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Integration, Incentives and Innovation Nike’s Strategy to Improve

Social and Environmental Conditions in its Global Supply Chain

“Sustainability will be at the nexus of transformation in business, economies, and

markets,” stated NIKE, Inc. President and CEO Mark Parker in the company’s 2011 corporate
sustainability report. Like many multinational firms, the world’s largest footwear, apparel and
sporting goods company faces innumerable complexities in managing social and environmental
issues among its 700-plus contract factories in 42 countries. The company’s approach to
managing supplier responsibility greatly evolved over the last two decades, with the company
establishing a robust system of supplier monitoring, auditing, and remediation. Despite using an
expansive monitoring program, Nike found that many factories continued to move in and out of
compliance. In 2009, Nike launched project “Rewire” and transformed its approach from
focusing primarily on compliance to one that gives supplier incentives to improve their social
and environmental performance, since they are now evaluated on sustainability factors in
addition to cost, on-time delivery, and quality. Nike’s “Rewire” approach to supply chain
sustainability has involved making several changes in the company: Transitioning to a more
integrated organization structure, delivering lean manufacturing training to build workers’ skills
and improve efficiency, developing a new supplier incentive scheme, and promoting innovation
to engage all relevant stakeholders in creating the environment needed for systemic change to
take place. This study explores three key aspects of responsible supply chain management that
Nike believes will influence performance going forward: Integration, incentives, and innovation.

Integrating Sustainability with Supply Chain Management

Rewiring Nike’s approach to supply chain sustainability has involved changes both at the
company level and with its suppliers. Within the company, Nike changed its organizational
structure to better integrate sustainability within traditional corporate functions. The company
uses a matrix organizational structure in which managers’ report to multiple departments. Based
on business unit goals, employees develop strategies and plans detailing their multidisciplinary
responsibilities. Internal scorecards are used to report progress towards the goals. As part of this
shift, Nike’s Sustainable Business and Innovation (SB&I) team is now formally part of the
innovation team, and the SB&I leadership either reports to or works closely with sourcing and
manufacturing, product design, product creation, strategy, finance and marketing organizations.
With each department accountable for sustainability performance, Nike can better integrate
sustainability into business decisions much earlier in the design process, rather than after-the-
fact. Top company management has driven this transformation with initiatives being led, and
accountability shouldered, by top management. According to Andrew Ogilvie, Nike’s Senior
Director for Labor Excellence & Innovation, while the matrix approach can be complex, it has
helped to promote the integration of sustainability within the company. Ogilvie further stated,
"We have integrated sustainable innovation within Nike's growth strategy and, as a result, we
have found leverage points within our matrix to accelerate change." Cross-department scorecards
are used to report Nike’s progress toward achieving goals and targets. At the factory level, when
training contract manufacturers, the company uses an integrated model that addresses a full range
of issues influencing sustainability, including lean manufacturing, Human Resource
Management (HRM), health and safety, environmental compliance, energy management, and
environmental sustainability. The principles of lean are aligned with sustainability best practices
such as reducing resource use and waste, valuing the workforce, and reducing downtime, all
managed under a continuous improvement system. Nike’s practice of encouraging lean
manufacturing by its contract manufacturers embraces the philosophy of continuous
improvement, which aims to lead to increased productivity through a more skilled and engaged
workforce. Nike’s contract manufacturers are trained and encouraged to implement lean
principles by empowering workers to create innovative solutions that improve productivity.
Ultimately, this can lead to both increased worker satisfaction and gains in business
performance. Moreover, it believes respecting and empowering workers are critical to improving
labor conditions in its supply chain, as opposed to simply increasing their wages. At the end of
FY 2011, 80% of footwear, 57% of apparel and 11% of equipment was made at Nike’s contract
factories using processes meeting Nike’s minimum baseline definition of lean.

Penalties and Incentives: The Manufacturing Index

Implemented in 2011, the Manufacturing Index (MI) is a business model innovation that
“elevates the importance of sustainable manufacturing practices”, according to Hannah Jones,
Vice President of Sustainable Business and Innovation. The MI provides a consistent framework
for measuring performance across Nike’s supply chain, brands, and products. The index is used
to monitor, measure, and reward suppliers on quality, on-time delivery, cost, and sustainability
performance. Each of the four categories receives a 25% weighting. The 25% weighting given to
sustainability is one of the highest the authors have come across in their research to date. The
sustainability dimension of the index covers environmental, social, lean implementation, and
health and safety issues. The MI program has grown from a handful of factories in 2011 to 79
supplier groups (a total of 144 contract factories) by 2013.

Based on scores in each category, factories are awarded a score between 0 and 100,
putting them in a gold, silver, bronze, yellow or red category. While many companies penalize
suppliers for noncompliance with their code of conduct, Nike has put into place incentives aimed
at changing supplier behavior for the better. Suppliers achieving the minimum acceptable level
(bronze) in sustainability, cost, delivery, and quality qualify for receiving priority consideration
for orders. High performing suppliers can also access Nike leadership and training on issues such
as waste and energy management, and the implementation of lean practices.
Only after being compliant can suppliers access Nike’s leadership and resources. The
adoption of this “pull” model incentivizes suppliers to achieve the highest performance possible
in order to benefit from the MI incentives. This ultimately helps to promote supplier ownership
of responsible practices, which benefits Nike and contract factories as well. This pull model is
different than the more commonly adopted “push” model, where firms invest in suppliers that are
frequently under-performing and not complying with minimum standards. Nike is interested in
doing business with more proactive and high performing suppliers. Contract factories may only
become an approved Nike supplier if they achieve the minimum bronze compliance standard
from the outset. The company has set a target that all of its products will come from factories
that have achieved bronze or higher status by the end of FY204.

