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The Supply Chain has The Supply Chain has Strategic Importance Strategic Importance

Supply chain management is integrating the activities that

• buy raw materials and services,

• change them into intermediate and final products, (and)

• distribute them to the final customer.

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The Supply Chain has The Supply Chain has Strategic Importance Strategic Importance

The aim of supply chain management is to

reduce costs within the supply chain (and)

maximise value to the customer

Competition is not between companies; it is between supply chains

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Supply Chain ManagementSupply Chain Management

1. Transportation vendors (globallocal)

2. Credit and cash transfers (timing, size, methods)

3. Suppliers (one, few or many?)

4. Distributors (intensive or exclusive strategy)

5. Accounts payable and receivable

(links to 2, also ownership of goods)

6. Warehousing and inventory (market access, size & timing)

7. Sharing customer, forecasting, and production information

( information sharing leads to competitive supply chain)

Important activities include managingImportant activities include managing

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The Supply Chain has The Supply Chain has Strategic Importance Strategic Importance

As the supply chain is of strategic and competitive importance, businesses within the same supply chain are

cooperating, not competing,

this means that pricing, terms of trade, etc should be favourable to other supply chain members.

marketing activities should be well coordinated for maximum success.

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A Supply Chain for BeerA Supply Chain for Beer(very important)

Figure 11.1

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How Supply Chain How Supply Chain Decisions Impact StrategyDecisions Impact Strategy

Low-Cost Strategy Response Strategy Differentiation Strategy

Supplier’s goal

Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell)

Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers)

Share market research; jointly develop products and options (e.g., Benetton)

Primary selection criteria

Select primarily for cost

Select primarily for capacity, speed, and flexibility

Select primarily for product development skills

Table 11.1

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Supply Chain RiskSupply Chain Risk

More reliance on supply chain partners means more risk, such as

Vendor reliability and quality risks

Fewer suppliers increase dependence (Porters 5 forces)

Globalization / international supply chains increase risk, such as

Political and currency risks (Oooby story)

(Extreme weather events) ?

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Make-or-Buy DecisionsMake-or-Buy Decisions

Choice between internal production (make)

and external sources (buy)

Issues of capacity, costs, quality, flexibility, etc

(Can be short term capacity mgt, or strategic decision to outsource)

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Supply Chain StrategiesSupply Chain Strategies

Negotiating with many suppliers

Long-term partnering with few suppliers

Vertical integration

Joint ventures

Keiretsu

Virtual companies that use suppliers on an as needed basis

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Many SuppliersMany Suppliers Commonly used for commodity products

Purchasing is price sensitive

Suppliers compete with one another

Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

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Few SuppliersFew Suppliers

Buyer forms long term partnerships with few suppliers

Create (extra) value through economies of scale (bulk) and learning curve improvements

Suppliers more willing to join JIT programs and share design and technological expertise

Cost of changing suppliers is huge due to ‘supplier lock in’.

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Vertical IntegrationVertical Integration

Figure 11.2

Raw material (suppliers) Iron ore Silicon Farming

Backward integration Steel

Current transformation Automobiles Integrated

circuits Flour milling

Forward integration Distribution systems Circuit boards

Finished goods (customers) Dealers

Computers Watches

CalculatorsBaked goods

Vertical Integration Examples of Vertical Integration

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Joint VenturesJoint Ventures

Formal collaboration / contract Enhance skills

Secure supply

Reduce costs

Cooperation within supply chain that does not affect brands or give away competitive advantage

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Keiretsu NetworksKeiretsu Networks Supplier and buyer company buy shares in

each other to have common interest

Members expect long-term relationships and provide technical expertise and stable deliveries

May extend through several levels of the supply chain

Toyota (Nagoya City) a good example of this.

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Virtual CompaniesVirtual Companies Rely on a variety of suppliers to provide

goods/services on demand

Flexible organisation to create ‘unique’ enterprises to meet changing markets.

Exceptionally lean performance, low capital investment, flexibility, and speed.

BUT – high risk strategy. Very good controls needed. E.g. Nike

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Managing the Supply ChainManaging the Supply Chain

Agreeing on goals

Trust

Compatible cultures/values

There are significant management issues when controlling a supply chain of many independent organizations

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EurodellEurodellhttp://www.eurodell.co.nz/

Global supply chains from Europe to NZ.

Wide range of products to wide range of clients, small and large.

