this future expectation of the customer. One structured way of doing this gathering of information and examining the choices and trade-offs that the designers must make is the House of Quality (Hauser and Clausing, 1988) or Quality Function Deployment as shown in Figure 2.3. The essential logic is to gather the customer requirements, weighted ideally in importance terms in as detailed and measurable way as possible. This can be by a variety of means including focus groups, market surveys or competitor analysis. (Or indeed as discussed earlier, by allowing the designers to follow their products into the market and ask users directly what they value and how they set their priorities.) These customer requirements are then related to the design and technical options to satisfy these requirements. However, some of the features might work in opposition to each other. The classic example is the weight of an automobile door which needs to be heavy enough to close with a reassuring ‘clunk’ while at the same time is not so heavy that it cannot be pushed open when the door is facing up a hill. The ‘roof’ of the house is where these design correlations (both positive and negative) can be examined and decisions made to resolve them for best technical and value outcomes. The same diagram

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Figure 2.3

House of Quality Generic Model.

can be used to examine the relative competitive advantage between the focal design and competitor offerings to see what added features or performance levels could be usefully added which were of value to the customers. The voice of the customer use of these diagrams is in a cascade from base customer needs through other diagrams looking in turn at the designed features in specific detail which is then translated into the detailed planning for the processes to be used to make the parts and then into the details of the production planning process. In this way, the voice of the customer is carried deep into the organisation in a controlled, considered and comprehensive way, and all key decisions are made before any resources are committed to actually spend or act. (Remember the discussion earlier?) These techniques are the essence of the quality statement ‘Right First Time’ and reinforce the process of thinking about quality from the very beginning and avoiding the late panics and surprises of more typical product planning processes where often the product is launched onto the

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market even though it is known that work is still needed to sort out the final design choices and solve the expected problems. 2.8.3 Standards Business needs to have as much clarity as possible in its dealings with customers and each other, and to this end a variety of international bodies have collaborated over many years to create specifications for both items and business systems. These standards simplify the buying process in that if a supplier agrees to supply according to a specified and internationally approved standard, then it becomes much easier for the buyer to have trust that this is what will actually happen. It means that the communications and the contracts become simpler since both sides are referring to agreed sets of details which both understand and are committed to providing. In other ways, standards can be used as pre-qualifying criteria for suppliers who can be inspected and certified as operating according to the detailed procedures set out in the standards. In the quality world, the most important sets of standards are the International Organization for Standardization, ISO 9000 suite of related standards. These are informed by the eight quality principles of Customer Focus, Leadership, Involvement of People, Process Approach, System Approach to Management, Continuous Improvement, Factual Approach to Decision-making and Mutually Beneficial Supplier Relationships. This comprehensive approach considers much of the supply chain and the intention is that the agreed procedures cross each of the organisation boundaries up and down the chain so that all are operating to the agreed best practices. In this way, we can think of the standards embedding the ideas of Total Quality Management (TQM) as an agreed way of thinking and acting across all of these boundaries and indeed, if operated on internationally, we can conceive of efficient supply chains crossing the globe. Total Quality Management needs to build on the continuous improvement logic in all aspects of the business and especially in the supply chain where the old computer adage applies very strongly. Garbage In Garbage Out (GIGO) states that no matter how hard you try and control quality internally, if you buy in poor-quality product or service, then it is likely

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that your own quality performance will be reduced and your own customer’s satisfaction might be at risk. Another feature is that as we try and improve other less obviously quality related aspects of our performance, we often find that we need to go back to the underlying processes and improve the quality level in them before we can achieve the new levels of performance. In this way, the quality thinking permeates through all aspects of the business and becomes the fundamental underpinning of all that we are trying to do. All businesses need this basic understanding of their customers, what quality means for them and how we can control and improve their quality experience reliably. The internationally approved standards are also added to by sector or company specific sets of standards, but the problem with non-ISO standards is that for a supplier there can now be multiple sets of standards and probably inspection and approval regimes which they must satisfy in order to be an approved supplier. This must mean a degree of overlap, potential confusion and certainly added costs which have to be covered somewhere in the chain. This is essentially a waste of resources, and major buying organisations should be thinking carefully why they are forcing their suppliers to add these costs into the business processes. 2.8.4 Service quality Much of what has been discussed so far related to physical products, so where does this leave service businesses which have the same expectations from their customers but often more difficult measurement issues and inherently more variation in their operations since they are dependent on the variations which humans bring into play. The most important approach produced so far comes from Parasuraman et al. (1988) in their SERVQUAL Model. This builds on the dimensions of customer satisfaction captured in the acronym RATER which stands for Reliability (that the service will be delivered dependably and accurately), Assurance (knowledge and courtesy of employees and the ability to convey trust and confidence), Tangibles (the appearance of people and hardware surrounding the service encounter), Empathy (the attitude of service delivery people in providing caring and individualised attention to the

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customers) and Responsiveness (in allowing for customer requirements in a prompt and accommodating fashion where possible). However, it recognises that quality is a perception of the customer so Service Quality is the gap between the perceptions of quality the customer expected and the perceptions of quality that they actually experienced. Perceptions therefore are the problem since they cannot be measured in the same way that physical product dimensions can be. To help explain this better, the SERVQUAL Model was constructed to demonstrate how this final performance gap is influence by four other possible gaps. Figure 2.4 is taken from the Wikipedia article where Gap 5 is the gap between perceived expectation and perceived delivery of the service. In Figure 2.4, the focus is on the marketer but we can change this into supplier as we have been discussing. The customer/consumer expectations are constructed from their recognition of their own needs, any past experience they have had of the service delivery organisation, and word of mouth communications from family, friends and colleagues (including increasingly the effect of social

Figure 2.4 The SERVQUAL Model (5 Gaps).

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media communications). This is also affected by the way the delivery organisation presents itself in its advertising and social presence through marketing-related activities. Gap 1 is potentially the design gap where the supplier tries to understand what the customer actually expects before moving into the specification stage that was discussed above. Any misunderstood or misperceived customer requirement can create Gap 2 when the detailed service specifications are created. Gap 3 arises when, as a result of a number of factors, what is actually delivered by the person interacting with the customer is not according to the designed specifications. This can arise from poor internal training, bad communication or low motivation or a lack of ability in the delivery person to understand and act according to the defined specifications. (In product related, areas this would be described as the quality of conformance to the design). Gap 4 can arise if the internally defined service experience details are not communicated effectively enough to properly inform the customer expectations. Like all such models, there is debate in the academic world about many aspects of the model but it is widely discussed and actually used in practice and has much to recommend it. It was designed to study and explain service quality, but when we look carefully there is much here that also apply for product delivery as well. So perhaps the need is to look across the product/service differentiation to look for lessons to apply in each area as part of our own continuous improvement ambitions. If we do this well, then perhaps we can talk of total quality in practice.

2.9 Operations Management Operations management grew out of the need to manage factories producing goods and many of the concepts have most resonance in those kinds of settings. However, when one looks past the uniquenesses and particularities of the language used to describe their activities and uses more generic descriptions, then we can realise that service businesses also demonstrate many of the same issues. Of course, there are some key differentiations. Services cannot store their output; the consumer has to be present in some form when the service takes place, whereas products can be produced in advance of demand and stored until needed; services are

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very dependent on the service provider to deliver quality, whereas products can have more impersonal ways of controlling quality. We have already realised in our quality discussions that sometimes we can make too much of the perceived differences. In fact, most businesses demonstrate features of both sets of activities so we need to look at a more overall picture across these possible boundaries. The basic Operations System diagram shown below in Figure 2.5 demonstrates this generic thinking. All operations activities are essentially transformations of some input resources by an activity in the operations area which produces a modified output according to the principles being applied in the transformation. So in product manufacture, raw materials are converted and transformed in some way by abstraction (for example, from raw petroleum to plastic derivatives) or addition (for example, in automobile assembly from parts and sub-systems into finished product), but there are similar services examples ( for example, marketing data mining takes large data sets of customer buying behaviour and abstracts subsets of similar customers for a target advertising campaign) or the assembly of the details and contents of a will by a legal service provider. This systems diagram also demonstrates the fundamental process of control. The organisation has to determine what kind of output it wants (driven by customer demand and the opportunity to provide satisfaction at an acceptable level of reward to the provider), and so they have to select both the input resources and the transformation resources to create the output they have designed. However, control comes from a measurement of what actual output is produced against the planned levels and feedback to either or both of the transformation process managers and input selectors, modifications to either close the gap between output and desired target OUTPUT

INPUT NPUT

Transformaon

FEEDBACK

Figure 2.5

Basic Operations System Diagram.

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(negative feedback) or indeed to increase the gap (positive feedback). Negative feedback is classic control and is demonstrated by the action of steering a vehicle along a highway where the movements of the steering wheel are the control actions to keep the vehicle moving along the desired path on the road. Positive feedback would answer the old joke about marketing that only 50% of marketing works but the problem is to know which 50%. If we could identify what was working, we would then positively feedback that information and change the input or transformation resources to create outcomes which would be reflected in increased sales. 2.9.1 Managing resources Discussions about the boundaries of the firm highlight that there can be choices between owning resources and accessing resources owned by other organisations. In similar fashion should one manage the purchase of input resources or engage others to do it on one’s behalf. Whatever route an organisation takes, the systems diagram requires that these things take place, and this has to be at an appropriate time and place to meet the obligations made to customers. Generally speaking, changes in customer demand can happen more quickly and with greater variety than an operations system can react to comfortably. This raises issues of capacity and capability to respond to such changes. Many operational systems require large, fixed investments in capital equipment that takes time to replace when necessary. Such investments need to generate cashflows over extended periods of time in order to pay back and then to create financial returns to justify the investment. The matching of available capacity to real or expected demand becomes one of the big interactions between the marketing and sales functions and the operations functions with finance looking on with interest. Even if the capacity is related to people, then some issues are similar. In retail, for example, the business does not know when customers will come through the door and therefore how many staff they need to have available to serve them. This has led to a solution for management, which in the UK is called ‘Zero Hours Employment Contracts’ and has been mentioned earlier. This is structured so that the employee has a contract which requires them to be on call to work when required but does not pay

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them when they are not called in. Essentially, this means that the employee has to always be available to work but is not being paid during their standby periods. However, they cannot do anything much during this time because if they did and the call comes, they might not be able to respond in time. So the management have a solution, but one which causes hardship and uncertainty for their employees. It is difficult to see a happy workforce in such situations, and so other problems might be created in solving the capacity matching one. Resources are often interchangeable, especially as new technology and software make it possible to replace some of the activities that people have traditionally done. This is certainly true with transformation resources, but alternative materials, sources of energy or information at the input stage also have impacts. Managers have an ongoing need to evaluate the relative costs and benefits of these resource choices all the time to meet the changes in their supply and competitor marketplaces. Part of the loss of jobs in manufacturing, for example, is due to machines replacing people. At the start of the industrial revolution, this was a process where manual labour was replaced by machines (think about farming for example), but increasingly it will be the mental processes of analysis and decision-making that will be replaced by Artificial Intelligence and agent-based software solutions. Some of these investment decisions are major, and many organisations, especially in manufacturing, will have a high proportion of their total assets invested in the operational areas. In all of this, the fundamental question (the answers to which can vary over time) is ‘are these investments providing a financial and customer satisfaction return’? If the answer is no they are not, then they are actually creating wastes in the business and they should be reappraised and probably liquidated. 2.9.2 Role of inventory This is more important in the product world where inventory can be of Finished Goods or Products; products in the Distribution chain to customers, products which have not yet completed all of their manufacturing process stages, that is Work in Progress; or Raw Material Inventories.

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Many such inventories represent an investment or are counted as assets in the financial accounting system that may or may not result in a final sale to a customer. However, in a Make to Order situation the customer will likely have already paid, so the risk is removed. To a large extent, however, inventory is an indicator of a system failure to react quickly enough to satisfy an immediate customer demand. If a customer is not prepared to wait for their goods or essentially demands instant gratification (retail stores suffer this… if the goods are not on the shelf they cannot be sold), then the only way to cope with the demand is to have products ready for the customer (in inventory) when they appear. (We will discuss the options around this in the Supply chapter later.) However, the investments made in inventory mean that the money invested is not available to be spent in other ways and so create opportunity costs if these other ways could have provided better returns. The ideal is to have an operations process which can react instantaneously to actual customer demand and produce the perfect result with no delays and no extended management processes to plan and manage all of the inventory complexities. 3D printing or additive manufacturing holds out some promise for what is at the moment a rather science fiction vision of a possible future. For services, the concept of inventory needs some more interpretation. The service encounter cannot be stored, but many of the features around the service have to be stored so that the service can be provided when required. Hotels therefore need to have an inventory of rooms available even if they do not know if any customers will arrive that they do not already expect. This is why pricing models reflect this difficult of trying to create a new demand to fill their available capacity. So we have websites offering last minute deals for hotels, theatre or flight tickets to help fill the providers’ supply and demand gaps. 2.9.3 Role of information systems in operations Operational management is a hugely complex task, but since the advent of computer systems it has become possible to plan and control and to simulate the decisions that are needed to match supply capability to consumer demand. This started off internal to the factory as manufacturing resource

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planning (MRP) but has evolved to enterprise resource planning (ERP) which operates from the design specification of a part, matched to the process specification of the transforming resource to be used while allowing for demand, inventory and capacity considerations so as to provide a best fit to the customer requirement. The enterprise aspect spreads out coverage to the incoming supply chain so that in effect we have a complete computer model of the whole business supply chain from customer back through to supplied raw material resources. The simulation aspect means that rather than simply making a delivery statement to a customer and hoping it can happen, it is possible to simulate all of the related decision choices and provide both a more realistic and reliable delivery promise. This is in fact much better for the customer who often has to make their own calculations of ongoing activities, based on the delivery promises from their supplier. The link back to the designed part and process specification again demonstrates the critical importance of the design activity. 2.9.4 Performance metrics Our systems diagram indicated the basic ideas of control, but in such a complex world what should we be measuring? Each of the categories that follow can have many sub-categories and special features depending on context, but we will stay with generic discussions here. Owing to the importance given to quality and design, we have been arguing here then all aspects of perceived as well as quantitative and rigorous scales are needed in all aspects of the business. Time, including delivery to promise and time to change as well as overall response time, is key. Incoming and operational resource usage costs need to be captured and controlled as well as tracking sales and marketing and other overhead expenses to generate the information for profit calculations. Even if the business is not competing on its rate of innovation at the product or service level, there is always scope for innovation in processes, so overall rates and attitudes to innovation and the quality concept of continuous improvement need to be measured and the people thinking like this need to be supported. While underused or inappropriate resources are inherently

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wasteful, some processes also produce wastes as by-products of their primary purpose. This needs to be controlled and reduced as does actual pollution into the external environment and generally the need to control and reduce the environmental impact of all operations is both sensible from a business standpoint, but even more, from a social responsibility viewpoint. All of these issues are underpinned by the measures and controls put in place for the recruitment, care and development, as well as rewards, for the people employed in the organisation and for those dependent on them in the wider community. 2.9.5 Lean Japanese management techniques had, until the publication of the book by Roos et al. (1991) called ‘The Machine That Changed the World’, been studied by relatively few, but Japanese Automobile assembly operations was seen as so different from all that had gone before that MIT engaged with a number of global automotive manufacturers to conduct what was effectively a global benchmarking study to compare the best of the Japanese companies (Toyota) with those in the rest of the world who would cooperate. Prior to this book, there were various suggestions about what made the Japanese car assemblers so competitive including: extensive support from government or high levels of automation as well as less polite suggestions about the work intensity and unreasonable commitment from the work people. The study blew those excuses away because the very best company in the world was Toyota in Japan but the second best factory (but employing Toyota techniques) was Ford in Mexico. So here was the modern inventor of mass production in automobiles (Ford) working in what was then a developing country (Mexico), and so it proved that what was being demonstrated was not dependent on an unique set of countrybased characteristics but was in fact about a management system that was both understandable and transferable to other companies and parts of the world. The approach came to be called Lean Production. This title referred to its ability to use much fewer resources than their counterparts while

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producing higher quality and more reliable cars with more variations introduced into the market more quickly and effectively. To do this, Toyota had studied what Ford in particular did to make cars just after the Second World War and rejected or reexamined many of the taken-forgranted assumptions as not appropriate or useful in a Japanese context. Toyota were of course pioneers in the quality movement where the same kinds of thinking had also paid dividends. They also did not have the money or the space in their island home to build huge factories with enormous stores of materials that they regarded as wasteful anyway. Instead, they made a virtue of producing in small batches or production lot sizes so that the materials would not stop or remain in storage or inventory but would instead flow continuously with value being added at all times until the final product could be dispatched complete and ready for the customer. Lean thinking emphasises 5 key concepts. (1) Define value as seen by the end customer and remove all waste (activity not adding this value). (2) Identify the entire value stream, across all boundaries for each service, product or product family. The value stream gathers all of the required activities through three key processes of Product/Service definition; Information management — from order taking through detailed scheduling to delivery and Physical Transformation in the terms we have discussed above. (3) Make the value-creating steps flow. The ideal is to efficiently produce in batch sizes of one by removing any impediments and wastes. (4) Produce only what the customer wants, only when they want it. The customer pulls the product/service from the value stream Just-in-Time to satisfy their demands and this avoids any need for stock holding and the wastes of inventory. (5) Perfection is a valid goal on a continuous improvement journey. In order to realise this vision, Toyota worked over many decades to educate and train their people, managers, suppliers and to an extent their customers to allow these principles to come together. There are some other underpinning thoughts and principles and these include trying to standardise the design where possible even if it means

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bundling options in as standard rather than as add-on special features. This enhances the sales offer while reducing the inventory and complexity costs in the factory; challenging their work people to look for innovations in processes and empowering them to make the changes (in a controlled process of experimentation as a continuous improvement process) as well as stopping production if there are any possible problems in quality or flow; selecting and training suppliers who can work in this way in collaboration with Toyota and who are ready to commit to a long-term relationship in which both sides recognise the value of working closely together for mutual benefit and end customer satisfaction. This awareness of the external connections required them to take what we now call a supply chain view of the world and they then organised the participating organisations into a tiered or pyramidal structure where Toyota only deals with the first tier of immediate suppliers (around 300–400 companies) who then take responsibility for managing the lower tier suppliers in order to support themselves and Toyota. They become the system integrators on behalf of Toyota, so that perfectly designed and produced sub-assemblies can be sent onto the Toyota production line Justin-Time for the production schedule. Given there are approximately 30,000 parts in a typical passenger automobile, this means that Toyota has a much less complex set of relationships to manage. A first-tier supplier to Toyota is almost part of the family with a real co-destiny involvement so that what is good for their customer is also good for themselves in the medium and long term. Both sides of the relationship are looking to a long-term involvement and two-way sharing of information and expertise and in this way it is sensible to say that the competition in the final consumer marketplace is between rival supply chains, not just individual brand companies. The first-tier suppliers are regarded as the experts in what they do, which is complementary to the skills that Toyota keep to themselves, and Toyota will often allow them a lot of freedom to design the details of their part or sub-assembly but within the constraints of how that part has to interface with or join to other parts. In this way, Toyota gets the benefit of the suppliers’ innovations very quickly, but it does demand such innovation and the expectation is that there should be an annual reduction in costs of around 3–5% without doing anything really innovative. This is based on the principle of the Learning or Experience

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Curve which posits that high levels of repetition in the productions of identical units allows for the reduction in the unit operational costs by a significant factor. The principles of lean thinking have been demonstrated to have application in many other sectors including services, and the literature and consulting activities in these areas are very many. Truly, the automobile on its own, but especially when produced by using the Toyota methods of Lean Production, has changed the world in many ways and in many locations. However, there remain challenges for high variety products which are highly engineered to particular customer requirements. These sectors do not allow for the relative stability of the automobile product (platforms can be stable over a number of years typically) and they may not have the volumes being demanded which can justify some features. As is the case everywhere, the manager has to examine her own context and see if the learning from the automobile experiences can be fitted or adapted to solve the unique problems in the particular situation. For this writer, the book still captures the most comprehensive definition of what an effective supply chain vision of management can be and provides a possible ideal case towards which it is worth striving. For those marketplaces where customers require more customisation than for automobiles, the Toyota methods are seen as too rigid, and for these the alternative approach has been to build a more Agile approach. This will retain many of the Toyota ideas but recognises that, in order to manage a much more diverse set of customer demands, inventory will still be needed to allow for response to unforeseen demands. In Agile, however, the inventory is not everywhere. Instead, it is located at strategic points in the supply chain just before one of the decision tree branching points in much the same way as we discussed earlier. Agile in this sense is trying to match the purity of Lean thinking but apply it in a more demanding and variable environment. Now we need to consider in more detail how the supply side activities can support the flow of resources into the operational system.

Chapter 3 Supply 3.1 Buying and Trading We have been arguing that in many business situations there are basic choices of whether the business needs or chooses to own the productive/ operational resources as part of the asset portfolio of the business or whether it is content to let others own these resources and contract with them when the need arises to utilise the outputs from these resources. These choices define the nature of the business tasks accepted as appropriate for the achievement of their objectives and are among the most important that a business will make. However, the answers might change as the dynamics of customer and/or supply markets change, so they need to be in a more or less constant state of evaluation. As a general statement, for many technology-influenced or -dependent sectors, it is no longer possible for any one organisation to be at the leading edge of all of the complicated and interacting technologies on which their product and/or service depends and on which, in turn, their customer satisfaction performance also depends. In such circumstances, bringing the assets or resources and capabilities in-house is simply not feasible technically or economically. In these circumstances, the only option is to trade in the supply market. It is worth firstly reflecting on the opportunities and benefits of this approach as well as potential risks. Buying from the market (outsourcing or sourcing from outside the organisation) allows the buyer to procure the most up-to-date solutions 95

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without having had to make any investments in ownership, which also means that if there were wrong choices made then the buyer is not lockedin to the use of these wrong resources. If they had been in-house, they would be already paid for and there would be pressure to generate some kind of financial return achieved by using them. In theory, by buying from the market they can then simply cancel one contract and start searching again to find a ‘better’ choice. The downside risk is that the supplier does not agree to supply this buyer for some reason (perhaps they are already supplying a competitor and do not want to harm that competitor’s business opportunities), then the buyer might have to look for a less attractive supplier with whom to contract. The biggest issue is however the lack of control over the supplier’s actions. Ownership allows a degree of priority setting simply because of the common ownership and the internally agreed strategic direction. Without this potential control through organisational structure and management, the buyer has to work on ways to influence the supplier to work as if they were part of the same organisation with mutual interests. The Toyota example demonstrated that as a feature of their approach for their first-tier suppliers, but even here it is also quite normal for Toyota to take an equity stake in these suppliers and to have staff who retire from Toyota to take up positions in the supplier companies. It is no surprise therefore that it is possible to talk of co-destiny relations and extended business families, in that environment. Western companies do not seem ready to go as far as Toyota very often, but that remains the ideal and many try to emulate a number of the Toyota practices, at least to some degree. Another of the downside risks is that in communicating information about what the buyer organisation is doing to be competitive in the market place (which the supply contract is likely to make apparent), then the supplier gains information about this buyer’s competitive strategy and this information has a value to other of the supplier’s customers or even the supplier itself who might then become a competitor in the same market. We are always dependent on ethical behaviour in the supplier organisation so that such information is not abused or leaked to others. Possibly losing influence and control over supplier priorities is even more the case when the initial meaning of the outsourcing concept takes

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place. This is when an activity, which was originally taking place inside one organisation, is transferred outside of that business. This can happen either through a trade sale to another business entity ready to continue to develop and extend their capability in this area or indeed the activities and people employed are transferred into a new organisation established to trade in that activity. The business doing the outsourcing often still requires a service to be provided internally from the newly outsourced entity, but rather than being the only (internal) customer they are now one of a number of customers potentially looking for service and support. As such, they are no longer able to demand the service previously offered and have to try and influence and contract for it with the legally separate external entity. Even if activity is outside, responsibility never leaves the brand owner. For example a health authority which contracts with a supplier to design, build and operate a new hospital (in the UK this could be for the next 30 years) might think they are outsourcing the business risk by so doing, but the reality is that if something goes wrong in the supplier’s business and they cannot complete the hospital building project then there might be breach of contract court cases to be argued but the health authority still has a group of patients to care for in some hospital provision somewhere. No risk has in reality been transferred at all. At best this is an exercise in getting capital investment off the balance sheet of the commissioning organisation or its government funder (in the UK at least), but the commercial and reputational risk is never transferred. Managers considering outsourcing would do well to think about these scenarios very carefully before proceeding. Of course, no one can foretell the future, so any attempt to make assumptions 30 years ahead is challenging in the extreme. This kind of approach might be better considered in terms of the legacy it creates for future generations of patients and taxpayers. Perhaps there is a lack of Corporate Social Responsibility in evidence here? The recent failure of a major contractor (Carillion) to various branches of the UK Government is a recent case in point. 3.1.1 Offset When major government funding projects are opened up across international borders, especially in aerospace and defence businesses or major

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utilities and infrastructure contracts, there can often be a requirement for the winning supplier or lead contractor to use some of the income generated to buy from other suppliers local to the purchasing authority. In effect, the flow of money out of the buying country is offset by a fraction of the money flowing back in the opposite direction. This is a deliberate attempt by the purchasing government to obtain the benefits from the initial purchase but to also gain cash flow for their own citizens and companies to share in the economic benefits of the spending. They did not have the skill or scale to supply the requirements of the initial contract but can share some of the money spent. However, even more important and a major reason for offset requirements is to force the supplier who wins to transfer some of their expertise, knowledge and intellectual property (IP) to the local companies. It is not industrial espionage since it is open and understood, but the effects are the same. IP is transferred from the winning supplier to the local companies and over time (with the right kind of planned process and awareness of the opportunities), a local competitor to the external supplier will grow and act against them in the local and other international markets. For the external suppliers, this is a real problem. They want the market access and business turnover but recognise the risks they face, so what can they do? One approach is to outsource to the offset supplier old technology so as to try and remain in the technological lead. In China, for example, the airliner business is a huge and growing market and the government has made no secret of their desire to build a local capability to challenge Boeing, Airbus and their engine suppliers. There is then a fundamental concern for the western producers. Can they stay ahead against the coordinated approach to gather their IP in design and manufacture? Is it worth having this continual fight to stay as number 1 or 2 in the world? What happens if they fail, will they still have enough of a market in the rest of the world or will the new leaders attack that market as well? An alternative approach, but with a different set of risks perhaps, is to believe that the sheer size of the Chinese market and the influence of government direction and policy means that it is inevitable that they will eventually catch up and surpass the current market leaders from the west. If this belief makes sense, then perhaps it might be worth considering an alliance or joint venture (JV) with a rising star Chinese company?

