An-Najah National University Faculty of Graduate Studies Evaluating the Supply Chain Management System of Palestinian companies By Ahmed Bassam Abdullah Supervisor Dr. Husam Arman This Thesis is Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Engineering Management, to The Faculty of Graduate Studies, at An-Najah National University, Nablus, Palestine 2011 III   Acknowledgment In the beginning I thank God and praise Him in a manner that befits the (infinite) number of His creation, and as it pleases Him, for supporting me in the completion of this work. I would like to express my gratitude to my supervisor Dr. Husam Arman for being an outstanding advisor and excellent professor. His constant encouragement, support, and invaluable suggestions made this work successful. He has been everything that one could want in an advisor. Words fail me to express my appreciation to my wife Eng. Ghadeer whose dedication, love and persistent confidence in me, has taken the load off my shoulder. I owe her for being unselfishly let her intelligence, passions, and ambitions collide with mine. Finally, I would like to thank everybody who was important to the successful realization of thesis, as well as expressing my apology that I could not mention personally one by one. V اإلقرار :أنا الموقع أدناه مقدم الرسالة التي تحمل العنوان Evaluating the Supply Chain Management System of Palestinian companies باستثناء ما تمت اإلشارة إليه حيثما , اقر بأن ما اشتملت عليه ھذه الرسالة إنما نتاج جھدي الخاص ي جزء منھا لم يقدم من قبل لنيل أية درجة علمية أو بحث أو أ, و أن ھذه الرسالة ككل, ورد .علمي أو بحثي لدى أية مؤسسة تعليمية أو بحثية أخرى Declaration    The work provided in this thesis, unless otherwise referenced, is the researcher’s own work, and has not been submitted elsewhere for any other degree or qualification. Student Name : اسم الطالب : Signature : التوقيع : Date : التاريخ : VI Contents Content Page Acknowledgment III Declaration V List of Figures VIII List of Tables IX APREVIATION X 1 Introduction 1 1.1 Overview 1 1.2 Research Questions 2 1.3 Research aim and objectives 2 1.4 Research design and methodology 3 1.5 Thesis Outline 4 2 Literature review 6 2.1 Introduction 6 2.2 Supply chain and Supply Chain Management 8 2.3 E-Supply chain 13 2.4 Global supply chain 15 2.5 The Objective of a Supply Chain 17 2.6 Logistics Network strategy 38 2.7 Supply Chain Management: Demand Planning 43 2.8 Supplier relationship 52 2.9 Supply Chain Management: Customer Relationship 54 2.10 Supply Chain drivers and Metrics 58 3 Methodology 71 3.1 Introduction 71 Theme1: Supply chain management concept and its impact on the success of the firm 71 Theme 2: Competitive and supply chain strategies 72 Theme 3: Supplier relations 72 Theme 4: Customer relation 72 3.2 Research Background 73 3.3 Research Design and Methodology 74 3.4 Research Approach 80 3.5 Research methodology description 88 4 Data gathering and analysis 91 4.1 Introduction 91 4.2 Theme (1) Supply chain management on the firm 94 4.3 Theme (2) Competitive and supply chain strategies 100 VII 4.4 Theme (3) Supplier relations 104 4.5 Theme (4) Customer relation 115 4.6 Findings and conclusions 126 5 Framework 127 5.1 Introduction 127 5.2 Palestine business environment constraints 130 5.3 Generic Supply chain Management Framework 136 6 Conclusions and Recommendations 173 6.1 Thesis conclusions summary 173 6.2 Contribution to knowledge and practice 175 6.3 Recommendations 175 6.4 Future works 176 References 178 Appendecies 183 ب الملخص VIII LIST OF FIGURE Figure 2.1 Overview of supply chain management 12 Figure 2.2 Classification of forecasting techniques 45 Figure 3.1 The Qualitative versus the Quantitative Approach 83 Figure 4.1 Geographical distribution of the surveyed firms 92 Figure 4.2 The percent of each sectors forming the sample 93 Figure 4.3 Elements should be managed in the supply chain 95 Figure 4.4 Production process approach 97 Figure 4.5 Companies’ competitive advantage strategy 101 Figure 4.6 Strategic fit between supply chain strategy and competitive advantage 102 Figure 4.7 Mechanism to achieve the strategic goals with managing the relationship with customer 118 Figure 4.8 Delivery fulfillment performance 119 Figure 4.9 Company's using of customer desire information to provide individual customer needs 121 Figure 4.10 Application of (postponement) 122 Figure 4.11 Used postponement form 123 Figure 5.1 Conceptual framework 141 Figure 5.2 Business strategy formulation 143 Figure 5.3 A model of competitive advantage 145 Figure 5.4 Source of competitive advantage 146 Figure 5.5 Uncertainty spectrum 155 Figure 5.6 The cost-responsiveness efficient frontier 156 Figure 5.7 Zone of strategic fit 159 Figure 5.8 Cross functional consistent strategies 160 IX Figure 5.9 SCOR model 162 LIST OF TABLES TABLE Content Page 1.1 Outline of the thesis 5 2.1 Types of operations strategies 27 2.2 Types of inventorieS 48 2.3 Facility metrics 61 2.4 Inventory metrics 62 2.5 Transportation metrics 63 2.6 Information metrics 65 2.7 Sourcing metrics 67 2.8 Pricing metrics 70 4.1 Chi Square to investigate the relation between the ackground 99 4.2 Ranking of the supplier selection criteria 105 4.3 Ranking of the supplier selection criteria 106 4.4 Chi Square to investigate the relation between company/supplier 112 4.5 Chi Square to investigate the relation between ompany/supplier 113 4.6 Company customer relationship management 115 4.7 Chi Square to investigate the relation between company’s actions to establish long 117 4.8 Chi Square to investigate the relation between the percent 120 4.9 Chi Square to investigate the relation between production 124 4.10 Chi Square to investigate the relation between anufacturing according 125 5.1 Comparison of efficient and responsiveness supply chains 166 X APREVIATION SCM Supply Chain Management CLM Council of Logistic Management PFI Palestine Federal Industries PCBS Palestinian Central Bureau of Statistics EDI Electronic Data Interchange ERP Enterprise Resource Planning RFID Radio Frequency Identification XI Evaluating the Supply Chain Management System of Palestinian companies By Ahmed Bassam Abdullah Supervisor Dr. Husam Arman Abstract Today, customers have the upper hand. The days where they had to take what has been offered to them has gone. Customers now choose the right products they want, when they want them, and at the right price. With the advent of new communication networks, the world has become a smaller place. Customers can now decide on products offered by suppliers around the globe. Therefore, the competition is no longer regional; it is global. In order for the enterprises to remain globally competitive they have to rethink their strategy and manage things differently. One of today’s major issues is managing the supply chain effectively. The purpose of this research is to develop a generic framework for Palestinian companies. The framework can be applicable in the research environment and the special conditions of Palestine in order to align the strategic fit area between supply chain strategy and the competitive advantage. The current practices of the Palestinian companies suffer from many problems and difficulties from supply chain perspective. Quantitative and qualitative research methodology was used in this study. The quantitative research data was gathered with the aid of online survey. Seventy five surveys have been sent to six sectors of manufacturing XII industrials companies in Palestine, Plastic industry, Marble and stone industry, Foodstuff industry, Pharmaceutical industry, Chemical industry, Engineering and metal industry, forty responses were received. The response rate was (53.3%) percent. The results of the interviews and survey revealed a high level of weaknesses in the four key themes were studied and analyzed through the survey results, supply chain management concept and its impact on the success of the firm, competitive and supply chain strategies, supplier relations, and customer relation A Generic framework for the supply chain management was proposed. It aims were to guide the company to structure a successful supply chain, and does not assume any particular solution. The framework is comprised of four major levels: 1. The business strategy level. This level involves formulating a strategy and deciding what the objectives of the business are, i.e. to sustain company advantage over its competitors. 2. The competitive advantage level. . In this level it is discussed what a company should do to attain a competitive advantage, in order to achieve successful supply chain management. 3. The supply chain strategy level. This level shows how supply chain strategy aims to achieve business goals by using or implementing the competitive advantage, and reveal hidden interactions. XIII 4. The strategy translation. This final level explains the role of the physical infrastructure and the supply chain function process to implement the supply chain strategy, effectively determining responsiveness and efficiency. The generic supply chain management framework presented a process that helps in understanding, describing, measuring, evaluating the supply chain activity, providing systematic process to establish new project and enhance, and develop ongoing project.                                   1 Chapter 1 1 Introduction 1.1 Overview For many decades, companies in Palestine have suffered hardship and failure. This is due to many factors which include political unrest, economic oppression and down fall, social incompatibility, and geopolitical instability. The companies are facing internal and external challenges, within the nature of the environment in which the companies live…….multivariate, complex, and interrelated. On the other hand the subjective obstacles are a result of the old paradigm and traditional structure. Effective supply chain management has become a key driver for enhancing the competitive advantage and improving organizational performance. However, there is an urgent need to assess the performance of the overall supply chain. This study will evaluate the supply chain management (SCM) activities in private companies in Palestine and will diagnose and analyze the current situation of selected companies in different sectors. Companies will be selected according to the predetermined criteria to represent some sectors of the Palestinian companies. The evaluation of the (SCM) system will be through developing a generic supply chain management framework, which can be used to support the Palestinian organizations. The framework will be structured by conducting the literature review of 2 (SCM) concept, issuing a comparative study between Palestinian companies and the state of the art practices of (SCM). The expected outcomes will be establishing a framework, increasing the awareness of the importance of supply chain management, and finding better ways of managing the supply chain among the local companies. 1.2 Research Questions The research questions were raised based on the observed gap between the current application of supply chain management in research environment, and current global supply chain management illustrated in literature review chapter. Based on that the research questions were formulated as follows: 1. What are the gaps between applied supply chain management in Palestinian companies, and the theoretical and practical global concepts used in successful world companies? 2. What is the suitable supply chain management framework that can be used to leverage company’s performance, taking into account the condition of the research environment? 