Strategic Cost Management in Supply Chains

8/6/2019 Strategic Cost Management in Supply Chains

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Presented by:

KASHIKA WELLINGTON

SHIVANI MEHTAVINITA SUDHIR

ABHINAV SINGH

VINNY MAGU

SAPNA MUNJAL


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Firms are taking up challenge to manage costs throughout thevalue chain.

As the value of purchased materials and services as a share ofselling price has increased, firms find themselves managing

complex supply chains. 2008 survey of top executives found that 57 percent identifiedcost reduction as the primary strategic goal for supply chainmanagement.

Complex supply chains also create new costs and risks that must

be managed. The organizing framework employed incorporates elements fromShank and Govindarajans 1992, 1994 discussion of structural andexecutional cost drivers and value chain analysis and Tomkins andCarrs 1996 dynamic model of strategic investment.


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STRATEGIC COST MANAGEMENT

Cost management research has tended to fall into two relatedstreams:

1. examine whether and how firms configure accounting data tosupport value chain analysis,

2. attempt to derive the relationship between a firms strategy andcost structure.

Focus is on the causal relation between activity levels and the

resources that are required.

These streams take as given the firms strategy and structure andfocus on whether accounting records are capable ofreflecting ordetecting the economics of the chosen strategy.


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DEFINITION

A deliberate decision making aimed at aligning the firms coststructure with its strategy and with managing the enactment ofthe strategy.

Focuses on interactions across firm boundaries; specifically, thebuyer/supplier interface, as a source of competitive advantagethat can deliver low cost, as well as high productivity, quality,customer responsiveness, and innovation.

Two types of cost drivers are the basis for strategic cost

management:1. structural cost drivers: reflect organizational structure,

investment decisions, and the operating leverage of the firm,

2. executional cost drivers: reflect the efficacy and efficiency ofexecuting the strategy.


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Market and

Competitive

Analysis

IdentifyCustomerRequirements

EvaluateCompetitorOfferings

Assess FirmCapabilitiesand

Assets

Buyer & Supplier:

Joint Strategy

Development

and Structural Cost

Management

Specify theValue

proposition

SpecifyOrganizational

Design

Stakeholders Value Chain

Buyer &

Supplier:Executional Cost

Management

Joint Ongoing

Operations

Buyer &

Supplier:

Executional CostManagement

Analysis of Sustainability of the Supply Chain

Financial and Nonfinancial Performance Measurement

Performance Monitoring, Feedback and Improvement


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STRUCTURAL COST MANAGEMENT IN SUPPLY CHAINS

Sourcing, Supplier Selection, and Design of Supply Relationships

y In supply chain management, structural cost managementincludes the decision to seek an external supplier with or withoutcontemporaneous production by the buyer, selecting one or

more external suppliers, and designing the buyer/supplierrelationship.

y Supplier selection processes are akin to personnel controlswithin the firm that ensure fit between employee skills and jobrequirements.

y

Design

ing the buyer/suppl

ier relat

ionsh

ip encompasses formalcontractual management controls such as specifying authority

for supply decisions, performance requirements, and rewards orsanctions for nonperformance, as well as formal and informalcontrols that reinforce desired cultural norms.


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Sourcing: Make, Buy, or Ally

Organizational Boundariesy The so-called make-buy-or-ally decision considers how and

where in the value chain firms draw their organizationalboundaries and which activities are conducted inside versusoutside the firm.

y In the make mode, firms verticallyintegrate and business unitsprocure from other business units, with associated benefits ofinternal coordination and adaptation among firm units.

y In the buy mode, a firm procures input from other firms basedon arms-length contracting, and markets provide incentives for

the transacti

on to succeed.y The ally mode has characteristics ofboth market and hierarchybecause, although the buyer and supplier are separate firms, thesupply relationship often includes collaboration in the uncertainrealm of product and process design and a long or indefinitetime horizon for interaction.


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y Hybrid organizational forms offer high-powered profit

incentives and enhanced coordination

y Transaction cost economics TCE is the most widely usedframework for explaining firm boundary and organizationaldesign choices.

y TCE builds on propositions that firm boundaries reflectmanagers efforts to minimize production and transaction costs.

y Production costs are defined by production technology andefficiency. A buyer and suppliers production costs may differ ifthey use different technologies, operate at different scales, oroperate with different efficiencies.


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y Underlying TCE concerns about opportunism and coordination

failure are two types of risk: relational risk and performance risk.y Relational risk is unique to interfirm transactions and is closely

related to the opportunistic behavior.

y Performance risk is found in all decisions that put execution ofthe firms strategyin jeopardy and are not unique to

buyer/supplier transactions. performance risk is common insupply chain activities.

y A survey of supply chain professionals identified the three mostsignificant risks: supply chain disruption caused by supplierfailure, logistics failure, natural disaster, or geopolitical event,

weak senior leadership in supply chain management, and theabsence of accurate, timely, supplier performance measures.

y But by cooperating and pooling unique competencies and assets,cooperative relations between buyers and suppliers are intendedto enhance the likelihood of success, to reduce the time to realizedesired outcomes


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Supply Chain as a source of

Competitive Advantagey Conflict between TCE (Transaction Cost Economic)

approach and RBV (Resource Based View) regardingpartnership strategies in supply chain

y However, both assume that firm choices are motivated bythe goal of maximizing long-run performance


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Supplier Selection

y Selecting suppliers with capabilities and resources thatmatch the buyers needs is critical to supply chainperformance and coordination

y Criteria used for supplier selection reflects the specific

resources and competencies that are desired in potentialpartners

y Risks associated with the decision to outsource and hence,selecting supplier can be rational risks, performance risks

and their assoc

iated costs

y Selection process involves supplier identification, short-listing, information requests, reference search, invitationsto tender and site visits.


