SUPPLY-CHAIN STRATERIES

For goods and services to be obtained from outside sources, the firm must decide on a supply
chain strategy.
1. The approach of negotiating with many suppliers and playing one supplier against another.
2. Develop long-term “partnering” relationships with a few suppliers to satisfy the end customer.
3. Vertical integration, in which a firm decides to use vertical backward integration by actually
buying the supplier.
4. Some type of collaboration that allows two or more firms to combine resources-typically in what
is called a joint venture-to produce a component.
5. Combination of few suppliers and vertical integration, known as a keiretsu. In a keiretsu,
suppliers become part of a company coalition.
6. Develop virtual companies that use suppliers on an as-needed basis.

MANY SUPPLIERS
With the many-suppliers strategy, a supplier responds to the demands and specifications of a
“request for quotation” with the order usually going to the low bidder. This is a common strategy when
products are commodities. This approach holds the supplier responsible for maintaining the necessary
technology, expertise, and forecasting abilities, as well as cost, quality, and delivery competencies.

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. Long-term
suppliers are more likely to understand the broad objectives of the procuring form and the end
customer. Using few suppliers can create value by allowing suppliers to have economies of scale and a
learning curve that yields both lower transaction costs and lower production costs.
Few suppliers. Each with large commitment to the buyer, may also be more willing to participate
in JIT systems as well as provide design innovations and technological expertise.
Like all strategies, a downside exists. With few suppliers, the cost of changing partners is huge,
so both buyer and supplier run the risk of becoming captives of the other. Poor supplier performance in
only one risk the purchaser faces. The purchaser must also be concerned about trade secrets and
suppliers that make other alliances or venture out on their own.

VERTICAL INTEGRATION
Vertical integration means developing the ability to produce goods or services previously
purchased or to actually buy a supplier or a distributor. Vertical integration can take the form of forward
or backward integration.
Backward integration suggests a firm purchase its suppliers. Forward integration, on the other
hand, suggests that a manufacturer of components make finished product.
Vertical integration can offer a strategic opportunity for the operations manager. For firms with
the capital, managerial talent, and required demand, vertical integration may provide substantial
opportunities for cost reduction, quality adherence, and timely delivery. Other advantages, such as
inventory reduction and scheduling, can accrue to the company that effectively manages vertical
integration or close, mutually beneficial relationships with suppliers.
Because purchased items represent such a large part of the costs of sales, it is obvious why so
many organization find interest in vertical integration. Vertical integration appears to work best when
the organization has large market share and the management talent to operate an acquired vendor
successfully.
JOINT VENTURES
Because vertical integration is so dangerous, firms for some form of formal collaboration. Firms
may engage in collaboration to enhance their new product prowess or technological skills. But firms also
engage in collaboration to secure supply or reduce costs. As in all collaborations, the trick is to
cooperate without diluting the brand or conceding a competitive advantage.

KEIRETSU NETWORKS
This is a strategy found by many large Japan manufacturers; part collaboration, part purchasing
from new suppliers, and part vertical integration. These manufacturers are often financial supporters of
suppliers through ownership or loans. The supplier becomes part of a company coalition known as a
keiretsu. Members of the keiretsu are assured long-term relationships and are therefore expected to
collaborate as partners, providing technical expertise and stable quality production to the manufacturer.
Members can also have suppliers farther down the chain, making second- and even third-tier suppliers
part of the coalition.

VIRTUAL COMPANIES
Virtual companies rely on a variety of supplier relationships to provide services on demand.
Virtual companies have fluid, moving organizational boundaries that allow them to create a unique
enterprise to meet changing market demands. Suppliers may provide a variety of services that include
doing the payroll, hiring personnel, designing products, providing consulting services, manufacturing
components, conducting tests, or distributing products. The relationships may be short or long term and
may include true partners, collaborators, or simply able suppliers and subcontractors. The advantages of
virtual companies include specialized management expertise, low capital investment, flexibility, and
speed. The result is efficiency.
In virtual company, the supply chain is the company. Managing it is dynamic and demanding.

MANAGING THE SUPPLY CHAIN

As managers move toward integration of the supply chain, substantial efficiencies are possible.
The cycle of materials-as they flow from suppliers, to production, to warehousing, to distribution, to the
customer-takes place among separate and often very independent organizations. Therefore, there are
significant management issues that may result in serious inefficiencies.

How to achieve success?