1.3 Research aim and objectives The aim of this research study is to develop a generic supply chain management framework that can be used to support Palestinian organizations through integrating various supply chain activities. Further objectives are listed below; 3 a. To investigate the role of supply chain management in providing competitive advantage for companies b. To explore and asses current practices and understandings of Palestinian companies’ in relation to the supply chain management concept. c. To investigate the state of the art in the area of SCM. d. To develop a generic framework that complements Palestinian industry. 1.4 Research design and methodology The Importance of the research stems from the fact that it looks at things not addressed before in Palestine, the study evaluates the performance of the companies and its extended relations on the customer service and strategic goals achievements. The research addresses the weaknesses of supply chain management taking in to account the research environment, and suggests a framework for designing best of supply chain management, which can tackle these weaknesses and propose the solutions. The methodology preferred for this research was a conceptual model, quantitative methodological approach. The collected data shall be validated using different data sources. Research hypotheses have been approved using quantitative statistical tools. Based on parameters of the research‘s scope, associated with time and resource constraints, it was supposed that the defined 4 Framework for supply chain would best satisfy the articulated objectives and respond the research questions. 1.5 Thesis Outline The thesis will be formed from six chapters as shown in Table 1.1. The introductory chapter, which outlines the character of the study, Chapter 2 will review the related literature of the supply chain management concept and related topics. Chapter 3 will present and defend the dissertation‘s selected methodology. Chapters 4 will discuss data gathering, analysis issues and research results. Chapter 5 will display the framework and its implementation process. Finally, Chapter 6 will conclude the study through an articulation of the research findings, and conclusions. 5 Table 1.1: Outline of the thesis C ha pt er 1 In tro du ct io n 1.1Overview 1.2 Research Questions 1.3 Research aim and objectives 1.4 Research design and methodology 1.5 Thesis Outline C ha pt er 2 Li te ra tu re R ev ie w 1.1Introduction 2.2 Supply chain and Supply Chain Management 2.7 Demand Planning 2.8 Supplier Relationship 2.9 Customer Relationship 2.10 Drivers and Metrics C ha pt er 3 R es ea rc h M et ho do lo gy 3.1Introduction 3.2 Research background 3.3 Research design and methodology 3.4Research approach 3.5 Research methodology description C ha pt er 4 D at a G at he rin g d l i 4.1Introduction 4.2 Supply chain management concept 4.3 Competitive and supply chain strategy 4.4 Supplier relation 4.5 Customer relation 4.6 Findings C ha pt er 5 C on ce pt ua l Fr am ew or k 5.1 Introduction 5.2 Palestine business environment constraints 5.3 Generic Supply chain Management Framework C ha pt er 6 C on cl us io n 6.1 Conclusion summery 6.2 Contribution to knowledge 6.3Recommenda tions 6.4 Future work 6 Chapter 2 2 Literature review 2.1 Introduction This research aims to evaluate the current practices of supply chain management system in the manufacturing industry in Palestine. The literature review provides a starting point for research, and an essential part of the research process, since it helps to generate ideas for research and summarizes existing research by identifying patterns, themes and issues. The conducted literature review covers the four major four key themes which are studied and analyzed through the survey results, and then some conclusions are drawn and displayed. The first part of the literature review transacts to the supply chain design strategy, assured that the success of a supply chain correlated by the best fit between the design and the management of the supply chain. The principles and methods of supply chain design were reviewed. From the conducted literature review it was found that the companies should practice supply chain management activities that are most aligned with their business strategies. The aforementioned concepts proceeded with supply chain definition and supply chain discipline. The second part of the literature review entails the supply chain demand management, as the most important business decision in the course of managing the supply chain. It starts with forecasting the customer demand 7 in order to handle the difficulties of demand vary from time to time. The literature showed many technique used in forecasting that the companies can use. Moreover, aggregate planning was found to be fundamental concept in the supply chain demand management, where the aggregate plan focus on general course of action, compliance with the company's strategic goals and objectives, without going down in details. Level of demand aggregation is important consideration in company’s decision with respect to what to forecast and where the aggregated demand will be. The literature showed the important role of the inventory in the supply chain, and how it may be boom or bane on the companies. The third part of the literature cleared the role of the supplier and customer in the supply chain; the literature displayed the latest ideas of integrating the customer and the supplier in the supply chain. This way of looking at the business involves integrating the customer into all aspects of the supplier's business, and vice versa. This implies a relationship that is deeper and wider than the traditional 'arms-length' supplier-customer relationship. How to attain the utmost positive results from supply chain management were addressed in the last part of the literature review, where the company shall determine the factors and elements that contribute in its success and drive supply chain to better performance. Finally, common measures and metrics to evaluate company’s performance were presented. 8 2.2 Supply chain and Supply Chain Management (Mentzer, 2001) defines the supply chain as "a set of three or more entities (organization or individuals) directly involved in the upstream and downstream flows of product, services, finance, and /or information from a source to customer". The supply chain according to (Handfield, 2002) may contain internal division of the company as well as external suppliers that provide input to the company. A supplier for the company has his own chain of suppliers that provide raw input, which is called second tier suppliers. Supply chains are essentially a series of linked suppliers and customers till product reach the final customer. Supply chain of a company forms from an upstream supplier’s network and its downstream distribution channel. Depending on how complex the supply chain is, (Mentzer, 2001)defines three types of supply chain: 1. Direct supply chain, which consist of a company, a supplier, and customer. 2. Extended supply chain, which includes suppliers of the immediate supplier, as well as customer of the immediate customer. 3. Ultimate supply chain, which includes all the organizations involved in all the upstream and downstream flow. 9 2.2.1 Supply chain management Through a historical narrative that was reviewed, it was found that with the development of the companies and its expansion, the concept of supply chain management has matured, where attention to the company’s management as a separate entity has been shifted to the company and all concerned, furthermore became a harmony between the company's objectives and all parties in the chains. ( Chopra, et al, 2001) consider the supply chain as system that consist of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain does not only include the manufacturer and suppliers, but also transporters, warehouses, retailers, and customers themselves within each organization such as manufacturer. According to ( Chopra, et al, 2001) the supply chain includes all functions involved in receiving and filling a customer request. These functions include, but are not limited to, new product development, marketing, operations, distribution, finance, and customer service. (Terry, et al., 2004) define the supply chain as " … a set of value-adding activities that connects a firm's suppliers to the firm's customers. The basic unit of a supply chain activity is: Receive input from supplier - Add value - Deliver to customer According to (Terry, et al., 2004) definition, the objective is to determine and identify the activities with the supply chain to be considerable in which by add value to the product. 10 ( Krajewski, et al) define the supply chain from the relegation ship between the process involved in achieving the shared goals "Supply chain management seeks to synchronize a firms processes and those of its suppliers to match the flow of materials, services and information with customer demand", while (Suhong Li, et al, 2005) mentioned that the council of logistic management(CLM)(2000) considers clearly that the supply chain management as the system ,strategic coordination of the traditional business function and tactics across these businesses function within a particular organization and across business within the supply chain for the purpose of improving the long term performance of the individual organization and the supply chain a whole. Other authors like Govil, et al, 2002, look at the supply chain from a networking perspective and consider the supply chain a global network of organizations that cooperate to improve the flow of materials and information between suppliers and customers at the lowest cost and the highest speed. Govil, et al, 2002, indicate that the supply chain is limited to logistic activities, while most other authors emphasize the objective of a supply chain as achieving customer satisfaction. ( Supply Chain Council, 1996) developed a framework called supply chain operation reference model (SCOR). This process model is design for effective communication among supply chain partners. The scope of the SCOR model is defined as "from company's suppliers’ suppliers to company's customers customer"(supply chain council). It is based on five 11 distinct management processes (plan, source, make, deliver, and return). Each of these processes is implemented in four levels of details, level one defines the number of supply chain as well as what metrics will be used, level two defines the planning and execution process in material flow, level three defines the inputs, outputs and flow of each transitional element (Lambert Douglas M, 2005). Each process is analyzed and implemented around three components: business process reengineering, benchmarking, and best practice analysis. From the definitions mentioned above, we can find that all definitions share and intersect about; the Supply chain management is the combination of art and science that the companies endeavor to enhance the way acquire the raw elements it needs to make a product or service and deliver it to customers. These component of the definition can be applied on any company, whether small or large scale. Where the concept of the supply chain management is philosophy, should be carried and adapted by company's top management to compete strongly, Figure 2.1 shows the extended supply chain from suppliers to customers. 12 Figure 2.1 : Overview of supply chain management (Ritzman, et al, 2002) 2.2.2 Supply chain Management as management philosophy Supply chain management as a management philosophy takes a system approach to viewing the supply chain as single entity; this means that the partnership concept is extended into all company effort to manage the flow of goods from suppliers to the final customer. Each company in the supply chain directly or indirectly affects the performance of the other supply chain component, as well as the overall performance of the supply chain (CooperMartha, et al, 1997) Supply chain management as a philosophy can be seen from the following according (Lambert, et al , 1997) • A systematic approach to viewing the supply chain as a whole and managing the total flow from the supplier to the final customer. • A strategic orientation toward cooperative efforts to aggregate and converge internal and external capabilities. 