Supply Chain

Management

MMM341/1

© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 References
• Dobler D.W. and Burt D.N. (1996)
“Purchasing and supply management: text
and cases 6th Edition”, McGraw Hill,
Singapore, ISBN 0-07-114144-8
• Hicks C., Earl C.F. and McGovern T.
(1999) “Supply Chain Management: a
Strategic Issue in Engineer-to-Order
Manufacturing”, International Journal of
Production Economics 65(2) pp179-190

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 “A 5% reduction in
costs can have the same
effect on the bottom line
as a 25% increase in
turnover”

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Drivers

Companies in all sectors are seeking ways to:

• reduce costs
• shorten product development times
• manage risk.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Supply Chains

There are two types of supply chain:

• External supply chain - involving other
companies. Supply chain management
involves relationships with: the customer
through marketing and sales; and with
suppliers through the procurement
function.
• Internal supply chain - involving
functions / departments / business units
within the organisation.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Supply Chains
The transactions in supply chains are
characterised by:
• adding value up through the chain
• incurring costs (and consequent payments)
down the chain.
A market economy can be viewed in terms of
competing supply chains. Many sectors
have therefore focused on reducing waste
in the supply chain as a whole e.g.
automotive industry, CRINE in the oil
industry.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
Types of supply chain relationship

• Single stage - sourcing standard items for

steady state production
• Double stage - tendering stage, followed
by contract execution stage. May involve
significant engineering activity and the
development of conceptual designs.
Probability of success often low <30%

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Supply Chain Management
Aims

• Reduction of costs
• Reduction of lead times
• Reduction in transactions
• Release of value
• Ensuring appropriate quality

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Trends

• Outsourcing of non-core activities to

suppliers
• Focusing of operations
• A reduction in supply base as companies
shift from multiple to single sourcing
• Long-term buyer supplier relationships.
• Partnerships rather than adversarial trading
The outcome of these changes are that
companies are establishing new
relationships with their suppliers.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Traditional model

• Adversarial arms-length trading.

• Buyers defined production and process
specifications.
• Components were obtained from multiple
sources.
• Little information was disclosed to
suppliers on technologies, processes and
production targets
• Price competition was the primary
criterion on which contracts were awarded.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Multi-sourced trading

• Characterised by win-lose transactions and

mutual mistrust
• Multiple sourcing constitutes a strategy for
reducing purchasing uncertainty.
• Moving towards single sourcing
partnership arrangements can be frustrated
by long-term adversarial attitudes.
• Cultural change, the absence of trust and
the prevalence of opportunism are major
barriers to change in buyer-supplier
relationships.

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University of Newcastle upon Tyne
 Evolution of partnership models
• Adversarial relationships proved counter
productive to both parties.
• By 1980’s a partnership model was being
adopted to reduce costs, resolve scheduling
problems and other technical difficulties.
• Strategic change was required to
implement total quality principles and JIT.
• The partnership, or obligational model, is
characterised by close operational and
strategic links between buyer and supplier;
the provision of technical and managed
assistance to suppliers and the
establishment of preferred supplier status
or single sourcing agreements.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Outsourcing opportunities
• Strategic benefits of outsourcing to best-in-
class suppliers
• Greater flexibility in the purchase of
rapidly developing new technologies
• A reduction in design cycle times
• Higher quality
• Cost advantages due to higher volume
production
• Risk is transferred to the supplier
• Less capital is required as the requirement
for investment is transferred to the
supplier. This is a major driver for
companies aiming to optimise ROCE.
• Technology critical to success should not
be outsourced.
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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Power Relationships

• In many cases “collaborative”

relationships are underpinned by strong
buyer control, enforced through vetting
and monitoring
• Powerful buyers impose terms on weaker
dependent suppliers (e.g. supermarkets)
• Research has concentrated upon focal
producers able to exert a significant degree
of control over smaller suppliers (e.g.
automotive companies)
• Other sectors such as engineer-to-order,
low volume manufacture may have
different power relationships.

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University of Newcastle upon Tyne
 Core Activities

Core activities can be interpreted in several

ways:
• an activity traditionally performed
internally;
• critical to business performance
• creating current or potential competitive
advantage
• driving future growth, innovation or
rejuvenation of the enterprise.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Common doubts
• Research suggests that adoption of new
practices is piecemeal and concentrated in
particular sectors e.g. automotive and
electronics industries.
• Even in leading-edge companies mistrust
between buyers and suppliers has been
found to be prevalent
• There have been difficulties experienced in
establishing tiered systems of component
supply.
• Many companies have struggled to
implement JIT
• Despite the importance of quality and
delivery, price and cost are still the main
determinant of contract awards
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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Comments
• Large batch and flow line systems
generally exhibit the characteristics of
standardisation of products, repetitive
manufacturing and assembly processes that
are necessary to allow the full application
of JIT techniques.
• Some techniques such as supplier quality
certification and point of use delivery may
far broader applicability.
• Development of partnership relationships
may require a significant volume of
business.
• The impetus for product development may
reside with either the buyer or the supplier.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Traditional Purchasing

Traditionally the purchasing function was

evaluated in terms:
• The purchase price of materials.
• The ability to “keep production running”
• The cost of the Purchasing Department’s
operation
It was often a reactive clerical function that
responded to requests from other business
functions such as engineering or
production.

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne
 Current Perspective
World-class companies expect supply chain
management to focus on the following
value adding outputs:
• Quality – purchased materials and services
should be virtually defect free. Many
defects can be traced back to bought in
items.
• Cost – minimisation of total cost of
acquiring, transporting, holding,
converting items as well as quality costs.
• Time – need to minimise time to market
for new products as well as minimising
lead-times to increase flexibility.

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University of Newcastle upon Tyne
 Current perspective (continued)

• Technology - ensuring that the firm’s

supply base provides appropriate
technology in a timely manner; ensuring
that technology associated with core
competence is carefully controlled.
• Continuity of supply - need to reduce risk
of supply disruptions. These may have
impact on other functions (aluminium vs
carbon fibre reinforced plastics in the
aerospace industry). May involve the
development of alliances.

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University of Newcastle upon Tyne
 Strategic Focus
• Integration - the firm’s supply chain
strategy should be integrated with
marketing, production and financial
strategies.
• Business environment - supply chain must
address the identification of threats and
opportunities (with particular reference to
suppliers and customers).
• Technology - access and control, avoid
turning suppliers into competitors.
• Information systems - need timely,
accurate and cost effective transfer of
information with buyers and suppliers (e.g.
electronic data interchange).

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University of Newcastle upon Tyne
 Strategic focus (cont.)
• Value chain - need to ensure that the value
chain of which the company is a part is
competitive (e.g. careful management of
margins through the supply chain)
• ABC analysis - concentrate on high value
items - decentralise decision making for
low value items.

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University of Newcastle upon Tyne
 Major Developments

• Cross functional teams - engineering,

procurement, marketing, tendering,
accounting
• Supply chains - management and
development to ensure competitiveness
• Partnerships and alliances - relationships
may be either mutually beneficial open
relationships or the creation of a separate
legal entity called a joint venture (e.g.
capital goods for the oil industry).

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© Dr. C.Hicks, MMM Engineering

University of Newcastle upon Tyne