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1 Hoetomo Lembito
PUCHASING IN LOGISTICSAn Introduction Concept
JAKARTA, 26 MARCH 2011
Prepared by
HOETOMO LEMBITO
2 Hoetomo Lembito
Sasaran Perkuliahan
• Memberikan pemahaman kepada para mahasiswa tentang esensi konsep purchasing in SCM
• Memberikan pengertian dan pemahaman konsepsi akan hubungan supplier dan buyer (supplier – buyer relationships)
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Bab 1
World Class Supply Management
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Supply Chain Management Requires Many Different Functions
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Integrated Logistics
Order Processing
Order Processing
TransportationTransportationWarehousingWarehousing
InventoryInventoryPurchasing/ProcurementPurchasing/Procurement
Topik diskusi Perkuliahan ini adalah
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Key Concepts
• World Class Supply ManagementSM
» Implementing World Class Supply ManagementSM
• Supply Chains and Networks
• The Extended Enterprise
• Supply Management and the Bottom Line» Increased Sales
» Faster to Market or Time-Based Competition
• Supply Management and Return on Investment5
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• The Four Phases of Supply Management» Generation of Requirements
» Sourcing
» Pricing
» Post Award Activities
• Supply Management Systems
• B2B E-Commerce, the Internet and Supply Management
• Strategic Supply Management Activities
Key Concepts
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World Class Supply Management
• WCSM is the philosophy of continuously improving…
• …the process of design, development, and management…
• …of an organization’s supply system,…
• …with the objective of improving the bottom line.
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World Class Supply Management
• Recognizes the global environment• Is a philosophy• Is proactive• Spans functional boundaries• Spans company borders• Focuses on optimization of the supply chain• Requires change from upper management• Requires continuous improvement• Requires development of institutional trust
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Implementing WCSM
• Senior management must recognize supply management's critical nature and support the required transformation
• Firms must know where they are in relation to where they want to be
• Benchmarking best-in-class practices and developing metrics enable WCSM
• Appropriate action plans and metrics focus their vision and continuously improve their contribution to the bottom line
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The Progression to WCSM
Supply management a core competence
Strategic sourcingMonitor supply environmentDevelop and implement
commodity strategiesSupply base by designDevelop and manage
alliances and networksTime based competitionVirtually defect free materials
and servicesLeverage supplier technologyIntegrated supply strategyManage riskEmphasis: total cost
relationshipsRelationships: transactional,
collaborative and allianceBottom line impact: increase
shareholder valueReporting: member, executive
groupData: facilitates strategic
planningUnderstand key supply
industriesE-Commerce II
Coordinate procurement systemDevelop suppliersLong-term contractsInvolved in development of
requirementsPlan for recurring requirementsProcurement adds valueActive in source selectionNear defect free materials and
servicesEmphasis: cost, quality and
timelinessRelationships: transactional and
collaborativeBottom line impact: profit
contributorReporting: upper managementData: facilitates sourcing and
pricingFulfill social responsibilitiesE-Commerce
Transactional focus
React to requisitions
Not involved in key source selections
Emphasis: purchase price
Relationships: transactional and adversarial
Bottom line impact: revenue neutral
Reporting: low level
Data: used to expedite
Computers process paperwork
Process Paperwork
Confirm actions of others
Emphasis: convenience
Relationships: personal
Bottom line impact: overhead
Reporting: very low level
Data: not available
Clerical
World Class
Proactive
Mechanical
1 2 3 4 5 6 7 8 9 10
Figure 1-1Figure 1-1
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Clerical Stage• Process Paperwork
• Confirm actions of others
• Emphasis: convenience
• Relationships: personal
• Bottom line impact: overhead
• Reporting: very low level
• Data: not available
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• Transactional focus
• React to requisitions
• Not involved in key source selections
• Emphasis: purchase price
• Relationships: transactional and adversarial
• Bottom line impact: revenue neutral
• Reporting: low level
• Data: used to expedite
Mechanical Stage
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• Coordinate procurement system
• Develop suppliers
• Long-term contracts