In terms of sanctions, suppliers performing at yellow or red levels can be subject to

serious review. When issues arise such as detection of uncontrolled hazardous waste, a supplier
must create an action plan to address and remediate the issues within a defined time period after
which a follow-up audit is conducted. If satisfactory progress isn’t made, the supplier may
experience a reduction in orders or, depending on the severity of the issue, eventually be
considered for removal from the supply base. Suppliers receiving yellow or red ratings are also
required to fund third-party audits until they can achieve and maintain the minimum bronze

Implementing the MI has taken substantial effort from both Nike and supplier
management to ensure goals was aligned. Nike selected factories to implement the MI based on
strategic importance rather than willingness to participate. In alignment with the “pull” model,
Nike wants to work with suppliers that are investing in their future and in sustainable practices.
Interestingly, Nike has reduced its supplier base from over 1,000 factories in 2009 to less than
800 in 2013. This allows the company to strategically manage a source base, build capacity, and
grow with the contract factories that are philosophically aligned with similar business and
sustainability objectives.

As of 2013, 79 supplier groups (a total of 144 contract factories) are part of the MI
program. Nike says it is too soon to tell whether supplier performance is improving as a result of
the MI system; most suppliers have only been a part of the program for three or four quarters.
Some sustainability investments suppliers have made have a longer time horizon before they
yield results. For example, several suppliers are investing in management development training
and capital infrastructure projects to reduce water, waste, and energy use.

While the impact of the MI rollout may take time to realize, some supplier factory
managers have reported that they have a far greater understanding of their business performance
expectations because of the scorecard and incentives structure. Presenting the MI in a clear
dashboard format has helped both Nike and its suppliers evaluate their performance against
Innovation in Product and Process Design

In addition to business model innovations such as integrating sustainability within

business departments and improving the supplier incentive structure, Nike has also been focused
on collaborative product and process design innovations focused on environmental sustainability.
The company has targeted innovations that can prevent environmental issues and still create
value for the customer.

“...only innovation will make the difference because these issues are simply too big and complex
for Nike or any one business to address on its own. We need coalitions to drive systemic change
at scale.” Hannah Jones, 2013.

Several recent product design innovations have been successful. In 2010, World Cup
football shirts were made from recycled plastic bottles and developed using the Nike Materials
Sustainability Index, which enables product creation teams to select environmentally better
materials. More recently, Nike’s Flyknit technology was used to deliver a lighter shoe for
runners that uses fewer materials. The shoe uses “essentially a single thread”. Since the one-
piece upper does not use the multiple materials and material cuts used in traditional sports
footwear, the shoe reduces both waste and cost.

Nike is also investing in manufacturing process innovations. For example, it made a

minority investment in Dyecoo, a Dutch technology firm, which seeks to create the first
commercially available waterless textile dyeing machines. By using recycled carbon dioxide to
transfer the dyes, DyeCoo’s technology eliminates the use of water in the textile dyeing process.
The textile industry is one of the largest consumers of water, and most of the world’s textile
suppliers are located in Asia. The scale of the industry’s activity in the region can put pressure on
the availability of clean water and contribute to environmental pollution in the discharges from
manufacturing processes. By removing the need to use water in the dyeing process and
eliminating the risk of effluent discharge, a known environmental hazard, DyeCoo could bring
significant benefits to the region, as well as reducing the environmental impact of its own supply

Finally, in an effort to harness collective innovation that can raise the bar for
sustainability across industries, in 2009, Nike formed LAUNCH with NASA, USAID and the US
Department of State. LAUNCH is a collaborative effort to generate “open source” innovations
related to sustainability and accelerate potentially successful innovations. The initiative has
brought together stakeholders across the system such as multinational firms, suppliers, material
providers, academics, and chemists in adjacent industries. In 2013 the LAUNCH focused on
catalyzing action around one of the world’s biggest challenges – the sustainability of product,
which makes it, what it’s made of and how it is made.

Andi Erna Mulyana, S.T., M.Sc.

Semester Genap 2019
Definition & Concept
• Supply chain
The flow of materials, information, money, and services from raw
material suppliers through factories and warehouses to the end
• e-supply chain
A supply chain that is managed electronically, usually with Web
• e-supply chain management (e-SCM)
The collaborative use of technology to improve the operations of
supply chain activities as well as the management of supply chains
e-supply chain
The success of an e-supply chain depends on:
1. The ability of all supply chain partners to view partner collaboration
as a strategic asset
2. A well-defined supply chain strategy
3. Information visibility along the entire supply chain
4. Speed, cost, quality, and customer service
5. Integrating the supply chain more tightly
e-supply chain
Activities and infrastructure of E-SCM
1. Supply chain replenishment
2. E-procurement
3. Supply chain monitoring and control using RFID (Radio frequency
4. Inventory management using wireless devices
5. Collaborative planning
6. Collaborative design and product development
7. E-logistics
8. Use of B2B exchanges and supply webs
• The use of Web-based technology to support the key procurement
processes, including requisitioning, sourcing, contracting, ordering,
and payment.
• E-procurement supports the purchase of both direct and indirect
materials and employs several Web-based functions such as online
catalogs, contracts, purchase orders, and shipping notices
Collaborative planning
A business practice that combines the business knowledge and
forecasts of multiple players along a supply chain to improve the
planning and fulfillment of customer demand
Infrastructure for e-SCM
1. Electronic Data Interchange (EDI)
2. Extranets
3. Intranets
4. Corporate portals
5. Workflow systems and tools
6. Groupware and other collaborative tools
EC Solutions along the Supply Chain

1. Order taking
2. Order fulfillment
3. Electronic payments
4. Managing risk
5. Inventories can be minimized
6. Collaborative commerce
Component of Collaborative Fulfillment and APS
How Information Systems Are Integrated

• Internal integration includes connecting applications with

databases and with each other and connecting customer-
facing applications (front end) with order fulfillment and the
functional information systems (back end)
• Integration with business partners connects an
organization’s systems with those of its external business
• Web Services
An architecture enabling assembly of distributed applications from
software services and tying them together
• Integration along the Extended Supply Chain
Information integration along the extended supply chain—all the way
from raw material to the customer’s door
• Corporate (enterprise) portal
A gateway for entering a corporate Web site, enabling
communication, collaboration, and access to company information
Corporate Portal Framework
Global Supply Chain Operation

Andi Erna Mulyana, S.T., M.Sc.

