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Week 3 summary

Week 3, focused on the topic of ‘Shop till you drop: Purchasing and procurement in context’. Before immersing yourself in the world of manufacturing,
YEO ZHIQUAN: Hello Learners. I’m Yeo, your mentor for week three. Here with me is Catherine Bowser, the educator for the week. Hello Catherine. How are you doing?
CATHERINE BOWSER: Hi Leo. I’m great, thank you. How about you?
YEO ZHIQUAN: I’m great too, thank you. So, last week, Catherine, you have introduced us to the topic of sourcing decisions. And there are five key questions to any sourcing decisions. So first of all, we need to know what needs to be purchased, and what does the potential supply look like, which approach suits the best, which supplies to select, and finally, how do we improve? Look, Catherine, behind all these key questions, looking at the grand scheme of things, what is the key message in thinking about sourcing decisions in the supply chain context?
CATHERINE BOWSER: Yeah. I think what I want to do for this is just reposition and stand back to that big framework that we introduced at the start of the week. So very much seeing this as a decision making process focused around those five questions that are really about exploring, analysing what fits behind good decision making. And I think what makes this different now is that this is something else from purchasing or procurement. This is really around sourcing decisions in a supply chain context. So if we think that purchasing might be around more sort of order pulling, so when a decision is made, how do we then place the order maybe through to payment.
Whereas, in a very traditional way, procurement was more strategic. But very much a decision within the bounds of the organisation. And really around optimising that particular unit in the supply chain. If we think about sourcing strategy decisions, that they’re really more far reaching in that we’re trying to get as far upstream towards the suppliers that we can, to understand how they best fit our downstream perspective of what customers really want and value. So this is a really important component of supply chain strategy and supply chain thinking. I think it’s also that this is a decision making process. It’s a journey. And that there is no one right answer.
We’re going through these steps, so that effectively, we can make good choices and come up with decisions that are contingent with the case in hand.
YEO ZHIQUAN: Thank you. So Catherine, you mentioned about customer value. So, what’s the significance of understanding customer value in the first place?
CATHERINE BOWSER: Yeah. I mean, I think this whole process, we said, just like designing supply chains starts with understanding the customer’s– segmenting the customer market, we can design appropriate supply chains. That’s so true for these sourcing decisions. So what we do need to start with, is understanding and defining the products service offering by getting into what is it that the customer wants and values? So when we saw the case study, the article was around the beef, you know, and although that of course was [INAUDIBLE],, we were actually thinking that part of the story was this segmentation of the customers. So this wasn’t a beef burger supply chain. There were two very unique supply chains in here.
One driven by values– that of a higher meat content, a higher quality specification, and a desire to pay more for that, commensurate with the amount of meat in it. And the second supply chain, there were– it was– the customer was prepared to pay less. And the quality of meat, indeed, the amount of meat in the burger was 30%. So these were two very different supply chains with very different specifications as the customer was looking at the quality, the specification aspect, and the cost aspect. So we were making sourcing choices appropriately around that. I think another point to come out of that, actually, was that, when we’re thinking about the specification, there’s always two components.
There’s the specification, which is around, in this case, the meat content, or the product specification, indeed a service offering. That’s the context we’re looking at. But there’s also the component of qualities, which is the capability of the supplier to deliver reliably and dependably against that specification. Here, even though the burger world may have been segmented, actually that specification reliability and dependability was actually in place. So the customer value, we really do need to stand, as we’ve mentioned, against that requirement. It’s no good having high specification, cost, high service, whatever it is, if the customer isn’t valuing that capability or that requirement.
I think what I saw and picked up in some of your comments around some of the value, the consumer value, was that more and more, we see consumer values coming into the design of supply chains and the selection of suppliers, the players in that supply chain. So when you heard the words of corporate social responsibilities, the sustainability, you picked up on the environmental, cultural, ethical, religious, whatever the context, that consumers bring their personal values into choices. And in fact, I was thinking about this when I saw those comments, that were all over the press in about 2013, when suppliers working for Apple and that, and when they said their suppliers, 400, they found 70 instances of child labour.