• Involved in development of requirements
• Plan for recurring requirements
• Procurement adds value
• Active in source selection
Proactive Stage
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• Near defect free materials and services
• Emphasis: cost, quality and timeliness
• Relationships: transactional and collaborative
• Bottom line impact: profit contributor
• Reporting: upper management
• Data: facilitates sourcing and pricing
• Fulfill social responsibilities
• Engage in electronic commerce
Proactive Stage
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World Class Supply Management Stage
• Supply management a core competence
• Strategic sourcing
• Monitor supply environment
• Develop and implement commodity strategies
• Supply base by design
• Develop and manage alliances and networks
• Time based competition
• Virtually defect free materials and services
• Leverage supplier technology
• Integrated supply strategy15
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Supply Chains and Networks
• The supply chain extends from the ultimate customer back to Mother Earth
• The chain is viewed as a whole, a single entity rather than fragmented groups
• Money enters the supply chain only when the ultimate customer buys a product or service
• Supply systems play a key role in supply chains
• Supply chains are relatively easy to describe and visualize, but the term supply network is emerging as a more accurate description
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World Class Supply Management Stage
• Manage risk• Emphasis: total cost relationships• Relationships: transactional, collaborative and alliance• Bottom line impact: increase shareholder value• Reporting: member, executive group• Data: facilitates strategic planning• Understand key supply industries• E-Commerce II
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A Definition of Supply Chain Management
• Supply Chain Management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores,…
• …so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time,…
• …in order to minimize system wide costs
• …while satisfying service level requirements.
Source: Simchi-Levi, Kaminsky, and Simchi-Levi, Designing and Managing the Supply Chain,
Irwin, McGraw-Hill, 2000.18
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The Value Chain
MotherEarth
OriginalEquipmentManufacturers(OEM)
ExtractorsMinersHarvesters
Converters(suppliers)
Distributors
End Customer(the sourceof funds)
The Supply Chain The Distribution Chain
Figure 1-2Figure 1-2
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Supply Networks
DistributorsMotherEarth
Extractors Converters Converters OEMs Customers
Figure 1-3Figure 1-3
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The Extended Enterprise
• When a group or network of firms collaborate in partnership (alliance) fashion, this is sometimes referred to as a strategic network, virtual corporation, or extended enterprise
• When the group of firms view each other as partners and collaborate effectively for the good of the larger group, then they leave established an extended enterprise characterized by virtual integration
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Supply Management and the Bottom Line
• Purchased items account for a large percentage of the cost of goods sold.
• Outsourcing allows firms to focus on their core competencies.» Organizations outsource when they decide to
purchase something they had been making in-house.
• A dollar saved in materials cost is usually considered a dollar increase in profit
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Supply Management’s Impact on Net Income and the Bottom Line
Increased Sales:• Faster to Market• Improved Quality• Pricing Flexibility• Innovation
Lower Total Cost:• Acquisition Cost• Processing Cost• Quality Cost• Downtime Cost• Risk Cost• Cycle Time Cost• Conversion Cost• Non-value Added Cost• Supply Chain Cost• Post Ownership Cost
Figure 1-5Figure 1-5
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Return onInvestments
10.0%
Total assets$4,000,000
Sales$5,000,000
Divided by
Profitmargin
8%
Asset turnoverrate1.25
Multiply
Cash$300,000
Accountreceivable$300,000
Inventories$500,000
Ass
ets
Labor$700,000
Materials$2,300,000
Overhead$800,000O
pe
ratin
g c
ost
ele
me
nts
($515,000)
($3,685,000)($2,185,000)(10.3%)
(1.26)
($3,975,000)
($1,075,000)
($475,000)
(13.0%)
What if wedecreasematerials costby 5%?(or $115,000)
Sales$5,000,000
Net income$400,000
Divided by
Fixed assets$2,900,000
Current assets$1,100,000
Plus
Other costs$800,000
Sales$5,000,000
Cost ofGoods Sold$3,800,000
Minus
Plus
Supply Management and Return on Investment
Figure 1-4Figure 1-424
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The Impact on ROI of Reducing Materials Costs vs. Increasing Sales
• If the same profit increase were to be generated by increasing sales, what sales increase would be required?