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This approach might mean that instead of being in control and number one globally they become, over time, the junior partner in the larger organisation. They would at least in this scenario still have a presence in the market and continued income and employment for some of their people. Business leaders are however often known for the size of their egos, and so this is a difficult strategy to enact even if their other board members and shareholders could also be persuaded. The potential loss of IP is a real issue in any trading relationship and is another of the potential principal and agent problems where the agent is essentially learning from the principal’s experience (or stealing from them, depending on what use the agent or supplier makes of the new knowledge). If the agent is motivated to behave in the way of opportunism and taking advantage of the trading relationship in an exploitative way, there is little that the principal can do except build more transaction costs into their monitoring and control efforts or find another agent who might be influenced to act more in accord with the best interests of the principal. In the extreme, of course, counterfeiting and passing-off takes this to illegal outcomes. Counterfeiting is a global problem where someone’s IP embodied in a product is copied to some extent so that the counterfeit looks and to some extent performs like the original but at much reduced cost, and therefore sales price, to compete unfairly in the market place. While this is very common in the luxury goods markets, for ladies handbags for example, it might be argued that the brands which suffer are inclined to exaggerate the selling prices far in excess of production costs and ‘reasonable’ profit margins. To some people the fake product situation is a victimless crime, but industrial counterfeiting is also an issue in maintenance goods for automobile parts including brakes and for aero engines where a substandard turbine blade or disc can explode and put the whole aircraft and its passengers at serious risk. There are also counterfeit drugs and medicines where again the consequences are very serious. This is part of the argument which has resulted in Viagra tablets now being (in the UK) available over the counter rather than on prescription since data suggests many men were looking for the pills online with no guaranteed safety of the supplied products. Passing-off is when an organisation pretends to be another one through a similar name or web presence perhaps so that business which

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should have flowed to the rightful company is diverted to the one who is pretending to have all of the capabilities and reputation of the original. This is partly why the ownership of domain names is so important and why patents and copyrite agreements are also so important in order that investments made by the original provider are protected and can generate due rewards. Passing off is in this sense a form of counterfeiting but not just of a products but of the whole business.

3.2 Customer Supply Chain Segments Marketing managers have long understood the need to identify groups of customers which had similar needs and could be considered somewhat similar. Often these categories would relate to their spending patterns, demography or geography, but more recently people have begun to ask if this kind of segmentation might not also be true in terms of the kinds of supply systems that are best placed to satisfy the other aspects of the total product service package. Gattorna (2006) is the leading proponent of this kind of approach. He builds his concept around the basic human traits, which operate along two axes 90° apart but rotated through 45° as shown in Figure 3.1. These axes represent extreme points along a continuum from operating with pure Intuition to the opposite where all the senses are utilised and action is based on hard data where possible (called Sensing by Gattorna). On the other axis, the extremes are from Feeling, which emphasises the human tendency for empathy, to, at the other extreme, a more logical, analytical approach based on Thinking. Of course, we all display a mixture of all of these traits in our everyday life, sometimes moving along or between these axes as we interact with others and deal with ongoing situations. Gattorna labels each of the quadrants, and these labels are carried through each of the next few diagrams and indicate a broad category of supplier which shows a tendency to occupy one or other of the quadrants. However, it is also true that organisations can demonstrate a variety of these categorisations at different times and in different circumstances. Like all such concepts, their value is not necessarily in their precision of definition but the fact that the models allow for a more informed

Supply I Integrator

Developer D

Feeling Cohesion, Cooperation and Relationships

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Intuition Creativity, Change and Flexibility

Behavioural Forces

Analysis, Systems and Controls Sensing (Data Driven)

A Administrator

Figure 3.1

Energy, Action and Results

Thinking

Producer P

Gattorna’s Behavioural Logic of Supply Chains.

Source: Adapted with permission from Gattorna, 2006.

consideration and discussion framed around them. I consider that this is very valuable even though, as you will find out later, I do not find his choice of words completely useful in places. The argument then develops that if individuals and organisations can demonstrate elements of these dimensions, then we can consider the market place or the customer groupings in the same way and so we have Figure 3.2 which looks at the Market logic as a means to identify similar customer segments around which supply solutions can be constructed. In Figure 3.2 there are two more axes included. On the vertical we can consider how certain (or not) the market place demand is likely to be, while the horizontal axis addresses the degree of competition present in the market place. Thus, we can see that the Developer quadrant is coping with a very competitive market place with a high degree of uncertainty, and this is described as Turbulent. In the Producer quadrant, they have to cope with a market with many competitors but where the demands are more certain. It is however very Competitive. The Administrator quadrant is dealing with high levels of certainty in a low-intensity competitive environment

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Supply Ecosystems Uncertainty I Integrator

Developer D

Low Competitive Intensity

High Competitive Intensity

Turbulent

Forgiving

Behavioural Forces

Competitive

Stable A Administrator

Producer P Certainty

Figure 3.2

Gattorna’s Market Logic of Supply Chains.

Source: Adapted with permission from Gattorna, 2006.

while the Integrator is dealing with high levels of uncertainty but perhaps with customers who are understanding and loyal to them. (In the book there is much more discussion and attempts to describe in words how each of these categorisations work out, and this is the inherent difficulty for all who try and find such an all-embracing means of defining complex situations. You will have to decide for yourself how successful Gattorna is in doing this.) The next diagram in the sequence, Figure 3.3 now tries to match the supply side to the segments of the customer-based market demand diagram. In this diagram, we are now looking from the supplier’s viewpoint as they try to match what capability they want to offer into each of the market segments. The vertical and horizontal axes now have to change to reflect this. The horizontal axis is based on the risk as seen by the supplier in the market place, while the vertical axis represents how they plan to respond to it by reacting when required or trying to be more proactive and trying to influence their customers rather more. These are basic strategic choices of the kind of supply business they want to be.

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Proactive I Integrator

Developer D Pathfinder

High Risk

Low Risk

Protective

Behavioural Forces

Operational

Evolutionary A Administrator

Producer P Reactive

Figure 3.3

Gattorna’s Strategic Logic of Supply Chains.

Source: Adapted with permission from Gattorna, 2006.

Now the Developer quadrant is operating as a Pathfinder, pushing to generate new solutions for their customers. The Producer is more Operational, making sure that what is expected is reliably delivered. The Administrator moves along a more considered Evolutionary path, changing as required, probably in small increments. The Integrator is trying to ensure that their loyal customers are sufficiently satisfied that they will stay with their supplier who, thereby, Protects their business relationship. The final diagram in this group (Figure 3.4) reflects on the need to support the chosen supply strategy with an internally consistent set of cultural standards and behaviours. Now the vertical axis represents the choice of command and control approach taken from a very direct and obvious one to a more subtle and less direct approach. The horizontal axis shows a focus of attention from a largely internally biased one to the other extreme where it is more externally focused. Suppliers in the Developer quadrant want their people to be Entrepreneurial and ready to take chances and be creative, while the Producer quadrant wants their people to focus on getting the job done in

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Supply Ecosystems Indirect Control I Integrator

Developer D Entrepreneurial

Internal Focus

People and teamwork important Consensual decisions Loyalty and commitment to group highly valued

Creative and innovative Broad concepts and hypotheses Proactive to environment Inspiration and entrepreneurialism encouraged

Behavioural Forces Traditional administration Process more than content Strong internal focus Stability and order valued

Action emphasis Goal directed High environmental awareness Productivity valued

Hierarchical

External Focus

Group

Rational

A Administrator

Producer P

Direct Control

Figure 3.4

Gattorna’s Cultural Logic of Supply Chains.

Source: Adapted with permission from Gattorna, 2006.

a controlled and Rational way. The Administrator quadrant expects their people to obey the internal rules in a very Hierarchical, process-driven way. The Integrator quadrant wants a culture that is very group driven, and the group probably includes their customers. Gattorna further argues that each of the cultures also requires a different kind of Leadership approach to continue the inherently consistent set of approaches, but this is enough for our purposes here. This kind of model can be considered a different example of the House of Quality logic we discussed earlier in that the voice of the customer (the Market Logic) is progressively brought inside the supply chain in greater and greater detail. Gattorna also tries to summarise this thinking into four generic supply chain types, and it is here that I have the most difficult with his choice of words. His four types are: Fully Flexible, Agile, Continuous Replenishment and Lean. Now the problem appears because, from our discussion of Toyota earlier, we have a set of concepts defining Lean Production and indeed Agile, but the way that Gattorna uses these labels and supports

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them with example word pictures does not feel comfortable to this writer, but by all means read the original works and make up your own minds. The essence of these discussions is that customers are the most important people in the business situation. We need to understand them and their needs and desires in great detail, and we are then in a position to consider if we wish to offer them a supply solution and if so we can structure and manage our supply system to provide a good probability that our design, operation and delivery efforts will be rewarded through their ultimate satisfaction (and payment of their invoices).

3.3 Supplier Selection Business-to-business relationships require both a buyer and a seller who agree to act in a coordinated way such that the buyer’s needs are satisfied so that their customer needs can in turn be satisfied. This in turn requires that the supplier’s needs are also satisfied. Whether the levels of satisfaction are equal is not the important consideration since there may be very good reasons why the returns on the trading investment decision have to be different. We might, for example, be valuing an innovation, or market access or any other competitive factor which one side has but which the other side wishes to make use of for an agreed period of time. Relative power differences can also come into play here but, as we will discuss later, power is a dangerous concept if mishandled. What is important is that both parties see the outcomes for themselves as equitable in the circumstances. Remember that the reason a buyer looks to source goods and/or services from a supplier is that the buyer organisation has chosen not to be an expert in or even invest in the capability that the supplier considers core to their business. So the first issue for the buyer is the supplier’s capability to fulfil the task. Then comes a list of things whose priority in the sequence might vary but will include: availability of equipment and people to perform, quality assurance, pricing and cost control, delivery capability, innovative potential, planning and support systems, managerial processes and attitudes. It is said that Japanese companies will only decide not to invest in a potential supplier if they consider that their managers do not think and act with the right attitudes since these are the most important

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and most difficult things to change. Almost everything else will yield to enough time, money and training. Of course, the supplier is also trying to establish a similar set of criteria for their evaluation of the potential customer. Trading is a two-way process and our decision processes should recognise this. Even if a supplier might be forced to accept a particular deal at one point in time, if they consider that the deal is not equitable then they are likely to exact a consequence from the buyer at some future transaction. This is why power is such a difficult thing. One definition is the ability of one actor to impose their will on another actor so that the other actor does something they would not otherwise have chosen to do. We can see in this definition the problem and the opportunity for an exchange of somewhat unpleasant actions as the circumstances creating the power opportunity vary with market conditions. Whole industries can swing from the power being in the buyers’ hands to being one where suppliers are, for some time, in a position to demand what they want of the buyers. Over the long term, these swings do nothing to build a sustainable future. They promote distrust and opportunistic behaviour, and while there will always be some markets where this is in some ways acceptable, and smart managers learn to play the game according to these rules, the argument in this book is that for those customers and suppliers who really need each other in a cooperative, coordinated, mutually supportive relationship then power has no positive role and should be challenged whenever any party tries to play that game. To some extent buyers have power, since they are choosing who to spend their money with, but as soon as the buyer decides on one supplier all of that power is transferred to the supplier who now has to decide if they are going to behave in the ways the supplier promised in their sales pitch and the buyer believed they would when they made their sourcing decision. The supplier selection decision can therefore be of high strategic significance allowing the best possible collaborative offer to be made and delivered to the buyer’s customers. Get it wrong, and the costs of relative failure can be extensive, and the rectification costs, which might include replacement of one supplier with another, can make the contract loss-making rather than the beginning of a long-term business relationship. There are clear reasons why this overall process needs careful planning and operation.

Supply Introduction Start Up & Ramp

Maturing market — Plateau

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End of Life

Volume Demand

A/I I/D D D/P

Very Flexible Rapid Volume Innovaon Increase High Quality

Figure 3.5

Stable, Reliable Reducing Costs Wide Distribuon

Small Lots Very Flexible Innovave

Life Cycle Supply Requirements.

Another issue we also need to consider is the choice of supplier at different stages of the product life cycle. Figure 3.5 illustrates a typical product life cycle curve. The challenge is that at each of the life cycle stages the situation in the marketplace suggests that what the supplier has to be good at changes and the question then is can any one supplier be sufficiently adaptable to be able to cope with each of the stages. During the Introduction phase, many of the product details will be being tested and modified depending on customer reactions in the market place, so the design will not be stable and the supplier therefore needs to be able to handle fast moving changes and be innovative in product and process design. In Gattorna’s terms, this is the area for the Developer D type. At the Start Up and Ramp the final design is clear and the market preferences are being fully understood. Now the challenge is to get the new product introduced effectively to the market before the me-too products are developed and marketed. Here, speed and consistency of quality and delivery are key criteria to get the product into the market in volume and to build a lead that competitors will find hard to catch up. In Gattorna terms, this sounds more like the Producer P type with a bit of D included at times.

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At the Maturing market and Plateau, we are approaching market saturation. Competitor products are also established so it is more about competition in marketing and maybe delivery and service. The Gattorna types are Producer to keep the volume flowing and perhaps the Administrator A to keep the flow under control, but there could also be a role for the Integrator I who is trying to keep long-standing customers satisfied and involved. End of Life is a particular challenge. At this stage, it is likely that newer technologies have been introduced from competitors and these are taking market share away. There is still however a market for the existing products, just not in the same volumes and so the ideal supplier type also changes and we need a more flexible response to cope with smaller order quantities and production batch sizes, so the Developer’s D skills are more likely to be needed. In addition, it is here that cost reduction efforts are also needed in an attempt to persuade the customers that there is still some benefit to them of staying with the old product. Again the Integrator I might help keep the customer involved in the process and extend the cash flow a little bit more into the future. If one supplier can manage this changing requirement effectively, then all to the good but if no single supplier can change to follow this life cycle challenge we might be forced to think of selecting different suppliers for different parts of the life cycle. Re-sourcing then becomes a planned process, but it would be wise to make this clear to the suppliers as they are selected since their orders might be stopped for no fault of theirs but forced by the changing requirements. This discussion indicates that selection is not a simple exercise and not one that can be effectively done without a lot of internal communication and joint decision-making and a high level of external communication, especially with those suppliers whose capability is built into your product and service offering and on whom your future success depends. These key strategic suppliers justify commitment and involvement of a Toyota type.

3.4 Supply Side Infrastructure Large businesses will often be split into smaller organisational units or divisions, and if so there are now choices on how the buying operation is to take place. To some extent this is no different to other organisational

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structure decisions, but the tendency to switch structures with each change of leadership is a particular issue if, as we argue here, the supplier selection decision has at some point been seen as highly strategic and an attempt to ‘lock-in’ a key supplier has been committed to in all good faith only to find a change of leadership takes the business in a different direction. Such behaviour can put at risk months or years of relationship building activities and joint, interactive system developments. In such circumstances, it is often a requirement for the relationship managers to argue on behalf of their key supplier that the organisational change must not be allowed to put at risk the investment in mutual understanding and support. Table 3.1 captures the arguments for and against each of the strategic options. The key supplier consideration suggests that this is too important to devolve to a division or single budget holder and should be seen for what it is, a highly strategic decision in which the centre and indeed top management needs to both understand, agree and commit to the interaction rules, in a very public way. If this is done, the supplier will have a degree of comfort that their medium- to long-term involvement is not something that will be easily cancelled out by a change in managerial fashion for a different structure. Whatever structure is put in place, it is incumbent on the managers to understand and capture the advantages and recognise and mitigate the disadvantages. This is also a process that needs to be reviewed periodically to ensure that the correct choices have been made to support the business objectives. So far, we have made little distinction between whether our focus is on businesses in the private sector or for business type activities in the public sector. However in the purchasing procurement activities, there are some fundamental differences which need to be recognised and managed. In some senses, the public sector is more advanced than the private sector in this, but the operational constraints are different. Operating in the private sector is seen to be controlled and evaluated according to market performance considerations, and the ultimate responsibility of the business managers and owners is to their shareholders who regularly review their performance against plans and competitor’s actions to evaluate the degree with which they are comfortable to allow them to

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Description

Organisational Location of Purchasing Activity. Advantages

Disadvantages

Centralised

A powerful central office specifies and buys on behalf of all divisions.

Economies of Scale. Standardisation. Policy deployment to divisions. Financial oversight and control. Simpler auditing. Common IT systems. Allows staff exchange from divisions to centre and vice versa.

Lack of empowerment in divisions causes resentment. Temptation to do local deals against the central policy. Missed opportunities for local specials. Divisional overheads not fully recovered. Possible slow response from centre.

De-centralised

Central office makes policy and does corporate deals. Divisions purchase on their own behalf.

More autonomy locally. Increased variety and diversity of purchases. Local responsibility for actions. Staff rotation for varied experience is possible. Possibility of using one deal in other divisions (lead buyer approach). Possible inter-division competition (is this good or bad?).

Possible for suppliers to offer different deals to different divisions causing cost confusion. Potential for duplication of effort. Danger of skill shortages across the network. Financial control more difficult across many systems. Potential for local ‘Maverick’ deals — good locally but not for whole group and against central agreements and policies.

Supply Ecosystems

Table 3.1

Atomised

Small central office makes policy. All other decisions devolved to individual budget holders.

Local autonomy and responsibility. Simple controls. Quick response.

Maverick buying of personal favourites or corrupt buying. Suppliers divide and confuse with multiple offers. Price control lacking. Commercial risk not visible centrally. Multiple IT systems makes audit and updating difficult.

Federal

Divisions award power to central office for policy and buy services from them when required and controlled by divisions.

Agreed rules. Dual citizenship. Minimal central control empowers local entrepreneurial behaviour. Cross fertilisation across divisions provides learning and response capability.

Complex arrangements and negotiations. Unclear hierarchies and corporate responsibilities. Central bureaucrats. Risk of instability.

Supply 111

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continue to trade, (assuming that they are not already breaching corporation law and should be wound-up and the business liquidated). The Public sector is fundamentally different in that they are in effect acting as the agents of the wider society and in particular the tax payers and voters in their regions. The market therefore does not exert the same direct pressure on this sector although it is often seen as the exemplar for business behaviour, but in terms of procurement for public sector organisations I would argue the learning should be the other way round. Public sector organisations have the additional stress of operating in political environments where directions can be changed dramatically as voters change the politicians and in some situations the administrative officials whose task it is to translate political directions into practical actions. This political direction also raises the potential for public sector purchasing decisions to be biased in favour of the voters or political supporters on whom the politician depends for re-election. In the USA, this is described as pork–barrel politics where funds from the many are used to benefit the few, in the legislator’s home state. This situation is not unique to the USA of course and many regimes stay in power by such acts of cronyism, nepotism or other forms of corruption. Inside the European Union, the recognition of this problem was behind the introduction of a different set of procurement rules.

3.5 EU Procurement Rules Part of the concept of what was once called the common market in Europe was the recognition that politically or geographically biased public procurement negated a lot of what the ideology of a common market should be. In effect, the European Union, as it came to be called, wished to see fundamental principles enacted in all of its member states in which the right and freedom to bid for and a have a fair chance of winning government contracts was there for all potential bidders from any of the member states. These principles are: open and transparent competition in which tenders are evaluated on objective and published criteria and that all are treated equally using sound procedural management which is open to audit and challenge. Losing bidders have the right to know why their bid was not selected. The procedures are designed to achieve a

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procurement market that is competitive, open and well regulated. The central EU procedures have to be transposed into local laws for each member country (see https://ec.europa.eu/growth/single-market/publicprocurement_en). The system operates according to spending thresholds which are updated every 2 years, and in 2017 these were set at €5,225,00 for works contracts (that is major construction types of projects) and for the majority of goods and service type contracts the threshold is either €209,000 or €135,000. There are some variations around these for different circumstances, but the important point to note is that these are relatively not large numbers given the size of governmental spending, and so it is more than likely that public authorities will find that they have to operate their procurement activities according to the EU procurement rules. The procedures are too detailed to reproduce here, rather it is worth highlighting some key features. There is a requirement to publish actual and sometimes planned expenditures in sufficient time for potential bidders to be able to react and develop their responses. Potential bidders are selected in a variety of ways, to be described shortly, but once selected into a bidding situation all must be treated equally. Questions to clarify details of the buyer’s requirements are allowed and should be answered if sensible, but the questions and all answers must be communicated to all bidders to ensure the transparency and fairness aspects. Decisions can be based on a collection of criteria, all of which must be communicated to all bidders as must the weightings that will be applied in the evaluation process. Evaluation processes need to be data driven and objective in nature and all involved should aim to operate impartially. This can be aided if the evaluation process itself uses electronic voting systems which hide who of the evaluators is giving any of the scores. Another attraction of an electronic voting system is that it provides an audit trail about the veracity of the anonymous voting processes and the overall evaluation. This can be of great support if the final decision is challenged on the grounds of a supposed process flaw (the only acceptable grounds) where all decisions can be made transparent. The data can also inform any feedback demanded by losing bidders and the comprehensive

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ability to analyse one questionnaire response or provided response value in a bid document can be compared with all others and the winning bid, to demonstrate the correctness of the decision against the given criteria. There are three main types of process that can be used depending on the type of purchase requirement and uniqueness. The Open procedure is for lower value and risk procurement where the focus is on price and is for a very well-specified and usually standardised commodity. As the title suggests, bidding is open to anyone, but then the complication is that there can be high numbers of bids to be evaluated. The most often used procedure is the restricted one. This is a two-stage process where a contract notice (CN) is published (often preceded by prior information notice (PIN) to warn potential bidders that bids are to be sought in the future) which invites possible bidders to complete a comprehensive questionnaire (a pre-qualification questionnaire, PQQ) which has to be submitted to allow for the pre-selection of candidate bidders who are believed to have the capability and current capacity to successfully fulfil the contract, if selected. For those passing the PQQ stage, they are then invited to submit a final bid in the stage called invitation to tender (ITT). This smaller number of bids or tenders is then subject to the full process of information exchange and will often include formal presentations from the buying agent to allow for answers in the public forum about issues in the ITT document. This raises important considerations for potential bidders who might have an innovative idea which might win them the contract award, but might not be allowed by the tenderers. If the question is asked, the others hear it (either in the open forum of the presentation meeting or as part of a question and response communication process) and so can recognise the innovation and either copy it or work against it in their own bid. Potential bidders thus have to play a careful and clever game to get the information they need without giving away any of their potential competitive advantage. This is even more the case in the final procedure. This one has a variety of names including: Negotiated, Competitive Dialogue or Innovation Partnerships and are for situations where the buying agent knows what result they want to pay for but do not how to achieve it and therefore cannot specify their requirements in advance as they can in the other procedures. In this one, a small group of expert suppliers is preselected and are part of a discussion process with the buying agent to

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explore what is possible and desirable in the final tender document. This kind of procedures makes sense for software, architectural structures or creative art works, for example where relatively few people or groups have the ability to work in this way. Once a specification can be developed, then the tendering process continues as before. All of these procedures have stipulated time scales for each of the stages to which adherence is mandatory. In all cases, the award decision is announced in a contract award notice (CAN), but there is a standstill period of a minimum of 10 days in which a losing bidder can challenge the decision, but this will only succeed if they can prove some procedural flaw in the process. One of the issues in these procedures has been to accommodate the natural instinct to look for additional local benefits during the implementation stages of the contract. This can be included if they are included in the decision criteria, which must be satisfied by any successful bidder. Thus, if a new hospital were to be built somewhere as part of a contract it is not acceptable to award the contract to a local supplier based only on their localness, but it is acceptable and smart to specify additional local benefits (maybe sourcing materials, employing a percentage of local labour, building social amenities in addition to the hospital, retraining local unemployed people, for some examples). All bidders have to promise to do these aspects as part of their tender proposal. Thus local benefit is multiplied but the overall process is non-discriminatory. While some of these procedures seem as first glance to be onerous and possibly overly bureaucratic, there is much to recommend their general principles. A degree of openness and an ability to audit the overall process to demonstrate fairness must surely be best practice for all procurements?

