Operations Strategy — Student Study Guide CHAPTERS 6 and 7 SUPPLY NETWORK RELATIONSHIPS, SUPPLY NETWORK BEHAVIOR Introduction Chapters 6 and 7 both examine what has become one of the most fashionable topics in management over recent years ~ supply chain or supply network management. And while many fashions in management decay rapidly, supply network concepts are likely to be influential in the long term. This is because the network concept has been particularly influential in developing our understanding of the scope and content of strategic action. Yet, as an idea, itis not all that novel. Many authors and academics over the last 30 or 40 years have emphasized that an organization's success depends on its relationships with other “actors” in its industry, whether those be suppliers, customers, partners or collaborators. The two chapters dealing with the these topics are (ina similar way to the capacity issue) divided into one that initially looks at supply networks from a static perspective, concentrating on the nature of the relationships between actors in the network. The other examines the more dynamic behavior of supply networks as they change both in the short term and long term. Key points Operations strategy changes over time It is useful to staut off by recognizing that supply network management is, of itself, still a controversial issue. Some people object to the term “management” in this context. They argue that the organization ends where its discretion ends and another begins. In other words, how can we manage the other actors in the network, they are beyond our control. Yet, even if this view is technically correct, it is certainly over pedantic. How can you manage anything or anybody for that matter? By “supply network management” we are fist of all attempting to understand how one company’s actions are influenced by its interactions with other players in the network and second, thinking about how we can influence other players in the network towards a set of specific ends. ‘Although neither chapter dwells on this issue, there is another point and a particularly important one, that needs to be understood. That is, supply network management has substantially reinforced the idea that operations management and strategy is an important subject. Think about it like this. At one time, in order to sell something to a customer, you simply extolled the virtues of the product or service you were trying to sell. Yet the vast majority of sales transactions (in terms of value at least) are from one company to another. Therefore, rather than say, “Buy my product or service, it’s better than anyone else’s”, it is perhaps more appropriate to say, “You are a business with an operation to run, Lam also a business who runs an operation, how can my operation help your operation fo run better?” Essentially this is an “operation-to-operation” transaction and in order toOperations Strategy — Student Study Guide make that transaction work the supplier operation must understand something about the customer operation. That is, in order to make a sale to another business you must be able to understand the operations management and operations strategy issues that it faces. Or put it another way, you can’t sell effectively unless you have the skills that enable you to analyze and understand your customers” operations. Types of relationship ‘© Chapter 6 uses the market requirements — operations resource distinction to define different types of relationships. In Vertical integration Traditional market relationships Partnership supply relationships Virtual relationships Vertical integration has become relatively unfashionable in recent years as organizations have been trying to stick to what they know best and ditch other activities. Yet, although pure vertical integration is rarely found in modern business, most organizations, at the margin, are still faced the decision as to whether to do certain activities themselves or alternatively outsource them. Therefore, just because vertical integration in its extreme form is unfashionable, the principles and decisions behind vertical integration are an every day concem of most businesses + Traditional market supply is the polar opposite of vertical integration. It means relying on the market to provide goods and services as and when they are needed A company which practiced traditional market supply would therefore have a large purchasing department that would continually be searching the market for the best value. Relationships will be probably short and certainly purely commercial. ‘© Partnership supply relationships are a method of trying to get the closeness of vertical integration without its complacency. Although partnership relationships have become very fashionable, Chapter 6 stresses the problems as well as the advantages of such relationships. It also makes the point that the level of trust required to maintain such relationships is often beyond the abilities (or indeed interests) of many organizations, Virtual relationships are not so much a type of supply network relationship, but rather a description of the extent to which a company relies on them. A pure virtual company has no resources of its own but buys in everything it needs. In its pure form one can imagine one person with a good internet connection and a telephone running an entire networkOperations Strategy — Student Study Guide Supply Network Behavior © One of the key points to understand about supply network behavior is that supply networks change over time. They always have, and they always will. In any particular industry sometimes the structure of supply networks changes quickly, at other times relationships between companies may remain stable for years. What is important is that any company understands when it is coming up to, or in the middle of, a period of change, and is able to work on the operations implications of that change. The best example of this (mentioned in Chapter 7) is the recorded music industry. At the time of writing it is still not clear in what way (if at all) the ability to download music over the Internet will change the nature and role of all the companies that make up the supply networks in that industry. * The second issue of supply network behavior which it is important to understand is that of network dynamics. By this we mean the way that specific supply chain or supply networks behave in the short to medium term. There are two ways of thinking about this issue © From a quantitative point of view — understanding the bull-whip effect. © Froma qualitative point of view ~ soft system dynamics. ‘There is a famous game, called “The Beer Game” which demonstrates this. It involves a “chain” of players, who initially are not allowed to talk to each other, placing orders on paper and moving products (barrels of beer, represented by coins or counters) down the line. It demonstrates how relatively small changes in market demand are amplified significantly further back up the chain, From an arithmetic point of view, this is demonstrated in the form of a simple four-stage chain in Chapter 7. It is worthwhile making sure that you understand the math used in this example. Talk to any operations manager who runs a business upstream in a supply chain and he or she will tell just how important this effect is. + Often, an equally important issue is the qualitative nature of supply chain behavior. This is illustrated in Chapter 7 by the gaps and mismatches that occur ‘between operations in a supply chain. Don’t dismiss this idea just because it is not demonstrated mathematically. In practice it can be equally, if not more, important as quantitative supply dynamics.Operations Strategy — Student Study Guide Hints on answering the Astec Component Supplies case exercise This case is really about risk. What risks does Astec face if it tums down the deal from Desron or if it accepts the deal? The obvious way forward is to try and identify the advantages and disadvantages of accepting or rejecting the Deston deal. Next, try and think of how you could reduce the downside effects of accepting or rejecting the deal should you choose to do so. Think about how the issue of “trust” applies in this case. Hints on answering the Zentrill case exercise This case is about how we can only understand the pressures on one operation by putting it in the context of its suppliers’ and customers’ operations The case provides us with an opportunity to look for, not only the relationships between the three operations described, but also how upstream and downstream relationships affect each other Use the soft supply network behavior model and its gaps to analyze the relationships between the players in this chain. In such circumstances it’s usually best to start at the demand end and work backwards through the chain,