They used child labour both within their direct suppliers, and their supplier’s suppliers, which shows the extent of really understanding that this sourcing decision isn’t bounded, that it’s a supply chain issue. Because that reshaped Apple sourcing strategy is they didn’t want to be in any way tied to unethical supply practises. So we see that it’s absolutely [INAUDIBLE] in so many aspects as we’re thinking about supply chain design in our sourcing choices.
YEO ZHIQUAN: OK. So in making sourcing choices, what other key considerations should decision maker take note of, then?
CATHERINE BOWSER: So, I think again, this comes back to this framework of questions. If we have both established what the value is, and effectively bounded the product service offering in whatever we need to for the consumer, the user was far up in the supply chain as we can get a representation, in a way, then we can start thinking about what’s the characteristic? What’s the nature of that product service offering? How does that match for this supply chain? So we try to get this match, this best fit, [INAUDIBLE] sources. So effectively, we talked about in there when we were looking at this block, the difference, really, between very high value and potentially unique and difficult to source type [INAUDIBLE] service offerings.
First is lower value, maybe more commodity items, where there was a readily available market, but actually less sensitivity around the service levels availability, whatever their representation of value is. And really, what we’re running through our mind here is [INAUDIBLE] matrix. This is Peter [INAUDIBLE] back in the ’80s, the HBR, Harvard Business Review, sort of [INAUDIBLE] the thinking that said, just as we segment market, we have to understand and segment supply market. Because, the more we understand and ask questions of what sits behind the supply market, what are the risks, what are the capabilities, what complexity, how easy is it for us to get what we want? Where’s the value– not the value. How much are we spending?
And where’s the opportunity to do things differently? The more we can understand that, the better able we are to make good sourcing choices. Which comes back to we need to be able to bound our product service offerings to then evaluate the supply market, so that we can– this isn’t about selecting suppliers. This is about what are the characteristics of that supply market? And who might be potential? And what would be the sort of the trajectory or the improvement if that’s what we need to do? So really, we’re saying, in this decision making and analysis phase, we’re going out and seeing what is the capability?
Remember what we’re trying to do here is ensure that we have capable supply chains, which means equitability through the whole of the supply chain, our upstream path to deliver value to the customer.
YEO ZHIQUAN: OK. So, so far, we have talked about knowing the customer value downstream. And then, on upstream, we’ve talked about the segmenting the supply market and understanding the supply, and most importantly, finding that match. So, are there any other significant issues in the sourcing decisions, then?
CATHERINE BOWSER: Yeah. I think there are. One of the things that we did touch in– touch on in sourcing– and again, I think this is true for all supply chain decisions– is taking a different view of cost. We need to be thinking supply chain costs, and we need to think differently. And whilst we’re very good in standard costing and traditional sort of management accounting terms, building up profiles of product costs, and indeed, potentially service costs, we’re not necessarily very good at really understanding what are the activity costs. And therefore, what are the true things that are happening sitting behind our cost decisions? So certainly, within this sourcing context, total acquisition costing becomes an important consideration.
So it’s not that traditional view of just what is it that I paid for? What’s the invoice price? It’s actually taking an extended view and saying, actually, what’s the true cost of me buying this? What costs am I really incurring? So we talked in our segment here about important things around cost. This pre transaction transactional component and post transaction component, it’s just one framework. But it’s saying extend our views. So certainly, I think we do this ourselves when we make our own acquisitions. And, in different ways. So we talked earlier in the week about the buy one, get one free type of initiative. And taking a wider perspective, even as consumers, about how much it might look cheaper.
But does buying in bulk always give us a true cost advantage? So if we take that from a sort of business context, if I buy in bulk because it gives me a lower invoice price, I have a huge costs, potentially, of holding inventory, and holding inventory I don’t know is even going to be needed by my customer. So it can become obsolete stock. It might be that I need to consider how much it’s costing me to move this stock? You know, maybe if I went to a [INAUDIBLE] cost perspective, might be that this particular supplier is [INAUDIBLE].. So many different cost factors I really want to consider if I’m evaluating to the true cost of this acquisition.
