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Proceedings

Extended Supply Chain & Global Complexity Super Session

Wednesday, June 25, 2007 9:30 am - 3:30 pm

Friday, June 27, 2008 8:15 am - 12:30 pm

Presented By:

Marie Lacertosa, SVP &

Director of Supply Chain,

JCPenney

Dr. George Haley,

University of New Haven

Super Session Abstract

The Super Session on Extended Supply Chains & Global Complexity will focus on the supply chain and logistical issues that are occurring in today’s business environment where there is increased emphasis on outsourcing everything from product components to entire products. Companies are under increasing pressure to shed assets of all kinds and especially to shed production assets. The goal of this strategy is to maximize returns to the shareholder, and it has largely been achieved – in 2000 the average book-to-market ratio was six times what it was in 1981.

The primary problem with the strategy is that the perils of the strategy are not adequately addressed. Among the basic assumptions of net present value theory is the assumption that all decisions made can be reversed without suffering a penalty, hence financial analyses do not make the effort to adequately address the potential for losses due to unpredicted, yet often predictable problems. For instance, research has shown that:

1.) Within two years 20-25% of all supply relationships will fail

2.) Within 5 years fifty percent of all supply relationships will fail

3.) Seventy percent of buying companies are unhappy with their suppliers citing

M Suppliers not understanding their needs

M Suppliers providing poor service

M Supply costs being higher than predicted

For example, in setting a strategy of outsourcing, the cost estimates never include the cost of continuously having to find replacement suppliers for those supply relationships that fail. Though it may be difficult to determine which supply relationship will fail, it is perfectly predictable that there will be failed supply relationships and thus, costs for building replacement supply relationships should be included in the analysis. It is only when a factor possesses high uncertainty that appropriate cost estimates cannot be generated.

In addition, there are the perils that are associated with the very philosophy of outsourcing entire functional areas of your business. Some are so tremendous that they should be absolute deal killers. An increasingly well known peril of this kind is the increased risk of losing a technology that represents your company’s competitive advantage in the marketplace. One peril of this kind that is not yet focused on is capability loss – the loss of a skill that may not be a company’s competitive advantage, but which is a requirement to compete effectively over the long term, such as production skills. Though the new mantra calls for the shedding of production assets in favor of focusing on the less asset-intensive functions like product design, the best and most successful product design efforts are those that work incorporate feedback and knowledge from production.

Finally there are the outsourcing perils associated with the new sources for outsourced products and services. Some, such as communication difficulties due to cultural differences between the supplier’s home country personnel and the foreign markets they are being called on to serve. However other perils are not only less obvious, but completely new. Some of these are perils such as supply chain fragmentation, supply chain substitution and here-to-fore unknown shortcuts. The pet food scandals of 2007 are an example of the latter problem. US pet food suppliers had no test to check for the additives Chinese suppliers introduced to the product to simulate high quality protein readings because the additive was never used in the West in food of any kind. In China, the additive was used in the human food chain.

Learning Objectives:

Learning objectives for this super session are for participants to familiarize themselves with the complexities of designing and building extended supply chains in the new emerging markets.

Learning Outcomes:

• 50% increase in recognition of complicating variables

• 50% increase in identifying potential cost increasing variables

• Recognizing the difference between high risk variables and High uncertainty variables