3.6 Role of Procurement As we shall see in the next chapter on contract management, the role of procurement changes when we consider it as part of the overall business processes involved in managing outside resources. However, the historical role of procurement was to enact the decisions of others and usually to do so at a minimum cost to purchase, with little thought given to the real or

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total cost of procurement. The impact of this view is best reflected in the quote attributed to John Glenn (one of the American astronauts) when asked in 1962 what he thought of sitting on the top of an atlas rocket about to be launched into Earth orbit. I felt exactly how you would feel if you were getting ready to launch and knew you were sitting on top of 2 million parts — all built by the lowest bidder on a government contract.

Perhaps mission critical or safety-related procurement needs to consider more than just cost to purchase? Traditionally procurement was a clerical function which came at the end of a lot of other function’s decision processes. However, as we will see the role of procurement changes as soon as we realise that the majority of the money spent in many businesses is with outside suppliers (the Buy option) and that quality, innovation, cost and customer satisfaction will all ultimately be dependent on the choice of supplier and how the customer–supplier relationship is managed. However, the procurement requirement is not uniform, and realising this is part of the solution to making better decisions. Firstly we need to recognise the differences between two fundamental categories. Direct Procurement and Indirect Procurement. Direct procurement involves the sourcing of materials which will eventually form part of the final product or service the business produces and which will be sold to customers (hopefully at a value greater than the purchase cost). Direct procurement therefore directly contributes to the value adding transformations in the business and to the generation of revenue and profits from the market. It therefore has always attracted most attention and attempts at control. Indirect procurement involves everything else by way of goods and especially services which are needed to allow the business to function and to deliver the value adding offer to the customers. These are essentially in support of the directly market-related activities. Many of these will involve spending in areas away from the product or service mainstream like advertising, auditing, legal, catering and facilities management for example and often be managed by function heads who saw no need to involve the purchasing function as they considered themselves to be better

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able to choose suppliers because of their own expertise and local knowledge. For this reason, much of the spending on indirect purchasing can be regarded as maverick in potential. Historically, indirect procurement has not had the same focus or control applied to it. However, as the Lean messages were applied very successfully to the direct activities to reduce cost while improving quality and reliability, the same focus on indirect procurement lagged behind in many businesses. The success of lean in manufacturing has encouraged the application to the indirect area where new opportunities for waste reduction and performance enhancement can also be realised. Regardless of what kind of procurement we are involved with, there is still the issue of how to apply managing resources to the selection and interaction with the chosen supplier, and it is here that considerations of portfolios of relationships comes to the fore. This concept builds on the reality that in many aspects of life there is demonstrated an 80:20 rule which is often quoted as Pareto’s Rule or Law after the Italian economist who identified in 1896 that 80% of the land in Italy was owned by only 20% of the population. Since then, many aspects of business have demonstrated the same kinds of ratios, for example 20% of customers account for 80% of the turnover or that 20% of the suppliers account for 80% of the costs. These are the Important Few, and the logic of identifying them is that scarce managerial resources should be applied to both groups to maximise profits on one side and minimise costs, while supporting the competitive offer on the other side. In order to use this rule in procurement, it is necessary to conduct a Spend Analysis. Here, all of the company’s spending is analysed and allocated to one or other of the quadrants on a 2 × 2 matrix as shown in Figure 3.6. This and the following two figures are adapted from the original ideas presented by Kraljic (1983). In Figure 3.6 we are looking at how a customer can evaluate its spend with its suppliers. The x-axis on the graph is Value of the spend in actual or relative terms running from low to high. The y-axis is the criticality of the supplied items for the customer’s business success or the risk of nonsupply, that is the impact on the customer’s business if the supplier failed to deliver for any reason. This gives us the classic 2 × 2 matrix and four quadrants. In quadrant 1 we have supplies both of high value to the

Supply Ecosystems

Criticality/Risk

High

118

2

1

80% of spend 20% of effort 4

3 20% of spend 80% of effort

Low

High

Value Figure 3.6

Customer’s View of Suppliers.

customer and representing the 80% of the total spend value. These are also highly critical and risky. These are therefore the items and their suppliers on which most effort should be expended since improvements here will make a big difference to overall performance. However, typically these items only attract 20% of the procurement effort! At the other extreme we have quadrant 4 where only 20% of total value lies but this accounts for 80% of the management effort. These are usually low-cost or -value items where risk in the market is low, (that is, there are lots of suppliers so we will never have a shortage and therefore risk is low). Contrary to quadrant 1, these are the Trivial Many. However, these often require lots of managerial attention so typically account for 80% of the effort. Quadrant 2 represents items that are highly critical or where sources are few and therefore risk is high. These are called Bottleneck items and are best designed out of the product because of the problems they can cause if they are not delivered or if suppliers cannot easily be found for them. The final quadrant 3 is the Leverage one. Here the risk is not high but the value is, and so the customer will try to use the volumes or total values to ‘leverage’ some best prices from the supplier. The supplier’s reaction, if they find themselves in this quadrant as seen by the customer, is to make themselves more important to the customer perhaps by bundling more items or

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services into a bigger package which will justify the customer giving them more consideration and therefore moving them into quadrant 1 as shown by the arrow. Quadrant one represents the quadrant that the customer needs to manage very carefully, and it is here that the most mutually considerate and involved relationships are to be found, hence the smiley face. The logic of supplier relationships is that all customers will have a variety of suppliers in each of these quadrants although we want to minimise the numbers we have in quadrant 4 to reduce the effort involved and also redesign the items in quadrant 2 to remove them if possible. The portfolio argument then is that a customer will have a variety of supplier relationships in place from close and cooperative in quadrant 1 to marketdriven, brutal, select and replace policies in quadrant 4 to coercive, power driven in quadrant 3. Businesses need to understand their spend patterns to properly allocate their managerial resources and activities in proportion to their relative importance for their successful market strategies. However, suppliers also have views about which customers they want to pay close attention to and which they want to replace as simply not worth the effort. Figure 3.7 shows the view from the supplier’s side. From the suppliers view, the 80:20 rule still applies in that 20% of the customers account for 80% of the economic benefit to their business and these customers are worth investing time and possibly real money to keep them satisfied and coming back for more business in the future. Instead of risk on the y-axis, we now have customer attractiveness. This idea covers the situation of perhaps being a global brand but certainly showing potential future growth and a belief that they will behave as intelligent customers in their relationship with the supplier. Quadrant 4 in this diagram represents the truism that a supplier can go bust satisfying customers if those customers are not reasonable in their demands for service while minimising the amounts they will pay in prices. Such customers are best avoided or replaced. Of course, it is in the nature of customers to assume that their business is very important to any supplier, but the reality is that suppliers make choices in the priority they apply to all of their customers. The challenge for a customer is to become the preferred customer of their important suppliers so that their needs are dealt with before the supplier’s other customers.

Supply Ecosystems

Attractiveness

High

120

1

2

Preferred Customers

80% 4

20%

3

Nuisance Customers

Low

Figure 3.7

High

Supplier’s View of Attractiveness of the Customer.

Money is not always the most important driver in this decision process and suppliers have a measure which is important to them. This is Cost to Serve, and if it is too high then that is when the supplier will either reduce the cost number by affecting their level of responsiveness, their pricing or charges for distribution or changes or by simply cancelling the contract in favour of a better customer. Often these actions will not be visible until too late to the customer, but the choice for the supplier is there, and the intelligent customer makes sure that for their important suppliers that this does not become the correct choice for that supplier. They do that by making sure that the interaction is both fair and open and that there are no unpleasant surprises in the business relationship. The challenge for a nuisance customer is to change their interactions and probably the money they spend to move them from quadrant 4 to quadrant 1 as shown by the arrow. Having looked from both sides of the relationship, we now need to put them together. The customer has done its spend analysis and chosen a supplier that they wish to get close to and build a mutually valuable relationships with and will send out a request to begin the discussion about this and hopefully have their chosen preferred supplier choose them as their chosen preferred customer, but there can be three reactions to this from the suppliers point of view, as shown in Figure 3.8.

Supply Customer High

2

1

Criticality / Risk

High

Supplier Perspective

4

20% of 3 spend

Attractiveness

Possible Preferred

anks

No th

Low

Value

Figure 3.8

High

121

Low

Value

80% of spend

High

Relationship Portfolio Possibilities.

The lower line shows the reaction when the supplier looks at the customer and says they are not spending enough to be interesting immediately and do not look to be very attractive in terms of future potential either. The supplier is likely to decide that they do not want to invest the time or other resources to build a collaborative relationship with such a customer and so the invitation will be declined. The customer in this sense is in a difficult position since they have evaluated the supplier as important to their future performance but they have been refused a special relationship. Perhaps the supplier already has a more important customer they have invested in and if this customer is a competitor of the focal company there can be real problems. If this is not the case, the customer might still continue to have business transactions with the supplier and perhaps try to become more attractive over time, but it might be more sensible to start the search process again to find a more accepting alternative supplier. The second line at the top of the diagram shows a different response. Here, the customer is not yet spending enough money with the supplier to make them immediately convinced, but the customer attractiveness is very high so the potential future benefit is there. The supplier response is therefore that a special relationship is possible and is worth exploring through some investment in relationships building and see if the future orders and cash flows follow the hoped for growth pattern. The response therefore is positive and discussions can begin.

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Supply Ecosystems

The best result from the customer’s point of view is when they invite the supplier to be a preferred supplier and the supplier is happy to commit to this customer as one of their preferred customers. This is the meeting of minds on which true collaborative and mutually supportive business relationships can be built. The customer locks-in a critical supplier and the supplier locks-in a critical customer and the whole process of cost reduction and value enhancement can begin, making this part of the supply chain behave almost as one unit, at least for this range of products or services. One important point to recognise however is that the unit of analysis of a company is too big. Large organisations have so many sourcing requirements and sales opportunities that they will often have supply contracts with different parts of the same supplier company and similarly a supplier will often have contracts with different parts of the same customer company. Each one of these contracts will have had to form in different circumstances and not all of them will demonstrate preferred characteristics. The portfolio of relationships must be built in recognition of these differences as well as recognising that market circumstances can also change such that a preferred relationship might become less important and have to be dissolved in a managed and safe way. Managing the relationship portfolio and associated relationship investments must therefore be subject to the same dynamic oversight as all other areas of business. However, the relationship investment can often mean that rather than simply walking away from one partner to look for another it might be possible for the partner to change some business activity dramatically to meet the changing market situation, thus avoiding the search and change costs of a major re-sourcing exercise or major sales drive for new customers. A consideration for sourcing strategy is how many suppliers per item or service. The options include Sole Sourcing which is where there is no choice, there is only one possible supplier operating as a monopoly and all customers need to deal with them. Such suppliers have all the power and can choose who they will supply, at what price and how they want to deal with their customers. Individual customers have little influence and will wait their turn to be supplied. For customers, this is not a comfortable place to be and so they will look for or even invest in alternative suppliers

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who might develop or be supported to develop a parallel capability to break the monopoly. Single Sourcing is when there is a choice of suppliers but the customer only contracts with one of them. This allows the customer to develop a special relationship with the chosen supplier but exposes them to the risk of supplier failure with no back-up plan in place. Dual Sourcing is where two from a number of possible suppliers are chosen to avoid the shortage issue if one supplier fails to deliver in some way. Toyota uses this approach but in addition manages the suppliers together so that they have to collaborate on best practice and innovation while guaranteeing that supply failure is not catastrophic since the second supplier can rapidly increase their own production to cover the other’s failure. Multiple Sourcing is where there are lots of alternative suppliers and traditionally this is where the suppliers would be forced to compete on price in particular. For non-critical standard products this can work well and can be used in quadrant 4, for example, to force best, market-driven, prices. Suppliers do not want to operate in quadrant 4 for this reason as price wars are dangerous for them. What we have been discussing here as cooperative and collaborative and mutually supportive relationships is often referred to a Partnering Relationship and is usually between a buyer company and a supplier company. (Note that it is not a Partnership which is an organisation with a distinct legal status. This where two or more parties agree that each is liable for the other’s decisions and all liabilities are shared. Joint and Several Liability is how it is described in legal terms. The liability is unlimited so that in a partnership one party’s bad decision can cause their partner(s) to lose all of their assets, houses included. For this reason most professional businesses, like lawyers or accountants, now trade as Limited Liability Partnerships to limit their exposure to the other parties’ risks.) However, some of the same interaction characteristics are represented in other type of business-to-business relationship. Figure 3.9 shows these. The Joint Venture (JV) is between two or more organisations who decide to create a third organisation where some if not all of the activities of each of the parent organisations is vested into a new legal entity (the JV). The legal entity aspect has an important difference from the other relationship types in that legally the people in the JV must now behave with the interests of the JV as their priority, in effect leaving their parent

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Brand Owners/ Original equipment suppliers Main Contractors

Joint Venture

Alliance Partnering Partnering i

First er suppliers

Suppliers

Alliance

Figure 3.9

Different Relationship Types.

organisations behind. The other relationship types are meant to behave like this in practice while retaining their separate legal entity status. They are obliged to retain the interests of their parent organisations as they operate closely with their partner organisations. These kinds of relationships are more voluntary and more easily terminated if the worst comes to the worst. Partnering types of relationships can be very long lasting and in Toyota’s case the suppliers become hard to separate from their buyer and have worked productively with this brand owner for decades. In effect, the boundary of the firm becomes permeable and indistinct as the formally separate entities act as if they are one, since their co-alignment is almost perfect. Alliances are very similar to partnering types of relationships (and the terms are sometimes used interchangeably depending on the industry sector). Alliances can be between suppliers or even between parties at different levels in supply chains. The overall logic of all of these relationships is to harness the benefits of the other party’s complementary skills to enhance the ability to take a successful offer to the market so that each party benefits from the increased trade. If this does not happen, then there is no reason to continue the relationship and a more market-driven trading process might then be sufficient. It is really only in the Partnering type of relationship that it makes sense to talk about supplier involvement in the buyer’s business activities

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but maybe we should simply expand the concept and talk of partner involvement. If we have chosen wisely to identify the partner we wish to work closely with, then it should be obvious that they have skills we do not have. If this is the case, then we need to respect their expertise and allow them the freedom to make the choices that are best for the relationship with a trust that this freedom will not be abused or treated lightly. This is most obvious when the issue of design arises. We have previously argued for the recognition of the fundamental importance of good design and if the partner has the skills, they are also best placed to produce the best design solutions. However, the other party will have to work with these designs so the communication needs to be open and specific where possible. When we talked before of the voice of the customer being drawn into the design process, now we are likely to have another party acting for the final customer. As before however, this intermediate customer is not an expert who knows how to do current things and has no ability to innovate in the design space. They are however probably going to need to manage the interface between the other party’s designs and the work they have to do on their own. To give an example we will go back to an automotive design. The car assemblers Toyota, Ford and Geely, for example, choose areas of their own expertise and if that does not include seat design, for example, what they will do is what is called Functional Design. Here, they specify certain parameters that the actual seat design must be able to deliver including, for example, weights of passenger, presence of adjustments in certain ranges, incorporation of heating elements, positional memories and may well indicate materials or colours for the seat coverings which have to coordinate with vehicle colour choices and interior finishes as well as many other aspects. They must also specify how and where the seats must connect to the vehicle and the internal wiring looms to carry power and control information. The functional specifications provide an envelope within which the seat supplier can utilise their ingenuity to design a range of seats to fit the vehicle and probably be delivered directly to the assembly line, quality assured, to be fixed into place as efficiently and quickly as possible. The corollary of the different types of relationship is that choosing possible partners becomes a real challenge. Clearly, partners need to have complementary skills and the capability and commitment to enter into a

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collaborative and very open working relationship. Selecting such a partner is about measuring the requirements and the demonstrated capability in the people, their management systems, the financial health of their business and which other businesses they work with to avoid possible clashes of interest. Above all else, however, it is the attitudes and mindsets of the management team which are most appropriate but also difficult to establish. Prior experience of working in such close relationships helps to convince the other party that the challenges are understood and indeed welcomed. Of course such partners have to be found, and if they are not obvious in current business interactions or industry experience then the procurement function is often tasked with finding possible suppliers from other fields where even if the products are different the skills being utilised might transfer relatively easily. Some of the EU procurement processes might be useful here at the early stages, but soon the need for face-to-face interaction and two-way evaluations will be needed.

3.7 Support Systems In the discussion about relationship portfolios we talked about spend analysis as a key process. It is simple to envisage it, but it depends on having good data to do it usefully and that can be the problem for many organisations. Procurement activities are often spread over different subgroups in large organisations and many companies will have grown by acquisition or merger with the result that their IT systems will have grown up in different circumstances and may not be wholly integrated or their information completely compatible. Identifying exactly where the procurement money is spent is not always easy therefore. As a simple example from my own University, the finance system regards me as a supplier because I have sometimes raised a claim for travel expenses. Their system regards any payment as a transfer to an entity which is called supplier so I will appear on the spend analysis information as a perhaps very small data point. Spend analysis therefore often requires some prior work to clean out spurious data like my status before meaningful analysis is sensible. Increasingly, intercompany communications and trading documents are based on electronic transfer, and this is important to speed up certain

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of the sub-categories of the whole process and at the same time reduces possible human error in data entry. The sourcing process greatly benefits from gaining access to a sometimes global supplier market, but this raises other problems since we now have to find ways of assuring ourselves that the supplier is real and is as capable as they claim. Global sourcing has other constraints since there remain many locally based approval and licensing procedures and qualifications which incoming suppliers may be unaware of or not qualified under. These local standards have been used in the past as a barrier to trade for the incomer. (The EU procedures were intended to reduce these aspects.) On balance, e-business processes speed up communications aspects while probably increasing the effort needed to fully specify requirements so that they are understandable to all possible bidders and they also increase the effort to evaluate bids because of the increased numbers and geographical spread of the newly discovered potential suppliers. Of particular interest in the electronic business space is the use of Reverse Auctions. Whereas traditional auctions for art, property or classic cars perhaps, will have the bidders increasing their bids until no one else bids higher, the reverse auction, as one might expect, works in the opposite direction. Here, the process is that bidders are progressively bidding lower values until no one else is prepared to bid and the last bidder wins the auction and gains the contract to supply. The process usually takes place over the internet where potential bidders are invited to be part of the process and will be instructed if necessary in how the system will operate. The buyer will suggest a starting price point based on their view of an appropriate price point or on their current contract price and the auction then tries to find bidders who will undercut the starting price. The auction is usually operated by an independent third party, to avoid a situation where a buyer, acting as one of the real bidders, places a bid themselves to force the price down. When bidding, all participants can observe how the anonymous bids appear on the computer screen and watch as the bids decline over time. The bidding takes place over a predetermined time limit on a given day with the right to extend the bidding process by increments of time if there are a rush of late bids in the final scheduled minutes of the allocated time. This prevents a bidder trying to submit their final low bid before a competitor can react.

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The issue with this process is that it is easiest for standard products or services where the order winner is the price, but this is not seen as beneficial to a supplier whose offer is more around service, flexibility or innovation since it is hard to define these sufficiently clearly to allow for a variety of bidders to calculate their best prices to take part in the bidding. Reverse auctions have been very successful in reducing the purchase costs for such things as stationary and other standard products and even hotel bed bookings for airline flight crews overnight accommodation where the standard of accommodation is recognised in international hotel groups. The proponents of the systems argue that it establishes the real market price but often rerunning the auction after a year produces little improvement. It seems as if all the possible cost reductions are given away the first time. In all procurement activities, clearly defining what the product or service is unambiguously remains a challenge. It is aided, for hazardous materials, by a set of UN standard codes. The same problem is present, however, for all other articles and for them a set of European Article Number (EAN) and now Global Trade Item Numbers (GTINs) have been established. These can uniquely identify the item, the packaging used and the manufacturer. The GS1 organisations are continually expanding and developing these numbering systems which can then be represented as barcodes or for Wi-Fi-based Radio Frequency Identification (RFID) identification and tracking systems. While global standardisation of these types can significantly facilitate and assure trading processes, they still have to be adopted and used by sufficient number of parties in the global supply chains to make them really effective. This may be used by a buyer organisation to act as a qualifier for potential suppliers and to simplify the buyers’ search and evaluation efforts. It is quite normal for these codes to be part of CNs under the EU Procurement Directives, for example. If we move back up the life cycle of a product to the design stage, we recognise another way in which design is a business critical activity, particularly for products. Most products will be designed using computeraided design tools. Thus, the design process digitally codes all of the product features of material, measurement, manufacturing process, quality and safety features, possibly packaging and of course recycling

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requirements and associated identification features. This same digital information is used to instruct and control the operators and their equipment performing the physical transformation along with the quality measurement processes. This data is therefore created once in design and transferred along the line to manufacturing, into procurement and sourcing to be used by the suppliers and will be used when the items are delivered for further processing at the next supply chain stage. This information can be used to inform marketing and distribution and in the end to make possible recycling or recovery of value from products at the end of their first life. It is really a form of digital DNA. As we shall see later, Blockchain processes could make a huge impact here. When we talk of standardisation we also need to consider two other aspects. These are compliance and enforcement. All businesses operate under legal obligations for personnel training, performance measurement and in many cases reporting for: financial; labour entitlements and disputes procedures; safety/quality systems, and environmental impacts and business outcomes and results as well as any required rectification through recalls for example. As supply chains become ever more global, these compliance and enforcement issues are both more necessary and harder to implement consistently. As the world moves more online and social media and trade information is more and more available or accessible to determined searchers, then the data protection issues become ever more pressing. In March 2018, the EU Global Data Protection Regulations will be imposed on all businesses which interact with the public and/or private data of EU citizens regardless of where in the world the activity is located. Its intention is to return a degree of control to EU citizens over what personal data is held by organisations and provides these organisations with an obligation to effectively police their own supply chains to ensure that no breaches of the rules occur in the external parties which form their supply chains. Organisations cannot remove themselves from the obligation to know what the companies in their supply chains are actually doing and while this is focused on data in this EU requirement it suggests a newly active awareness that, in the past, major organisations seemed to be happy not to know what was happening in terms of bad or even criminal practice in their supply chains. They seemed only to take action when these practices

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entered the public domain, usually as the result of some major crisis of a factory fire in a manufacturing unit, falsified quality records in a supplier factory or abuse of labour forces and the use of child or slave labour. Of course, consumers have been somewhat supportive, through their ignorance of the real conditions in the supply chains, and have been happy to accept the low-cost products supplied without too many questions. Countries have also been complicit in prioritising the winning of business and the earning of foreign currency above the well-being of their working populaces and permitting, or simply being blind to, business practices which keep costs low and therefore export earnings high while their workers are effectively abused or employed in situations the developed world has largely consigned to industrial history. This includes child labour and slavery, but these exist in many societies and the UK has recently introduced a Modern Slavery Act 2015 and recent prosecutions have involved farm workers, domestic servants and general labourers. Of course, people trafficking can be related to slavery, especially for the sex trade (see http:// www.legislation.gov.uk/ukpga/2015/30/contents/enacted). The trend in legislative enforcement and a wider awareness in business of their responsibilities to wider society suggest that the developing world will follow the same path of consigning such practices to history as they become more prosperous. The recent decision in China to stop recycling the world’s waste to deal with local pollution issues might be an example of this new reality. Of course, where money is being spent then corruption is also a possibility and while some parts of the world would seem to have a bigger problem than others and at many levels in society some of the largest corruption issues have been demonstrated or believed to occur in large organisations, not least where government procurement is concerned. The EU procurement rules are intended to reduce these possibilities, but in global businesses the picture can be very difficult to see clearly.