13 • Customer focus, to create distinct, leading to the customer satisfaction. Supply chain typically consists of supplier, manufacturer, distributer, retailer, and customer. A Palestinian company's manager shall be aware of supply chain components and its role along the supply chain. However it is not necessary for each supply chain to be designed according the typical form of global supply chain such as Dell. Palestinian companies are considered to be small companies relative to the international companies, therefore the Palestinian companies should work to configure the most effective chain to achieve its goals taking in to account Palestinian environment. 2.3 E-Supply chain The commercial companies more than any non profit companies are affected by innovation and new technologies, where it employ the new technology to keep its advancement in order to maximize the profits. (Terry, et al., 2004) Assured that the supply chain management is significantly affected by the huge growth of electronic commerce. Where the developments in the communications made the conveying of information very fast, manufacturing, warehousing, and distribution technologies could not accelerate the movement of material to such levels without using information revolution and the world web net. (Terry, et al., 2004) added that the coordination of information and material flows will 14 increase the importance for profitable electronic commerce. While the impact of the Internet on supply chain coordination has been rather positive, some reservations remain regarding its impact on supply chain design, such as incentive alignment, trust, and fair process required for effective communication and collaboration. The extended supply chain suffered from disturbed information whether amplification the information or underestimation, therefore the growing in the technology and information transmission reduced the side effects, (Terry, et al., 2004) declared that the bullwhip phenomenon, the big challenge in supply chain coordination, which cause delayed and distorted information as well as by transaction. Web-based technologies have the greatest impact on supply chain coordination through the elimination of information delays and distortions, and through the reduction of business costs. Creating sufficient information infrastructure to interface members of a supply chain has always been challenging (Mason, et al, 2000). (Terry, et al., 2004) Declared also that the infrastructure must satisfy the following needs (Upton and McAfee 1996): first, it must be able to adapt members with different levels of IT sophistication. Second, it must provide a wide range of functionality ranging from simple data transmission to access to applications on a remote computer. Finally, it must be able to adapt with changing pool of suppliers and customers at varying stages of relationship. According to (Terry, et al., 2004) the current technology on the design side does not yet allow the mitigation of the trade-off between richness and 15 reach in the crucial area of supplier identification, certification, and selection. The Palestinian companies can use e-Business as an enabler to drive supply chain to gain clear visibility across their extended network of trading partners and help them respond quickly to changing customer demand captured over the Internet. But in context of applying e-Business the Palestinian companies shall face challenges, cultural and physical infrastructure issues, where Palestinian environment suffering from lack of information integration, synchronized planning, coordinated workflow, and new business models. As a result, many of the core supply chain principles and concepts cannot now be put into practice much more effectively using e-business, and significant value cannot be created by e-business enabled for Palestinian supply chain. 2.4 Global supply chain With increased globalization phenomena and sourcing activities, global supply chain management becomes an important issue for many companies. Where one of the supply chain management endeavors to reducing the costs of procurement and decreasing the risks related to purchasing activities. The big difference is that global supply chain management involves a company's worldwide interests and suppliers more than simply a local or national. According to (Long, 2003)the global supply chain management usually involves more than one country; it also 16 usually comes with many new difficulties that need to be coped. One of these difficulties that companies should consider is the overall costs. While local labor costs may be significantly lower, companies must also focus on the costs, tariffs, and other expenses related to doing business out of country. Additionally, companies need to review the exchange rate of the money. Companies must do their research and give serious consideration to all of these different elements as part of their global supply management approach. (Mary J, et al, 2005) added that the time is another big issue that should be addressed when dealing with global supply chain management. The productivity of the other country employees and the extended shipping times can be positively or negatively affect on the company's lead time, subsequently affect the customer satisfaction. Other factors can play significant effect like the weather conditions on one side of the world often vary greatly from those on the other and can impact production and shipping process. Also, customs clearance time and other governmental red tape can add further delays that need to be planned for and viewed into the overall picture. (Long, 2003)mentioned that the issue that must be addressed into a global supply chain management strategy is supplier selection. Comparing supplier’s bids in the company's home can be difficult, but comparing bids for global suppliers can be more complex. The first decision companies must make is to choose the qualified suppliers, which should be based on 17 research and previous experience. Many companies go to the lowest price instead of taking the time evaluate all of the other elements. In addition to money and time factors, companies must make decisions about the number of suppliers to use. Few supplies may be easier to manage but may lead to potential problems if one supplier is unable to deliver as requested or if one supplier tries to leverage its supply power to obtain better price. Palestinian companies as well as rest companies who choose to create national relations and want to ship their manufacturing overseas may face some additional considerations. Where many questions need to be answered, regarding the number of plants that need to be established, as well as the locations for those plants. This can create difficult logistical problems for companies to examine these issues in terms of the global supply chain. For example, if a business uses a number of vendors around certain area, it should locate the manufacturing plant that would utilize those supplies in or around the intended area. Not only will this provide lower employee costs, but overall shipping and tariff expenses can be reduced. 2.5 The Objective of a Supply Chain The former sub titles in the beginning of the literature review, as well as the definition of supply chains may put the basis of the supply chains objectives, where the primary purpose from the existence of any supply chain as stated by ( Lambert, et al , 1997) is to fulfill customer request, in 18 the process generating profits for itself. Supply chain activities begin with a customer order and end when a satisfied customer has paid for his purchase. The term supply chain bring up images of product or supply moving from suppliers to manufacturers to distributors to retailers to customers along a chain. 2.5.1 Supply chain design/strategy Any project has life cycle, the utmost important stage of the project life cycle is the design stage, the importance of the design stage stems from the future implication and on the size of the efforts and resources spent. The sensitivity and importance of the design stage will increase according to the project scale, so when we talk about supply chain design ,the design decision shall be rational and taken according cross functional study to all parties concerned. (Terry, et al., 2004) describe the important considerations of designing a supply chain, where they mentioned that the Supply chain design has a large impact on various measures of performance such as profitability, customer service, flexibility and reliability, also It is a critical source of competitive advantage given that as much as 80% of total product cost may be fixed by these decisions. ( Chopra, et al, 2001), declared that there is a close connection between design and management of supply chain flows of the product, information, and fund. They assured that the success of a supply chain correlated by the best fit between the design and the management of the supply chain. The 19 authors has described in the narrative course the companies that succeed in the supply chain design, Wal-Mart, Dell computer, and seven –eleven Japan are examples of companies that have built their success on superior design of their supply chain, in contrast the failure of many e-business such as Webvan can be attributed to weaknesses in their supply chain design. The successful of the mentioned companies can be attributed to its beginning where the companies invested in transportation and information infrastructure to facilitate the effective flow of goods and information (Chopra, et al, 2001). During the design phase the companies shall decide how to structure the supply chain over the next several years, it decides what the chains form will be, how resources will be attained, and what processes each stage will execute. All decision during the design stage will have long term effect; (Chopra, et al, 2001)stated that the firms must ensure that the supply chain configuration supports its strategic objectives and increase supply chain surplus during this phase (Terry, et al., 2004) stated that the Supply chain design is the process of determining the supply chain infrastructure the plants, distribution centers, transportation modes and lanes, production processes, etc. that will be used to satisfy customer demands. These studies are strategic in scope, use a time horizon of many months or years, and typically assume little or uncertainty with the data. The framework The decisions in the design stage are considered at the strategic level, its draw the future form of the supply chain and how will supply chain 20 configuration operate supply chain management functions, ( Govil, et al , 2002) clarifies that The decisions at the strategic level of the supply chain lay out the framework of how the supply chain operates, and there are five major activities take place within supply chain at the strategic level, buy, make, move, store, and sell. 2.5.2 Principles and methods of supply chain design The principles and methods of supply chain design have been introduced from a variety of viewpoints; some authors offered the supply chain design from analysis perspective where supply chain design addresses a wide range of strategic infrastructure issues for the firm, other authors offered the supply chain design from major activities take place within a supply chain, these decision will be taken at strategic level lay out the framework of how the supply chain