• At the existing 8% profit margin, the following calculation provides the answer…
• Profit increase = new sales X .08
• $115,000 = new sales X .08
• new sales = $1,437,50025
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The Impact on ROI of Reducing Materials
Costs vs. Increasing Sales
therefore…..
• ($1,437,500 / $5,000,000) X 100 = 28.8%
• or a sales increase of 28.8% is required to match the profit increase generated by a 5% reduction in materials cost
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The Four Phases of Supply Management
• Generation of Requirements
• Sourcing
• Pricing
• Post Award Activities
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Supply Management Systems
• Virtually all firms have supply management systems
• A cross-functional approach enables the lowest total cost
» Example: Maintenance is a function that should be considered early in the acquisition of equipment to avoid difficult to maintain machines and downtime
• Carefully selected suppliers should also join in-house cross-functional teams
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B2B, E-Commerce, the Internet and Supply Management
• The 21st century corporation must adapt itself to management via the Web
• The Internet and B2B e-commerce are accelerating supply management to a core competency
» Reverse auctions, exchanges, real-time electronic transmissions, etc. only increase the importance of supply management
• The Internet is an enabler, not the manager of improved supply chain management
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Strategic Supply Management Activities
1. Environment Monitoring
2. Integrated Supply Strategy
3. Commodity Strategies
4. Data Management
5. Corporate Strategic Plans
6. Strategic Sourcing
7. Strategic Supply Alliances
8. Supply Chain / Supply Networks
9. Social Responsibilities
10. Understand Key Supply Industries30
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Concluding Remarks• Supply management must be a core competency based on its
impact on the bottom line
• WCSM requires change, driven by upper management
• Decision-making processes toward optimization of the supply chain
• World-class supply managers proactively improve supply processes
• Traditionally, purchasing was considered as a clerical function, and did not contribute significantly to a firm’s overall business strategy
• Today, the purchasing function has evolved into an integral of SCM and adds significant value for a firm’s overall performance
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Bab 2
Buyer – Supplier Relationships
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• A Transformation in Relationships• Three Types of Buyer-Supplier Relationships
» Transactional Relationships» Collaborative and Alliance Relationships» Collaborative Relationships» Supply Alliances» Which Relationship is Appropriate?
• The Supplier's Perspective• Developing and Managing Collaborative and
Alliance Relationships
Key Concepts
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• Situations Wherein Alliances may not be Appropriate
• The Role of Power
• A Portfolio Approach
• New Skills and Attitudes Required
• E-Commerce and the “Right” Type of Relationship
• Relationships of the Future
• Institutional Trust
Key Concepts
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Evolving to WCSM Through Alliances
• Systematically selected supply alliances…
• …built on institutional trust...
• …help organizations complete their evolution to World Class Supply ManagementSM.
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A Transformation in Relationships
• The transformation from reactive and mechanical purchasing to proactive procurement and on to WCSM parallels a similar transformation in relationships between buyers and suppliers
• Prior to the 1980s most purchasing relationships were reactive
• Interaction between vendor and purchasing resulted in outcomes where one’s gain would be the other’s loss
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Problems with the Term Partner
• During the late 1980’s and early 1990’s, “partnerships” became popular» Implications of the term “partner” were not well
understood
» Legal problems and concerns inevitably arose
• While the term “partnership” is still relatively common, we avoid use of the term preferring the terms “collaborative relationship” and “strategic alliance.”