Semester Genap 2019
1) Lingkungan bisnis global
2) Tantangan-tantangan strategis
3) Peran global supply chain
4) Trend Global Supply Chain saat ini
Global Business Environment
• The rationale of global market convergence lies partially in the
irreversible growth of global mass media including internet, TVs,
radios, news papers and movies
• For organization and their supply chains, the logic of going global is
also clearly recognizable from economic perspective.
• Inter-organizational collaborations in technological frontier and
market presence in the predominantly non-homogenous markets can
also be strong drivers behind the scene.
Global Business Environment
Key characteristics that global supply chains must recognize before they
can steer through:
• Borderless
• Cyber-connected
• Deregulated
• Environmental consciousness
• Social responsibility
Strategic Challenges
Market Dimension
• Continuing demand volatility across the world market has hampered many
supply chains’ ability to manage the responsiveness effectively.
• Demand fluctuation at the consumer market level poses a serious
challenge to the assets configuration of supply chain, capacity
synchronization, and lead-time management.
• Geo-political instability around the world has also contributed to the
market volatility to certain industries.
• Technology development and product innovation constantly creates as well
as destroys the markets, often in a speed much faster that the supply chain
can possibly adapt.
Strategic Challenges
Technology Dimension
The key strategic challenges in the technological dimension are:
• The development lead-time challenge: this is partially due to the
much widened global collaboration on technological development
and subsequent commercialization and dissemination.
• Comes from its disruptive power: not all new technologies are
sustaining to business, often they are competency-destroying. The
product or service developed through applying new innovative
technologies may not be so much appreciated by the consumers.
Strategic Challenges
Technology Dimension
The key strategic challenges in the technological dimension are:
• In the supply chain network:
- The innovative ideas and new technologies usually emerge from a
supplier or a contractor in the supply chain network. To convince the
whole supply chain of the value adding or cost reduction is not
guaranteed. Each supplier and contractor will have its own value
stream and will make technology adoption decision based on the needs
of its customer.
- Innovative ideas that come up from subcontractors may be stifled due
to the supply chain’s inability to coordinate value contribution between
individual members and the whole supply chain.
Strategic Challenges
Resource Dimension
• Global supply chain development is both motivated by dinging new resources
around world and by make better use of its own already acquired resources to
yield economic outputs.
• One of the key strategic challenges in global supply chain development is about
resource deployment.
• Stretching supply chains’ downstream tentacles around the world opens the door
for making good (more efficient) use of internal resources. However, the internal
resource or competence based strategy will also face more severe challenges on
the global stage than in its own local or regional market.
• Stretching the sourcing-end (supply side) of supply chain to the global market is a
great strategy to acquire scarce resources or any resources at a much lowered
Strategic Challenges
Time Dimension
• In order to maintain a nimble footed business model, the supply chain may have
to upgrade its facilities with investment, having higher than usual production and
service capacities, or having high level inventories.
• A key challenge to supply chain managers is would the resultant agility pay for the
heightened supply chain costs?
• The time measures on many operational issues have also been the major
challenges for supply chain managers. Customer lead time, i.e. from customer
order to product delivery, is one of those challenges. Toyota claims that they can
produce a customer specified vehicle with fortnight-the shortest lead-time in the
auto industry. This adds huge value to the supply chain in terms of customer
satisfaction, cost reduction, efficiency and productivity. But it could be a huge
challenge, when the customers are all over the world and the productions sites
and distribution logistics facilities are not well eshtablished.
How Global Supply Chain Responded

5 common approaches that supply chains have survived the global

1. Collaboration
“If you cannot beat them, you better join them”
• The content of collaboration varies from project to project, and from
business to business. It may be the research and development
collaboration which is aiming perhaps for a technological advancement
or a new product design; or it could also be marketing collaboration
where the aim is to penetrate the market and increase sales.
• The collaboration is usually mentioned when there is an area or a
project the activities of the collaboration can be associated with.
How Global Supply Chain Responded

Reason why collaboration is one of the most favourite supply chain

management approaches:
1. Sharing sources
2. Achieve synergy
3. Risk sharing
4. innovation
How Global Supply Chain Responded

2. Supply chain Integration

• Supply chain integration can be defined as the close internal and
external coordination across the supply chain operations and
processes under the shared vision and value amongst the
participating members.
• A well integrated supply chain will exhibit high visibility, lower
inventory, high capacity utilization, short lead-time, and high
product quality (low defect rate). Therefore, managing supply chain
integration has become one of the most common supply chain
management approaches that can stand up to the global
How Global Supply Chain Responded

3. Divergent product portfolio

• The global market becomes the stage for the supply chain. Two key
characteristics of global market are volatility and diversity.
• Develop divergent product portfolio will make the supply chain
more capable of satisfying the divergent demand of the world
• The divergent product portfolio strategy can also significantly
mitigate the market risks that brought forth by the nature of global
market volatility.
How Global Supply Chain Responded