3.8 Logistics The procurement issues are still focused on inbound movements of goods and materials to another transformation stage and for products this refers to the physical movement of the items needed to make the goods for

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onward sale. However, there is physical movement needed inside the transformation processes and outbound to distribute the goods to the next customer along the supply chain. This is the area of logistics which can be called the management of inventory in motion and at rest. The word inventory is important here since for service-based activities where inventory of the service is not a meaningful concept the logistics concerns are more about planning and sequencing of actions rather than with the focus on the goods. While manufacturing provides Form Utility to a customer through the physical transformations of the input materials to the output goods, and marketing and sales provide Possession Utility as ownership is transferred from supplier to buyer, then logistics provides two related forms of utility, Place and Time Utility in which the purchased product is distributed from the factory to the chosen customer location at a time of mutual agreement. While logistical considerations might not impact the core product design much if at all the need to protect the finished good at its final quality level in a manner where the distribution process will not cause damage to it while in transit and where, if necessary, the goods can be displayed in retail outlets for example, requires that packaging design becomes very important. Packaging design can also be influenced by the decisions made by marketing to aid visibility of the product in a competitive retail environment or to suit different market segments perhaps. Packaging is also emerging as a major environmental hazard as plastics in particular do not degrade effectively and so remain a problem for many years and ocean pollution threatens the food chain for all species living in the oceans and rivers and downstream consumers of those food products. Physical logistics is also responsible for much global pollution through emissions from transportation vehicles, and of course global supply chains can exacerbate this as components and sub-assemblies for products can travel thousands of kilometres between supply chain stages and crisscross the globe many times even before the first-life consumer has the product in their hands. The modern demand for natural water products in single life bottles means that countries with perfectly safe water sources are importing waters in branded products from all over the world and then not effectively dealing with the empty bottles.

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The world needs to rethink many of their current logistical concepts if we are serious about the human impact on our environment. Until then, let us consider what we need to do to make the current systems work better. Moving materials involves a number of interlinked and interdependent factors. The materials can be in liquid or in discrete forms. They can be moved in bulk or in discrete and packaged quantities and cost depends on both weight and volume of the space they use in the designated transportation mode. In addition, for any vehicle transportation the costs depend on the demand location and overall volume to be moved. This is often directional. One of the key business factors for logistics managers is to try and fill up their vehicle in both directions, out and return. Often, the return journey is more difficult to optimise. The modes for continuous materials are by pipeline (oil, gas, water) and while we do not often talk about them in this way, conductive cable or fibre optic versions are also distributing product or indeed services in the fibre optic example. Discrete modes include a variety of sizes of ships for canals, rivers or seas, road vehicles, rail and air systems. There is a trade-off in transportation costs between the size of the load being transported and the number of locations from which items are collected or to where they are to be delivered. This is shown in Figure 3.10. One of the reasons for inventory we discussed earlier was to separate out different parts of the supply chain in terms of demand variations and supply capability. In the logistical aspects of supply chains, inventory separates out the variety of customers and suppliers from the efficient transportation between major centres. In Figure 3.10, this is represented as an analogy with bicycle wheels where the hubs are major geographical locations where warehouses are located as temporary storage facilities. On the inward process the input hub gathers materials from widely distributed suppliers along the variety of routes called spokes and prepares them for distribution along an efficient bulk carrying mode to another similar hub at the destination. Here, the storage warehouse acts to break the bulk down into their individual packages for onward distribution, often in smaller road vehicles which can get close to the final destination location of the customer, along a further set of route spokes. The process works in reverse to get other materials to fill the return

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Spokes — Small unit movements - complex, variable path

Bulk movements — efficient, fixed path

Build or Break Bulk in Hub warehouses Figure 3.10

Logistics Hub and Spokes.

journey. Hub-to-Hub transportation tends to fixed routings, by agreement for aircraft or by infrastructure investment in roads, rail, canals and pipelines. As over 90% of global trade is carried by sea transport, the invention of the container by Malcolm McLean in 1937 has totally transformed the nature of the tasks. Containers can be loaded and unloaded (building and breaking bulk) away from the ports. Port operations can now be much more automated and fast while the security of the boxes has largely eliminated the crime that used to be prevalent on the quaysides of the ports. The container ships continue to expand their capacity so that ports and their land-based transportation systems have grown to match and canals have had to be expanded to cope with the size of the ships (largest in 2017 is the OOCL Hong Kong capable of carrying over 21,000 standard containers) while the scheduling of their routes and arrival processing at the ports becomes a major challenge. While containers are more secure by their construction than many other forms of distribution package, nevertheless there are concerns. Each container carries cargo of, sometimes huge, value, so stealing it or breaking into it to steal its contents is a real concern. Security systems therefore

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mean that the container filling and emptying facilities need their own security systems, more like military establishments. We also want to know that the containers on ships are also secure and that the ships themselves do not divert to unauthorised ports of call to unload or load containers of contents. There is also the possibility that criminals or terrorists might load drugs, people or bombs on board one of these containers. There are so many containers in the world (estimates vary between 5 and 170 million) including many lost at sea, that no importing country can inspect all those passing through their ports, so security at the exporting port is required in order to provide some assurance to the importer that all is well. Each ship can be tracked using versions of GPS systems across the globe to check for any unauthorised diversions and RFID tags can be used to identify individual containers. Containers can be scanned using nonintrusive X-ray types of systems, but again like any inspection process this is usually done on a sampling basis or following up on prior intelligence about possible wrongdoing. Ship location systems can currently be switched off, and sometimes this is done to avoid pirate attacks but sometimes for commercial reasons to influence or affect market prices or to hide materials being diverted to countries where political trading restrictions are in place. Global communities work to make the systems more secure and transparent to ensure that markets stay open for international trade flows to take place effectively. On the commercial side of global trade, where goods transit national borders, we have had since 1936 an agreed set of terms of trade created by the International Chamber of Commerce called the INCO terms (see https://iccwbo.org/resources-for-business/incoterms-rules/incotermsrules-2010/). In distribution systems of this type, there is a need to fully understand the terms of trade and the point at which ownership is actually transferred. At this point the responsibility for choosing transportation modes and suppliers as well as for cargo insurance takes place. These terms of trade were established when ships were the only real means to cross water-based national boundaries and so the language reflects this, referring to whether transfer takes place on the quayside, on the ship, at the

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point of supply or on delivery to a final destination, with many variations included. The point is really to understand the legal situation at all times and therefore the required actions to take for all parties. It also allows the procurement decision to be better made in comparing like with like. For example, a price which is quoted as Ex Works requires the buyer to carry all costs associated with transportation, insurance, customs charges for export and import and distribution in the destination country. The Ex Works price, if compared with the cost to Deliver Duty Paid to the final destination for example, will be very different. Buyers therefore need to consider careful what terms of trade make sense, in what circumstances. Taking responsibility for choosing modes of transport and carriers might ensure more visibility of likely arrival dates, making ongoing planning more controllable so the decision, as always, should never just be about the unit price.

3.9 Organisational Buying Behaviour Having spent some time looking back up the supply chain from a procurement view, we need to take a little time to see the opposite side and look into how buyers make their decisions. Often this view would be taken by the sales people, but of course every purchase has both suppliers and buyers and we have been arguing that this needs to be a more two-way and mutually considerate process, for best results all round. We need to recognise that there are different types of products in terms of their uniqueness, and shortly we will also explore how buyers gain information about products or services to buy. Straight Re-buy covers items which are well known and just need replenishing. Most information about the items will already be in the buyer’s systems but there may be price variations since the last purchase order. A Modified Re-buy is a purchase decision where the buyer needs to do some research to see if there are better product characteristics currently or potentially available from a number of suppliers and if prices or terms of supply have varied. A New Task has never been done before and all information required has to be found and evaluated. Given these buy types, how do we then find out about them? Figure 3.11 shows the overlapping characteristics of goods and services and how we can find out information about them.

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Search

Clothing Jewellery Furniture House Car

Most Goods Restaurant meals Holiday

Experience

Haircut Child Care

Most Services

Credence

TV Repair Legal Services Dentist Car Repairs Medical Diagnosis

Figure 3.11 Types of Products and Services.

Most goods can be found by a search process often now using social media or internet search engines. Commercial or industrial search can also be done through trade directories and publications, exhibitions or by invitation to potential suppliers as an information gathering process in the first instance, rather than as a formal procurement one. In personal buying, people now seem to use a mix of clicks and mortar in that they research what is possible using online shopping and search and if possible visit the retail outlets to try and feel the product and then often go back online to find the best price for the product they have decided on. The next category requires more actual experience to really evaluate them. We might still go through the search process before choosing the restaurant for example and we need to make a buying decision and visit for a meal, but the experience at the first meal determines if we will return for another visit, and tell our friends about the good or the bad experience we have had. Websites like TripAdvisor try to aid this process by drawing on others’ experiences, but we need to be careful about the sample of people who complete evaluations and to what degree we are going to put

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our faith into what can often be a small sample of the user population thinks and reports. The final category is where we can search but our decision is more influenced by what is called credence, that is, the reputation and/or branding of the goods and services. These services are very dependent on who is providing the service and this is very difficult to evaluate without experience. Such service providers tend to tailor their advertising to present a form of credence to potential customers. Look at lawyer and financial service organisations for examples. We have discussed earlier how suppliers are really only making an offer to a customer which is intended to satisfy the needs and wants of the customer. This is demonstrated in Figure 3.12 looking at how a product is defined. The core of the product is best thought about as providing some kind of benefit (satisfaction of a need or want) to the customer. Thinking in terms of benefits to customers keeps the focus right and avoids the trap of trying to sell whatever we already have. The Actual Product can be a physical thing or a defined service, but it is to some extent tangible,

Augmented Product

Delivery

Warranties Actual Product Core Product Benefit

Finances

Services

Tangible Installation/ Support

Customer Care Re-cycle

Figure 3.12

Product Definition.

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literally for the product, and less tangible, but still definable, for the service offer. Around the actual product we have the augmented product where features in support of the core benefit are added to the overall package of the offer. From a procurement point of view, all of these different features need to be considered, evaluated and clear specifications provided for the procurement activity with potential suppliers. From a supplier point of view, there might be less freedom to offer variations around the core product but the augmented product offers scope for negotiations and differentiation from competitors. It will often be in these areas that negotiations will focus. A term that sales people use is the Buying Centre. This refers to the wider group of people inside a business who are actually involved in a procurement decision. It recognises that such decisions are actually group based rather than the right of only one functional group like procurement. The sales people try and find out all of the people involved and try and find ways to influence the others in the process so that in turn they will exert internal pressure on the negotiators or bid evaluators in favour of the selling organisation. The users/specifiers are in effect the internal customers whose needs and wants have to be satisfied so that the procurement can be seen as successful. Of course like other customers, users might not know precisely what they want or how to get it and so specifiers might be needed to translate the expectations into a clearer definition. Sometimes this group might have preferred suppliers and are biased in their favour. A highly ranked surgeon for example might argue to keep purchasing from the same supplier because the results in the past have been good and (s)he is scared to risk changing. Influencers can help clarify definitions and might be technically competent to recognise what is possible. Technical personnel can often fall into this group. They contribute their expertise but are probably not that concerned with the decision choice after their involvement. The buyers are empowered by the organisation to manage the procurement process, select and evaluate bids and negotiate the final deal to agree the terms of business and service-level agreements. They will not always be technical experts in what they are purchasing, and that is why the involvement of the others in the buying centre is so important.

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Deciders have formal or informal power to select or approve the final choice of supplier. They may be senior managers or simply people of influence who everyone accepts has to be involved in the final decision. In the entrepreneur-owned business, they will often require involvement for as one such owner expressed to a consultant ‘it is my money after all’. Gatekeepers are people who in some ways control access to other people or can influence the flow of information. Personal assistants often act in this way to manage their boss’s time. Sales people will always try and find out who these people are, what their agendas are and how to influence them. They are not formally or informally involved in the purchase decision but are nevertheless very important people. In this book, we have been arguing for a more integrative and holistic approach to managing these interrelated and interdependent activities and the buying centre concept reinforces this view. It also demonstrates why the contracts that will underpin all of these interactions have also to be considered in the same way but with extensions to cope with other aspects of the total contract life cycle.

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Chapter 4 Contract 4.1 Context A legal contract is created with two purposes in mind. The first is to define the agreement between the two parties in terms of what is to be paid for what goods or services under what operating and monitoring conditions as well as defining conflict resolution and restitution processes. The second one is to allocate cost penalties in the event of some form of contract breach. The legal agreement has to be agreed to operate under a particular legal system, often determined by the customer. The second purpose is the one that traditionally has been the focus for parties who believe that trading is inherently an adversarial process where if one party wins something then the other party has an equally equivalent loss. Thus, the legal focus has been to anticipate and mitigate against failure of the other party and to allow for some financial recovery to compensate for any failure. This raises the very real problem of how anyone can anticipate the range of possible failures in order to include their effects into the contract and, if they could, would the counterparty accept them. It is also even more difficult when the contract is about services rather than products (which is increasingly the case at typically over 58% in 2017), given the intangibility of some service provisions. It is also very difficult if the contract is for services which have to be provided in a flexible way and at improving levels of performance over time. Best practice companies are now trying to put more focus on the first purpose, to define and agree on how business between the two (or more) parties is intended to operate for 141

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mutual benefit. In effect, this is emphasising the positive aspects of the relationship rather than try and anticipate the negatives. The privileged role of the legal function in contracting in the past is reducing as it is recognised that a more integrative team approach pays better dividends. The ideal situation is where a contract is approved and forms the basis for a profitable and mutually satisfactory set of behaviours. It therefore acts as a guide to working practice rather than being filed away in both organisations and only referred to again because the behaviour of any the parties causes a concern to the other parties such that they would need to try and invoke any of the liability clauses included in the contract. If any business relationship needs to invoke any of the legal mitigation clauses, then it is probably already too late to save the relationship and all that can happen now is more costs are incurred with more lawyers and in the replacement costs incurred to find new suppliers or customers. The legal function does have responsibilities to ensure consistency of treatment and risk management across a number of contracting units, and this is likely to increase with more contracts and more complexity but new technologies will impact this as we shall discuss later.

4.2 The Contract Life Cycle As in the discussions about the buying centre, there needs to be a wide ranging involvement from across the business functions to ensure that a contract is well thought out, a provider or customer identified, and everything agreed and implemented to the best of everyone’s abilities. Research carried out by International Association of Contract and Commercial Management (IACCM) has shown the cost of contracting at $6,900 for low-risk contracts, $21,300 for medium-risk ones, while highrisk contracts can cost hundreds of thousands of dollars. They also found that an average of 9.2% of annual revenue is lost as part of the 40% of contracts which fail to deliver all of the benefits which were negotiated and agreed during the early stages of the contract life cycle. They have identified 10 reasons for this, which they call Pitfalls, which are discussed here in order of importance. (a) Lack of clarity on scope and goals. This harks back to earlier discussions about customer voice and design and in supply procurement.

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(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

If this is not done well, then arguments are bound to occur and be the source of claims and disputes. Often, the legal or contract experts are not involved early enough to shape negotiations and possible agreements, so are left to try to make a bad job better but really when it is too late. Lack of involvement with all of the stakeholders. This might actually be a subset of pitfall (a) since, if they are not involved, their expectations cannot be properly incorporated into any agreement and they are likely to be dissatisfied with the final outcome. Adversarial negotiations, often around price and risk allocation, set the wrong tone and avoids discussing how the relationship is intended to work. Negotiations therefore are focusing on things which can go wrong and allocate blame rather than how to make them go correctly to reduce or manage risks and gain new opportunities. Lack of flexibility is a major issue, especially if the process takes too long to conclude while the world has changed. The wrong kinds of contracts then lock-in a no longer appropriate deal. Difficult to understand language and formats. If written by lawyers for lawyers and to anticipate court arguments, then normal managers cannot understand what they mean and 90% say they cannot understand the contracts they are supposed to operate. If the contract is intended to define how the business relationship is intended to work, it needs to be written and illustrated in a much more user-friendly style. A poor handover from the procurement stages to the operational stages are next in impact, no doubt also affected by any lack of involvement on contract agreement issues. Poor IT support can affect both good record keeping but more importantly tracking and reporting on contract performance. Contracts need to be written as documents to be used to direct practice and to facilitate reporting and improvement agendas. Poor post-contract award process and management. This is the area where the contract management activities are needed to make sure that all the promises and procedures are fully implemented and targets achieved. Without fixing the earlier pitfalls, this will be really difficult but, even if they were very good, the ongoing challenges of making good on all of the two-way commitments will require good

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people to be actively involved and properly supported in the two organisations. From this and other information, we can identify seven stages of the complete life cycle, which we will look at in turn. There is a clear overlap in the contract life cycle with the other functions we have focused on this book. Stages 1–3 have been covered in our design, operations and especially the supply chapters, so as long as these have been carried out with the extended contract team, then we should have selected and agreed a contract with the other party, which for our discussion we will assume is a supplier, although many of the same considerations apply to contracting with a customer. 1. Need identification and requirement specification 2. Make or Buy and if Buy then Sourcing strategy 3. Sourcing process and contract award The above issues were covered in earlier chapters, so this chapter will concentrate on the next four steps. • • • •

Initiation and Implementation into operation Contract monitoring and improvement Contract end game options Contract de-brief and capture of lessons learnt

4.2.1 Initiation and implementation into operation Once the selection and award process has been completed and everyone is ready to move into implementation of the contract, there arise a number of issues to manage. There is a structural decision as to who will be involved in day-to-day interactions with the other party. The choices are perhaps three. Of course, the people and function for whom the agreement was drawn up, the users or internal customers, are most dependent on the contract performance in order to meet their commitments to their downstream customers (internal or external), and so they will be intimately involved in coping with any crises that might arise, but formally the

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escalation of problem solving in the business-to-business interactions might involve an organisation choice between using the team that did the purchasing/procurement activities and a perhaps separate function set up to manage the contracts. There are arguments in favour of both (and the demonstrated practice in the benchmarking exercises discussed later suggest an even split in the choices made by different organisations), but some argue that the skill sets are different between the different stages. The procurement function is often commercially driven and operating as agents of the users or operations function. The skills of sourcing, bid evaluation and playing an important part in creating the contract can be different from managing ongoing and perhaps evolving business-to-business relationships, and so a separate function to manage the agreed contracts can make sense. However the organisational design issue is resolved, there is always a handover requirement from one stage of the life cycle to the next with at least a change in focus if not team members. Some organisations describe this process as mobilisation. Systems need to be updated with new contact information, schedules of operational and review meetings need to be planned, interaction teams identified and contacts exchanged, initiation meetings and activities planned and delivered, and finance updated on how to pay or submit invoices. These processes are described as Purchase to Pay in many organisations and computer software suites so that all steps are transparent and auditable to see if the internal compliance to the contract agreements is working well. It will often also make sense to consider how the agreed conflict resolution processes will work with the right personnel identified and briefed. If the contract is important enough, there might need to be a launch event at which senior managers are very visible in confirming their support of the agreed operational principles. This is good publicity, but more importantly it helps convince the other party that the organisation is seriously committed to the promises they made in the contract. Senior people need not be involved in day-to-day details, but should be part of the review process somewhere to demonstrate their continuing commitment. We also need to remember that the other party to the contract, while accepting the words agreed on the contract, will be watching carefully to see if their opposite numbers are behaving in the spirit of the agreement. If this is the case, trust will begin to build, and with trust comes new

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opportunities to solve problems and look for improvements. Trust however is very fragile. It takes time to build, but can be destroyed very quickly by an inappropriate action or comment. The face-to-face people need also to manage their own support and senior management teams to try and keep everyone compliant with the contract agreements. 4.2.2 Contract monitoring and improvement The users and operational people are stereotypically fixers who will try and make things happen even if their plans have to change for some reason, so if the contract is not working well they will do their best to cope and adapt and will interact with their opposite numbers in the other organisation to see how they can change plans and allocate resources to troubleshooting and problem solving and that should be part of the normal activities within the contract delivery process. However, there are two situations where this might not be enough. The first is when failure is not random but frequent (by decision or negligence) and then the conflict resolution processes needs to move into action with the goal of using the ongoing business relationship to surface issues and to deal with them fairly. This might happen because the world has changed in some way since the contract was signed and the current agreement is no longer so attractive to one or other of the parties. If there are no sensible modifications possible to these process difficulties under the existing contract, then we might be faced with a renegotiation of aspects of the contract or declaring a contract failure that requires a new partner search project, and maybe a breach of contract court case. The second situation (and one which should have been recognised as a possibility, if not a requirement, in the initial contract) is when an innovation in the product/service or delivery process has been identified which needs reconsideration of some feature of the initial contract. If the business to business relationship is a collaborative one and the actual behaviours of the parties have followed the promised mutually beneficial path, then this innovation will be regarded as worthy of support. However, it may be that some reward for the innovation is also fair. As

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in any joint situation, if equal benefit can be justified then it makes sense to agree that, but often one party will have had to spend money to create the innovation and that investment should be recognised in the modified contract terms. Suppliers in particular need to believe that it is in their interest to support their preferred customer by providing the innovations that benefit their joint part of the supply chain. If suppliers feel aggrieved by their treatment by the customer, they will look for more considerate customers to support and the relationship will no longer be such high priority. When changes do happen, then many of the IT systems will have to be updated to use the new standards and here change control is very important. In the same way that digital information can move from design CAD systems through to operational equipment before going to suppliers and into their systems, then a change control process needs to flow through the same information paths to ensure everyone in the chain is operating to the latest versions of the data. The well-publicised problems of trying to operate with different versions of computer-aided design software in the assembly of the Airbus A380 were some of the most expensive examples of what can go wrong. In this case, the software in Hamburg produced results that left the different parts of the aircraft unable to join together because the electronic cables were too short when supplied to Toulouse and this was in one company, albeit a difficult transnational alliance. How much greater is the potential trouble in international supply situations between legally separate organisations? (see http://www.nytimes.com/2006/12/11/business/worldbusiness/11ihtairbus.3860198.html). What is true for changes to product or process specifications is also true for issues around governance of operational activities, compliance with the raft of legal requirements in all of the different territories and legislative jurisdictions in which supply chains operate. This can be considered under the heading of Risk Management which can be grouped under sub-headings of Economic, Environmental, Geopolitical, Societal and Technological. Some of these are influenced by people’s actions and some by the joint effects on the planet of climate change.