operates. (Terry, et al., 2004) rely on asking questions to key infrastructure issues in order to address the strategic firm concerns. The following are some key issues and its analysis: Manufacturing Strategy • How many plants are needed • Where should each plant be located • What products should each plant make • What process technologies should each employ, and how much of each process is needed 21 • What markets should each plant serve Supply Base Design • Who are the suppliers should be determined for all parts within commodity groups • Who are the suppliers should be allocated to plants. Distribution Strategy • Should we ship direct or stock regionally • How many DCs are needed and where should they be located • Which DCs will server which customers • What transportation modes will be used Outsourcing • What portions of the supply chain remain in-house versus outsourced • Cost tradeoffs versus service considerations New Product and Process Design • What infrastructure should be used when new products are added to existing lines • At what demand points are additional sources of supply needed and where should they be located 22 (Terry, et al., 2004)concluded after extensive experience with a number of supply chain design projects, that the benefits are tangible and executed supply chain can be substantial. Some remarkable outcomes are: • Decreased costs of 5-60%, with 10% typical • Decreased service times of 25-75%, with 30% typical • Foster cross functional teamwork and "out of the box" thinking • Provide an objective assessment of alternatives in the politically charged environment of strategic supply chain decision making (Govil, et al , 2002) offered the supply chain design from the strategic decisions taken with respect to the following activities: • The buy activity includes the tasks of buying raw materials, components, resources, and services. • The make activity concerns creating products, maintenance and repair of resources when needed and training workers, performing all the tasks that are needed for production. • The move activity concerns transportation of materials and personnel inside and outside the supply chain. • The store activity concerns the work-in-process (WIP) and raw material when it is waiting for transportation or transformation as well as the finished products waiting to be sent to customers. • The sell activity concerns all the market activities, including marketing and sales. 23 Each of these activities is linked with all other activities. In contrast to the day-to-day decisions in each of these activities, which are covered at the tactical level, the strategic level focuses on the long term. For example, the buy activity at the strategic level focuses on developing long-term relationships with suppliers. It is not short-term goal of buying from the supplier submitted low price. It shall select suppliers whose strategic goals are compatible with those of the supply chain. (Govil, et al , 2002) determined These goals : • Direction of technical innovation for the supplier • Focus on quality • Focus on reduction of cost • Focus on reduction in response time 2.5.3 Supply chain strategy as part of Business Strategy Companies shall practice supply chain management activities that are most aligned with their business strategy. Effective business strategy begins with the core strategic vision that lays down the framework for the business. Business strategy defines what the company is, what it does, and what it does not do (Cohen, et al, 2005). Company’s blind adaption of generic supply chain may allow a company to compete with its competitors, but it will not create basis for competitive advantage. The question is how to develop supply chain capability and select the exact best practice, those that will drive a company's strategic objective ahead. 24 Supply chain strategy designs a unique supply chain configuration that drives strategic goals forward. A supply chain strategy consists of five building blocks ( Cohen, et al, 2005) • Operations strategy. • Outsourcing strategy. • Channel strategy. • Customer service strategy. • Asset network. Our decisions with respect to the components mentioned above of the supply chain strategy will play together to define the supply chain strategy. 2.5.3.1 Operation strategy: The decisions about how will we produce goods are forming our operations strategy. ( Cohen, et al, 2005) asked question to enable us to determine the operation strategy • Will you choose make to stock, make to order, engineer to order, or some combination? • Will you outsource manufacturing? • Will you pursue a low-cost offshore manufacturing strategy? • Will you complete your final configuration outside the manufacturing plant and closer to the customer? 25 The answers of the above questions are critical decisions, because they influence and shape the whole supply chain and the investments. Furthermore the operations strategy determines how we staff and run our factories, warehouses, and how you design our processes and information systems. Make to stock is the best strategy for standardized products that sell in high volume. Larger production batches keep manufacturing costs down, and having these products in inventory means that customer demand can be met quickly. Make to order is the preferred strategy for customized products or products with infrequent demand. Companies follow this strategy only when a customer orders are in hand. This keeps inventory levels low while allowing for a variety of product options. Configure to order is a hybrid strategy in which a product is partially completed to a generic level and then finished when an order is received. This is the preferred strategy when there are many variations of the end product and you want to achieve low finished-goods inventory and shorter customer lead times than make to order can deliver. Engineer to order, which shares many of the characteristics of make to order, is used in industries where complex products and services are created to unique customer specifications. 26 Changing your operations strategy can be a key source of performance advantage see table 2.1. many companies after they be aware of the operation strategies, found that moving from make to stock to configure to order improved service levels while reducing inventory. 27 Table 2.1: Types of operations strategies. Source: ( Cohen, et al, 2005) Strategy When to Choose This Strategy Benefits Make to stock For standardized products selling in high volume Low manufacturing costs; meeting customer demands quickly Configure to order For products requiring many variations Customization; reduced inventory; improved service levels Make to order For customized products or products with infrequent demand Low inventory levels; wide range of product options; simplified planning Engineer to order For complex products that meet unique customer needs Enables response to specific customer requirements The operations strategy of the supply chain as all component strategy of the supply chain, it is changeable. A key driver is the product life cycle (Cohen, et al, 2005). As demand for products increases and then decreases, companies can move from make to stock to make to order to reduce inventory problems while still interesting with competitive price. Another driver is the number of product kinds. It is not unusual to find that 80 percent of volume shipments comes from just 20 percent of your sales item numbers (or possible configurations). In this circumstance, a hybrid make- to-stock and make-to-order strategy may be more appropriate (Cohen, et al, 2005) 2.5.3.2 Out sourcing strategy: Outsourcing decisions started with an analysis of our company’s existing supply chain capabilities. (Cohen, et al, 2005) ask questions to determine the suitable out sourcing strategy. 28 • What is your company really good at? • What areas of expertise are or have the potential to become strategic differentiators? • What are the activities you should keep in-house and make even better. • When to consider outsourcing activities are low strategic importance or that a third party could do better, faster, or more cheaply. Outsourcing allows companies to go up or down quickly, produce new products, or change the position in the marketplace, all by leveraging the capability and ability by other company's qualifications. The out sourcing provides the company more flexibility which allows companies to focus on their core competencies and enhance their competitive positioning. Before going forward, the company shall be considering the risks and strategic consequences of the company outsourcing decisions. The company must be aware that, Introducing new products, managing inventory levels, and relationship with customer by configuration supply chain to support competitive customer lead times; these are strategic activities that cannot be shifted to a third party. (Cohen, et al, 2005)ask question to put limitation to the out sourcing strategy • Should outsourced skills also be maintained internally, or are they no longer needed? 29 • Which existing skills should be strengthened? • Will new tools or skills be needed, such as the ability to manage inventory across the extended supply chain? • Can it be done more cheaply outside?” is unlikely to provide a strategic solution. ( Cohen, et al, 2005) Cleared that the outside partners can deliver three potential advantages: Scale: Third party provides often services more cheaply because he is specialist in his aspect and there are large customers in additional to us. The third party can provide needed product without having to invest in new manufacturing capacity. Scope: for companies that want to expand into new markets or geographies, outsourcing partners can provide access to new locations. Technology expertise: Outsourcing partners may have differentiated product or process technology that the company needs to invest in new project to produce such product internally, and may be not as well as the third party quality. Despite the benefits mentioned above, outsourcing isn’t always the right decision. Before decide to attain services from external providers, the company according ( Cohen, et al, 2005)shall consider four things: differentiation source, operating scale, power position, and the uniqueness of operations. 30 First, the company shall know what let it differentiated. What gives the company competitive edge? If the product or process technology is a source of differentiation, the company must not outsource that aspect of your operations. Second, the company shall compare between the sizes of the internal processes against the requirements. If the operations at or near full capacity utilization, with no plans to increase production, you will not gain any benefit from the cost of outsourcing Third, locate the uniqueness of your internal operations. The company shall seek if it have unusual product characteristics that will not be accomplished by outsider .If so, the company have little to gain by going outside, ( Cohen, et al, 2005)mentioned Wal-Mart as example, it has developed a highly customized internal logistics operation that manages inbound inventory flows from its central distribution centers to the shelves of its retail locations. As the owner of one of the largest warehousing operations in the world, Wal-Mart has nothing to gain and everything to lose by outsourcing this aspect of its operations. Fourth, the company shall compare its power with the outsourcing partner power. Many providers of services, fulfillment services are already larger than their customers. They’ll gain more power and be better than the company. 31 The company to be able to choose the best decision regarding the out sourcing, the company must go beyond technical criteria and consider the overall business context. The company shall think about its volume against the service provider’s, and then take the correct decisions. 