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Three Types of Buyer Supplier Relationships
• Transactional
• Collaborative
• Alliance
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Continuum of Buyer-Seller Relationships
Figure 3-1Figure 3-1
CommunicationCompetitive Adv.ConnectednessContinuous Impr.Contributions to NPDDifficulty of ExitDurationExpeditingFocusLevel of Integration
High pot. for problems Systematic approachLow HighIndependence InterdependenceLittle A focusFew Many – ESILow Difficult – high impactShort LongReactive ProactivePrice Total costLittle or none High or total
Activity/Attribute Transactional Collaborative Alliance
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Continuum of Buyer-Seller Relationships
Number of SuppliersOpen BooksQualityRelationsResourcesServiceShared ForecastsSupply DisruptionsTechnology InflowsType of Interaction
Many One or fewNo YesIncoming inspection Design quality in systemInward looking Concern w/well beingFew – low skill level ProfessionalMinimal Greatly improvedNo YesPossible UnlikelyNo YesTactical Strategic synergy
Activity/Attribute Transactional Collaborative Alliance
Figure 3-1 ContinuedFigure 3-1 Continued
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Transactional Relationships Characteristics
• An absence of concern
• One of a series of independent deals
• Costs, data and forecasts are not shared
• Price is the focus of the relationship
• A minimum of purchasing time and energy is required to establish prices
• Transactional purchases lend themselves to e-procurement
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Advantages of Transactional Relationships
• Relatively less purchasing time and effort are required to establish price
• Lower skill levels of procurement personnel are required
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Disadvantages of Transactional Relationships
• Potential for communication difficulties
• Expediting and monitoring of incoming quality
• Inflexible when flexibility may be required
• Tend to result in more delivery problems
• Quality will be only as good as required
• Suppliers provide the minimum service required
• Less effective performance by suppliers
• Customers are subject to more supply disruptions
• Supplier is not motivated to invest time and energy development of buyer’s products
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Collaborative and Alliance Relationships
• "Collaboration is the new imperative," declares Michael Dell
• Collaborative and alliance relationships tend to result in lower total costs and improve performance of the supply chain
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Three Success Factors
• Researchers Stanley and Pearson found that the three most important factors in a successful buyer-supplier relationship are:» (1) two-way communication,
» (2) the supplier's responsiveness to supply management's needs, and
» (3) clear product specifications
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Collaborative Relationships
• Typically used for the procurement of non-commodity items and services
• A collaborative relationship frequently is an appropriate first step on the road to a strategic alliance
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Collaborative Relationships
• Collaborative relationships tend to foster….» Longer term contracts» Reduction of risk for suppliers» Reducing total costs » Improvement of processes» Improvement of products» Increased investment in R & D» Increased investment in training» Increased investment in equipment » Better focus on customer needs
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Supply Alliances
• The fundamental difference between collaborative relationships and supply alliances is the presence of institutional trust in alliances
• The failure to develop and manage institutional trust is the principle reason that so many supply alliances fail
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Benefits of Supply Alliances
• Lower total costs.
• Reduced time to market
• Improved quality
• Improved technology flow from suppliers
• Improved continuity of supply
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Alliance Attributes
• Continuous improvement
• Interdependence and commitment.
• Atmosphere of cooperation
• Informal interpersonal connections
• Internal infrastructures to enhance learning
• Openness in all areas of the relationship
• A living system
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Alliance Attributes Continued
• A shared vision of the future
• Ethics take precedence over expediency
• Adaptable in the face of change
• Design of experiments and supplier certification
• Win-Win negotiations
• Executive level commitment
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Which Relationship is Appropriate?
• What are the “Strategic Elements of a Relationship?”
• Are there many relatively undifferentiated suppliers providing what amounts to inter-changeable commodities?
• Does the potential supplier possess economic power which it is willing to employ over its customers?
• If there is recognition by both parties of the potential benefits of an alliance, but adequate qualified human resources are not available at one or both firms?