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These global threats can of course impact our contracts, and so some degree of risk sharing and joint action to mitigate or recover is worth building into the contract agreements where possible and economically sensible, but sometimes we simply have to react and that can also make an amazing difference. The article listed below discusses the difference that Nokia managers made compared to their competitors in Ericsson when their common supplier’s factory suffered from a small fire after a lightning strike. Nokia initiated a series of changes before Ericsson realised there was a serious supply disruption and as a result Ericsson had to abandon their phone production while Nokia’s results showed little impact (see http:// www.economist.com/node/7032258). A regular process of contract review should take place, but this should be a two-way process where both parties can challenge the other about their performance against their commitments and to actively pursue performance improvements. While the process of contract review is important for all contracts, it is even more important for the preferred customer and supplier relationships. After all, these relationships are important because of the mutually supportive skill sets that they provide and for parties in such a co-dependent relationship it is even more important that all is well when examined from both viewpoints. When these are working well, it will be difficult to know where one organisation starts and stops. We worked with one electronics company whose preferred suppliers sat in a room inside their manufacturing factory with full computerised access to all the customer’s forward plans and current planning systems. It was they who decided when to replenish stocks in the customer’s inward goods systems by interrogating the customer’s production planning systems and they had full visibility and involvement with all the future product development processes. They were indeed partners in the best sense of the word. It is worth noting however that when the customer decided to relocate some of their business to a different market location and asked the suppliers to come with them, the biggest supplier decided against it as not compatible with their own development plans and so a very productive and collaborative relationship was wound down. Even the best relationships are subject to reevaluation and possible dissolution when the world

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changes. It is therefore worth considering the commercial equivalent of a prenuptial agreement to manage such transitions. 4.2.3 Contract end game options As the contract is nearing its end date, the customer and the supplier will begin to think of what happens now. Of course, the requirement for the contract may now have ended and no new agreement is needed, but it will still be useful to keep in contact with each other as the investments made in building the relationship might make for easier involvement for something new in the future. For some form of continuing need the buying centre options apply here but we have to recognise which sector we are in. In the public sector, all contracts have to finish and, even if everything worked as planned, we are obliged to treat the next contract consideration as a new task and run another procurement competition. In the new competition, we are not allowed to favour the incumbent suppliers’ performance, they have to compete as if they had no prior involvement with the purchaser. In the private sector, we can be facing a straight re-buy and if agreed by both sides can renew the contract very easily, maybe with some pricing variations if market conditions have changed enough to justify it. A modified re-buy will require new negotiations but not necessarily a new sourcing project. The value of the prior relationship experience can justify a new award to the current supplier even if there have to be some negotiations to reflect the modified specifications and requirements. It might be that the purchaser feels the need to evaluate alternative bidders, but it will be better to explain that to the current supplier as part of a market reality check rather than as a direct threat to the current supplier. It is also possible to go to the market to consciously look for new ideas and information with no intention of switching suppliers but rather to use the information to drive the improvement agenda with the current partner organisation. This should be done with the full knowledge of the current supplier but sounds a little unfair for the possible alternative bidders who might, if they realise what is going on, be more reticent to share their secrets.

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4.2.4 Contract de-brief and capture of lessons learnt All organisations should be learning all the time how to perform better at everything they do. The competitive race does not let up, and learning effort is usually rewarded. This is very much the case for contract management, but is rarely done well if at all. The pressures of business often mean that the procurement team just want to move on to the new challenges and get the new deal in place while a supplier needs to find new customers, so will stress the search and sales process rather than the reflective benefits of a contract de-brief. Examining what went right and wrong, what could have been done to avoid these bad issues or at least mitigate against their possibility, as well as understand the people skills and attitudes which worked or did not, in which circumstances, is information that can be used in the next contracting process to avoid repeating the same mistakes. The process will be aided if the information systems around contract review were used to record major events, discussions and agreements on actions needed. Overall performance reviews (especially to provide proof if the 9.2% wastage did not happen) will be important and all of the lessons learned should be built into procedures to be used in the next contracting process. Documenting how the contracting process has contributed to the user performance results and to the business success criteria will also go a long way to ensure that senior managers recognise the value and contribution of a properly staffed, trained and supported set of groups involved in the overall process. After all, 9.2% of annual revenue might well be greater than their profit margin, and reducing this waste might be easier than generating new sales to increase profits.

4.3 Law, Intellectual Property and Negotiation While not everyone in the contracting process need to be qualified lawyers, it is well worth everyone understanding enough about the law to avoid obvious errors and to also recognise when the full capabilities of an expert are necessary. Not all business arrangements will need full contracts, but when they do it is important to recognise that they will be subject to some particular features depending on where the contracts will be legally located in terms

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of different jurisdictions. The world is largely split into two different kinds of systems. Any contract has to indicate under which jurisdiction the contract will be set up and where any breach of contract actions will take place. Often, this will be chosen by the customer but should certainly be made clear to all concerned. The two basic systems have their differences through their historical development. Much of the world is subject to a process called Civil Law where decisions made by the state set out a framework of legal principles. The origins go back to late Roman times. The alternative system, and the one most common in the extended Anglo-Saxon parts of the world, is the Common Law. Here, although the legislatures will pass laws, the courts operate by judges’ interpretation of these laws and their subsequent rulings in actual court cases, thus creating a precedent that informs future decisions. For this reason, this system is also referred to as case law. For the purposes of this chapter, we will discuss English law. A contract is above all an agreement between at least two parties who intend the contract to be enforceable in the jurisdiction agreed. This means that an aggrieved party has a belief that any grievances will be dealt with fairly by the legal system. This of course also requires that there is an effective and impartial legal process working in that jurisdiction. The contract requires that one party offers some terms of trade, which are accepted by the other party, so offer and acceptance is important. This means that both parties have to be able to understand and agree the details of the contract, so infirm or young people are not deemed able to agree to any contract. Some consideration (not always money) is needed in English Law to mark the contract. Contracts are also deemed to be void, that is unenforceable, if one of the parties was under some kind of duress to agree or there was any deliberate or even unintended misrepresentation of any information presented in the contracting process. While the contract will address many of the issues we have already discussed about rights, obligations, performance measures, measuring and reporting and conflict resolution, one very important issue is that of intellectual property (IP). Organisations build up experience and knowledge in many aspects relating to their chosen business experience. This belongs to them and is largely why another party wishes to work with them in the contract. It is

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recognised as Background IP and is not expected to be transferred during the contract. However, new knowledge will be created during the time of the contract, referred to as Foreground IP and ownership of this needs to be agreed and incorporated into the contract at the very beginning to avoid later disputes. Customers will often claim foreground IP since they are the ones who recognised the need for a new solution to offer to their own customers and they therefore contracted with the supplying party to use their background IP, along with the information provided by the customer, to create the new solution and new IP. While this is an example of co-creation as we discussed earlier, there is still the issue of what happens to the innovation after it is successfully developed. The customer might have no interest in the new IP once the immediate need has been satisfied, so for them to own it but not use it can be seen as a wasted opportunity. The customer might however wish to use it again with new customers so would be interested in owning the new IP. In a similar fashion, the supplier might see opportunities to supply the new IP to another of their customers, but the current paying customer might not want their competitive advantage given away too quickly and so might stop this through the ownership of the IP or by having some kind of delay clause inserted into the contract. For customers who do not see commercial advantage in any future use of the new IP, it might be sufficient for them to have the right to use the new IP for no further cost for as long as they need it, but not to claim ownership. These are difficult circumstances to anticipate and evaluate, but all parties need to be aware of the options and their relative constraints and opportunities. The new foreground IP might be codified in some way and incorporated in products or processes, and this valuable property can be protected in a variety of ways. Copyright © refers to anything that is written, and there is an automatic assumption that the originator of a published piece of work owns the copyright for between 50 and 70 years after their death. During that time, the obligation for anyone who wants to use these words is to

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acknowledge and fully reference the source author’s works. Databases follow much the same rules. Trademarks ® have to be registered and in the EU last for 10 years but can be renewed indefinitely. They show who created the goods and services and protect businesses, to some extent, from competitors passing their offers off as yours. Designs ® are about the look and feel of items, and almost anything can be a registered design. They can be products or craft items, logos, typefaces, packaging, colours, drawings and artwork, parts of products, ornamentations, web designs, maps or even actions in advertising, but not computer programs. Patents are for major innovations and last for 20 years but the details have to be filed in every jurisdiction where the innovation might be traded, so it can get very expensive. You have to prove that the designs and processes are new and so have to search for earlier ones that might do the same thing, which would prevent you being granted the new patent. Then you have to go through a process, taking up to 5 years for the first one, at a cost in the UK of £4,500. Replicating this in each jurisdiction is clearly a concern. The fact that you have to disclose so much information to prove uniqueness is also is a problem since a competitor might be able to effectively reverse engineer your ideas, modify them a bit and produce a competing product on the market. For this reason, if you have something unique, it might be best not to patent it but to keep it a complete secret and let the competition try and understand your solution by buying your finished product and trying to break it down to find out how it does what it does so well, a process described as Reverse Engineering. In any supply chain transaction, there is an inherent dilemma. We often need the other party for complementary skills, but we need to share our ideas and background IP to make the contract work. In this way, the other party learns a lot from us, and it is not unusual that the cooperative party in the contract becomes a full competitor afterwards. This can even be a tactic for a developing country to look for sub-contract work from global brand owners for their local supply companies who are even not expected to make money in the conventional sense but to learn from or even steal ideas and skills from their customers to build up the local knowledge base

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with the aim to compete in the global markets. Such countries are often accused of showing little respect for IP, but over time as they develop their own IP they will wish to protect it and the courts may become more active in protecting everyone’s IP so that their own companies are also protected. With very important mission- and survival-dependent information, it could be better to avoid supply chain solutions altogether and build or use internal capability to produce the desired outcomes.

4.4 Ethics and Corruption In the supply chapter, we discussed how the threat of corrupt activities in government procurement practices has influenced the direction of the EU Procurement Rules, but there are other aspects of corrupt practices about which those involved in contracting need to be aware. The Foreign Corrupt Practices Act 1977, while an American act, is written in such a way that anyone or any organisation who has some form of connection to life in the USA is subject to its provisions, especially since an amendment in 1998 (see https://www.justice.gov/criminal-fraud/ foreign-corrupt-practices-act). It essentially makes it illegal for any form of bribery to be offered to a widely defined range of foreign government officials in order to secure decisions in favour of the briber, which might not otherwise have been made. Very many major organisations have been subject to large fines when wrongdoing has been proved or admitted. There is also provision that full accounting records should be able to prove that transactions have been legal and in support of this organisations should have in place procedures and training to indicate their belief in not operating corruptly. In some cases, businesses have accepted a lesser charge of inadequate accounting or disclosure rather than admit to the corruption charges. They have then modified their visible information on brochures, websites, training and policy documents to indicate that the organisation recognises their commitment to ethical trading. There is a problem however in countries where some form of bribery is accepted. Grease Payments are a form of bribery which does not change a decision which would have been made anyway but simply speeds things up. An example might be delays at a customs post where an inbound shipment would get through in turn but

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bribery facilitates a jump to the front of the queue. To many, this is no less an unfair advantage and often the monetary amounts are not large; however, the distinction is a rather fine one. The UK Bribery Act includes these as prohibited, but the reality is that few cases at this level are brought to trial (see https://www.legislation.gov.uk/ukpga/2010/23/contents). It is interesting to note however that the Swiss courts only as recently as July 2016 brought their own laws into more alignment with other major trading nations. This emphasises the issue of international trade where not everyone is operating according to the same rules and might be considered to be taking advantage of their situation in some unfair way.

4.5 Risk All business activity runs under conditions of risk and uncertainty from which they hope to generate financial returns. Generally, the riskier the business activity the higher the rewards have to be to justify running the risk, the so-called Risk Premium. However, the words are used imprecisely since in an uncertain world an outcome can be less than desired or greater than expected due to the uncertainty. A bad outcome is called by many, a risk, but this ignores the other possibility where the outcome is better. We can also talk of an Upside Risk to reflect a better outcome or a Downside Risk where the result is not welcomed. Unwelcome occurrences can take many forms in life and business. Some of these possibilities can be recognised and their financial implications estimated, their likelihoods estimated with a probability value and the Risk Exposure calculated by multiplying value by likelihood. This will help decide how much money it is worth investing to avoid the risk or reduce their impact. However, it is often more about Risk Attitude which reflects on a manager’s propensity to accept or take risks. This can be translated into a prevailing culture of a business. Possible impacts of course vary enormously in terms of size and extent of their effects, and our extended supply chains exacerbate these. Some risks are manifested as small perturbations in a flow, for example when a planned delivery is late arriving at a manufacturing unit. The unit

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operational managers are skilled at rescheduling and rebalancing their resources to cope with this kind of effect and no one else might recognise that the event happened. If it happens frequently however, that is the probability increases markedly, then larger remedial action might be needed and this can take place across a contract boundary and be the subject of a performance review. Larger impact events can create larger disruptions in the flow, causing larger efforts to try to cope and adjust, or in the limit, stop the flow altogether causing a business interruption. The Nokia and Ericsson example we used before demonstrated that the Nokia managers minimised the impact of the same flow disruption that caused a calamitous production failure for their Ericsson competitors. So, disruptions can be anticipated or not (as in the unknown, unknowns we talked of earlier); they can be evaluated by what are sometimes very personalised estimations of probabilities affected by particular personality features; they can be built into evaluation processes to estimate how much it is worth to try and avoid or mitigate the impact if the risk happens. However, rather like the lawyers who try and anticipate what might go wrong in a contract and write mitigation and damage recovery clauses into the contract, we cannot foresee all eventualities. We have also seen that for small disruptions, local fast-thinking managers can adapt to reduce the impact. However, how do we deal with sudden, large impacts? The supply chain can be part of the answer if the relationships are good since immediately there are more resources and distributed knowledge to bring to bear on finding workarounds, if not permanent solutions. Part of the Nokia story demonstrates this feature as well. One key factor is available time to respond. When the crisis hits with no warning, then the task is much bigger, so getting warning of possible problems allows for a more considered response with perhaps some alternative options. How do we get such warnings? Cooperative relationships in the supply chain, backed up by the right communications channels and the right attitudes, can help greatly. The problem sometimes is that rather than admit to an issue arising which might create a supply problem later, there is a tendency for suppliers in particular to try and fix the issue before telling their customer of the circumstances. This is partly to ensure their customer does not have any information which might cause them to doubt

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the supplier’s capability and partly to demonstrate their coping ability to themselves and if necessary their customer as well. However, it is actually best practice to inform the customer of all such possibilities as soon as they become apparent since this allows the customer to also begin to think of plans to cope if the problem materialises. The supplier should still inform their customer of what they are doing to avoid the issue impacting their service delivery to the customer even if no action is requested from the customer in the meantime. Both parties can then be part of solutions if that becomes necessary, but at least the customer has had time to think and consider their options as well. In the same way as product design can incorporate robust features to ensure quality, the business relationship needs to build robust interaction and communication processes to ensure the supply chain has a chance to overcome disruption challenges. In many global supply chains, the source of a problem can be very difficult to find. Food adulteration issues in the milk supply chain in China spread around the world, while the horsemeat scandal in Europe had a supply chain which crossed many national borders. Problems included lack of visibility into the extended supply chains, insufficient quality checks or in fact criminal misreporting or ignoring of concerns. Driven by small actions by uninformed and uneducated small farmers in China and criminal gangs in Europe, regional governments and clients of the supply chains had to greatly increase their inspection regimes, but in China this was after very many children in particular died or became seriously ill after consuming adulterated milk products. The major lessons learned were to do with the major brand companies seeing past the first tier of suppliers and in effect cascading the best practices back up the supply chain to earlier players. The major brand companies had to deal with major reputational risk effects, product re-calls, customers switching brands or stopping buying any similar products and renewed and increased focus on how they ensured compliance to their own and international quality and food safety standards in all areas of their supply chains. Here again is evidence that business risk can never be outsourced or removed through market trading. The responsibility (especially for safety but actually for all the product/service features) is still the final supplier’s

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or brand owner’s to ensure that what they process and pass on to their customer is everything the customer believes it to be and the supplier can also prove it to be so approved. This is a legal requirement in developed marketplaces and more importantly a moral obligation, in order to be worthy of a customer’s trust. Customer trust is what provides the supplier with a licence to trade but once lost is very difficult to recover, if indeed recovery is possible. Even the mighty Toyota got much of this wrong when they suffered problems with faulty braking systems around the world (see http://www.motortrend. com/news/toyota-recall-crisis/).

4.6 Measurement All businesses need to measure their activities at all stages of the transformational processes we discussed earlier in the Operations chapter. Neely (1998) suggested that there were four purposes and three uses of measurement, which is a helpful way to consider the issue. Under the purpose heading, we have Check Position which relates to classic control as one might drive a vehicle for example or operate a room thermostat. Once identified, the measurement can be used to Communicate Position to all of the relevant stakeholders, for example reporting on financial results to shareholders and financial analysts. Measurements also allow us to Confirm Priorities as it might be that we have stayed in control but the world has changed and we need to refocus our strategic direction. For example, we may have increased market share in our current market but we now realise other markets are more attractive. Measurement can also be used as a carrot or a stick to Compel Progress, in other words to reinforce directives given to personnel either to improve up to the given standard or to accept new directions as a result of a refocusing decision. Thus, the uses of the measurement are to control against Key Performance Indicators (KPIs) and in our supply chains these should have been mutually agreed as part of the deliverables of the contract and should then be subject to reciprocal measurement processes. We talked above about licence to trade, this is a form of Health Check. Is the business doing what it promised in a consistently efficient, effective, safe and socially constructive way? If not, then customers can very quickly remove the licence to operate by simply not

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buying from them anymore. Of course, some businesses operate in highly regulated markets in finance and aerospace sectors as well as legal and medical professions for example and the licence to operate is real and tangible and might be displayed on the walls of the business and in their advertising. The final use is to Challenge Assumptions. The market example above illustrates the point. We had assumed that one market was the place to be, but new information causes us to reexamine that choice to see if there is a better one. In the supply chain, this might be when having committed to one supplier we find a new supplier with a much superior product or demonstrated performance success and we have to ask is it worth the changeover or switching costs of cancelling one arrangement to build another or can we realistically refocus the existing business and its measurements but stay with the current supplier. First of all, we need to understand the difference between efficiency and effectiveness. Efficiency is about use of resources and can be consider the ratio of useful output to input, but effectiveness is about the overall benefit of having done the action. Sometimes it is described as ‘Efficiency is about doing things right while Effectiveness is about doing the right things’. However, doing the right things can be achieved inefficiently so we need to do both. There is another issue however in that efficiency is more often measured at a local level where quantification is possible and this is where the problem of Sub-optimisation can happen. This is the situation where a local, efficient result is achieved, but at the total business system level the result is less effective. For example, a production operations manager can be very efficient producing more output than scheduled of one kind of product using the same input resources, but if all it does is to create a delay in working on other desired products then the system effectiveness is reduced. Why would this happen? It can be because reward systems can produce unexpected consequences if not thought through properly. If the local manager is incentivised on the basis of efficiency and not effectiveness, then it is in her best interests to optimise efficiency and the business overall will suffer. In extended supply chains, where there are a series of one-to-one relationships and contract links with effects rippling up and down the chain, it may be that one part of the chain should be inefficient in order to make the chain effective overall. However, without the total view of the

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chain and an appropriate rewards structure at chain level, where is the incentive for a supplier, far removed from the area of concern, to perform inefficiently? In these circumstances, relying on a serial set of communications and requests for change to ripple back to that supplier is unrealistic. It might be necessary to bypass many links and go direct to the supplier to find a way to compensate them for the local inefficiency. Of course, getting agreement on the appropriate chain levels of performance measurement is a difficult task, but performance against agreed metrics at all points along the chain is a good place to start and to focus on the customer satisfaction of the final consumer on whose payment all in the chain ultimately depend. If all contracts could avoid the 9.2% loss of value identified by IACCM, then all in the chain would benefit alongside all of the customers along the way to the final consumer.

4.7 Business to Business Relationships This book has argued that for those critical few customers and suppliers, there is no logical alternative to cooperative and mutually supportive relationships of the partnering kind. We have seen how the processes to identify and form agreements with preferred partners is challenging, but we must also recognise that life after selection should not be easy. The effort to provide a win on both sides of the relationship is significant and that is why it is not sensible to try and work this way for all relationships. This indeed is the logic behind the relationship portfolio approach, but the mutual measurement and challenge to continuously improve captures the quality journey ideal as well. Part of the contract discussions should be to capture these features and make them part of the normal way of working, and we have also argued that the benefits split needs to be agreed upfront. This is not based on any historical perceptions of the power of the customer but rather a considered and considerate mutual evaluation of what is appropriate and fair to each party. One group in the USA calls this approach ‘Whats in it for WE’ rather than the historical and adversarial approach where the WE is replaced by ME. This is a movement based on research done at the University of Tennessee which aims to promote this kind of

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thinking under the Vested banner (see http://www.vestedway.com/layingthe-foundation-whats-in-it-for-we/). In the UK, the Institute for Collaborative Working has been instrumental in creating an International Standard in ISO 44001 2017 for Collaborative Business Relationship Management Systems (see http:// www.instituteforcollaborativeworking.com).

4.8 SCMG Ltd Contract Management Benchmarking Framework In 2010, The Royal Bank of Scotland commissioned the author, through the University of Southampton, and the consultancy company SCMG Ltd, to investigate how to benchmark their contract management practice. This led to the creation of an online survey tool and the growing of a group of interested practitioners who respond to an annual survey, which RBS still supports through participation and hosting events. The online site demonstrates the logic behind the contract management model with examples and discussions, so will not be repeated here. The model is simple, but to our minds, captures the important features also discussed in this book. Participation is free and geographical location is not an issue (see http://www.scmg.co.uk/cmb/manage.htm).

4.9 People Skills The essence of this book is that the business need is paramount, and how we choose the internal organisation of our business can create divisions and difficulties to coordination and effective performance. The biggest challenge is the understanding and vision (or the lack of these things) of the management group, since with the right amount of time and resource allocation most things in business can change. So we need to have educated and motivated leaders. However, the overall model is not just dependent on them. The concept of a supply chain helps reduce the significance of boundaries between business entities, but the same driver should also be apparent inside organisations since if there is no atmosphere of collaboration inside the organisation, it is likely to be less than optimum between organisations.

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Relationships with key customers and suppliers is fundamental to this networked world, but we still have to manage the currently non-critical relationships and contracts for even very low value items or services can become critical very quickly. We need to be training people at all levels in our organisations to welcome the challenges of thinking about larger supply chain issues and looking to grow effective responses to ensure customer satisfaction and sustainable business activities. Not all relationships need to be fully collaborative, but some of the general principles should be uniform across most areas. Considerate and data-driven planning, effective and open communication channels using IT systems to best advantage, face-to-face discussions and attentive listening, striving to be and do the best with an attitude of continuous improvement can all be applied. One set of skills that is often neglected is that of selling ideas based on thorough business case generation. With the reduction in the importance and use of power, the business activities are much more about persuasion and in that sense an idea has to be sold to the other stakeholders. Perhaps the most obvious place to start on this improvement journey is to accept the challenge of the 9.2% of revenue wasted through poor contract management and do something to reduce and finally eliminate this waste of scarce resources.

Chapter 5 Possible Futures The great science fiction writer Arthur C Clarke first said in 1962 that ‘If an elderly but distinguished professor says that something is possible, he is almost certainly right; but if he says that it is impossible, he is very probably wrong’ Clarke (2013). This author certainly fits the first part of the description if not the second, but here goes anyway.