2.5.3.3 Channel strategy. The channel strategy of the company tackle the issues related to how the company will get the products and services to buyers or end users. The decisions deal with these issues as the company sell indirectly through distributors or retailers or directly to customers through its show, should take in to account the market segments and geographies the company is target. Although since profit margins vary depending on which channels are used, the company has to decide on the optimal channel and how will the availability of products in shortage period or in the high demand. 2.5.3.4 Customer service strategy: Customer service strategy is another key configuration component to draw the supply chain strategy. The customer service strategy shall be based on two things according to ( Cohen, et al, 2005): the overall volume and profitability of your customer accounts and an understanding of what your customers really want. The two criteria, overall volume and profitability will contribute to form the supply chain strategy because they help you to prioritize and focus your capabilities. 32 • Should all customers get same-day delivery? • Should you aim for different service levels depending on customer importance? • Should all products be equally available, or should some customers have quicker, easier access? The company should review its service strategy, to don’t provide more costly levels of service than the customers need, or missing important market opportunities. Where not all customers care about same level of service, but it’s important to know who are the high-value customers. The company shall rely on customer service strategy to deliver the best cost and the best service tradeoff to the customer segment that can pay to maximize company's revenue. 2.5.3.5 Asset Network The final component of the supply chain configuration is the decisions that the company makes regarding the company’s network, the factories, warehouses, production equipment, order desks, and service centers that backup up the supply chain. The location, size, have considerable impact on supply chain performance. According to ( Cohen, et al, 2005) the companies choose one of three network models based on some criteria like business size, customer service requirements, tax advantages, supplier base, local content rules, and labor costs: 33 Global model: Manufacturing of a certain product is executed in one location for the global market; the need of such model is to control unit manufacturing costs, or the need for highly specialized manufacturing skills. Regional model: Manufacturing is done in the region where the products are sold, although some product manufactured in more than one region The regional model is chosen based on a mix of factors, including customer service levels, service levels, and the need to adapt products to specific regional requirements. Country model: Manufacturing is done primarily in the country where the market is. This is the model for goods that are expensive to transport. Other factors include duties and tariffs and market access that are conditional on in country manufacturing. 2.5.4 Check list for effective supply chain strategy The components of the supply chain strategy, operations strategy, channel strategy, outsourcing strategy, customer service strategy, and asset network, are the base of supply chain strategy. So the company shall operate these components to drive the strategic business and achieve a competitive advantage, ( Cohen, et al, 2005) mentioned that these components and the choices the company makes about shall be: • Aligned with your business strategy • Aligned with your customers’ needs 34 • Aligned with your power position (your influence) • Adaptive, because competitive advantage is temporary and market conditions change. 2.5.4.1 Aligned with your business strategy The supply chain strategy shall drive business strategy, and the business strategy extracted from the core strategic vision where its answer very important question like, what you are, what you’ll do, and what you are not and what you won’t do. The core strategic vision clarifies the answers to key business strategy questions such as: • What are your overall strategic objectives? • What value do you deliver to your customers? • How does your company differentiate itself in the marketplace? Without answering these key questions the supply chain strategy and configuration, will be operating in a space. 2.5.4.2 Align with Your Customers’ Needs The company shall capture customer needs to create a competitive advantage and aligned their supply chains accordingly. The company shall ask itself; do we really know what the customers want? Are there opportunities that you’re not exploiting simply because you can’t predict them? 35 2.5.4.3 Align with Your Power Position: The supply chain strategy must be based in an understanding of the company power and influence compared to customers and suppliers. Why is this so important? Because by company power can really achieve its goal and reconfigure the supply chain to meet strategic objective. The company needs to understand how much its power is, and its influence on the ground. And before practice supply chain power must understand the effect on other. The supply chain control is a possibility but the collaboration is better. Therefore the company shall analyze its position in the supply chain to determine how can rethink your interactions to cut costs. 2.5.4.4 Become Adaptive The company shall be aware about the surrounded, where the change is a given, market circumstances are shifted, business strategies evolve, and new technologies emerge. The company must pay attention; otherwise the supply chain will get out. The supply chain strategy, like the business strategy, has to adapt. The change is constant, and will happen depend on the industry aspect. (Cohen, et al, 2005) declared that the components of the supply chain strategy, operations strategy, channel strategy, outsourcing strategy, customer service strategies, and asset network, are the base of supply chain strategy. So the company shall operate these components and interact all 36 together to rely supply chain strategic aligned with the competitive advantage, the a company's competitive strategy according to ( Chopra, et al, 2001) is defined relative to its competitors, and the customer needs that the company pursue to satisfy through its product and services, the customer needs can be viewed from how the customer prioritize the product cost, delivery time, variety, and quality. ( Chopra, et al, 2001) start the relationship between the competitive advantage and supply chain strategy from the value chain for any organization to analyze company capability in term of responsiveness and efficiency, companies that focus on cost leadership as a competitive advantage will tend to find the lowest cost of overall functions in the supply chain and rely efficiency strategy; on the other hand companies that focus on differentiation leadership will tend to rely responsiveness as a supply chain strategy that consistent with customer needs regardless of the cost. 2.5.5 Supply chain strategy Responsiveness versus Efficiency The company business strategy lays down company's competitive advantage, which allowing a company to compete with its competitors, and the company reviewed all supply chain components in order to structure supply chain strategy, the companies shall decide how to structure the supply chain over the next several years, it decides what the chains form will be, how resources will be attained, and what processes each stage will execute. The company should take into consideration that all decision 37 during the design stage will have long term effect and must support its strategic objectives and increase supply chain surplus. company’s decision with respect to supply chain infrastructure the plants, distribution centers, transportation modes and lanes, production processes, etc.. These studies are strategic in scope, use a time horizon of many months or years, and typically assume little or uncertainty with the data. The supply chain strategy in designing the aforementioned components can be categorized to the responsiveness and the efficiency. Responsiveness comes at a cost, where to fulfill all quantities demand; the capacity should be increased, which cause to increase the costs. In the other hand supply chain efficiency is the inverse of the cost of producing and distributing a product to the customer. Increasing cost to implement company function activities will lower efficiency. For every strategic choice to increase responsiveness, there are additional costs that lower efficiency. Deciding the strategy of the supply chain whether to be responsive or efficient will affect all design component of the supply chain design. The supply chain strategy defines the processes within the company in additional to the role played by each supply chain entity. To explain the effect of these strategic decisions, the company should define the value chain of the product produced by the company and introduced to the customer. 38 Whether the companies rely on supply chain design from analysis perspective to addresses a wide range of strategic infrastructure issues for the firm, or rely on supply chain design from strategic decision perspective to lay out the framework. The two perspectives have the same aim and can be applied, The concern is to work on the design before proceeding in the management, where there are those who think, they are working according to the prior design but the truth may be otherwise, where each part in the supply chain works around company boundary subsequently aligned goals and supply chain surplus will be beyond what is at hand. With respect to the study of Palestinian companies, there is no real design of supply chains, according to study result (see chapter 4) for the following reasons: • There is no practical or theoretical researches that have addressed management issues like supply chain concept or how the company can design supply chain. • The Size of the companies in Palestine are small comparing to global companies • The facts on the ground like economic situation or how companies interact with research and development. 2.6 Logistics Network strategy The company pursue to align all processes and decisions with the company's objective and one of the most important decision is logistic 39 network design, where it has considerable short and long term effects. Therefore the optimal configuration of a company’s product distribution network can create a balance between the logistics and delivery costs required to achieve desired level of customer services. An agile and flexible distribution network can be a strategic competitive advantage, where the distribution is main function in the value chain. (Frazelle, 2001) mentioned that there are many factors that play a role when the company want to configure the network logistic like, Security requirements, new trade agreements, shifting labor rates, space costs, supplier and customer locations, new carriers and products, lane congestion, and fuel costs and he assured that optimum network design tend to minimize the inventory, and transportation cost, but at the same time satisfying customer needs. (Chopra, et al, 2001) Supply chain network design decision include the assignment of facility role, location of manufacturing storage or transpiration related facility, and the allocation of capacity and market to each facility. 