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Strategic Elements of a Relationship
• Is one supplier head and shoulders above the rest in terms of the value it provides; including price, innovation, ability to adapt to changing situations, capacity to work with your team, task joint risks, etc?
• Are some suppliers “strategic” to your business?
• Would your company benefit greatly if the supplier were more “integrally connected” with your company?
• Do your customers require high degrees of flexibility and speed of responsiveness?
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The Supplier’s Perspective
• Supplier’s want good customers
• Several issues affect their assessment, among them are:» Cash Flow
» Openness and Approachability
» Availability
» Professionalism
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Questions to be Addressed Before Proceeding
• Is there a danger that the supplier may act in an opportunistic manner over time?
• Do electronic systems allow for optimum communication and sharing of information?
• Is the potential strategic alliance able to stay current in the industry?
• Are both the organizations willing to keep attention focused on the joint customer?
• Are there other suppliers worth investigating before committing to a strategic alliance?
• Has the supply manager been thoroughly trained?55
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• Is the organization proud to be aligned and associated with the supplier?
• Is the organization comfortable with the level of risk associated with reducing the supply base?
• Are both supplier and buyer aligned in what their ultimate customer considers to be valuable?
• If there is substantial risk for the supplier to develop new technologies, products, processes, or service support?
• Are both supplier and buyer aligned in their respective visions?
• Are there sufficient operational points of interaction?
Questions to be Addressed Before Proceeding
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Situations Wherein Alliances
may not be Appropriate• Stability
» Price Volatility» Demand Volatility» High Switching Likelihood with High Switching Costs
• Capability» No Partnership/Alliance-Capable Supplier for the
Item» No Partnership/Alliance-Capable Supplier in the
Geographic Area » Rapid Technological Change» Mismatch of Clock Speed
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Situations Wherein Alliances
may not be Appropriate• Competition
» Non-Competitive Market
» Supplier Dependency Creation
» Neglected Areas
» Suppliers Seeking to Reduce Competition
• Benefits» No leverage from Partnership
» No Hard Savings from Partnership
• Internal Buy-In» No Internal Customer Buy-In58
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The Role of Power
• Power is a topic that makes people uncomfortable
• Power is at the heart of all business relationships• Power plays a key role in two important
subclasses of buyer-supplier relationships: » Captive Buyer: buyer is held hostage by a supplier
free to switch to another customer» Captive Supplier: makes investments in order to
secure a portion of the buyer's business, with no assurance of sufficient business to recoup the investment
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The Portfolio Approach
• Successful supply chain management requires the effective and efficient management of a portfolio of relationships
• Three environmental factors to consider:» (1) the product exchanged and its technology,
» (2) the competitive conditions in the upstream market, and
» (3) the capabilities of the suppliers available
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New Skills and Attitudes Required
• Developing and managing collaborative and alliance relationships require supply professionals that possess the following skills and attitudes:» Recognize the benefits of collaboration
» Ability to identify, obtain and use data
» Able to work in chaos and uncertainty
» Agile, flexible, and highly adaptive
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E-Commerce and the“Right”
Type of Relationship
• "How does B2B eCommerce affect our selection of the 'right' type of relationship?“» Selection must be a function of the requirement, not
of the Internet!
» B2B eCommerce is an enabler
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E-Commerce Traps to Avoid
• Trap #1: Guilding the pig» Take an archaic, cumbersome procurement process and
“webbize” it
• Trap #2: The Magic pill» Looking for the one solution that can be used to solve
every procurement situation
• Trap #3: Supplier equality» Supplier relationships range from transactional
to alliances
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Concluding Remarks
• Establishing good relationships with current and potential SC members is essential to the success of any company’s competitive strategy
• Not all relationships are created equal – nor should they be.
• Customer, supplier, and service provider should be classified based on their strategic relevance and importance
• Direction of relationships maybe horizontal (same echelon), vertical (different echelon), and hybrid (expansion of capability occurs both vertically and horizontally)
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THANK YOU
Jakarta – 26 March 2011