5.1 Global Warming What we have been discussing so far is the current state of the world, as seen by this author at least. However there are many suggestions that in many fields driven by technology we are standing or getting close to a cusp where things might change very quickly. The biggest possibility to many people’s eyes is climate change, and for all those who deny the weight of scientific evidence and informed opinion there are increasing legions who believe action is needed now to give our children a chance to have a future on this planet. One of the scariest thoughts might be the changing rate of change. So far, we are concerned about the rise in CO2 emissions and more recently the particulate emissions from diesel vehicles but these trends have been somewhat slow suggesting that we might have time to respond, change behaviours or invent a new technological solution. However, the cusp aspect comes from possibilities of global warming from permafrost under the tundras at the poles, releasing methane (the chief CO2 gas) in great quantities very quickly. This could 163

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accelerate the warming effect and thus bring catastrophic change more quickly and severely. The melting of the polar icecaps where, as the ice melts global seal levels rise, exacerbates this. Shipping transportation is a large contributor to global warming, using as it has the dirtiest type of fuel oil for its engines. Legislation is forcing this to change but will it come quickly enough? Our current global supply chains have been chasing low-cost labour sources around the globe but in many products labour cost is not the most significant one. For too long, the same narrow and sub-optimal view has been taken but once we begin to seriously calculate the real, total cost of our global supply chains will we be happy to continue? Part of the logic for these approaches has been the different evolutionary state of the business activities around the globe, but as emerging nations approach or exceed parity in gross domestic product (GDP) with the old developed world perhaps these pressures will be replaced by trends to reduce the length of the global supply chains. In this process, more local groupings might be anticipated where even more trade is within the local group than between them. Of course, the UK leaving the EU and USA leaving the Trans Pacific Partnership (as it was called at the time) goes against these trends. Indeed, the Chinese Belt and Road initiative, although driven by and supportive of the ambitions of China to become or maybe consolidate their role as the leading trading nation, still envisages a degree of global trade between trade groupings, so who knows how it will turn out? At the very least, one would expect global businesses to take a more holistic view of the economic and social impacts of their decisions about where to locate their business activities.

5.2 3D Printing Another feature to challenge the need for logistical distribution at all is the rise in what has come to be called 3D Printing. While actually a very wide range of different techniques, the essence is that materials are produced in layers similar to an ink on paper printing process except that structures are created in the third, vertical direction to produce composite parts which often do not need to be assembled in the way that traditionally produced items would be joined together. Nevertheless a layer-by-layer structure takes time to complete. The range of currently practical materials, while

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wide, is not as wide as in traditional manufacture and there are still practical reasons to favour traditional methods, especially for highvolume, simple parts. Biological materials can also be used to create structures to mimic human ones so that alternatives to transplant surgery and electrometallic systems are becoming possible. This demonstrates perhaps the focus of likely applications of 3D printing which are for lowvolume, relatively unique parts. Its main role in manufacturing may be in prototype generation and testing, especially for the tooling to produce in volume later through plastic injection moulding perhaps. Maintenance and repair is one area where 3D printing makes most sense. By its nature, a complex piece of equipment which needs a replacement component part poses huge logistical problems. Do we store (where?) inventories of parts in case of an unpredictable failure or do we hope to react to the failure by producing the part, as if for the first time, which then gets delivered along some logistical pathway. Both of these are more or less impractical. Space travel demonstrates this, where space is limited for inventory and a replacement part cannot sensibly be sent to fix the problem. Storing the right kinds of materials on board a space ship, for 3D printing on board as required, is a theoretically better solution to the problem.

5.3 The Internet of Things One of the greatest inventions of the 20th Century has been the internet and its essential openness and lack of central ownership has allowed for rapid expansions in scale and reach so that it is hard to envision an world where the first response to any question is not to Google it and search Wikipedia. Of course, the lack of central control has also produced concerns of a variety of types and some of the companies actively involved have huge financial and, maybe indirectly, political power. Until recently, the internet required computers in some form (from smartphones, tablets, laptops, desktops to data centres) to connect to other computers over global networks, but this still involved humans directing some enquiry or communication. The next big thing is to embed in a variety of artefacts (from clothing to refrigerators to vehicles to light bulbs and so on) sensors which can connect to the networks and create the Internet of Things. This greatly

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expands the possibilities for working and living in new ways as well as some scarier scenarios. It is possible to have your refrigerator monitor your food consumption and refresh your food stocks automatically by sending a purchase order to the supermarket and have the delivery made, probably to some safe place on your property or for pick up on the way home from work. The refrigerator can also warn when your food is approaching its best before date so can reduce the likelihood of food poisoning. Home security and access control can be done in this way and remote monitoring and permissions can be granted. You can see what your pets or aged relatives are doing and take some actions from a distance. More eco-friendly domestic heating and lighting controls will reduce overall consumption. Already, aircraft engines have machine logging sensors and condition monitoring built in, and as the aircraft lands the flight operational data is downloaded and analysed so that maintenance planning can be better informed. This is very significant as without this data the maintenance people often will not know what they need to do until they open up the engine and see for themselves. This makes the extent and duration of the repair uncertain in an industry where fast turnaround is key to profitability. After all, the aircraft only earns money when it flies. As the engine manufacturers move more to ‘Power by the Hour’, it is in their interests to reduce this downtime to a minimum. The possibilities are very extensive and limited only by human imagination, and entrepreneurial drive along with much greater network visibility and social acceptance.

5.4 Robots At the moment, Robots are limited examples of this. While relatively simple robots are already very important in manufacturing factories, nuclear and disaster search and rescue and clean-up operations, their application to more general applications are still patchy. In Japan, there is a high level of acceptance for companion and health care type robots around the home, but much work is ongoing to develop them to allow for higher acceptance levels more widely. There is a fundamental question about how humanlike we want them to be for domestic acceptance and even simple delivery

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robots being tested in Los Angeles are being constrained by the local politicians in terms of their speed and place of operation. Society, however represented, has some difficult questions to answer. In the factory, however, the trend is clear. People are just too expensive and variable in their behaviour (while also needing to eat and sleep), so the robots are progressively replacing the human workers. Foxconn, the main sub-contractor making products for Apple and Samsung, is replacing work people with robots on a massive scale (see http://www.bbc.co.uk/ news/technology-36376966). At the moment, most of these robots are not designed to be able to safely work alongside humans and tend to work behind safety fences, but over time it is possible to see robots working as part of a mixed team with humans, where this makes sense. This is already possible in remote surgery where a skilled surgeon in one location operates a surgical robot in a different location and performs a surgical procedure that was not available locally. Distributed medical treatment of this kind has a huge potential given the areas of the world which do not have the same levels of health care, or the practitioners of this kind of skill level. All robots are not of course applied in universally beneficial ways for all of the populations involved. The use of drones in conflict zones removes the direct risk for their pilots who would otherwise fly these missions but might mean that the collateral damage issues are more extensive. There is also the possibility that effectively killing people from the computer screen in one country produces a certain detachment from the human horror at the receiving end so that the drone operators find it psychologically easier to fire the missiles and then go home for dinner with a more limited awareness of the actions they have taken. Does it make it easier for politicians to take such decisions about conflicts when they have no ‘Boots on the Ground’? On the other hand, remote monitoring might make the prosecution of war crimes easier and therefore act as more of a deterrent. In these issues, there are clearly no easy answers, but if the technologies are there then they are likely to be used. War is played by adversarial games in which win wins are not likely. Only diplomatic games can hold out the possibility of that kind of result. Of course, drone technology can have beneficial uses in civilian society. Already a drone has dropped safety flotation equipment to save

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swimmers in trouble off Australian beaches. Their use in search and rescue operations can increase the areas to be searched dramatically and reduce reaction time to rescue. Medicines can be delivered quickly enough to be effective without worrying about the need for refrigerated transportation systems. In Tanzania, the Zipline company has a distribution system based on drones flying at 110 km/h and a communications process built around text messaging. In more commercial settings, drone technology is being developed for use in the final delivery process to customers who order with Amazon.

5.5 Blockchain While cryptocurrencies like Bitcoin are gaining a lot of attention and concerns exist about a black tulip, or South Sea Bubble effect, what lies behind this is the use of Blockchains. A blockchain is in effect a computerised record or transaction ledger where a particular event is recorded, encrypted in a highly secure manner and then validated by a globally distributed network of computers. In this way, no record can be changed by any individual since all in the network would have to accept the change. This makes it very secure against hacking or fraudulent behaviour. The involvement of so many other parties also makes the system very secure and fault tolerant as in effect there is a high degree of redundancy in the network that no organisation or company could afford on their own. The further application to Blockchain 2.0 allows the creation of Smart Contracts which have the capability to facilitate exchange between two parties so that a supplier for example gets paid automatically when the delivery is registered at the buyer’s end of the chain. This action disintermediates so that banks, for example, are no longer required to act as storage of value and distributer of value on each side of a transaction. Blockchain technologies are being evaluated in voter registration, recognition and vote counting. They can provide unique identities and provenance information for all items and could avoid incorrect medicine delivery in hospitals and the inaccurate inventory information in storage facilities (which might be backed up by drone data collections perhaps). Some argue that Blockchain provides a foundational technology that

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will allow new forms of commerce to emerge, but in the meantime can cause those businesses and activities that are disintermediated to disappear from the scene with consequential impacts for turnover, taxes and employment. The impact of Blockchain approaches to business-to-business contracting could be profound as would be the impact on house buying where the unique identification will simplify the process of proving who has title to the ownership of property thereby facilitating the process of offer and acceptance. For international trade, blockchain methods could greatly speed up information processing, insurance and customs clearance, for many of the same reasons as above. Whether the cryptocurrency versions will replace money and credit is still unresolved. Given so many of the current systems need to have proofs of various types to operate efficiently, the extent of these developments could be profound.

5.6 Artificial or Computational Intelligence Another foundational technology is Artificial or Computational Intelligence, however the definitions vary over a wide range. It is essentially trying to replicate (and some argue surpass) the human abilities to reason, analyse, decide and act and maybe also to create. Within bounded domains there has been great success, for example the factory robots, but these are essentially doing what the humans have instructed but without error. Systems having more autonomous capabilities have also been demonstrated in a variety of areas especially in gaming with Chess and GO human masters being outplayed and even in the American TV game show Jeopardy (which has no formal rules as in Chess and GO) and now we have computer chess programs competing against each other. Partly this has been a function of huge calculating power to work through all possible combinations of possibilities (in Chess and GO), but in Jeopardy and the newer game systems this has involved accelerated processes of learning by experience and analysis of huge volumes of data to find out which

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decision path is better to choose. The newer chess programs have also won by not doing anything that human masters would have regarded as best practice thinking, but it worked. The machines might soon be teaching their teachers something new. In our earlier discussions about the critical importance of the design activity, we were worried about the fact that design decisions have currently to be made with an incomplete view of the world that the design will inhabit and thus decisions made in good faith in these circumstance will be flawed in some sense as new information from elsewhere in the extended networks becomes available. To make sense of the different knowledge domains and real-time data (and future projections from markets perhaps) and build this into a design system that can allow the designer of the future to make a fully informed set of trade-off decisions to specify the most stable and ecosystem friendly design, such that right first time becomes a realistic possibility, will require a very creative and well-resourced effort. The organisation that can make that happen will have no difficulty selling the product if it is at all reasonably priced, for the need is real and urgent. The current race to develop autonomous vehicles (including the drones) is an example of how many different knowledge, technical, regulatory and social domains need to be incorporated into the intelligence built into a variety of computer systems. For vehicles, the internet of things might aid this as every vehicle, traffic light, road architecture and pedestrian(?) might be connected into the available knowledge space. It is also worth noting that as of 2016, 30% of all civilian jobs required some form of involvement in driving a vehicle, so what happens to these jobs when autonomous vehicles are fully developed? (see https://www. bls.gov/opub/ted/2017/30-percent-of-civilian-jobs-require-some-drivingin-2016.htm). There are currently serious attempts to address the ethical dimensions of driving in that given a choice in an evolving, dangerous emergency situation should the car save the occupants of the car and kill a pedestrian or vice versa? In the movie ‘I, Robot’, Will Smith’s character is saved from his submerged car while the 12 year old child in the other car is left to drown because the robot calculated that Smith had a better probability of survival

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and only one person could be saved in the time available. Smith’s view is that a human would have chosen the other way round. We could argue of course that the programming could have had a rule to favour the young over the older person but then the film would not have worked the same. The film also features Asimov’s Three Laws of Robotics even if they attribute them to one of the characters in the film. The logic of the three laws has been seen to be dangerous to humanity and is the point of the film. Asimov later added a fourth or zeroth law to deal with this concern. Significant thinkers see in these developments a threat to human society or maybe a merger of the computational with the biological as we evolve to a society of cyborgs. The science fiction writers may have valid points for us to consider? The essence of all of these developments is the increasing power of computers, their miniaturisations, the internet and network of things and the ability to very rapidly process vast quantities of data to look for patterns which are difficult if even possible for human intelligence to perform. The computational intelligence label is to indicate this difference in capabilities, origins and structure of data processing.

5.7 Job Displacement It is the ability overall to process large data sets which might be the most disruptive of our current world model. Martin Ford (Ford, 2015) used the word ‘predictable’ to define the jobs that are most at risk in the new industrial revolution that is dawning. Any job which can be described as repeatable patterns of behaviour can be taught to a computational intelligence or even better, learned by that intelligence by simply high-speed analysis of huge data sets. This definition captures many middle management jobs. In health care, radiologists scanning mammograms have human error to contend with as they become tired or distracted and they have a limit on how many they can process in a given time. Smart learning algorithms do not have these constraints, and this capability will also impact legal activities (especially reviewing case law), contract managers comparing different contractual clauses and outcomes and logistics planners trying to optimise vehicle routing plans. Other professions affected will include scientists, journalists, pharmacists, insurance and banking sector employees, trading

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companies and freight forwarders in international trade, maintenance planners, and so on. What will happen to the people currently employed in these activities who are currently well educated and experienced and core to their societies?

5.8 Universal Basic Income Anglo-Saxon style capitalism is no longer delivering sufficiently welldistributed benefits to society. In the west, we have experienced the progress of society as Creative Destruction (Schumpeter, 2008) where the entrepreneur sees new ways of competing through new technology or organisational thinking which creates a new normal, new jobs as well as old discarded jobs and the people who used to perform them. This has worked dramatically well to create growth in economies around the world and, as the thinking spreads through globalisation, millions of people have been lifted out of poverty in newly developing societies. The theory concerning the displaced workers was that some of them would be retrained to be fit for the new jobs that the innovation needed, but of course not everyone could be retrained or could afford to move to new locations for the new jobs. They became the ‘left behind’ so that in rust belt towns, little is left but often part-time work on zero-hour contracts or indeed no work at all. Many of these people were males who had been employed for their motor skills in factories or mines. Some growth in employment numbers but not always full-time or well-paid were women now trying to juggle even more demands on their time and attention. The left behind people become a burden on the state. The state responds by voting through complicated forms of welfare payments but these then have to be administered by other state employees. But none of this contributes much by way of added value to society. All the time the left behind feel degraded and undervalued in the society where once they were major contributors. In the meantime, large areas of activity are not even counted by the KPI of societal development, GDP including the black economy of cash transactions, homemakers and later carers, volunteers for charities and soup kitchens. In all societies, there is no shortage of useful work that could be done, but currently our

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governments can find no mechanism to pay people to do the work. Our populations also vote with their actions or inactions that some jobs are not suitable for them in some way and often immigrant labour (who entered into the country legally or not) provide basic efforts to keep agricultural harvesting viable for example. Wealth is still being created, but the existing processes favour the owners of capital above the value creators and also the manipulators of capital benefit as they find new ways to monetise different activities so that they can be traded for local profit but no real added value. After the financial crash of 2007/2008, who was prosecuted for almost destroying international businesses on a global scale? Instead, the financial institutions were considered too big to fail and politicians worried about a complete global collapse propped up the banks, helped recapitalise them so they could go largely on the same path gambling with other people’s money. As part of their reward structures, they take a disproportionate share of the artificial profit through inflated salaries and bonuses with which they buy more high-end goods and services while inflating house prices to the extent that many millennials will be poorer over their lifetimes than the older generations, especially the baby boomers who had all of the benefits when the economic benefit distribution was more equitable. When Vilfredo Pareto was looking at the distribution of the ownership of the land in Italy in 1896, the distribution of the benefits were 80% of the land being owned by 20% of the people. In the USA in recent years, and especially since the financial crash of 2007/2008, the income inequality figures have become much more dramatic (see https://inequality.org/ facts/global-inequality). The top 10 billionaires in the USA owned more wealth in 2016 than the total GDP of each of the following countries: Nigeria, Belgium, Iran, Norway, Thailand, Austria, United Arab Emirates, South Africa and Colombia. In the meantime, the top tiny percentage has gained the most value out of the recovery and the middle is essentially also being left behind. While using the statistics available at the time of writing, Robert Reich (Reich, 2010) argued that there are no signs that the inequality gap is reducing, in fact the contrary position holds and, he warns, threatens the future of the USA.

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Part of the problem is that this form of capitalism argues that only those directly involved in wealth creation have the right to participate in any benefits generated. This of course leaves government and society to sort out what is to support the left behind parts of the population. It also encourages the use of tax avoidance and clever use of different corporate taxation rules around the globe for corporations and individuals to hide their wealth, while building it even higher. Of course, many religions around the world recognise the need for wealth generation and recognise the need for, and even obligation to make, contributions to society through charitable acts to aid those less fortunate than themselves. There is no denying however that such gross inequality is not supported as valid or healthy by large parts of the population in many countries in the world. It has even been suggested that people who regard themselves as the left behind have voted for decisions seen as extreme by many other voters actively participating in the successful parts of the economy. Trump in the USA targeted rust belt voters among others, while in the vote to exit the EU parts of the UK where industrial jobs had largely disappeared supported the leave option against all of the ‘expert’ advice that the economic damage would be significant. It is as if anything would be better than what they currently experienced. Whose fault is it that the displaced workers do not get proper retraining or support? With the Anglo-Saxon capitalistic model focused on the participating employees and owners, it as if we have reverted to a narrow sub-system view that anything outside these self-drawn boundaries were irrelevant. That thinking has been shown to be flawed in terms of ecological, safety and Corporate Social Responsibility concerns, and so the system boundary of the business concern has become more porous or has been extended to include these concerns. What will it take for large, successful businesses to include the left behind inside their system boundaries? Rather than objectives that focus only on limited scope benefits through customer satisfaction, why can we not design systems where part of the economic benefits of market success are routed more directly to parts of the population who did not actively participate but are still part of the society which gives us a licence to trade? When possible, the left behind still spend what money they have to keep the wheels of

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commerce turning. As consumers, they still contribute to the economic activities counted in the GDP figures. Should society not value this role more rather than see them as useless or lazy? Rather than taxing the income of those fewer people employed, can we not concentrate on the wealth generation processes at the corporate level and introduce a taxation regime where the first call on profits goes to government for distribution across society. This would need to be done in a way that removes the current stigma of dependence on charity and welfare benefits when out of work, and replaces this with a system of Universal Basic Income which gives to all a living income so that they can be full members of the society, spend their money as they wish and so keep money circulating in the economy. If this could be done well enough, it would also be possible for individuals to do the things that interest them rather than the things they must do in order to get a wage and live. It would also be possible for the few that have the skills and interests to become part of the economic wealth generation process for added income or indeed continue to be carers, craftspeople, artists and musicians or just better neighbours and community activists. This idea sounds like a modern Utopia, but it is now being seriously examined in a number of economies. Rutger Bregman’s best seller discusses this as an idea both whose time has come but also as one that will be enabled and made necessary by the technological advances we have been describing (Bregman, 2017). Of course, if your world view is that people are inherently lazy and will waste such automatically provided income, then you will not believe this is possible. The rise of the robots and artificial intelligence-driven technologies, with their potential to displace jobs on a massive scale never seen before in previous industrial revolutions, means that we need to rethink our priorities, our deeply held assumptions about economies and human nature, otherwise we are building up an unsustainable situation where the very wealthy will retreat even more behind their high walls, private islands and mega yachts until another kind of revolution redresses the inequality.

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Chapter 6 Supply Ecosystems and Competitive Advantage For the near future, we are still going to be faced with the need to operate our current business systems but ever more productively, for one of the globalisation lessons is that if you are not successfully part of it someone from somewhere else will soon come over your horizon and take your lunch. The key lesson of this book is that in business almost everything is connected to something(s) else and more or less interdependent with them, and if we do not start with that holistic vision then we will be creating friction between the bits of our system rather than building an integrated, interdependent and co-destiny business ecosystem. In this book, we have concentrated on the Supply side and, to some extent, taken the Demand side as given. That is to say, we have not tried to incorporate the Marketing activities into the discussions. We have however recognised everywhere the importance of knowing and understanding the customer and, where possible and sensible, satisfying them. From this, everything else flows, but the flows can also be reversed since the supply side can create ideas for product and service offers which no customer can envisage. Applying all of the concepts we have discussed is not easy of course. Ideas take time to be realised into practice, look for example how long

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we have taken to begin to understand and apply the Toyota lean thinking ideas effectively into many areas of business where they could contribute massively. While this is a challenge, it is also an opportunity. If it is difficult, not everyone will try and fewer still will succeed, so if your organisation can move faster down this path than your competitors, then by definition you will be more competitive than them in the market place. The beauty of the approaches discussed here is their contribution works on both the demand and supply side. Many of the techniques are about reducing the wastes that occur at the boundaries between sets of activities so impact on cost reductions. However, the added value product and services offerings impact on the sales side of market growth, customer satisfaction and competitive advantage through the correct delivery of order winners. Successful operation of these activities as component parts of one solution is an organisation skill that will be difficult to replicate, so success provides a lead that will be difficult for competitors to copy quickly. They might buy the same technology as you but without the same integrated view of the supply ecosystem processes, then their progress will be limited. Some principles to embed in your solution. (1) Choose your customers carefully and get close to them, understand them and manage them carefully. (2) Satisfy your customers, but not at any price. (3) Look for complementary skills in your suppliers and build co-destiny relationships with the ones who are key to your future. (4) Look for win–win approaches where possible and sensible in support of the business objectives. (5) Recognise your role in the building of a better society and the survival of the planet. (6) Give Design and Contract Management increased importance in your organisation, but work in teams to make the decisions the best they can be. (7) Break down corporate boundaries where they are impediments to cooperation.

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(8) Value integrity, intelligence and contribution at all levels, in all locations. (9) Invest in your people, your systems and your community. (10) Deliver on your promises. (11) Innovate and improve continuously.

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Appendix A The RED/BLUE Game The game is a simple one between two teams of around 8–10 people at a maximum. They should be in different locations where they cannot see or hear the other team’s discussions.

Objective The objective of the game is for both teams to end up with positive scores. The team with the higher positive score at the end of the game wins.

Playing the Game The game is played over 10 rounds. In each round, the teams decide to play a Red or a Blue which they tell the game facilitator. After each decision has been collected, the facilitator will tell each team what the other team chose and the scores can be recognised and recorded before making the next decision to play Red or Blue in the next round. The scores are shown in Table A.1. Table A.1

Red Blue Payoff Matrix.

Group 1 (3) Group 2 (4) Plays Score Plays Score Red Red Blue Blue

+3 −6 +6 −3

Red Blue Red Blue 181

+3 +6 −6 −3

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The payoff for each set of decisions is shown in the table. If both teams choose Red, then both teams score + 3. If both teams choose Blue, then both teams score − 3. If one team plays Blue and the other plays Red, the team voting Blue scores +6 and the team voting Red scores − 6. Note: Each team knows what colour the other team chose before they make their next decision (except for the first decision). The scores are cumulative over the 10 rounds and can be recorded in a form as shown in Table A.2. Table A.2 Round

Red Blue Game Scores.

Group 1 (3) Colour

Score

Group 2 (4) Colour

Score

1 2 3 4 Conference

Y/N

Y/N

Y/N

Y/N

5 6 7 8 Conference 9 10

Teams are not allowed to talk to each other during the game, but after rounds 4 and 8 a conference is allowed. The facilitator will, after feeding back the votes at the end of rounds 4 and 8, ask each team if they want a conference. Only if both teams want a conference will there be one. If there is to be a conference, one or two people from each team will be taken to a neutral meeting place (away from the team locations where

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they can talk). The facilitator listens but does not take part in the discussions. The conference concludes when the teams decide. During rounds 9 and 10, the scores are doubled. That is +3 becomes +6 and −6 becomes −12 and so on. At the end of round 10, the teams are brought together to discuss the game and the lessons learnt. Note: Detailed facilitator notes are available for bona fide instructors on application to the author at [email protected].