2.6.1 Factors influencing network design decision According to (Chopra, et al, 2001) the company's competitive strategy has a significant impact on network design decision within the supply chain. Where companies that focus on cost leadership tends to find the lowest cost location of their manufacturing facilities, even if that means locating very 40 far from the market they serve. Firms that focus on responsiveness tend to locate facilities closer to the market and may select a high cost location if this choice allows the company to satisfy customer needs and be ready to changed circumstances. (Chopra, et al, 2001) added that the technological factors which characteristics of available production technologies have a significant impact on network design decision, if production technology reflects significant economies of scale, a few high capacity locations are more suitable like computer chip, but if facilities initial cost is low cost, many local facilities may be established because this helps lower transportation. in additional to the previous major factors that affect the network logistic there are other factor according (Chopra, et al, 2001), macroeconomic factors including tariffs and tax incentive exchange rate, demand risk political factors, infrastructure factors, competitive factor, customer response time, and logistic and facility cost 2.6.2 Network design In order the companies to create an optimal network design/redesign, (Frazelle, 2001) recommends a 10-step logistics network design process: 1. Assess/evaluate current network. 2. Design and populate network optimization database. 41 3. Create network design alternatives, such as more or fewer hierarchies, multi-commodity flows, pooling opportunities, merge-in-transit, direct shipping, cross docking, and supply-flow optimization concepts. 4. Develop network optimization model. 5. Choose network optimization tool. 6. Implement network model in chosen tool. 7. Evaluate alternative network designs. 8. “Practicalize” recommended network structure. 9. Compute reconfiguration cost. 10. Make go/no-go decision. According ( Chopra, et al, 2001) the company should take the following point to design its logistic network: the companies shall define a supply chain strategy, where the objective of the first stage of the logistic network design is to define firms supply chain design, this includes determining the stages in the supply chain, and the companies shall determine also the supply chain function if it will be in house or outsource, ( Chopra, et al, 2001) divided the network design into phases: 42 Phase 1 :starts with determining the firms competitive strategy as the set of customer needs that the supply chain want to satisfy .the supply chain strategy specifies the capabilities that the supply chain network must have to support the competitive strategy, forecasting of evolution of global competition and whether competitors in each market will be took place, based on the competitive strategy of the firm, its resulting supply chain strategy , an analysis of the competition, any economies of scale or scope, and any constraints, managers must determine the supply chain design for the firm. Phase 2: define the regional configuration; the objective of the second phase of network design is to identify regions where facilities will be located, their potential roles, and capacity. the analysis starts with forecast of the demand if the country including a measure of size demand, the next step is to identify whether economies of scale or scope can play a significant role in reducing cost, next the company must identify demand risk, exchange rate, managers must identify competitors in each regions and make a case for whether a facility needs to be located close to or far from competitors facilities Phase 3: select a set of desirable sites. The objectives of phase 3 is to select a set of desirable site within each regions where facilities to be located, site should be selected based on an analysis of infrastructure availability to support the desired production 43 Phase 4: location choices, the objectives of phase 4 is to select a exact location and capacity allocation for each facility, attention is paid to the desirable potential sites selected in phase 3, the network is designed to maximize total profits taking into account the expected margin and demand in each market, various logistic and facility cost, and the taxes and tariffs at each location the Palestinian companies should be aware that the network design decision have a significant impact on performance, and shall define its competitive advantage to be able to determine the network design strategy, where the determining of the supply chain network design will set constraints within which the other supply drivers can be used either to decrease supply chain cost or to increase responsiveness. The Palestinian companies can take use of Chopra approach when taking network design decision and its affect on each other, where decisions concerning the role of each facility are significant because they determine the amount of flexible the supply chain has in change the way it meets demand 2.7 Supply Chain Management: Demand Planning Demand planning is a vital aspect of managing flow of product along the supply chain. Generally, the first step of demand planning is to forecast product demand. The company can plan resource deployment in accordance with the resulting forecasts in order manage the inventory, it 44 should provide as accurate as possible information to the operation process. The company can enhance the forecasting and overcome the little and uncertainty information by forecasting on aggregate planning. The sections below shall introduce the demand planning function in details. 2.7.1 Forecasting: One of the most important elements of supply chain success is effective planning to determine customer demand, which begins with accurate forecast. A forecast according ( Krajewski, et al) is "a prediction of future events used for planning purposes". The important role of the forecasting appears among situations like changing business condition as a result of competition, rapid technological change, and rising environmental concerns. Forecast is needed to assist in determine the resources, scheduling existing resources and acquiring additional resources. The most important business decision in course of managing the supply chain which forming challenge to the company is to forecast the customer demand, where it is a difficult task because the demand for product and services vary from time to time, therefore forecasting demand in changeable situations requires uncovering the underplaying patterns from available information. ( Krajewski, et al)defined the pattern" is the repeated observation of demand for product or service in their order of occurrence such as horizontal, trend, seasonal, cyclical, and random". The company must take in to account when it goes to forecast demand the pattern and all 45 factors demand affects by it. The company shall ask itself what factors cause change in the demand for product and service over time. Generally such factors can be divided in to two main categories: external and internal factors. The company can use more than one method to issue the forecasting process, there are mathematical models using historical data, and qualitative methods based on managerial experience, or combination of both, but the company before starting forecasting according (Krajewski, et al) must determine what to forecast, what type of forecasting technique to use and what type of computer hardware or software to use. Level of data aggregation and unit’s measure are important consideration in course of company decision with respect to what to forecast. ( Krajewski, et al)Stated that the forecasting technique can be divided in to two main categories, qualitative methods and quantitative methods, the figure 2.2 shows the forecasting technique Figure 2.2: Classification of forecasting techniques (Armstrong, 1986) 46 In the supply chain management the forecasting is very important for all relied operation strategy, but (Terry, et al., 2004) stated that the forecasting is more necessary for companies that manufacture items for inventory make to stock strategy and that are not made to order. Manufacturers will use material forecasting to ensure that they produce the level of material that satisfies their customers without producing an overcapacity situation where too much inventory is produced and remains on the shelf. At the same time, the forecast must not fall short and the manufacturer finds them without inventory to fulfill customer’s orders. The cost of failing to maintain an accurate forecast can be financially catastrophic. The Palestinian companies lack in terms of utilizing the appropriate forecasting techniques in the supply chain management. Companies should start adopting new ways of doing things with regard using forecasting and the relevant software. Planners should review their decisions with respect to the internal and external environment. They should adjust the calculation to provide a more accurate forecast based on the current information they have. 2.7.2 Inventory management The basic purpose of supply chain management is to plan customer demand and to fulfill his order as well as the least lead time, therefore the company must control inventory by managing the flow of materials to achieve the desired fulfillment, according ( Krajewski, et al) the inventory is "a stock of material used to satisfy customer demand or support the 47 production of goods or services", the level of inventory is determined from the rate of input materials and product and the outward flow represents the demand for materials in inventory, like customer order or requirements for suppliers Inventory management is an important issue for the companies in all types of business, for large scale business, the company can improve it profits and maximize it surplus, for companies that operate on low profit margins, the poor inventory management can destroy the business. ( Krajewski, et al)stated that the challenge is not to pare inventory to the bone to reduce cost or to have plenty around to satisfy all demands, but to have the right amount to achieve the competitive priorities for the business. ( Krajewski, et al)stated that the inventory can be found in three categories with respect to the kind of material are stocked ,raw materials which are needed for production of goods or services, the raw materials are considered an input to the manufacturing process of the company, work in process which are consisted from items such as component or assemblies needed for final product in manufacturing, finished goods in manufacturing plants, warehousing, and retail outlet are items sold to the company’s customer, the finished goods of one company may be the raw materials for other. 