4. Develop the “Blue Ocean Strategy”

• Instead of going for the “head-on” competition in the already
contested “red sea” a much more effective approach is to create a
new market place in the “blue-ocean”, which make the competition
• Developing the “blue ocean strategy” has already been proven an
effective response to the global challenges for many supply chains.
Tomorrow’s leading supply chain will succeed not by battling
competitors, but by creating “blue-ocean” of uncontested market
space that is ripe for growth.
How Global Supply Chain Responded

5. Pursuing world class excelence

• The world class excellence defines the highest business
performance at a global level that stand the test of time
• To become a world class supply chain one need to excel in four
- First dimension: the operational excellence
- Second dimension: the strategic fit
- Third dimension: the capability to adapt
- Fourth dimension: the unique voice
Current Trends in Global SCM

Trend 1: Supply chain volatility and market uncertainty is on the rise

• Continued demand volatility in most of global markets is a major concern to the
executives of supply chains. Few companies have strategies in place for managing
volatility in the years ahead let along implementing it. The lack of flexibility to
cope with the demand change is increasingly a management shortfall. In the path
of economic recovery, this shortfall could well be the trigger for bullwhip effect.
• The fast development of cyber market and mobile media has given rise to the
market visibility leading to high level of market transparency. The only known
approaches to deal with the trend of increased volatility are improving
forecasting accuracy and planning for flexible capacity throughout the supply
chain. Best performing companies tends to improve supply chain responsiveness
through improving visibilities across all supply chain partners. On the
downstream side, companies are now focusing more on deepening collaboration
with key customers to reduce unanticipated changes.
Current Trends in Global SCM

Trend 2: Market growth depends increasingly on global customers

and supplier networks
• The immediate implication of this trend is that the supply chain will
have to produce higher number of products or variants to fulfill the
customer expectations. The pattern of global supply chain is going to
be more complex in terms of new customer locations, market
diversity, product variants and demand volatility.
• On the supply side, the trend indicated that a more dynamic supply
networks stretching far and wide globally. Managing those suppliers,
developing them and integrating them become more a critical
challenge than ever before.
Current Trends in Global SCM

Trend 3: Towards more cost-optimized supply chain configurations

• Globalizing supply chain operations and outsourcing specific function are critical
for controlling costs. It came as no surprise that outsourcing is on the rise across
many industrial sectors around the world. Companies are taking advantages of
lower costs in emerging markets and increasing their flexibility of their own
supply chain. The functions that will see the greatest increase in outsourcing are
product development, supply chain planning and shared services.
• Globalization does not seem to have reduced process and management costs. In
fact those hidden costs could be on the rise when supply chain becomes more
global if not careful. Many are embracing new concepts like Total Supply Chain
Cost Engineering, an integral approach to calculating and managing total cost
across all supply chain functions and interfaces. Rigorous cost optimization across
the end-to-end supply chain – from order management, sourcing, and
manufacturing to logistics and transportation – are critical for success.
Current Trends in Global SCM

Trend 4: Risk management involves end-to-end supply chain

• Risk has become an increasingly critical management challenge across the
global supply chains.
• Dealing with cost pressure of their own, many consumer have increased
their efforts in asset management and have started shifting supply chain
risks, such as inventory holding risks, upstream to their suppliers. This
approach, however, merely shift risks from one part of the supply chain to
another but not reduces it for the whole supply chain.
• Supply chain risks can only be most effectively mitigated by the end-to-end
supply chain approaches. These end-to-end supply chain practices include
advanced inventory management, joint production and material resource
planning, improved delivery to customers and so forth.
Current Trends in Global SCM

Trend 5: More emphasis on supply chain integration and empowerment

• Little can be achieved without appropriate management approaches that
truly integrated across all functions throughout the supply chain and
empowered them to take bold action.
• Integrated supply chain management across all key functions still seen to
be a myth, with many procurement and manufacturing executives making
silo optimization decisions.
Purchasing and Supplier Selection

Andi Erna Mulyana, S.T., M.Sc.

Semester Genap 2019
• Stategic role of purchasing
• Purchasing Portfolio
• Supplier Selection
• Knowledge Based Sourcing
Stategic Role of Purchasing

• Classical Definition
Purchasing is to obtain materials and/or services of the right quality
in the right quantity from the right source, deliver them to the right
place at the right price
• Composite definition
Purchasing is the process undertaken by the organisational unit
which, either as a function or as a part of an integrated supply chain,
is responsible for procuring supplies of materials and services of the
right quality, quantity, time and price, and the management of the
suppliers, thereby contributing to the competitive advantages of the
achievement of the corporate strategy.
Stategic Role of Purchasing

Operational Process of
Purchasing Function
Purchasing Portfolio

Kraljic Purchasing Portfolio

Purchasing Portfolio

Leverage Products
• Are those you buy from your supplier that will have significant impact on
the finance of your own final product, but it is relative y easy to buy from
the supply market, hence low market risk.
• Example: Wood (for a furniture manufacture).A large portion of the cost
come from wood price and the furniture prices are dependent on the
wood cost in the market place.
• For leverage products, Kraljic proposes a purchasing strategy of
competitive bidding. Competitive bidding wil only work if there is more
than one supplier. Alternatif suppliers in this case availabe and subtitution
if supplier is possible.
Purchasing Portfolio

Routine Products
• Are those materials that have very little financial impacts on the buyers
own products and also there are plenty to choose from the market place.
• For this kind of product, Kraljic proposed a purchasing strategy of system
contracting plus e-commerce solutions, because these product have
large varieties and high logistics complexity and often labour intensive in
Purchasing Portfolio

Strategic products
• Are those components have high level of financial impact to your final
product. They are expensive to develop and manufacture, and often
involve high technology contents. Not usually available in the market
place, thus high supply risk.
• Example: Engines for automobile
• For thi product , Kraljic proposed a purchasing strategy of performance
based partnership. That is to create a partnership relation with the
supplier and work together to develop and manufacture the
Purchasing Portfolio

Bottleneck Products
• Are those components that may or may not cost too much in comparison
with the total material cost, but the must have them and they are very
difficult to get a hold of.
• The supply risk for those components is high, and the availability of the
components is not guaranteed.
• Example: the small amount of precious metal required for the exhaust
purification system. Without it, the automobile will not pass the
environmental standard and will not be allowed on the road.
• Kraljic recommended a purchasing strategy of securing supply plus
searching for alternatives .
Supplier Selection

• A critical task of purchasing function is to identify and select the suppliers.

