Supply chain management : Should we make or buy a component?

How many
suppliers should we have?

CONTENTS
• Supply-Chain Management
• Global Supply-Chain Issues
• Purchasing
• Supply-Chain Strategies
• Vendor Selection
• Materials Management

LEARNING OBJECTIVES
On the completion of this section, you should be able to:
• Identify and define Supply-Chain Management.
• Explain the role of the Purchasing Department.
• Evaluate whether to make or buy a product.
• Comment on Materials Management.
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SUPPLY-CHAIN MANAGEMENT

Supply chain is the sequence of the organizations – their facilities, functions and
activities – that are involved in producing and delivering a product or service as defined
by Stevenson (2006:503)

Heizer and Render (2006: 432) defines Supply chain management as the management
of activities that procure materials and services , transforming them into intermediate
goods and final products and delivering the products through a distribution system

Supply chian management according to Kruger and Ramphal( 2009:157) entails the
palnning , deisgn and control of all the information and material flowing along thw supply
chain to ensure that the customers needs and wants , in the presnt and future , will be
met in an effective and efficient manner.
as the
Supply-chain management is the integration of the activities that procure materials,
transform them into products and deliver them to the customer via a distribution system.
Supply-chain management includes:

• Transportation
• Credit and cash transfers
• Suppliers
• Distributors and banks
• Accounts payable and receivable
• Warehousing and inventory levels
• Order fulfillment
• Forecasting
• Production

As companies strive to improve their competitiveness, quality, cost reductions and

speed to market, they place added emphasis on supply-chain management. The key to
effective supply chain management is to make suppliers partners. Let’s examine how
supply-chain can support an organization’s overall strategy

Global Supply Chain Issues

Managemnt of supply chain is integral to an organisaition success. When companies

enter the global market, expanding their supply chains becomes a strategic challenge.
Distribution systems in certain countries may be inferior or unreliable. Additionally,
companies may be faced with tariff quotas. Furthermore, market instabilities, such as
the devaluation of the rand, are common in newly emerging industrial economies.
Heizer and Render (2006:433) suggests that supply-chains in a global environment
must be:
􀂾 Flexible enough to react to sudden changes in parts availability, distribution or
shipping channels, import duties and currency rates.
􀂾 Able to use latest computer and transmission technologies to manage the shipment of
parts.th
􀂾 Staffed with local specialists to handle duties, trade, freight, customs and political
issues.
The need of supply chain management is largely due to the following issues
1. The need to improve operations – due to increasing competitive pressue as well as
concepts of lean manufacturing, the focus has also moved as procurement ,
distribution and logistics.
2. Increase levels of outsourcing: ie buying goods or services instead of producing or
providing them.
3. Increasing transportation cost: Transportation costs are increasing and has to be
carefully managed.
4. Competitive pressure : this lead to newer products with shorter development life
cycles and increasing amount of customization.
5. Increasing globalization : The physical length of supply chains further complication
by cultural, language and currency differences.
6. Increasing importance of ebusiness: This has added anew dimension.
7. Complexity of supply chains: although complex, it has to be dynamic and deal with
variables in forecast,delivery issues, substandard quality, equipment breakdowns
and cancelled orders.
8. The need to manage inventories: is critical in the success or failure in supply chains.

PURCHASING - Purchasing can be defined as the acquisition of goods and services.

For both goods and services, the cost of purchases as a percent of sales is often
substantial. Since such a huge portion of revenue is devoted to purchasing, an effective
purchasing strategy is vital.
Purchasing provides a major opportunity to reduce costs and increase profit margins.
The objective of purchasing activity is:
􀂾 To help identify the products and services that can be obtained externally.
􀂾 To develop, evaluate and determine the best supplier, price and delivery for those
products and services.

Supply- Chain Economics:

The supply chain is a integral part of the organizations strategy, and is the most costly
part of most companies activities.

Make or Buy decisions:

This entails choosing between producing a component or service or purchasing it from
an outside source. The purchasing department’s role is to evaluate alternative suppliers
and provide current, accurate and complete data relevant to the buy alternative. The
table below highlights considerations for the make-or buy decision
Insert table

Outsourcing is defined as transfer

ring a firms activities that have traditionally been internal to external suppliers.