48 2.7.2.1 Types of inventory The inventories can be classified according to how it is created, there are four types of inventories according ( Krajewski, et al): cycle, safety, anticipation, and pipe line each one of the four types comes into being in different way. Table 2.2: Types of inventories ( Krajewski, et al) # Type of Inventory Function 1. Cycle inventory the portion of total inventory that varies directly with lot size 2. Safety stock inventory placing an order for delivery earlier than when the item is needed therefore the replenishment order arrives ahead of time 3. Anticipation inventory used to absorb uneven rates of demand or supply which company may face 4. Pipeline inventory inventory moving from point to point in the materials flow system The aforementioned types cope with different situation, where safety stock type of inventory can be created to avoid customer service problems and hidden costs of unavailable components, on the other hand anticipation inventory suit uneven demand which lead the company to stock anticipation inventory during period of low demand to be used in peaks demand period later on. 49 2.7.2.2 Inventory controls The company must manage the inventory to achieve the objective and reach maximum profit and maximum surplus, inventory control system is the managerial function that should be practiced to attain the desirable objectives, selecting an inventory control system for a particular application, the nature of demand imposed on the inventory items is crucial. ( Krajewski, et al) stated that there are two inventory control system are, the continuo's review system, called Q system, and the periodic review system, called P system. Continues review system (Q): Continues review system, sometimes called a reorder point system or fixed order quantity system, tracks the remaining inventory of an item each time a withdrawal is made to determine whether it is time to order or not. When the inventory position reaches a predetermined minimum level, called the reorder point, affixed quantity Q of the item is ordered. Periodic review system (P): the second inventory control system is periodic review system, some times called fixed interval reorder system or periodic reorder system, where an items inventory position is reviewed periodically rather than continuously, a new order is always placed at the end of each review, and the time between orders is fixed at P. in P system the lot size may change from one order to the next, but the time between order is fixed. 50 The Palestinian companies shall be aware that the inventories are important to all types and scale of companies and their employees. Inventories affect everyday operation because must be counted, paid for, used in operation, used to satisfy customer. Where the inventories can be managed in simple technique rather to complicated technique, therefore the companies should adapt managerial concept to manage the inventory. Inventory require an investment of funds, they represent a drain on the cash flows of an organization. the Palestinian companies shall transform the inventory from a bane to boon, by do not reduce profitability if there is too much inventory, and do not damage customer confidence if there is too little inventory. The goal should not to minimize inventory or to maximize service, but rather to have the right amount to support the competitive priorities of the company, 2.7.3 Aggregate planning the companies pursued to improve its performance by preparing the plans and reduce the uncertainty as well as possible, so the companies used forecasting technique to enhance its ability in this regard, but is the forecasting enough and accurate? the company can enhance the forecasting through shorten the time horizon or by forecasting families of products whether for inventory level or for production plans, and many companies practiced seasonal shift in demand for its product, the shifting of demand is called an aggregate plan, ( Krajewski, et al)stated that the aggregate plan is 51 a statement of its production rates, workforce level, and inventory holding based on estimates of customer requirements and capacity constraints. This statement time phased, meaning that the plan is projected for several time periods in to the future. A manufacturing firms aggregate plan, called a production plan, focused on production rate and inventory holding, whereas a service firms aggregate plan called a staffing plan, centers on staffing and other labor related factors. For both types of company the plan must balance conflicting objectives involving services, workforce stability, cost, and profit. The aggregate plan determines how the company will work for the next year within existing resources and facilities capacity constraints. ( Krajewski, et al) stated that from the aggregate plan which is considered medium term plans the companies prepare detailed operating plans. For manufacturing companies the aggregate plan connect strategic objectives with production plans for individual's products and the specific component of them. The companies can apply the aggregate plan to be aware about the future without going into details, where the aggregate plan focus on general course of action, compliance with the company's strategic goals and objectives,. ( Krajewski, et al) stated that the aggregation allows company to determine whether they can satisfy budgetary goals without going to schedule each of the company’s products and employees, even if a planner 52 could prepare such a detailed plan, it will not be feasible to update it again, for this reason production and staffing plans are prepared by grouping or aggregating, similar products service, units of labor or units of time. 2.8 Supplier relationship In spite the companies have unique character, but it have to deal with others in many ways and forms. (Terry, et al., 2004) declared that the forms of the relationship between the companies are five types of supplier relationships: buy-the-market, ongoing relationships, partnerships, strategic alliances, and backward integration. But he said that the backward integration might not be considered a form of supplier relationship because the components are produced internally, he added that the relationship style should fit with the characteristics of the purchased component and of the marketplace. Buying from one firm today means no commitment to buy from same firm anther time, and the interaction between firms is very limited, where there is little need for face to face meetings. (Terry, et al., 2004) as firms move toward ongoing relationships and partnerships, they are responding to a need for interaction with the supplier. where some companies invest on such relationship to improve cost, quality, and delivery ,on the other hand Strategic alliances, involve even closer relationships, sharing the same location of facilities or personnel, wide sharing of information and plans, higher levels of trust, 53 2.8.1 How to Structure the Relationship In the previous section the relationship styles have been presented, but how should managers build their own supplier relationships? (Terry, et al., 2004) declared that there are four fundamental factors that should drive a firm toward closer relationships. These factors should be considered in light of the operations objectives of the firm cost, quality, delivery, and flexibility. Firms should focus on their critical objectives as they analyze relationship styles for each component category. The first factor is the strategic importance of the purchased component. If the component is critical to competitive differentiation, it is best to manufacture it in-house. If the firm cannot develop the capability to manufacture the component, it should form a close alliance with available suppliers The second factor is the number of suppliers that can provide the component or service. If only one supplier is available, the firm may need to maintain close relationships with it, the third factor is complexity of the interfaces between the components procured and the rest of the final product and the complexity of the supply chain itself, the fourth factor that affects relationships is uncertainty,. If a sourcing relationship creates high uncertainty, it should develop closer relationships. The importance of the cases is that the Palestinian companies must explicitly consider the operations objectives of cost, quality, delivery, and flexibility, and that they must understand the concepts of strategic 54 importance, number of suppliers, complexity, and uncertainty in determining how to structure their supplier relationships. As the Palestinian companies are working and practicing its activities, like outsource, selling, managing supplier relationships has become critical. therefore companies shall not go to strategic alliances as the only style of supplier relationships, and shall not take different way drastically, but careful analysis of the operations objectives of the firm and the number of available suppliers, in addition to examination of the uncertainty, complexity and strategic importance of the component being purchased, the companies can have clear image of how to structure supplier relationships. Thus, within the same firm some components should be purchased through strategic alliances while others purchased via a partnership, on-going relationship or buy-the-market approach. on the managing side of these relationships. Firms that decide to pursue strategic alliances should strongly consider introducing competition into the relationship, while firms that buy over the Internet should consider building longer term relationships. 2.9 Supply Chain Management: Customer Relationship Customer relationship management is a complementary process to the previous operations process to achieve the organization goals, so that efforts will be fruitful if all previous processes were coroneted of running a sound relationship with the customer. (Ellen, 2009) declared that the 55 customer relationship is an essential part of modern business management. And it concerns the relationship between the organization and its customers. Where the customers are considered the lifeblood of any organization. The companies and the customers have special environment to consider when building the relationship, (Ellen, 2009) declared that wants and needs govern the relation of both parties; organizations need to make a profit to survive and grow, customers want good service, a quality product and an acceptable price, therefore good CRM can influence both sets of conditions. In the company side the customer relationship management affects the overall company, where, (Ellen Gifford ) declared that the organization shifting the focus from product to customer, streamlining the offer to what the customer requires, not want the organization can make, and highlighting competencies required for an effective CRM process 2.9.1 Organization need to the CRM The final goals of the customer relationship management is to maximize supply chain surplus and earn customer loyalty to the company and let him to be company's messenger, this is will not be achieved without submitting better service more than any competitors else. the best customer relationship capability will be reflected on the company itself, (Ellen Gifford ) stated that CRM not only improves the service to customers though; a good CRM capability will also reduce costs, wastage, and 56 complaints (although you may see some increase initially, simply because you hear about things that without CRM would have stayed hidden). CRM enables instant market research as well: opening the lines of communications with your customers gives you direct constant market reaction to your products, services and performance, far better than any market survey. Good CRM also helps you grow your business: customers stay with you longer 2.9.2 What do customers want? Customer wants to get an equivalent to what he paid; (Ellen Gifford) mentioned that the customers want cost-effective products that introduce required benefits to them. But at the same time the same product or service can submit different benefits to different customers. so It's important to look at things from the customer's perspective to determine the satisfaction of the customer, (Ellen Gifford) declared that the customers want to have their needs satisfied, and will often include the buying-selling process, the way that communications are handled, and the nature of the customer- supplier relationship. (Ellen Gifford) mentioned that the CRM theory refers to the idea of 'integrating the customer'. This way of looking at the business involves integrating the customer into all aspects of the supplier's business, and vice versa. This implies a relationship that is deeper and wider than the traditional 'arms-length' supplier-customer relationship. 