• Group Discussion
1) Identify the process of selecting suppliers!
2) Identify tools for supplier selection!
Supplier Selection

1. Set up selection criteria

2. Initial contact
3. Formalevaluation
4. Price quotation
5. Financial data
6. Reference checking
7. Supplier visit
8. Audits, assessments or surveys
9. Initiation test
Supplier Selection

3 Significant different approaches toward supplier selection:

1. Based on the product that the supplier can deliver: this approach will
normally check the product prototype to see if the quality and
technical specifications can be met and the delivery terms are
2. Based on the capability that the supplier displays: it typical checks
whether the supplier has the design and development capability,
strategic investment in technology and skills, and up to scratch
3. The combination of product and capability selection: it applies to when
a strategically important new part is to be outsourced to a new
Tools for Supplier Selection

Basic quantitative tools

1. Categorical method
- Define selection criteria (quality, delivery and service)
- Make category judgment (Good; Unsatisfactory; Neutral) against the
criteria for each supplier
- Sum up the judgment into a total score for each supplier (the
highest one will be selected)
This method is very simple to apply but is rather subjective. It is
recommended to form a multi-functional team to make collective
judgments in order to limit the bias from individuals
Tools for Supplier Selection

Basic quantitative tools

1. Categorical method
Tools for Supplier Selection

2. Cost Ratio Method

- Set up the criteria against the alternative suppliers (not only based on the
people’s subjective judgments but also make use of some available data on
the quality performance)
- Based on the historically collected data, the corresponding cost ratios for
each criterion will be able to establish in term of how much the penalty
cost needs to be added.
- The original quoted unit prices from different suppliers will then be
adjusted to generate the net-adjusted costs
- If the supplier selection is based on the original quoted unit price, the
lowest cost would be selected. However, if the supplier selection process
takes into account of suppliers historical performances in the three areas
and use the net-adjusted cost, the lowest cost supplier would be selected.
Tools for Supplier Selection

2. Cost Ratio Method

4 Stages of The Purchasing Function based
on The Operational Focus Perspective:
1. Stage 1. Product Centered Purchasing: the operation is basically
concentrated exclusively upon the purchasing of the tangible products
and its outcomes on the overall business. It is usually measured in the
five rights (right price, right time, right quantity, right quality, and from
the right sources)
2. Stage 2. Process Centered Purchasing: it is predominantly process
focused operation. It moves beyond the direct outcomes of the
purchasing activities and into the processes through which the
outcomes are delivered. This means that the managers realized that
the processes are the enablers, and often the controllers of the
purchasing outcomes.
4 Stages of The Purchasing Function based
on The Operational Focus Perspective:
3. Stage 3. Relational Purchasing: the focus of the operation is not just on
the process but also on the inter-organizational the relationships. The
relationship has been taken on as the key management instrument to
enhance the product quality and technological advances; it is also had
massive positive impact on the supplier integration and development.
4. Stage 4. Performance Centered Purchasing: it focused on the optimum
business performances as a whole and managing the purchasing
functions contributions to the overall business performances. In this
way, the purchasing function has been strategically connected to the
businesses ultimate objectives and delivery.
4 Stages Purchasing Function Based on The
Characteristics Focus Perspective
1. Stage 1. Passive: in this stage the purchasing can be defined as lack of
strategic directions and is mainly reactive to operational requirements.
High proportion of purchasing managers time id on routine operations
with low visibility to the supply chain. The supplier selection is based
on price and availability only.
2. Stage 2. Independent: in this stage the purchasing may have adopted
the latest technology and process, but may have hot got the strategy
that aligned with the competition. Links between purchasing and
technical disciplines may have been established; performance based on
cost reduction; top management recognizes the importance of
professional development and the opportunities in purchasing
contributing to profitability.
4 Stages Purchasing Function Based on The
Characteristics Focus Perspective
3. Stage 3. Supportive: Purchasing starts to support firms competitive
strategy by adopting purchasing techniques and products which
strengthen the firms competitive position. Supplier are considered as a
key competitive resource. The supply market, products evolution and
suppliers capabilities are continuously monitored and analyzed.
4. Stage 4. Integrative: in this stage purchasing strategy fully integrates
with firms purchasing function. Multifunctional teams and cross
functional training of purchasing professional begin to take hold. Open
and close communication with other functional departments is hard
wired into the processes. Purchasing is measured in terms of its
contribution to overall success of the firm.
Knowledge Based Sourcing

The purchasing function has now become a much more sophisticated

process and has much wider and deeper impact to the business
performance. It is moving away from the short-term towards long-term;
from a function to processes; from transactional to relational; from cost
saving to performance enhancing.

The picture of purchasing in the future perhaps can be described as

the knowledge-based purchasing, which is built on the knowledge about
whole business objectives and stakeholders interest, the knowledge about
the suppliers and their capabilities and potential, the knowledge about the
people and their emotion towards relationship and culture; and the
knowledge about technology up-taking.

Andi Erna Mulyana, S.T., M.Sc.