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Bibliography Barney, J.B. (1991) Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99–120. Bartlett, C.A. and Ghoshal, S. (1989) Managing Across Borders: The Transnational Solution. Harvard Business School Press. Bregman, R. (2017) Utopia for Realists: And How We Can Get There. Bloomsbury. Brundtland Report (1987) Our Common Future, by the World Commission on Environment and Development, p. 43. Clarke, A.C. (2013) Profiles of the Future: An Inquiry into the Limits of the Possible. London: Hachette. Coase, R.H. (1937) The Nature of the Firm. Economica, 4(16), 386–405. Crosby, P. (1979) Quality is Free. New York: McGraw-Hill. Ford, D., Gadde, L.-E., Hakansson, H. and Snehota, I. (2011) Managing Business Relationships, 3rd edn. Chichester, England: John Wiley & Sons. Ford, M. (2015) The Rise of the Robots. London: Oneworld Publications. Gattorna, J. (2006) Living Supply Chains. Harlow, England: FT Prentice Hall. Hakansson, H., Ford, D., Gadde, L.-E., Snehota, I. and Waluszewski, A. (2009) Business in Networks. Chichester, England: John Wiley & Sons. Hauser, J.R. and Clausing, D. (1988) The House of Quality. Harvard Business Review, 63–73. Jensen, M.C. and Meckling, W.H. (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305–360. Juran, J.M. (2010) Quality Control Handbook, 6th edn. New York: McGraw-Hill. Kraljic, P. (1983) Purchasing Must Become Supply Management, Harvard Business Review, 109–117. 185

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Neely, A. (1998) Three Modes of Measurement: Theory and Practice. International Journal of Business Performance Management, 1(1), 47–64. Peters, T. and Waterman, R.H. Jr. (1982) In Search of Excellence: Lessons from America’s Best-Run Companies. HarperCollins. Parasuraman, A., Ziethaml, V.A. and Berry, L.L. (1988) SERVQUAL: A Multipleitem Scale for Measuring Consumer Perceptions of Service Quality. Journal of Retailing, 62(1), 12–40. Penrose, E.T. (1959) The Theory of the Growth of the Firm. New York: John Wiley & Sons. Porter, M.E. (1985) Competitive Advantage. New York: The Free Press. Prahalad, C.K. and Hamel, G. (1990) The Core Competence of the Corporation. Harvard Business Review, 68(3), 79–91. Rindfleisch, A. and Heide, J.B. (1997) Transaction Cost Analysis: Past, Present, and Future Applications. Journal of Marketing, 61(4), 30–54. Roos, D., Womack, J.P. and Jones, D.T. (1991) The Machine That Changed the World: The Story of Lean Production. New York: Harper Perennial. Reich, R.B. (2010) Aftershock: The Next Economy and America’s Future. Penguin Random House. Schumpeter, J.A. (2008) Capitalism, Socialism and Democracy. Harper Perennial Modern Thought. Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan. Taleb, N.N. (2007) The Black Swan: The Impact of the Highly Improbable. London: Penguin. Taguchi, G. (1993) Taguchi on Robust Technology Development: Bringing Quality Engineering Upstream. New York: ASME Press. Vargo, S.L., Maglio, P.P. and Akaka, M.A. (2008) On Value and Value Co-creation: A Service Systems and Service Systems Perspective. European Management Journal, 26, 145–152. Williamson, O.E. (1975) Markets and Hierarchies: Analysis and Antitrust Implications. New York: The Free Press.

Glossary Agile Manufacturing Lean manufacturing was developed and is at its most effective in repetitive production processes of somewhat standardised or modularised product designs. For businesses which allow for more customisation, pure lean is more difficult to implement. Agile tries to gain much of the benefits of Lean, but also allows for changing customer requirements often by building buffer stocks of inventory at crucial decision points in the flow which allow different options to be chosen. Alliance This form of agreement and agreed behaviours is set up by organisations (not just companies) to fulfil some objective but is not a legal structure of itself. It can be set up to market a new service offering or to promote some cause. It is often used in construction businesses where, for the duration of a particular project, the alliance is formed to try and coordinate resources and provide mutual support to achieve the project objective often for a reward-sharing benefit for a successful completion of the project on time and on, or below, budgeted costs. At the end of the project, the parties separate until they next see the benefits of forming a new alliance for another project. They might form the alliance in advance to enable a joint bid against a tender call.

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Artificial or Computational Intelligence This is the application of data mining of huge databases and deep learning to allow machines to approach and often surpass human equivalent performance levels. It has the potential to do very positive things in medicine and business but raises the issue of more structural job displacement than did any technology before. Assemble to Order This allows some degree of customer customisation through the design of the product in modules which can be assembled in different configurations to create somewhat different final products. The modules may be stocked, waiting for the final assembly stage. It allows better customer response while allowing some efficiency in producing the standardised modules. Note, services generally cannot be stocked. Asset Specificity When a customer asks the supplier to purchase a piece of equipment, say to supply a part or a service, but the supplier has no other customers looking to use the equipment, then the supplier holds an asset that is specific to that customer and is dependent on the customer to keep buying the service. Equally, the customer has no other supplier who can provide the part or service. The asset is specific to that relationship. They become locked-in to each other. Blockchain This is a computerised record or transaction ledger where a particular event is recorded, encrypted in a highly secure manner and then validated by a globally distributed network of computers. In this way, no record can be changed by any individual since all in the network would have to accept the change. This makes it very secure against hacking or fraudulent behaviour. The involvement of so many other parties also makes the system very secure and fault tolerant as in effect there is a high degree of redundancy in the network that no organisation or company could afford on their own. Blockchains can provide unique identities and provenance information for all items and could avoid incorrect medicine delivery in

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hospitals and inaccurate inventory information in storage facilities (which might be backed up by drone data collections perhaps). Born Global Such a company is not prepared to take a step-by-step approach over many years to create market growth across country borders and aims from its inception to see the world as the target market and will build supply chains to service all the countries in its sights, at the same time. Background Intellectual Property This represents the IP created in prior circumstances and is completely owned by the creators. Benchmarking This is a process where a group of organisations share their operational data with each other in the hope that, by studying similar activities taking place in different settings or industries, new learning will be realised allowing improvements to be made to the learners’ practices. Since competitors will not wish to share these details, the benchmarking process often excludes more than one party from each industry sector. It is not about the actual performance number achieved but what processes were used to create the number. Often, the parties will meet after the exercise to debate and discuss the results and again avoiding direct competitors allows for more open discussions. For example, organisations might compare their production change over processes with the pit crew in a Formula 1 racing team. Black Swan This is an example of an unknown, unknown. If all we have experienced are swans which are white, we cannot conceive of the possibility of a swan being black…until we find one! These rare events are usually located (if recognised at all) at the extremes of the normal distribution (which is a property of many populations of data) and are often ignored because of their very small probability of occurring. When they do occur, then they can change the world.

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Building to Stock This is necessary when demand for the product is expected but cannot be forecast accurately enough to respond to actual orders. Stock items have to be standardised. The stock is held in inventory in the hope that a real customer will come along in time to demand it. If the item is perishable, this complicates the planning process since after the shelf life time is expired, the stock has a much reduced value. Note, services generally cannot be stocked. Bounded Rationality Traditional economic theory assumes that decision-makers are rational and look after their own self-interest above all else. The further assumption is that with perfect information all such people would make the same kind of decision. However, often information is not perfect and, even more, people have difficulty dealing with complicated decision processes. Their cognitive abilities are limited by the limited number of factors they can deal with. The effect of this is that even if the decision-maker was trying to decide sensibly, they are incapable of reaching the perfect solution the theory would expect to be taken. In this sense, the rationality is bounded or limited by these natural constraints. Business Angels These are usually people with money available to invest in a growing business, often in the expectation that their prior business experience and network of contacts will be useful to the ongoing management of the companies in which they invest. They will not usually be involved long term as they often like to sell their shares at a profit and move to other challenges. Buying Centre This refers to the wider group of people inside a business who are actually involved in a procurement decision. It recognises that such decisions are actually group based rather than the right of only one functional group like procurement.

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Civil Law In this system, decisions made by the state are set out a framework of legal principles. The origins go back to late Roman times. Co-creation For some products, there can be little or no direct interaction between customers and suppliers in the detailed specification of the product. However, most services and some products require a close interaction with customers to really understand what they want and in some ways the customers are part of the transformation processes as well as the supplier organisation. Close involvement of this kind is described as co-creation by the customers and their suppliers. Common Law Sometimes referred to as case law-based system, this applies in the extended Anglo-Saxon parts of the world. Here, although the legislatures will pass laws, the courts operate by judges’ interpretation of these laws and their subsequent rulings in actual court cases, thus creating a precedent that informs future decisions. Core Competence All businesses have some set of activities, supported by peoples’ knowledge and skills, that they consider they are so good at that they can beat their competitors in any fair evaluation of relative performance. This set of activities provides their competitive advantage and should be protected from being stolen or otherwise acquired by their competitors. These activities should be supported and developed through internal investment and should never be outsourced to another party, as the intellectual property they represent could then leak out and the advantage be lost. The other activities needed to produce a completely rounded good or service can be bought in from the marketplace to create a combined product or service to meet the customer needs. Corporate Social Responsibility (CSR ) This represents the awareness that a business or other corporate entity recognises their wider role in society to better the situation of all stakeholders

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who are in some ways affected by the activities of the business. Decisions therefore cannot be based only on single criteria like financial benefit to the business but on much more widely diversified issues. It is part of the spread of sustainability concerns and recognises the positive and negative impacts which businesses can create. Cost A supplier uses a variety of resources as input to their productive processes as well as resources used to effect the transformation of the input resources to output goods or services. Cost is the representation, in financial terms, of the totality of the resources used to get to the end output stage. Cost is therefore an internal measure and has much to do with the effectiveness of the procurement of resources and the management of them through the supply chain. It is independent of the selling marketplace. Price and cost are not the same thing. They are driven by different forces, but cost is subject to higher level of management control than is price where market competitiveness affects the decision for a customer to buy. We can fail in business if we cannot create more value from sales than we spend on the cost of the resources we used. Cost to Serve All customers require some consideration to understand their needs and to try to satisfy their expectations. However, some customers expect more support and hence more cost from their suppliers, and the actual cost to serve these demanding customers might produce a situation where the economic benefit of keeping them satisfied is less than the cost to serve them to this level. Customisable An organisation can make a strategic decision that they will offer variants of their goods dependent on input from their customers (services are inherently more customisable). They must then also determine the extent of customisation they can afford to offer since all variants will cost more than the equivalent standardised item since the production runs will be

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shorter and planning more difficult. Unique is the enemy of low cost (and often speed or response), in most businesses. Counterfeiting This occurs when an organisation copies, without permission, another organisation’s product or service concepts, often at reduced cost and too often at much reduced quality and safety levels. They then sell that item as if it were genuinely produced by the original organisation, thereby stealing sales revenue possibilities from them. Degrees of Freedom This concept recognises that designers starting with a blank screen or sheet of paper can have an infinite set of choices (degrees of freedom) to make but that as soon as one decision is made the number of choices reduces by one each time. It captures the nature of a decision tree where one choice starts a process of branching but also makes it difficult to move from branch to branch without retracing all of the decision steps. Design for (x) where x = Function Design is responsible for translating the expressed customer expectations or internally generated innovative ideas into an achievable specification of the details of what the item is required to do to satisfy the customer requirements. Design for (x) where x = Process Design must consider the functional requirement details and set them against the existing or obtainable processes to ensure that the functional requirements are capable of delivering the required functional specifications. If not then, there has to be a redesign of the functional specifications to allow this to happen effectively. Design for (x) where x = Quality Design must ensure that the selected processes are capable of meeting the required quality standards or must redesign some specification details to make this possible.

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Design for (x) where x = Sustainability Design must consider all aspects of specifications and process details to ensure that due consideration is given to the sustainability impacts of raw material sourcing, energy use in manufacture and delivery as well as safety and social well-being considerations in their own business and with the customers who use the items. Design for (x) where x = Recycling Design must consider what happens at the end of the first life of the product (less so for services) so that possible recycling, repurposing and value recovery is economically feasible and can be achieved as efficiently as possible. This will include identifying parts to allow for effective reprocessing and making possible disassembly, where relevant. Design for (x) where x = Procurement Design has to recognise the possible impact of issues of sourcing of both goods and services so as to avoid supply interruptions during production and delivery as well as potential price increases, as far as it is possible to know in advance. Some consideration as to acceptable alternative solutions would help future proof the design. Design for (x) where x = Supply Chain Design has to recognise the impact that extended supply chains can have on the difficulty of coordinating and managing flows of goods and services and consider (with others) whether the supply chain risks can be managed or mitigated or if the design needs to be modified to allow for a lower risk solution. Note that at the time of writing, there are no known technical solutions to bring this set of diverse requirements together at the designer’s computer screen to aid the coordination of all of the Design for (x) decision processes. Direct Procurement This relates to all purchases which will directly affect and may be contained in the final product. They are crucial to the final product value offer

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and are part of the process of generating revenue. They are usually better controlled than indirect items. Downside Risk This describes what most people think of when using the term risk. That is, it is the possibility that the result of an action is against the best wishes of the person taking the risk. The term risk also covers the opposite outcome. Drones and Self-driving vehicles These technologies use many of the same kinds of technologies as those in Artificial or Computational Intelligence but also need levels of coordinated databases that remain a challenge at this time. They also need social and legal changes to match the technological ones for there to be acceptable performance and safety in domestic and business situations. These technologies have the potential to displace massive numbers of people from their driver roles with impact on employment and tax raising possibilities. Dual Sourcing Dual sourcing is used to reduce the risk of an individual failure of some kind since all of the buying orders can be switched to the second, surviving supplier. However, there are now two relationships to manage. It is also important to keep the output from both suppliers completely consistent over time so that switching can be efficient. Early Adopter This is a customer who is motivated by newness and being first to buy. They will buy from a respected brand almost without knowing the details of the new product and will buy regardless (and often queue up to be early into the store, think new Apple products). The order winner for them is newness and having ownership of the item or experience of the service, before their friends can buy. Enterprise Resource Planning (ERP) This is a suite of computer programs which work from individual item descriptions as designed to coordinate planning of all of the

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businesses resources. They work with customer demand data and design specification and process information, to allocate people and equipment to plan and deliver (from inventory or new production as required) to meet the agreed customer delivery date. The systems connect to customers and back through the supply chain and inform logistics coordination to ensure effective flows into and through the extended enterprise (or supply chain). They are capable of simulating the effect of changes to a plan so can be used for ‘what if’ type of planning. They are a basic building block towards the fully integrated and coordinating vision this book is describing but do not yet have all of the needed information sources and controls in place as a fully interacting information system. Foreground Intellectual Property This represents the IP created in new circumstances, and if this is done purely internally it becomes part of the owner background IP. If this is done as part of a collaborative process between a customer and a supplier, then there needs to be agreement about who has ownership and exploitation rights in the new foreground IP. Foreign Direct (inward) Investment (FDI) When a company chooses to invest in some capability in an overseas market so as to aid their business growth, either in the new marketplace or in sourcing to support their existing one, then the new host country will regard them as Foreign companies making a direct investment into their territory. FD Investors are welcomed because of the financial turnover, tax revenues and employment opportunities they bring while the opportunity for local people and businesses to learn new skills is an attractive additional, and maybe more important, opportunity to aid in the local development processes. Form Utility Manufacturing creates form utility for a customer by transforming, in some physical way, input resources to output products.

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Functional Design A buyer company will work with their preferred supplier because the supplier has capabilities they do not have, to design certain aspects of the product. The buyer has to specify general aspects of what the supplied design has to do and how it has to function, but will not specify the details how this will be achieved. Such functional design allows the supplier to use their background knowledge to design something which will meet requirements and successfully interface with other parts produced by other suppliers. Garbage In Garbage Out (GIGO) This recognises that regardless of what you do internally, the outcome cannot be better than the resources fed into the system from the supply side. If bad quality comes from suppliers, then it cannot ever get better without major effort and expense to correct it. Much better to ensure that what arrives from the suppliers is guaranteed good quality, ideally so no checking actions are needed, since this only adds more cost. Global Trade Item Numbers (GTINs) This is a global set of agreed standards to provide unique identification of a variety of product features, producer, packaging, location and much else. The numbers produced can be translated into linear or 2D bar codes and thus allow for scanning in stores and tills as well as incorporation into Wi-Fi-enabled tracking systems in Radio Frequency ID (RFID) formats. Buyers can specify these numbers in their tender documents and thus make it very clear what it is they wish to purchase. Global Warming For all those who deny the weight of scientific evidence and informed opinion, there are increasing legions who believe action is needed to mitigate the human impacts on climate change now, to give our descendants a chance to have a future on this planet. One of the scariest thoughts might be the changing rate of change, which seems to be accelerating and producing ever more severe weather situations.

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Grease Payments Some legal jurisdictions regard this as a form of bribery while others see it as less extreme. Where bribery is used to change a decision in the favour of the person bribing, grease payments are used to facilitate a decision (speed up often) which will be taken anyway. Attitudes to bribery vary around the world, but there are a number of international agreements to try and stop it occurring or punish those involved. House of Quality This is a visual guide for designers to consider how customer requirements (the voice of the customer) can technically be achieved and to identify trade-offs in the decision choices that have to be made. It can also be used to compare a possible solution to those of a competitor’s product to ensure some positive differentiation in performance can be achieved. Important Few This relates to the most important 20% of the population in the 80:20 rule applications. Making a small difference to these individuals leverages much more impact on the whole population. Indirect Procurement This relates to all purchases that are not directly incorporated or support the main product or service. They are however crucial to the functioning of the business but are more like overheads in that they need to be spent but do not often attract the same levels of control and focus as direct procurement. Initial Public Offering (IPO) This occurs when a business is planning to grow and sells some or all of its shares on a stock exchange, thereby generating large amounts (hopefully) of new investment from a large number of shareholders. Often, it is the way in which Business Angels realise their investments and exit from the company.

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Inventory as Finished Goods A build to stock approach creates final items ready for purchase. Once the customer order is received, all that is needed is to pack the item and distribute it to the customer. Inventory in Distribution Goods as input to a factory and on route to the customer through the distribution logistics system are all part of the value of inventory in distribution. Inventory as Work in Progress Any product which has completed some but not all of its internal processing stages can be counted as inventory in the category work in progress (that is not yet finished goods). Although they will be counted in the company’s financial accounts as assets, they really have little value until they are finished and sold. Inventory as Raw Material Raw material inventory is a store of the input materials on which the factory can draw quickly when they need to make the next items. Sometime it is worth speculating by buying more raw material then is operationally required if the expectation is that supply prices will be rising in the future. If this is the case, any stocks surplus to requirements can be sold to generate a profit. In-sourcing This is when a business, which needs to have access to goods or services, chooses to have them operate as part of their own organisation. They take ownership of these resources as a form of vertical integration. Intellectual Property (IP) This term captures the experience and knowledge embedded in systems and people’s memories and is essentially the basis for the business to compete in the market place. Particular versions cover Copyright ©, Trademarks ®, Designs ® and Patents.

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Internet of Things As more items are produced with embedded intelligence and communications capabilities, it is becoming possible to think of a future in which everything can be connected, and in some senses, coordinated. Selfdriving cars will need this capability as a minimum. Security and possibly surveillance issues will also have to be addressed. International When a business wishes to expand out of its home marketplace and sell in other geographies, their first move is normally to start by exporting the same goods or services (if possible), which are available in their home market. This first-stage expansion allows the company to become International. Joint Venture This is a legal form of new company which is formed by the joining together of previously separate legal entities. The JV must look after its own interests rather than those of its parent organisation, so while the parents might have had complementary skills and other features they now have to transact with the JV as if they had no prior history. JVs are often between companies which are close to being peers, but this is not a legal requirement. Suppliers and buyer companies could form a JV to move into a new country market for example, to offer a one stop shop service in that market. Just in Time This is effectively a make to order format extended into the factory so that if there is no demand from intermediate customers in the factory, then no output is created. This avoids large stock holdings while allowing high levels of variety to customers. It requires frequent deliveries from excellent suppliers, very high quality levels and people involvement in continuous improvement programmes. This is the method most manufacturers aspire to replicate. Toyota was the first company to make this work effectively.

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Lean Production This is another name for a Just in Time system or Toyota Production System. It aims to operate with high quality and low inventories. Learning or Experience Curve Repetition of any task over many repeat actions makes the action more efficient and less costly in resource terms. This is a learning process, and the plotting of the progressive improvement tends to follow a similar mathematical path or experience curve. It can be used to predict the effects of efficiency given a certain number of repetitions. Given the volume in mass production, this can be very important. Lock-in In a situation of asset specificity, one or both parties can be in a situation of lock-in where they have no other choice but to continue to trade and cannot easily find alternative business partners in the short term. It can reduce the search costs of finding new customers or suppliers, but if the initial choice turns out not to be the best, for whatever reason, it can be costly to break the lock-in and trade with other parties. Make or Buy (Products) and Do or Trade (Services) All organisations have to make decisions about how much they want to do by themselves and how much they are happy to pay for others to do things for them. Thus, the amount of their products they decide to make or services they will do themselves determines the set of the total customer support activities which take place inside their organisational boundaries. For the rest, they will buy products from suppliers or trade for services with service providers who are legally separate entities. This defines the boundaries of the firm. Make to Order In this approach, production of an existing product design does not start until a customer places an order. The supplier avoids spending money in anticipation and is guaranteed the sale from the beginning. If the product

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does not exist in concept, the approach can be modified to designing to order with the same benefit to the supplier and increased uniqueness for the customer. Market Follower The follower deliberately avoids the risks and costs of innovation and waits until a competitor introduces a new product or service and proves that customers are willing to buy it. The follower then tries to ‘copy’ (without infringing on copyright or patents) and become competitors in the expanding market by finding some aspect of the value proposition that will differentiate themselves from the initial leader. Market Leader This is the organisation, which is first into the marketplace with a new innovation, and if they can protect their initial market share they will be the leader in revenue as well. Market Pull This is a driver of innovation when the idea or demand comes from customers who ask for something new in the product or service. The attraction for the supplying business is that if they translate these wishes effectively, the likelihood is that these customers will buy the new offerings. It is relatively a low-risk approach to innovative change because of this prior customer acceptance. Modified Re-buy This occurs when a customer wishes to buy a similar item or service to ones previously purchased but with some specified changes. The possibility is to start a new procurement process to find suppliers better able to meet the new specifications. Multi-domestic When a company recognises the need to have more capability closer to customers in a foreign market, they can choose to create replicas of their business models in the new location. Each new market entity then operates

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as if it were an individual business in their own domestic market. Such a business can respond quickly to changes in customer requirements locally without needing to have anything change from their corporate headquarters. The corporate however might consider that they have lost some control over the local organisation. Multiple Sourcing Buyers using multiple suppliers need to be sure that they are all capable of producing the same level of quality and then use the market as a competition between these multiple suppliers to exert downward prices on the prices to supply. If the price competition drives some suppliers out of the market, the buyer does not care since there are many others to choose from. This makes sense for non-strategic supplies of very standardised products where price is the only differentiating factor, but even here it is not clear if the other features are indeed completely the same. Lots of suppliers means that no meaningful relationship can be justified, so it is not looked for on either side. Network View The essence of this view is that organisations are essentially open systems and that all such are members of a number of overlapping networks of other organisations, some of which are customers and suppliers, while there are other influencers or constraints on actions. In business relationship terms, this means that no one organisation is always the most important, instead influence ebbs and flows with market changes. Customers and suppliers cannot control in such circumstances, they can only influence others through their own actions and behaviours. New Task This is the need to buy something completely new with no prior knowledge of what the available market opportunities and threats might be. Offset When a government buys expensive goods or services from a foreign supplier, they will often demand that the supplier spends some of the

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purchase value in the buyer’s local community. In this way, the buyer government gets the items it needs but also provides some additional local benefit by way of employment of local people or sub-contracted work to their own companies. It can be used by those governments to force the supply company to reveal some of their technological secrets to the local companies, which over time, can become competitors to the foreign supply company. Opportunism The rational economic person is assumed to favour their own benefit above all others and to tend to look for opportunities to take advantage of the opposite party so that the results are better for themselves. They are acting with opportunism. In the jargon, they are out to Win, but to do so the other party must Lose. In game theory this is describe as a Zero Sum game, that is the amount of the positive gain when added to the negative loss equates to zero. Parties operating without opportunism look for ways in which both parties can gain something and so that is described as Win– Win or a Non-zero Sum game. Order Qualifiers An order qualifier is a product or service feature that must be present in the offering for the customers to even consider buying in the first place. It is like qualifying to race in the Olympics, you are in the race but you might still not win. A qualifier can also make it more likely for you to fail if you cannot meet the minimum standards in the market place. Safety would be one of these features. Qualifiers vary over time as competition creates new features of interest to customers. Order Visibility Point This is the point on a timeline when the customer order becomes visible to the supplier. If the customer only appears without warning and places the order, the supplier has no time to plan, they can only react, and if they have stocks they can then supply. The earlier a supplier knows about a coming order, the better they can plan and avoid building stock in anticipation, thus saving their costs. With close relationships, the supplier can in