 Mutual Agreement on Goals. Partners in the chain must appreciate that the only entity that
puts money into a supply chain is the end customer. Therefore, establishing a mutual
understanding of the mission, strategy, and goals of participating organizations is essential. The
integrated supply chain is about adding economic value and maximizing the total content of the
product.
 Trust. Trust in critical to an effective and efficient supply chain. Members of the chain must
enter into a relationship that shares information. Visibility throughout the supply chain is a
requirement. Supplier relationships are more likely to be successful if risk and cost savings are
shared-and activities such as customer research, sales analysis, forecasting, and production
planning are joint activities. Such relationships are built on mutual trust.
 Compatible Organizational Cultures. A positive relationship between the purchasing and
supplying organizations that comes with compatible organizational cultures can be a real
advantage when making a supply chain hum. A champion within one of the two firms promotes
both formal and informal contracts, and those contracts contribute to the alignment of the
organizational cultures, further strengthening the relationship.
BENCHMARKING OF SUPPLY CHAIN MANAGEMENT (MEASURING SUPPLY-CHAIN PERFORMANCE)
Like all managers, supply-chain managers require standards (or metrics, as they are often called)
to evaluate performance. Evaluation of the supply chain is particularly critical for these managers
because they spend most of the organization’s money. In addition, they make scheduling and quantity
decisions that determine the assets committed to inventory. Only with effective metrics can managers
determine: (1) how well the supply chain is performing and (2) the assets committed to inventory.

Supply-Chain Performance. This benchmark metrics focus on procurement and vendor performance
issues. World-class benchmarks are the result of well-managed supply chains that drive down costs, lead
times, late deliveries, and shortages while improving quality.

Typical Firms Benchmark Firms

Lead time (weeks) 15 8
Time spent placing an order 42 minutes 15 minutes
Percent of late deliveries 33% 2%
Percent of rejected material 1.5% .0001%
Number of shortages per year 400 4

Assets Committed to Inventory. Three specific measures can be helpful here. The first is the amount of
money invested in inventory, usually expressed as a percentage of assets.

Percentage invested in inventory = (Total inventory investment/Total assets) X 100

Example:

Home Depot’s management wishes to track its investment in inventory as one of its performance
measures. Home Depot had P11.4 billion invested in inventory and total assets of P44.4 billion in
2019.

APPROACH – determine the investment in inventory and total assets and then he Equation
SOLUTION – percent invested in inventory = (11.4/44.4) X 100 = 25.7%
INSIGHT – over one-fourth of Home Depot assets are committed to inventory
LEARNING EXERCISE – If Home Depot can drive its investment down to 20% of assets, how much
money will it free up for other uses? [Answer: 11.4 – (44.4 X .2) = P2.52 billion]

The second common measure of supply chain performance is inventory turnover. Inventory
turnover is computed on an annual basis, using this equation:

Inventory turnover = Cost of goods sold/Inventory investment

Cost of goods sold is the cost to produce the goods and services sold for a given period.
Inventory investment is the average inventory value for the same period. This may be the average of
several periods of inventory of beginning and ending inventory added together and divide by 2.
Example:

PepsiCo, Inc., manufacturer and distributor of drinks, Frito-Lay and Quaker Foods, provides the
following in its 2018 annual report. Determine PepsiCo’s turnover.

Net revenue P32.5

Cost of goods sold P14.2
Inventory:
Raw materials inventory P.74
Work-in-process inventory P.11
Finished goods inventory P.84
Total inventory investment P1.69

APPROACH – use the inventory turnover computation to measure inventory performance.

SOLUTION – Inventory turnover = Cost of goods sold/Inventory investment
= 14.2/1.69
= 8.4
INSIGHT – We now have a standard, popular measure by which to evaluate performance.

The reciprocal of inventory turnover, which is the weeks of supply, is the third common measure
of supply chain performance.

Weeks of supply = Inventory investment/(Annual cost of goods sold/52 weeks)

Supply-chain management is critical in driving down inventory investment. The rapid movement
of good is key. Supply-chain management provides a competitive advantage when firm effectively
respond to the demands of global markets and global sources.

THE SCOR MODEL

In addition to the metrics presented above, the Supply-Chain Council (SCC) has developed 200
process elements, 550 metrics, and 500 best practices. The SCC is a 900-member not-for-profit
association for the improvement of supply-chain effectiveness. The council has developed the five-part
Supply-Chain Operations Reference (SCOR) model. The five parts are Plan, Source, Make, Deliver, and
Return.
The council believes the model provides a structure for its process, metrics, and best practices
to be:
1. Implemented for competitive advantage
2. Defined and communicates precisely
3. Measured, managed, and controlled
4. Fine-tunes as necessary to a specific application