Semester Genap 2019

• Environmental awareness is increasing day by day. Supply chain has

now become such an important function that embedding
environmental issues in day to day supply chain issues has become
inevitable for sustainable development. This has led to interest in
Green Supply Chain Management.
• Reducing waste and environmental pollution, using less energy and
material resources are not only good for environment but are best for
supply chain because they cut operational costs. A company’s
performance is going to be measured by resource productivity. Waste
minimization is an integral component of green supply chain.

• When a company manages waste efficiently, it means that its

resource productivity is high and the business is able to manage cost
efficiently very well. This leads to operational efficiently and increase
in the profit margins. As the company gains exposure and experience
in managing the resources efficiently, the business becomes more
sustainable and over a period of time the company is able to achieve
competitive advantage in the market place. A green supply chain
strategy has become essential for a business that wants to be future

• Patrick Penfield of the Whiteman School of Management

Green Supply Chain Management as the process of using
environmentally friendly inputs and transforming these inputs into
outputs that can be reclaimed and re-used at the end of their
lifecycle, creating a sustainable supply chain.
• Srivastava (2007)
Green Supply Chain Management as integrating environmental
thinking into supply chain management, including product design,
material sourcing and selection, manufacturing processes, delivery of
final product to consumers and end-of-life management of the
product after its useful life.
Strategies for Green Supply Chain

• Using information technology as a strategy

Strategies for Green Supply Chain

• Reverse Logistics
Strategies for Green Supply Chain

• Waste Management
Benefits of implementing Green Supply Chains

Implementing green supply chains lead to:

• Increased Legal compliance
• Increased compliance with governmental regulations
• Increased revenues
• Satisfaction of moral and social obligations
• Improved brand equity
• Better relationships with customers
• Better employee relations
• Long term sustainability of the firm
• Community development
Benefits of implementing Green Supply Chains

• Companies that want to expand their global footprint will be able to

survive in a tough external environment if they are able to meet the
stringent environmental and social norms dictated by foreign
goverments. Unless a firm is able to develop ist capabilities to
implement green supply chains and move toward a sustainable
future, it is not possible to succeed in its international business
• When a firm implements green supply chain management, it can
taste success in foreign markets.
Challenges in Implementing of Green Supply Chains

• Globalization, innovation, and technology development have led

companies to look at the resource pooling rather than focusing on
own resource capabilities. Supply chain has therefore become a
powerful tool for cost reduction in order to deliver superior value to
the customer
• Implementation of green supply chain managementinvolves a lot of
time and effort and decision making by the top management. It needs
sustained efforts. It is not a one-time exercise.
• The greatest challenge in implementing green supply chains is in
changing the mindset of people. One has to really get people excited
to make positive difference for the cause of environment protection.
Challenges in Implementing of Green Supply Chains

• Often the extent and mode of implementation of green supply chains

varies from one firm to another firm. In some cases, the focus is mainly on
the suppliers without looking at firm’s own manufacturing processes. In
such a case, the efforts are at the risk of being somewhat half baked.
• If inbound logistics has to become green, the firms have to look at the
manufacturing processes of their suppliers in greater detail. This can
present a challenge in the form of resistance from suppliers who may be
unwilling to divulge their core competencies or trade secrets.
• As suppliers expose themselves to customers more and more, they also
end up becoming more transparent with regards to pricing. Not all
suppliers may be willing to bite the bait. In some cases, smaller suppliers
may expect that the customers support them in their green efforts for want
of resources like manpower, technical know-how and funding.
Overcome the Challenges

• To motivate the suppliers to green their business, companies have to

conduct seminars and workshop and initiate a productive discussion
with other suppliers. Under one forum, companies and their suppliers
can share know-how, best practices and problem solving experiences.
Suppliers in the same industry can be brought together for
stimulating discussion on greening their supply chains.
• Environmental awareness programs for suppliers, helping suppliers to
establish their own environmental programs, supplier relationship
• It is also important to involve customers and employees at an early
stage in the green efforts. Keeping the customers aware about the
relevance of green efforts is also imperative.
Green Logistics

• Green logistics is generating lot of interest because logistics is one of the

causes for increasing the levels of environmental pollution.
• another reason for interest in green logistics is that companies are realizing
it is not just about protecting environment – it is about increasing the
productivity, reducing the cost, improving the profit margins and rendering
greater value to the customer.
• Success in green logistics efforts can give an organization a competitive
edge in the market place.
• Logistics excellence in the future is going to be determined by the ability to
effectively manage the environmental issues. Companies are redesigning
logistics to make the activities more ebergy efficient and environmental
friendly. The overall obejctive of green logistics is to reduce environmental
impact of logistics activities, lower production costs, and improve product
Green Logistics

• Green Logistics Performance Index (GLPI)

This index can be used to gauge the environmental performance of
logistics companies across industries and countries. The index
considers the three components of logistics:
- Use of environment friendly materials
- Green packaging design
- Green transportation
• The canvass of green logistics is wide and overlaps other functions
within the organization. Use of environment friendly materials in
production or recycled parts in remanufacturing reduces the adverse
impact on environment but also reduces manufacturing costs.
Green Logistics

• Innovations in packaging design help minimize waste and reduce costs.

• Transportation becomes greener by consolidation of orders, optimization
of schedules, rationalizationof distribution frequency and reduction in fuel
• Smaller firms adopt green practices as a reactive approach to the
environmental regulation while larger firms are able to embrace greening
efforts in a pro active fashion bacause the have resources to spare such
efforts and they believe that going green will make their business more
• Logistics companies can increase their abilities to implement green
innovation by growing their awareness about green technologies, by
motivating their employees to learn new technology and by training their
employees to become kowledge workers.
Green Logistics

• Sustainable Logistics manages and balance the demands from society,

environment and business itself
Integrated Customer
and Supplier Selection

Andi Erna Mulyana, S.T., M.Sc.