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Supplier Preferences

1. Suppliers with whom firm has previously transacted

Advantages:

lower search costs

Increase level of trust

Operational efficiencies because of prior experience. Also,lower coordination costs


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Contd

2. Preference to existing suppliers

Advantages:y Smooth technology transfer leading to innovation

Disadvantage:

y Prevents the buyers from learning about new capabilitiesof other suppliers


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Domestic Supplier selection vs.

International partner

Domestic supplier:

y Higher trust level because of availability of theiri

nformati

ony Best when there is higher perceived degree of

unmanageable risk

International supplier:

Lower labour rates, lower tax rates, lower commodi

ty pri

cesMore competencies than in domestic partners

Complex inventory and logistics management

Relational risks may arise


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Design of buyer/supplier

relationship

Designing the buyer/supplier relationship involves specifying themanagement control practices used to mitigate risk and control lossand to facilitate coordination of complex joint activities.

Examples of management controls in supply relations include

formal controls such as contracts that allocate decision rights andresponsibilities between the contracting parties

1. define performance requirements2. delineate rewards and sanctions for nonperformance3. performance feedback processes4. joint budgeting and forecasting processes5. co-location of employees.


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y Contracts provide the formal and legal arrangementsin which accounting and control practices areembedded.

y Contracts align parties interests and facilitatecoordination between them, mitigating or providingmechanisms to manage relational risks andperformance risks.


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contractual complexity and identify two general underlying

contract functions: enforcement clauses and coordinationclauses. These clauses relate to both relational risks andperformance risks, and thus require contract designers toconsider multiple contract functions simultaneously.

fouri

nterrelated contract di

mensi

onsi

n a sample of IToutsourcing contracts that reflect the nature of the clauses:1. assignment of rights e.g., ownership rights, decision rights,

responsibilities;2 . product and price provisions e.g., product descriptions,

delivery terms, price level/change agreements;3. after-sales service provisions e.g., continued support,

service after delivery; and4 . legal recourse provisions e.g., liability, sanctioning,

arbitration, termination.


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Monitoring controls are used to measure supply chainperformance vis--vis supply chain objectives andaccountability for performance outcomes i.e.,executional cost management,

whereas incentives i.e., structural cost managementprovide supply chain parties with the motivation tomake the right decisions. An important reason whymany firms fail to maximize supply chain performance

is the absence of performance measures needed tointegrate supply chain activities to improve efficiencyand effectiveness


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yIncentive systems can be designed in many ways andmay be based on explicit e.g., pay-for performancecontracts or implicit incentives.

y Performance measurement information is critical toproviding accurate cost information about realizedsavings.


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STRUCTURAL COST MANAGEMENT

y Organizational design

y Product design

y Process design


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2. Kaiz

en costing

y efforts to improve processes of manufacturing after theproduct is launched

3. Value engineering

y method to improve the "value" of goods or products andservices by either improving the function or reducing the cost


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Value Proposition

1. Involvement of retailers helps to design of higher valueproducts-

y contribute insights into what customers valuey the problems associated with existing productsy creates commitment to and understanding of the product

2. Collaboration between retailers and manufacturers will help in-y Maintaining less inventoryy Wholesale price paid by retailersy Increased profit margins

APPROACHES FOR COLLABORATIONy co-locating workersy equity sharingy sole sourcing


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Low cost

y open book accounting for joint cost minimization

y integrated information systems for joint problem solving andconcurrent engineering


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Joint Process Design

y JPD improve supply chain efficiency and reduce productioncosts is key element of supply chain integration.

y JPD include inventory management , JIT delivery, VMIsystems associated with forward production, as well asinventory management associated with backward orreverse supply chain activities related to recycling, reuse,and product return

y JIT production emphasizes eliminating waste and improvingproductivity by producing output to match the pull ofcustomer demand.


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JUST IN TIME INVENTORY

y JIT reduces inventory levels and increases inventory turns.

y Improvements are realized in productivity, customer

response time, product quality, scrap and rework,production costs, lead times, setup times, and spacerequirements conclude that strategically and operationally,have the potential to add value and enhance competitivepositioning.

y JIT reduces inbound logistics costs and inventory levels andmitigates performance risk associated with supply chaindisruption.


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VMI systems

y In VMI systems, buyers resign the process ofinventorymanagement , stock levels, replacement schedules tosuppliers.

y This requires firms to provide suppliers with accurate,

timelyinformation about inventory levels and plannedusage, something that frequently require integration of thepartners information systems.

y Barrier in VMI: inaccurate forecasting, lack of coordination

or inappropriate incentivesy The use of VMI to reduce inventory costs and increase

profits in the retail supply chain.


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Information System Integration

y Effective information sharing between supply chainpartners is essential for effective supply chain practices.

y Recent technological innovations have enhanced the abilityto manage and track the flow of relevant informationacross supply chain members.

y Inventory management processes such as JIT and VMI, and

related information technologies such as EDI and RFID areimportant areas for structural cost management related tojointly designed supply chains

Documents

Strategic Cost Management in Supply Chains