Driven by customer service and profit

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OooobyOooobyhttps://www.ooooby.org/auckland

Short supply chain to maximise return to suppliers.

Connecting small business with small markets locally.

Resilient system as a reaction to global experience.

Driven by social and environmental agenda.

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Supply Chain issuesSupply Chain issues

Planning Supply chain strategy (one/many ? etc)

Sourcing products.

Method & timing of shipping/delivery.

In-store processing & storage.

Continual supply issues. (seasonality?)

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Supply Chain issuesSupply Chain issues

Purchasing Size and pricing of purchases.

Timing of purchases.

Payment methods / problems.

Quality checks etc.

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Supply Chain issuesSupply Chain issues

Processing Break in bulk / repackaging.

Rebranding to retailers.

Quality checks.

Assembly / disassembly.

Resources & facilities needed.

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Supply Chain issuesSupply Chain issues

Distribution Number of outlets supplied.

Frequency, size & timing of deliveries.

Cost efficiency.

Third party?

Vertical integration?

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Issues in an Integrated Issues in an Integrated Supply ChainSupply Chain

Local optimizationLocal optimization – individual firms focus on lifting their profit or reducing costs which may reduce overall efficiency of whole supply chain

Incentives (sales incentives, quantity discounts, Incentives (sales incentives, quantity discounts, quotas, and promotions)quotas, and promotions) – can push merchandise into supply chain and fill it up, increasing stock levels and costs

Large lotsLarge lots - low unit cost (good) but may not reflect sales(bad). Often a bias to big lots having low unit cost.

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Issues in an Integrated Issues in an Integrated Supply ChainSupply Chain

Bullwhip effectBullwhip effect - stable demand at retail becomes uneven at manufacturer due to lag effects and over-compensation.

1. An Increase in demand causes short supply at retail

2. As orders move from retailer back through wholesalers to manufacturers the size of the order is increased by a ‘safety - buffer’ at each step.

3. This leads to overstocking and next time the orders are decreased slightly at each step.

4. The manufacturer gets wild fluctuations between orders.

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BullwhipBullwhip

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Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain Accurate “pull” data

Lot size reduction

Single stage control of replenishment

Vendor managed inventory (VMI)

Collaborative planning, forecasting, and replenishment (CPFR)

Blanket orders

Standardization

Postponement

Drop shipping and special packaging

Pass-through facility

Channel assembly

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E-ProcurementE-ProcurementMethods:

Online catalogs

1. by vendors

2. published by intermediaries

3. Exchanges provided by buyers

Trading Exchanges

Auctions

Alibaba – 80% of SME sourcing from China (?)

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E-ProcurementE-Procurement(other online functions)(other online functions)

Electronic ordering and funds transfer Electronic data interchange (EDI)

Advanced shipping notice

RFQs Can make requests for quotes (RFQs) less costly

Improves supplier selection

Real-time inventory tracking

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Vendor SelectionVendor Selection Vendor Evaluation

Can be a critical decision

Find potential vendors (use RFQ)

Ability to supply / relationship ‘fit’

Vendor Development (supply chain as competitive unit)

Training

Engineering and production help

Establish policies and procedures

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Vendor SelectionVendor Selection

Negotiations Cost-Based Price ModelCost-Based Price Model - supplier opens books

to purchaser

Market-Based Price ModelMarket-Based Price Model - price based on published, auction, or indexed price

Competitive BiddingCompetitive Bidding - used for infrequent purchases (eg one-off subcontracting) but may not help long-term relationship

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Logistics ManagementLogistics Management(think ‘whole supply chain’)(think ‘whole supply chain’)

Aim of logistics is to have costs effective and efficient

operations by integrating all material acquisition,

movement, and storage activities across whole supply

chain

Specialist service = often outsourced

Allows competitive advantage to be gained through

reduced costs and improved customer service

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Distribution SystemsDistribution Systems TruckingTrucking

expensive, flexible (any size, any location)

RailroadsRailroads

Cheap, large volume, railway investment, few locations

Airfreight

Very expensive, very fast, specialist goods only.

Waterways

Canals not common, useful for larger volume, weight. Intl shipping slow.

Pipelines

Fixed, suitable some products, usually not very long.

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Third-Party LogisticsThird-Party Logistics(allows business to focus on core activities)(allows business to focus on core activities)

Outsourcing logistics can reduce costs and

improve delivery reliability and speed

Coordinate supplier inventory with delivery services

May provide

warehousing,

assembly, testing,

shipping, customs