57 2.9.3 Managing customers Why manage customers? the customers are the usual source benefit for the company, as well as the source of the information which is important for company success, therefore the customer relationship should be managed carefully. (Ellen Gifford) stated that managing customer's relationship will be by, knowing what customers want and need that let the company to focus on production and service according customer desire, the company also should know which products or customers have most growth which enables it to focus on developing highest potential, knowing which products or customers are most profitable which enables the company to focus on maximizing profit, and the company should know which customers will be supporters and loyal which enables it to provide references, case studies, and to safely test new products and services The company shall attain effective relationship with the customer through right management of the relation, the company will achieve effective customer relationship according (Ellen Gifford) by adopting a new perspective. • traditional customer service is something you 'do to' the customer • modern Customer Relationship Management is 'done with' the customer 58 The second statement is certain a big differences between traditional customer service, and the modern customer service. the Palestinian company should establish relationships with customers ongoing, cooperative, and built for the long term, and they will be aware that company who have many temporary relationships with customers have to spend a lot of money on finding new customers, where the cost of keeping existing customers is littlie bit of the cost of acquiring new customers. 2.10 Supply Chain drivers and Metrics The company shall support its competitive advantage by creating balance between the responsiveness and efficiency, but to understand how company can improve supply chain performance in terms of responsiveness and efficiency. ( Chopra, et al, 2001)stated that the company must review the logistical and cross functional drivers of supply chain performance to determine the supply chain performance, the logistical drivers are facilities, inventory, and transportation, the cross functional drivers are information, sourcing, and pricing. The fit between the competitive advantage and company supply chain strategy is the right combination of the three logistical and three cross functional drivers, where when the company takes decision with respect to each driver, it must make tradeoff between efficiency and responsiveness based on interaction with the other drivers. 59 The drivers are very important elements to enhance the supply chain performance, but how we can measure these drivers, ( Cohen, et al, 2005) stated that most people agree with the saying, “If you can’t measure it, you can’t fix it.” ,therefore a set of measures or metrics should be prepared to evaluate company performance with respect specific driver, ( Cohen, et al, 2005) stated also that yet few metrics programs actually provide a clear picture of overall performance, identify the root of performance problems, or identify improvement opportunities. The reason is simple: Establishing a robust and useful performance measurement program is difficult where still arguments to what to measure, how to define the chosen metrics, and how often they should be measured. The Merriam-Webster Dictionary defines a metric as “a basis or standard of comparison.” where by this definition, a stand-alone number or value is not a metric. A number or value only becomes a useful management tool when compared with another number or value. This is the premise of an effective performance measurement program. After explaining what the drivers and metrics are, the following sections take it in detail. 2.10.1 Facilities: The facilities are the location in the supply chain where product is stored, assembled or manufactured; ( Chopra, et al, 2001)stated that the facilities can be summarized into two major types, production and storage sites. Decision with respect the role, location, capacity, and flexibility of 60 facilities have a considerable effect on supply chain performance; therefore tendency to locate many warehouses closed to customer is expresses adaption of responsiveness, in the other side adaption efficiency strategy needs to locate fewer warehouses to increase efficiency despite the fact that this practice will reduce responsiveness. Decisions with respect facilities are very important part of supply chain, ( Chopra, et al, 2001)declared that the role of production facilities must be determined whether it will be flexible, devoted, or a combination of the two. Flexible capacity can be used for many types of product. On the other hand decisions regarding the location of facilities are part of the design of a supply chain, the company shall decide whether to centralize the facilities in order to attain economies of scale or to decentralize to become more responsive, facility capacity also is considered part of supply chain design where the company shall decide a facility's capacity to perform its intended functions. 2.10.1.1 Facility metrics: According ( Chopra, et al, 2001) there are below some of the metrics that the company can use to measure its performance. 61 Table 2.3: Facility metrics ( Chopra, et al, 2001) 2.10.2 Inventory: The inventories include all raw materials, work in process, and finished products within the supply chain. ( Chopra, et al, 2001)cleared that The inventories exist in the supply chain to compensate the mismatch between the supply and demand, therefore changing inventory polices alter the supply chain efficiency and responsiveness, therefore inventories play a considerable role in supply chain ability to reinforce a company strategy, company's competitive strategy which is relying on responsiveness can be achieved by locating large amounts of inventory close to the customer. On Metrics clarification Capacity Measures the maximum amount a facility can process Utilization Measures the fraction of capacity that is currently being used in the facility. Utilization affects both the unit cost of processing and the associated delays. Unit cost tends to decline and delays increase with increasing utilization. Production cost per unit Measures the average cost to produce a unit of output. These costs may be measured per unit, per case, or per pound depending on the product. Theoretical flow/cycle time of production Measures the time required to process a unit if there are absolutely no delays at any stage. 62 the other hand a company can use inventory to become efficient by decreasing inventory through centralized stocking. 2.10.2.1 Inventory metrics: According ( Chopra, et al, 2001)the company shall track the following inventory metrics that have significant influence on the supply chain performance: Table 2.4: Inventory metrics ( Chopra, et al, 2001) 2.10.3 Transportation: Transportation conveys product between different points in the supply chain, ( Chopra, et al, 2001)stated that the company can take more than one Metrics Clarification Cash to cash cycle time Is a high level metrics that includes inventories, accounts payable, and receivables. Average inventory Measures the average amount of inventory carried. Average inventory should be measured in units, days of demand and financial value Inventory turns Measures the number of times inventory turns over in a year. it is the ratio of average inventory to either the cost of goods sold or sales. products with more than a specified number of days inventory Identify the product for which the firms is carrying a high level inventory, this metrics can be used to identify products that are in oversupply or identify reasons that justify the high inventory, such as price discount or being very slow mover. 63 form or combinations of modes and routs.; the company can design its transportation network which includes collection of modes, location and routs to be close to the customer, and also can use faster modes of transportation or different forms like air, truck, sea and pipe line, thus transportation has a large impact on both responsiveness and efficiency making the supply chain more responsiveness but in the same time less efficient. 2.10.3.1 Transportation metrics: According (Chopra, et al, 2001) the company should measure transportation performance with respect to the following metrics. Table 2.5: Transportation metrics ( Chopra, et al, 2001) Metrics Clarification Average inbound transportation cost Typically measures the cost of bringing product into a facility as a percentage of sales or cost of goods sold (COGS).Ideally, this cost should be measured per unit brought in, but this can be difficult. The inbound transportation cost is generally included in COGS. It is useful to separate this cost by supplier. Average incoming shipment size Measures the average number of units or dollars in each incoming shipment at a facility Average inbound transportation cost per shipment Measures the average transportation cost of each incoming delivery. Along with the incoming shipment size, this metric identifies opportunities for greater economies of scale in inbound transportation. Average outbound transportation cost Measures the cost of sending product out of facility to the customer. Ideally this cost should be measured per unit shipped, but it is often measured as a percentage of sales. It is useful to separate this metric by customer. 64 2.10.4 Information: The information is considered across functional driver, where it affects every part of the supply chain and impacts every other driver. ( Chopra, et al, 2001)declared that the company can use information system to become both more efficient and more responsiveness. The wide growth of information technology is evidence to the impact of information on improving company performance; the company must decide which technologies to use and how to integrate these technologies into their company and their partners, there are many enabling technologies to be used to enhance information system among the company and its partners, such as electronic data interchange (EDI), internet, enterprise resource system(ERP), supply chain management software, and radio frequency identification(RFID). Information like other drivers, the company must make tradeoff between efficiency and responsiveness where at certain point the marginal cost of investing in additional information increase, whereas the marginal benefit from the additional information decrease. The components of information decisions exceed coordination and information sharing that occurs in all stages of supply chain to achieve objectives, where the company must analyze the information to increase efficiency and improve responsiveness. the companies that rely push system in its designing process of the supply chain require information in the form of elaborate material requirements planning(MRP), but companies rely pull system require information on actual demand, on the other hand 65 the companies need the information to forecast the future demand and to prepare the aggregate supply planning. 2.10.4.1 Information metric: The company can measure its performance according ( Chopra, et al, 2001)by examining the following metrics. Table 2.6: Information metrics ( Chopra, et al, 2001) 2.10.5 Sourcing: Sourcing is the cluster of business processes required to acquire goods and services. The crucial decision that company should take regarding Metrics Clarification Forecast horizon Identifies how far in advance of the actual events a forecast is made. The forecast horizon must equal the lead time of the decision that is driven by the forecast. Frequen cy of update Identifies how frequently each forecast is updated. The forecast