And if I’m making sourcing choices around which suppliers, then which one is really going to be an advantage? And so it’s not just I live with the acquisition cost, across the supply chain context I’m thinking, more where a particular expense and product specification to product and service offering. What’s going to be the cost of me owning something through its life? Certainly, in capital acquisitions for my home, I will think who I buy an appliance more expensive, [INAUDIBLE] potentially more maintainable or [INAUDIBLE] Do I pay more up front than taking a hit potentially on the total cost to provision that service over a lifetime by making a different sourcing choice.
So I think all of these things are true, whether it’s a business or personal perspective, that let’s consider real costs, because if it has a cheaper focus, it will drive sub-optimal decision-making within this sourcing and supply chain context.
YEO ZHIQUAN: Thank you Catherine. So, we have so far spoken about the issues revolving around sourcing decisions. But after once we’ve made the sourcing decisions, then, we have come to the issue about supplier performance then. So what are the most important aspects of managing this suppliers performance?
CATHERINE BOWSER: Yeah, I think we did talk about the sort of, KPIs, the Key Performance Indicators, in our week’s discussion. We also talked about the carrot and stick. I sort of want to raise that discussion that KPIs are only one part of what really drives our relationship management, which is part of our choice. Once we’ve chosen our strategy around how deep is our relationship? What level of trust? How integrated is our information? What does collaboration look like? All which is contingent in our decision. So I don’t want deep collaboration with everyone. I have to take what integration requirement we need to create value through the supply chain.
But one of the things I need to build in to my strategy is the relationship. Relationship management aspect. And this really is about how are we improving? Or how are we satisfying and how are we improving our supply chain performance? So I think if we’re thinking about actually using a stick and beating up our suppliers, that’s very old supply chain construct around abuse of power. So once we’ve recognised power in the supply chain, what we don’t want is the abuse of it, which sub optimises the overall supply chain performance. So more for me, the relationship management aspect and the KPIs are the part that they are a mechanism, a tool, to better facilitate communication and action between customers and suppliers.
So the more when there are problems, we can get to root causes, the more able we are to put them right, and continuously improve performance. And equally, this is very rarely that it is the supplier that is underperforming in their own right. So when we talk about supplier measures, again, it comes back to this cause and effect. So many times, it’s actually customer behaviour that drives sub-optimal or poor supplier performance. Maybe the customer’s changing their schedules, changing forecast, changing their [INAUDIBLE] for their requirements, which has such a problem for suppliers.
So the more that it’s integrated to the communication, even if the supplier isn’t necessarily performing well, if they have a desire to, then this customer can work with the supplier to improve performance. And this doesn’t mean that would be for all suppliers. This is about building capability, investing where appropriate throughout the supply chain, to drive and deliver the value that’s needed right down there that the customer, consumer, and– so for me, the KPIs are a completely very important part of the overall thinking. Very much aligned to the value that you’re trying to deliver. It should be, as some think. But it really is about delivering an enhanced end-to-end supply chain performance.
YEO ZHIQUAN: So, thank you Catherine for all the insights and sharing. We have come to the complete part of the summary. Any concluding remarks, Catherine?
CATHERINE BOWSER: Just learners, thank you very much for participating in this week. I want you to think about this as a process. So those questions, it’s curiosity, it’s exploring, it’s not making knee-jerk reactions. It’s making sure that we understand what is it that we’re really looking for, segmenting that supply market so that we can acquire what we need to, the product service, that we make good choices, we’re thinking about the right components. And really, that we’re making good decisions, and that this is very much part of the supply chain thinking. And really, to wish you good luck for the rest of the week. And on your onward journeys. So thank you very much.
YEO ZHIQUAN: Once again, thank you Catherine. So this comes to the end of our week three summary. So learners, all the best with the rest of the course.

Week 3, focused on the topic of ‘Shop till you drop: Purchasing and procurement in context’. Before immersing yourself in the world of manufacturing, take some time to consolidate your learning from last week by watching the summary video.

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