Oursouricng

SUPPLY CHAIN STRATEGIES:

There are certain stragtgies that have been recommended by Heizer and Render
(2006:438) to ensure effective control:

1. Many Suppliers
With the many-supplier strategy, the supplier responds to demands and specification of
a ‘request for quotation’, with the order usually going to the lowest bidder. This strategy
plays one supplier against another. Suppliers tend to compete aggressively with each
other. This approach holds the supplier responsible for maintaining the necessary
technology, expertise, quality, cost and delivery schedules.

2. Few Suppliers

A strategy of few suppliers implies that rather than looking for short-term attributes, such
as low cost, a buyer is better off forming a long-term relationship with a few dedicated
suppliers. Using few suppliers can create value by allowing suppliers to have
economies of scale. Few suppliers, each with large commitment to the buyer, may also
be more willing to participate in JIT systems, as well as provide innovations and
technological expertise.

3. Vertical Integration

This simply means developing the ability to produce goods or services previously
purchased or actually buying out (acquiring) a supplier or distributor. This strategy has
the advantage of improving research and development, quality and product flexibility.

4. Keiretsu Networks
Manufacturers sometimes offer financial support to their suppliers through loans. The
supplier then becomes part of the company coalition known as Keiretsu. Members of
Keiretsu are assured long-term relationships and are therefore to function as partners.

5. Virtual Companies

Virtual companies rely on a variety of supplier relationships to provide services on

demand. These companies have fluid, moving organizational boundaries that allow
them to create unique enterprises in order to meet changing market demands. These
relationships may provide a variety of vendor services such as doing the payroll,
recruiting personnel, designing products, providing consulting services, manufacturing
components, conducting tests or distributing products.
VENDOR SELECTION : is defined as a decision regarding from whom to buy goods or
services 2008:446 Hezier and Redner . A firm that decides to buy components rather
than make them, must select suitable vendors. Vendor selection considers numerous
factors, such as:
• Inventory and transportation costs
• Availability of supply
• Delivery performance
• Quality and reputation of suppliers
• Financial strength of the supplier
• Manufacturing range
• Technical assistance
• After-sales service
• Labour / trade relations
• Packaging
• Warranties and guarantees

1. Vendor evaluation invlolves potential vendors and determining the likelihood of

their becoming good suppliers. Longer term suppliers allow financial strength,
quality , management, research , technical ability , and potential for a close long
term relationship

1. Vendor development: may include everything from training , to engineering and

production help, to procedures for information transfer.
2. Negotiations: Approach taken by supply chain personnel to develop contractual
relationship with suppliers.

MATERIALS MANAGEMENT

Materials management is defined as “the function responsible for the coordination of planning,
sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to
provide a pre-decided service to the customer at a minimum cost”. Kumar and Suresh
(2009:161)
The purpose of materials management is to obtain efficiency of operations through the
integration of all material purchases, movement and storage activities. If transportation
and inventory costs are high, the emphasis should be placed on materials management.
Due to the high costs of moving materials, firms constantly evaluate their means of
distribution. Companies usually move materials through the following channels:

DISTRIBUTION SYSTEM

Road

Trucks are responsible for moving large amount of materials. Companies have put
pressure on trucking companies to ensure on time deliveries , with no damage to goods.
Trucking firms are using computer technology to monitor driving, weather patterns,
loading and unloading methods, reducing fuel consumption and finding the most
effective routes.

Rail

Containerisation has made inter-modal shipping of truck trailers on railroad flat cars a
popular means of distribution. With the growth of JIT, rail transportation has suffered a
setback because small-batch manufacturers require frequent, smaller shipments..

Airfreight
Seldom used because of the high cost. It is used mainly for national or international
movement of lightweight items such as medical and emergency supplies, flowers,
documents, etc. Airfreight offers speed and reliability.

Shipping
Shipping remains one of the oldest means of freight transportation. The usual cargo on
ships are bulky products such as iron-ore, grains, cement, coal, chemicals and
petroleum products.
Pipelines
Pipelines are an important form of transporting crude oil, natural gas and other
petroleum and chemical products.