Semester Genap 2019
• Supplier Integration Definition
• Closed Partnership
• Strategic Alliance
• Relationship Dilemma
• Supply Chain Integration
Supplier Integration Definition
Closed Partnership

The close partnership relation with suppliers was first practice in the
Toyota led Japanese automotive industry. It had profound influence on
Western assemblers and is now a dominant school of thought in supply
relationships. The basic practices of the Japanese close partnership
with suppliers involve many aspects of supply chain management.
• First, they reduced their supplier basis and form tiered supply
network structure. As a result, the buyer can then focus much smaller
number of first tier suppliers; more time and other resources can be
focused on them to develop much closer relationships.
Closed Partnership

• They use long term contract with their suppliers. Not only the long
term contract stabilises the contractual relationship, but also
psychologically it is a statement of trust and good-will intention which
seldom fail to entice a higher level of commitment.
• Single sourching is preferred to dual sourcing or multiple sourcing,
taking advantage of volume consolidation, coupled with greater
subcontracting to suppliers. This shift has seen the vertical
disintegration of the industry.
• They get the suppliers involved earlier in the new product
introduction process. Supplier can then contributing their expertise to
design and engineering of the new products, adding substantial value
to the supply chain.
Closed Partnership

• They moved away from price based purchasing towards quality-driven

purchasing. Putting tremendeous amount of effort in working with
the suppliers closely to achieve the ‘zero defect‘ target as part of their
TQM campaign
• They develop the JIT production system, which require close
integrationof supplier and buyers production system. Suppliers
capacity is sychronized with the buyers; and the production
scheduling is coordinated to ensure smooth flow of materials and low
or no inventories along the processes.
Closed Partnership

9 Factors Model to Summarize the Key Success Factors of the close

partnership between supplier and buyer, which could be helpful as a
benchmark for supply relationship development.
1. The nature of competition
- Global operation and local presence
- Based upon contributions to product technology
- Combination of organic growth, merger, and acquisition
- Dependent upon alliance/collaboration
Closed Partnership

2. Basis of sourching decision

- Small supply base
- Supplier selection not just on bid price
- Single and dual sourcing
- Re-sourcing as a last resort
- Earlier involvement of established suppliers
3. Role of information exchange
- True transparancy (example: cost)
- Two ways: discussion of cost and volumes
- Technical and commercial information exchange
- Kanban system for production deliveries
Closed Partnership

4. Management of Capacity
- Synchronised capacity
- Flexibility to operate with fluctuations
5. Delivery practice
- Just-in-time delivery
- Local, distance, and international JIT
6. Dealing with price change
- Price reduction based on cost reductions
- Joint efforts form a key part of information exchange in lean supply
- There is a combination of working pressure and co-operation, coupled with
transparency in costing
Closed Partnership

7. Attitude to quality
- Supplier vetting system become redundant
- Mutual agreement on quality targets
- Continual interactionand Kaizen
- Perfect quality as a goal
8. Role of R&D
- Integrated assembler and supplier
- Long-term development of components system
9. Level of pressure
- Very high for both customer and supplier
- Self-imposed
- Not culturally specific
Strategic Alliance

• Strategic alliance is defined as an informal or formal arragement between two

or more companies with a common business objective.
• 3 structural types:
1.Horizontal alliance: that is between companies on the same level of different
supply chains, which is also reffered to as inter-channel alliances.
2.Vertical alliance: that is between the firms on the different levels of the same
supply chain, which is also reffered to as the intra-channel alliances.
3.Lateral alliance: that is develop between the client company and logistics
service provider firms. Those logistics providers usually will serve many
different supply chains and thus they are often seen from any supply chain as
the ‘lateral‘ rather that internal
Strategic Alliance

Companies embarked on the business of strategic alliances do so for many

- Sharing complementary resources
- Sharing market risks
- Achieve economic of scale and economy of scope
- Joint development and collaboration
- Create value through synergy as the partners achieve mutually benefit
gains that neither would be able to achieve individually
- Cost saving and customer value adding
Continuous Processes of Alliance Development
Relationship Dillema

• Dilemma No.1
Relationship could often run into a dilemma between cooperation of and
• Dilemma No.2
Relationship-based supply chain collaboration and integration often run
into the dilemma between positive gains and negative constraint from the
same loyalty and closeness of the relationship.
• Dilemma No.3
Relationship development will always have the dilemma between the
level of commitment or cost on relationship and the level of benefit
gained from the close partnership.
Relationship Dilemma on Cost and Benefit
Supply Chain Integration

Andi Erna Mulyana, S.T., M.Sc.

Semester Genap 2019
Halal Supply Chain

• Halal food products are the main and most recognized components of the
Halal industry. It is no longer a niche market and no longer viewed as solely
religious requirements for the Muslim communities but the non-Muslims
have also started to demand for this particular product group due to the
perception that Halal foods are much more clean, hygiene and tasty.
• As the Halal food products are now being produced and originated from all
parts of the world, the question of whether the products are actually Halal
keep on playing on the mind of the Halal food consumers, especially
amongst the Muslim communities.
• With the complexity of the current world food trade scenario, the Halal
food consumers are skeptical on whether the food products are truly
produced according to the Halal and Sharia law principles; or, can the food
products remained as Halal when it has to go through various interfaces
during the travel period?
Halal Supply Chain

• To cope with the growing demand of Halal food from all over the
world, a comprehensive and well managed supply chain management
approach need to be adopted to ensure the availability of the Halal
food product.
• Halal food supply chain involved the process of managing Halal food
products from different points of suppliers to different points of
buyers/consumers, which involved various different parties, who are
located at different places, who may at the same time, involved with
managing non-Halal food products, with the purpose of satisfying the
needs and requirements of both (Halal and non-Halal) customers.
Halal Supply Chain