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effect look through their immediate customer’s eyes to the next customer along the chain and make more considered plans to supply efficiently. Order Winner In a competitive market, where customers have choices of what to buy to satisfy their needs, the order winner is that feature which is most important to the customer and will persuade them to actually buy the item. It is the feature which, all other things being equal, determines which supplier succeeds in the competition for the customers’ money. Different order winners emerge over time as competitors gain parity in the initial order winning feature and move to another differentiating factor. Partnering Preferred customers and suppliers are effectively in a partnering type of relationship where they operate as if they are the same organisation but without legally changing their separate legal status as independent of each other. This is not a partnership which is a legally defined status similar to a JV but with unlimited liability. Few companies in partnering relationships would consider becoming formal partnerships. Passing-off This is the process where one organisation behaves and illustrates itself as if they were another, more highly regarded, one to take customers away from their business. Essentially, they will be selling counterfeit items or services to customers who believe that are buying genuine ones. Place and Time Utility Delivery of a good or service needs to be at a time and place of some agreement, and to do this to a supplier provides them with the item in a useful state. Possession Utility Trade exchanges are a way to transfer possession of some assets to another party for some agreed value transfer to the transferor. Perhaps, we

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also need a Use Utility for those situations of value in use where ownership does not change. Preferred Suppliers and Customers These are the important few in business relationships on both the sales and the supply sides of the exchange. These parties are the ones on which your future as a business will depend and you need to keep them close and involved to build a mutually supportive future together. These are the ones where cooperative Win–Win relationships make most sense. Price In any market exchange, there has to be a supplier of some good or service and a customer who provides something of value to the supplier such that the two parties can agree to the exchange, as somewhat equitable, and the transfer of ownership of the goods or services goes to the customer in exchange for the valued item (money usually). The agreed exchange value is the price to be paid by the customer and agreed by the supplier. A supplier only needs one customer, who decides to buy, for each item. Price is a market mechanism to effect the process of exchange. Principal and Agent Theory This recognises that when a principal recruits or contracts with another to do activities rather than do themselves, they hope that the agent will behave as would the principal in that situation. The reality is that the agent often has other priorities, so what results is not as good as if the principal had indeed done the activity themselves. Process Capability All production and to some extent human processes are subject to inherent variation, even if they are trying to reproduce an exact replica of what went on before. This process capability can be defined by the dimensions of the likely distribution of values around a mean value. This is independent of the specification limits created by the item’s designers but it is in the relationship between process capability and specification limits that the likely quality performance is created. A narrowly distributed process

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working within a widely defined specification can avoid all quality problems in normal operation. Product Recall If, despite best efforts at producing quality products, problems occur in the market, especially if they are potentially hazardous to the health and well-being of the customers, then the suppliers are required to issue a product re-call. This involves contacting all of the customers (not always possible since actual buyers may not be known or contactable) to encourage them to stop using the item and claim compensation or arrange for it to be exchanged for a newer, safer version. This will be backed up by national advertising campaigns to find previously unknown customers. Overall, this is a public relations disaster for the supplier, causing huge loss of reputation and perhaps permanent loss of customers in the future. Sometimes, this is due to a design flaw or a failure in the manufacturing processes but the customers will not care why this happened in detail they will just blame the supplier for the failure. Even if the problem originated in the supplier’s own supply chain, the customers will not differentiate and still blame the key supply contact they bought from. This is one reason why risk is never actually outsourced. Purchase to Pay This describes the various activities needed to implement a purchase contract and make all of the interconnecting people and processes work to a consistent set of expectations and performance standards. It can often be supported by a suite of computer programs to manage the information flows and event planning arrangements. Quality Function Deployment The first house of quality connects to customers and specifies high-level requirements in the design. Quality function deployment acts as a cascade of this information into the organisation so that each level is expanded into more and more detail of how the whole organisation and its suppliers must perform so as to ensure internal consistency and compliance and that the voice of the customer is heard in all parts of the organisation.

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Resource-based Theory In the discussion of where market growth can come from, there are two main choices. One is to follow the customers wherever they can be found and build a capability to satisfy them, if this is different from current capabilities. The alternative is to base the decision on the existing resources. This latter argument is that we already know how to do certain things well, so let us use these resources to find new customers who need the services these resources provide. As always, this is a decision between the risks of doing new things or sticking to old things but running the risk that no new customers for these resources can be found. Reverse Auctions This is a competitive auction with multiple bidders making successively lower bids until no other bid is received. It is best suited for supplies of completely standardised and quality assured items and proponents argue it will establish the best current market price for the item in question. Suppliers often do not like it because of the focus on price, especially if they consider that their offer is based on other important aspects like innovation or responsiveness. Large initial saving have been reported for many diverse items, but future savings seem to be more difficult to achieve. Reverse Engineering This describes the situation where as an example a company will buy a competitor’s product and take it apart to try and understand the design decisions made and the production methods used to produce it. They will also try to identify possible costs of production and procurement. With this information, they might try to create a competing version of it to try and win some market share away from the original producer. If there is patent protection in place, they will try and use the information to find a variation in methods or detail such that they cannot be charged with patent infringement. Reputational Risk Organisations build up reputations with their customer and suppliers for being true to their values and beliefs. This form of trust in the brand takes

Glossary 209

time to build but can be lost very quickly if the organisation behaves in a way which then does not live up to this standard of performance. The risk is that formerly loyal customers and suppliers will refuse to do business with the organisation which has failed to live up to its promises. Losing your reputation for being a trustworthy party can destroy businesses very quickly and recovery (if possible) will be expensive and time consuming. Risk Attitude It represents attempts to measure the extent to which individuals (and their organisations) are comfortable at certain levels of risk. An entrepreneur is expected to operate with a more positive attitude to risk than someone who is just looking for a good job with defined prospects. Risk Exposure This is a calculation of the potential risks multiplied by the estimated probability of their occurrence. Risk Premium All business operates under conditions of risk, but the more the level of risk the more the person taking the risk expects to be rewarded for taking the risk. This is called the risk premium. Robust Design This is based on the statistical design of experiments approach but applied to product design. The various factors which impact the achieved quality levels are evaluated to find those that must be controlled very closely and to make the overall design less subject to other noise factors which might complicate control of the process. Rules of Origin Provides a customer with information on where an item has been produced. They also provide details to make customs charges appropriate. These rules also protect brands against unfair competition if the item location details are protected. For example, Champagne can only come from

210

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that region of France. Similar products using similar or the same grapes and produced in the same ways might be described as ‘Champagne like’ but not as Champagne from another region. Self-seeking with Guile This is one of the behaviours of a person being opportunistic. They are looking to better their possible results by hiding information, lying or not telling the whole truth or other devious ways of operating with guile to tilt the odds of winning more in their favour. SERVQUAL Model This model initially defined the processes of ensuring that service quality levels were as expected by customers. Services are much more about perceptions and are therefore much more difficult to control compared to physical measurements in the product world. The model describes five gaps between different stages of the overall process at which misunderstandings or poor performance against plans can cause problems. Since many organisations produce both products and services, it is good to think of this model alongside the physical aspects of other total quality approaches. Single Sourcing When there are choices of supplier for a given need but the buyer chooses to only use one of them, this is single sourcing. It is dangerous since there is no backup if something goes wrong with this supplier, but it can aid the consistency of quality supplied and allow for the building of preferred relationships. It does demonstrates the effects of lock-in however. Specification Limit As designers specify the dimensions of some item they recognise that they need to allow for practicalities of production and therefore they specify a range of acceptable values around the nominal one. These form limits in the specification within which a result will be deemed to be of acceptable quality. The upper and lower limits around the mean value form the basis for statistical process control as part of a quality assurance approach.

Glossary 211

Spend Analysis Spend analysis creates the information to understand the 80:20 rule in particular circumstances to show how value is distributed and to aid the allocation of scarce resources to where they can have the biggest impact. Sole Sourcing This is a supply situation where a supplier has a monopoly of some commodity or service such that a buyer has no choice but to accept the terms offered to them by the supplier. Most buyers will try and find, or help create, alternative suppliers just to break the power hold a monopoly supplier can exert on a market. Standardised An organisation can make a strategic decision that they will only offer a controlled number of variants of their goods (more difficult for services). These form the standardised list from which customers buy and will not be changed to satisfy a customer request. This is efficient for the supplier but might limit the choice for the customer. Straight Re-buy This occurs when a customer wishes to buy the exact same item or service. The price might change but the specification has not. Sub-optimisation This is a feature of systems thinking where the efficiency of a sub-unit can be made very high but at the higher systems level the result is less good. The optimisation locally has resulted in sub-optimisation at the total system level. Systems Thinking All life forms and businesses are complex systems which contain essential sub-systems which perform needed sets of activities and have to co-exist and mutually support each other so that the overall system can survive and prosper. In addition, all systems are themselves sub-systems of larger entities and it is these interconnections and interdependencies which define

212

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how our planet will survive (or not). Systems thinking recognises the scaling effect to larger or smaller systems and allows us, through the use of generic descriptions, to describe these in terms that capture their essential features. So, all systems use input resources and transform them into desirable and waste outputs and by comparing the outputs with the resources used as input and to the management of the transformation processes, we have the basis of measurement and control opportunities and the needed control actions to obtain the goals of the systems. Open systems accept input from their environments, while closed ones do not. Too many businesses behave as if they are somewhat closed in that they do not fully reflect on the effects they have on the larger systems or indeed recognise the effects that other systems can have on their own system effectiveness. Target Cost In traditional thinking, we add a profit margin to our costs to set a price which we offer to the market for our goods or services. However in the negotiation to reach an agreed price, the only factor that is being considered is the profit margin where the customer is trying to reduce the supplier’s margin as far as possible and the supplier is trying to get the highest price in order to maximise their profit margin. Target costing works in reverse. It accepts that price is set in the market and so abstracts from the anticipated price an acceptable profit margin to obtain the target cost. This is the cost which must be achieved to be competitive in that market. In this situation, the customer and the supplier can now work together to reduce the target cost so that the customer can compete in the final marketplace and the supplier gains a sufficient profit margin so that they can continue to invest in their businesses to be an effective partner to their customer over the longer term. Technology Push For radically different technologies or service concepts, current customers have no frame of reference or experience to help them understand what impacts a new innovation might have or if they would use the new market offering if it were to be produced. However, the technical experts in the

Glossary 213

supplying company can understand their own concept and how it might be wanted by customers, and so a decision to innovate in this way is essentially a gamble on whether the technologists were right and also if the customers might be persuaded to also welcome the item onto the market and to pay for it. The technology is pushed onto the market in the hope that customers will buy it. It is inherently high risk, but can be massively disruptive of current market situations if the innovation is a market success. Total Quality Management (TQM) Total quality recognises that quality depends on getting everything right ideally the first time. It is a whole-organisation issue and crosses into customers and suppliers as well. It is best thought of as a journey and attitude to always strive to be better and to involve all of the people in making this a reality and a core value of the organisation. Trade-offs A trade-off describes the situation where there are choices, but if we move in one direction to make something better then we usually make the other choice worse. For example, in designing a vehicle door we want the door to be heavy enough to carry all of the internal equipment and provide impact protection to the occupants but we do not want it to be so heavy that it is difficult to open the door when the vehicle is parked on an adverse hill. Some trade-offs are fixed at the current level of technology but some are in our minds and can be challenged by new thinking. Toyota could not afford the high stocks and storage space needed by their car competitors at the time, which they needed because their system built cars in large production runs of the same type. Instead, Toyota designed a system to reduce stock holding and space (through Just in Time) which allowed them to efficiently produce in very small production runs, that is one at a time. Transaction Cost Analysis (TCA) TCA recognises that market exchanges incur costs on both sides of the transaction to ensure factors such as ownership, truthfulness of

214

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statements, reliability of promises, capability and control are as the other party describes them. In addition, costs are incurred to monitor these issues in the other party’s behaviours, especially if one believes the other party is likely to try and take advantage (behave opportunistically) in some way which favours their outcomes over one’s own. If the costs of these market transactions are perceived to be too high, then there is a tendency to avoid them by, in some way, internalising the features we might otherwise have traded for in the market. It is part of the Make or Buy decision. Transnational The transnational organisation tries to get the benefits of local responsiveness to market changes while also gaining the benefits of global scale and support without expensive duplication of resources. For such organisations, the market is truly global and decisions will be made with this awareness. Such companies can have more financial size than some of the countries which host their subsidiaries. Universal Basic Income This is funding provided by government to give to all citizens a set living income so that they can be full members of the society, spend their money as they wish and so keep money circulating in the economy. Its proponents argue that it will be cheaper than social benefits to administer while avoiding the stigma of the benefit process. In a time of high numbers of left-behind populations due to market and technological changes, this would make society fairer and allow people to develop their own interests and to help others in making a contribution to society while the economic processes of money circulation could still to take place. Unknown, Unknowns Some factors which might influence the challenges facing an organisation will be known, but their expected value might not be. For example, it may be known that customers always arrive at the store but we just do not know when or what they will buy. These are known, unknowns. However, much more difficult to deal with are things of which we are completely unaware

Glossary 215

and whose impact, when they happen, is also unknown. These unknown, unknowns can often deliver potentially catastrophic impacts but were not foreseen by anyone; worse still, no one was even looking for them. Upside Risk Like a downside risk, the outcome is unexpected, but on the upside this covers a result which is better than expected and can be taken advantage of, once its causes are understood. Value in Transfer A trade is an exchange of different things of value to the parties in which the ownership of the item transfers from the seller/supplier to the buyer. This is value in transfer. Value in Use This is when ownership is not transferred from the supplier to the customer, but the agreement paid for by the customer is to have access to and use of the item or the service. In services, it is always value in use since the resources used by the supplier are never transferred to the customer but what is paid for is the benefit to the customer of using the supplier’s resources for the time agreed. Value Proposition A supplier to a potential customer tries to understand what the customer does, or might be persuaded to, want to buy and then creates an offer which captures this value to the customer in a proposition. That is a statement that says ‘if you buy this item, you will benefit in the following ways…’. This value proposition is then evaluated by the customer (often by comparison with other supplier propositions) before making the decision to buy or not. Only if the buy decision is made will there be an exchange and a trade, and only then does the supplier have a return on their investment. Venture Capital Funds These are financial fund businesses which act in a similar fashion to business angels but on a larger and more distributed set of growing companies.

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They are more financially driven and do not usually expect to be involved in the operational management of the growing business. They do expect to make a profit from their investments and will choose companies carefully rather than simply spreading investments over a very diverse portfolio, which a normal investment fund might do. Vertical Integration A fully internally organised set of activities in which all of the factors of production needed by the organisation are owned and operated by the organisation. In other words, such a system does not depend on buying anything from outside suppliers. For example, Henry Ford’s model T was produced using supplied raw materials, through manufacture, to distribution to dealers, who were all part of the Ford organisation. Modern products and services are widely believed to be too complicated for any one organisation to be able to be the best solution provider in all of its aspects so some buying from outside is more likely. Zero-hour Contracts In, for example, retail businesses it is impossible to forecast in detail when customers will come through the door. Over time, certain patterns can be discerned but it is often not good enough for the store manager to match customer demand with numbers of sales people to optimise sales support. To solve this personnel planning problem, employment contracts can offer conditions of employment which do not guarantee any actual work times. In this way, the manager does not have to pay people to stand idle when no customers are in the store. However, the managers require the people to be on call to come into work when the manager decides s(he) needs them. These are Zero-hour contracts, which solve a staffing problem for the managers but create very uncertain payment and time management problems for the employees on such contracts. 3D Printing This production technology uses the design-generated digital functional specifications to drive a machine that builds up the design realisation through deposition of layers of a variety of materials (akin to an ink on

Glossary 217

paper, printing process) like plastics, concrete, metal-like materials as well as biological materials. Complex, near to final form, items can be produced relatively slowly and in small production quantities. It can reduce or remove the need to assemble parts and sub-assemblies in manufacture, but this might make some forms of recycling more difficult. For some solutions, this might remove much of the supply chain complexity involved in traditional processes. 80:20 Rule It is widely observed in many populations that only 20% of the total number in the populations account for 80% of the total value of the whole population. While this is even more extreme in many personal wealth distributions, it is used to identify important customers and suppliers in business and to concentrate efforts around these important clients.

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Index Business Start-up, 4 Business-to-Business (see also B2B) Relationship, 10, 41, 44, 105, 123, 145, 169 Buyer–Supplier Relationships, 44 Buying Centre, 138–139, 142, 149, 190

A Additive Manufacturing, xxi, 89 AIDS, 53 Anglo-Saxon Approach, 44 Anglo-Saxon Capitalistic Model, 174 Artificial Intelligence, xxi, 27, 29, 88, 175 Asimov’s Three Laws of Robotics, 171 Autonomous Vehicles, xxi, 170

C Check Position, 158 City Car Variants, 56 Civil Law, 151, 191 Clarke, C. Arthur, 163 Co-Creation, 57, 152, 191 Commercial Loans, 11 Common Law, 151, 191 Communicate Position, 158 Compel Progress, 158 Contract Award Notice (see also CAN), 115 Contract Notice (see also CN), 114, 128 Corporate Social Responsibility (see also CSR), 16, 37, 97, 174, 191

B Background Theory, xix, 39 Basic Operations System Diagram, 86 Black Swans, 67 Blockchain 2.0, 168 Born Global, 53, 189 Brexit, 16 British Merchant Marine Transportation Systems, 46 British Royal Navy, 46 Brundtland Report, 38 Business Angels, 12, 190, 198, 215 Business Managers, 7, 109 219

220

Index

Cost–Benefit Calculations, 51 Costing Approaches, 23 Costing Impacts of Decisions and Consequential Spending, 26 Creative Destruction, 172 Crosby, Philip, 76 Customer Trust, 158 Customer’s View of Suppliers, 118 Customer–Supplier Relationship, 116 D Data Mining, 27, 86, 188 Degrees of Freedom, 26–27, 193 Deming, W. Edwards, 76 Design and Contract Management, 178 Different Relationship Types, 124 Direct Procurement, 116–117, 194, 198 Do or Trade, 58, 201 Downside Risk, 96, 155, 195, 215 Dyson, James, 19 E Enterprise Resource Planning (see also ERP), 37, 90, 195 EU Global Data Protection Regulations, 129 EU Procurement Rules, 112–113, 130, 154 European Article Number (see also EAN), 128 Ex Works Price, 135 F 1977 Foreign Corrupt Practices Act, 154 Financial and Strategic Objectives, xix, 1

Financial Support Provider(s), 10 Ford, Martin, 171 Foreign Direct (Inward) Investment (see also FDI), 50, 196 G Garbage In Garbage Out (see also GIGO), 28, 82, 197 Gatekeepers, 139 Gattorna’s Behavioural Logic of Supply Chains, 101 Gattorna’s Cultural Logic of Supply Chains, 104 Gattorna’s Market Logic of Supply Chains, 102 Gattorna’s Strategic Logic of Supply Chains, 103 Genichi Taguchi, 79 Glenn, John, 116 Global Business Context, xix, 1 Global Trade Item Numbers (see also GTINs), 128, 197 Globalisation, xix, 9, 45–48, 74, 172, 177 Goods and Services, 56, 135, 137, 153, 173, 194 Grease Payments, 154, 198 Gross Domestic Product (see also GDP), 2, 164, 172–173, 175 H Health Check, 158 House of Quality Generic Model, 81 House of Quality Logic, 104 House of Quality, 80, 198, 207 I I, Robot, 170 Indirect Procurement, 116–117, 198

Index 221

Industrial Revolutions, 175 Infant Mortality, 5 Initial Public Offering (see also IPO), 11–12 Institute for Collaborative Working, 161 Intellectual Property (see also IP), 98, 150–151, 189, 191, 196, 199 International Association of Contract and Commercial Management (see also IACCM), 142, 160 International Marketing and Purchasing (see also IMP) Group, 44 Invitation to Tender (see also ITT), 114 J Joint Venture (see also JV), 98, 123–124, 200 Juran, Joseph, 76 Just in Time System, 62, 201 K Key Performance Indicators (see also KPIs), 158 L Lean Production, 91, 94, 104, 201 Lean Thinking, 92, 94, 178 Lego Brick Concept, 72 Life Cycle Supply Requirements, 107 Logistics Hub and Spokes, 133 Lower Specification Limit, 78 M Make or Buy Decision, xx, 58, 214 Market Logic, 101–102, 104 Market Pull, 18, 202

McKinsey 7-S Strategic Approach, 22 McLean, Malcolm, 133 Modern Slavery Act 2015, 38 Modularisation, 71–72 N National Health Service, UK, 3 Normal Distribution, 67, 76–77, 189 O Operations Management, xix, 70, 85 Order Penetration Point, 61 Order Visibility Point, 63, 204 Order Winners and Qualifiers, xix, 19–20 Order Winning Criteria, 32 Organisational Location of Purchasing Activity, 110 Ownership, 1–3, 29, 36, 40, 55, 58, 96, 100, 134, 152, 165, 169, 173, 196, 206, 215 P 3D Printing, 30, 89, 164–165, 216 Pareto, Vilfredo, 173 Pareto’s Rule or Law, 117 Pork–Barrel Politics, 112 Portfolio Analysis, 11 Power by the Hour Approach, 55, 166 Pre-Qualification Questionnaire (see also PQQ), 114 Principal and Agent Theory, 6, 206 Prior Information Notice (see also PIN), 114 Process Capability, 33, 79, 206 Process Variations and Sigma, 78 Procurement and Supply Chain, 25, 30

222

Index

Product Definition, 137 Public Sector Organisations, 112 Purchase to Pay, 145, 207 Q Quality Function Deployment, 80 Quality Loss Function, 79 Quality Performance, 55, 71, 83, 206 Quartz Digital Watch, 8 R Radio Frequency Identification (see also RFID), 128, 134, 197 RATER, 83 Red Blue Payoff Matrix, 181–182 RED/BLUE Game, xxi, 181 Reich, Robert, 173 Relationship between Design Tolerance and Rejects, 77 Relationship Portfolio Possibilities, 121 Reputation Risk, 36, 74 Request–Suggestion–Modification Process, 57 Research and Development (see also R&D), 25 Resource-based Theory, 42 Reverse Engineering, 153, 208 Risk Attitude, 155, 209 Risk Exposure, 155, 209 Risk Management, 142, 147 Risk Premium, 155, 209 Robots, xxi, 166–167, 169, 175 Robust Design, 79, 209 Royal Bank of Scotland, xx, 161 Royal National Lifeboat Institution (see also RNLI), 14 Rumsfeld, Donald, 67

S 2017 Stericycle Expert Solutions, 73 Service-level Agreements, 64, 138 SERVQUAL Model, 210, 83–84 Short-Term Opportunism, 41 Smith, Adam, xvii, 44, 170–171 Smith, Will, 170 South Sea Bubble Effect, 168 Spend Analysis, 117, 120, 126, 211 Sub-Optimisation, xvii, 159, 211 Supplier’s View of Attractiveness, 120 Supply Chain Finance Providers, 10 Supply Chain Partners, 10, 44 Sustainability and Recycling, 25, 29 Sustainable Development, 38 Swatch Consortium, 9 T Target Cost Approach, 24 Technology Push, 18, 212 Total Quality Management (see also TQM), 82, 213 Toyota Production System, xix, 201 Trade-offs, 71, 80, 198, 213 Trans Pacific Partnership, 164 Transaction Cost Analysis (see also TCA), 40, 213 Trump, Donald, 16, 47, 174 Types of Products and Services, 136 U Universal Basic Income, 172, 175, 214 Upper Specification Limit, 78 Upside Risk, 16, 155, 215

Index 223

V Value in Transfer, 55, 215 Venture Capital Funds, 12, 215 Virtual Integration, 36 W Walton, Sam, 13 Whats in it for WE, 160–161 Williamson, 40–42

Z Zero Hours Contracts, 57 Zero Hours Employment Contracts, 87