• In Halal food supply chain, the main goal is not only to ensure that
satisfaction of the customer is achieved, but also to ensure that the
Halal status of the food product remains intact throughout the whole
process of the supply chain.
• The integrity of the Halal food product must be protected by all
means and all necessary steps must betaken by all parties involved in
the supply chain to avoid any cross contamination that will lead to
product becoming non-Halal, or Haram. The food products must not
only be Halal at the supply chain starting point but throughout the
supply chain until it reaches its final destination.
Halal Supply Chain

• The possibility of becoming non-Halal is greater when the food product needs to travel a
greater distance whereby a lot of handling points will be involved. These handling points
can be the critical control points of which the Halal status of the food products can be
breached if the concept of Halal integrity is not fully understood by all parties involved in
the supply chain especially those who are involved directly in the operational handling

• For example, a batch of Halal slaughtered meat produced in a stringent Halal certified
slaughterhouse in Australia can be cross contaminated at any stage of the supply chain
during its travel to the its customer location in the Middle East. Without proper
understanding of Halal integrity, the workers receiving that particular batch of Halal meat
at the port warehouse might accidentally or mistakenly store it inside a transit cold room
together with a batch of non Halal slaughtered meat or pork. For some people
understanding, it offers no harm or physical contamination if these meats are stored
together side by side, but from the point of view of Halal consumer and the general
principles of Sharia law, that batch of Halal meat is no longer fit for the consumption of
Halal consumers as the integrity of Halal meat has been breached.
Halal Integrity

• Halal integrity assurance is the key factors in developing a well trusted

Halal food supply chain in the current complex and competitive
• To protect the Halal integrity, complete understanding of the whole
Halal food supply chain is required. Variations in the definitions of
Halal and the unavailability of single, worldwide Halal standard have
made the process of understanding of the Halal food supply chain
more complicated. Until then, all the parties involved must be able to
use every possible action to protect the integrity of the Halal supply
Halal Integrity

“ Who should take the responsibilities of ensuring the protection of Halal

integrity in the supply chain. Should it be the responsibilities of the
producer? Or should it be the responsibilities of the logistics service
providers? ”
• The straight and solid answer for these questions is all the parties involved in the Halal
food supply chain should bear the responsibilities. Joint actions must be taken in order to
ensure the integrity of the Halal status is protected at the highest possible level. Leaving
the huge responsibilities to single party alone is enormous and almost impossible.
• The Halal integrity of a particular food product is intact as long as the product is in
producer custody. However, once the product moves along the supply chain, the integrity
of that product will be the only intact if the next parties in charge have similar
understanding and operational practice of handling Halal product. All of the efforts taken
by the previous party in safeguarding the Halal integrity status will crumble and thus
increasing the possibility of the cross contamination.
Cold Supply Chain

• Cold Chain Management (CCM) can be defined as the network of

facilities and distribution options that performs the usual functions of
a standard supply chain cycle but with temperature and humidity
control throughout the supply chain stages and entities.
• Cold supply chain has become more and more important within the
changing global economy today due to the huge increasing demand
on the products of temperature controlled industries, especially fresh
agricultural products, manufactured food, chemicals, military
services, and medical vaccines.
Cold Supply Chain

• Cold chain logistics is considered as huge competition advantage as it

cause a valuable extension to product shelf life which gives the
suppliers the ability to access overseas markets and to meet the huge
local demand caused by the population growth as well.
• In an increasingly global market the demand for temperature
controlled food and nonfood is increasing in many markets across the
globe. One important factor is the movement of manufacturers and
retailers to emerging markets. This has resulted in high levels of
investments by logistics companies and their associate suppliers as
they have acquired or partnered local players in order to access these
markets and to open temperature controlled operations in these
regions to serve the growth in prosperity of local populations.
Cold Supply Chain

• Temperature monitoring and control are essential mechanisms in cold

chain management, because they are necessary for maintaining food
safety and quality.
• Multinational restaurant companies like McDonalds, KFC and Burger
King etc., manage technical challenges in target markets with tight
specifications and exclusive supply chains, while smaller firms use
extensive networks to supply imported frozen potatoes.
• Any changes in time-distance or temperature in the chain could cause
the net present value of the activities and their added value in the
supply chain to be perturbed.
Cold Chain Logistics Stage
Cold Chain Logistics System

• The cold supply chain logistics system aims to store & transport the
temperature sensitive goods from the manufacturer to the consumer
in a potent and a safe state.
• The cold chain system comprises three major elements:
1. Personnel, who use and maintain the equipment
2. Equipment for safe storage and transportation of goods.
3. Procedures to manage the program and control distribution and
use of the goods.
Cold Chain Logistics System

The picture demonstrates a typical

cold chain cycle, along the different
stages through the process of
delivering the temperature-sensitive
goods from the manufacturer to
final consumer.
Cold Supply Chain

• Cold chain supply chain is the network of facilities and distribution

options that performs the usual functions of a standard supply chain
cycle but with temperature and humidity control throughout the
supply chain stages and entities.
• Cold Supply chain is applicable in so many industries like:
- Agricultural products
- Food manufacturing
- Chemicals industries
- Medical vaccines and drugs
Cold Supply Chain

• Cold supply chain has major benefits on the industries that use it
- Valuable extension to the product shelf life
- Gives the ability to access overseas markets
- Gives the ability to meet the huge local demand
• Cold supply chain implementation has some costs and concerns like:
- The use of non-environmental gas compounds
- Frosting
- Safety concerns
- Continuous Control and monitoring of temperatures