Supply Chain Management

Overview

Impact of SCM on Operations Strategy

Supply Chain Risk

SCM Strategies

Make or Buy decision

Outsourcing

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 Supply Chain Economics
Supply Chain Costs as a Percent of Sales

Industry % Purchased
All industry 52
Automobile 67
Food 60
Lumber 61
Paper 55
Petroleum 79
Transportation 62

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Supply Chain Management
Supply chain management is the integration of
the activities that procure materials and
services, transform them into intermediate
goods and final products, and deliver them
through a distribution system

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 Supply-Chain Management

The objective is to build a chain of suppliers that

focuses on maximizing value to the ultimate customer

Competition is no longer between companies; it is

between supply chains

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 How Supply Chain Decisions
Impact Strategy
Low-Cost Strategy Response Strategy Differentiation
Strategy

Supplier’s Supply demand at Respond quickly to Share market

goal lowest possible changing research; jointly
cost (e.g., requirements and develop
Emerson demand to products and
Electric, Taco minimize options (e.g.,
Bell) stockouts (e.g., Benetton)
Dell Computers)

Primary Select primarily for Select primarily for Select primarily for
selection cost capacity, speed, product
criteria and flexibility development
skills

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 How Supply Chain Decisions
Impact Strategy
Low-Cost Strategy Response Strategy Differentiation
Strategy
Process Maintain high Invest in excess Modular
charact- average capacity and processes that
eristics utilization flexible lend themselves
processes to mass
customization

Inventory Minimize Develop Minimize inventory

charact- inventory responsive in the chain to
eristics throughout the system with avoid
chain to hold buffer stocks obsolescence
down cost positioned to
ensure supply

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 How Supply Chain Decisions
Impact Strategy
Low-Cost Strategy Response Strategy Differentiation
Strategy
Lead-time Shorten lead time Invest aggressively Invest
charact- as long as it to reduce aggressively to
eristics does not production lead reduce
increase costs time development
lead time

Product- Maximize Use product Use modular

design performance designs that lead design to
charact- and minimize to low setup time postpone
eristics costs and rapid product
production ramp- differentiation as
up long as possible

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 Supply Chain Risk

❑ More reliance on supply chains means more risk

❑ Fewer suppliers increase dependence

❑ Compounded by globalization and logistical

complexity

❑ Vendor reliability and quality risks

❑ Political and currency risks

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 Supply 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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 Supply Chain Strategies :
Many Suppliers
❑ Commonly used for commodity products

❑ Purchasing is typically based on price

❑ Suppliers compete with one another

❑ Supplier is responsible for technology,

expertise, forecasting, cost, quality, and
delivery

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 Supply Chain Strategies :
Few Suppliers
❑ Buyer forms longer term relationships with fewer
suppliers

❑ Create value through economies of scale and

learning curve improvements

❑ Suppliers more willing to participate in JIT programs

and contribute design and technological expertise

❑ Cost of changing suppliers is huge

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 Supply Chain Strategies :
Vertical Integration

Vertical Integration Examples of Vertical Integration

Raw material
Iron ore Silicon Farming
(suppliers)

Backward
Steel
integration

Current Integrated
Automobiles Flour milling
transformation circuits

Distribution
Forward integration Circuit boards
systems

Finished goods Computers

(customers) Dealers Watches Baked goods
Calculators

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 Supply Chain Strategies :
Vertical Integration

❑ Developing the ability to produce goods or service

previously purchased

❑ Integration may be forward, towards the customer,

or backward, towards suppliers

❑ Can improve cost, quality, and inventory but

requires capital, managerial skills, and demand

❑ Risky in industries with rapid technological change

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 Supply Chain Strategies :
Joint Ventures

❑ Formal collaboration
❑ Enhance skills

❑ Secure supply

❑ Reduce costs

❑ Cooperation without diluting brand or

conceding competitive advantage

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 Supply Chain Strategies :
Keiretsu Networks
❑ A middle ground between few suppliers and vertical
integration

❑ Supplier becomes part of the company coalition

❑ Provide financial support for suppliers through

ownership or loans

❑ Long-term relationships and provide technical

expertise and stable deliveries

❑ Extend through several levels of the supply chain

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 Supply Chain Strategies :
Virtual Companies
❑ Rely on a variety of supplier relationships to
provide services on demand

❑ Fluid organizational boundaries that allow the

creation of unique enterprises to meet
changing market demands

❑ Exceptionally lean performance, low capital

investment, flexibility, and speed

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 Managing the Supply Chain

❑ Mutual agreement on goals

❑ Trust

❑ Compatible organizational cultures

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 E-Procurement
❑ Uses the internet to facilitate purchasing

❑ Electronic ordering and funds transfer

❑ Electronic data interchange (EDI)

❑ Advanced shipping notice

❑ Online catalogs

❑ Catalogs provided by vendors

❑ Catalogs published by intermediaries

❑ Exchanges provided by buyers

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 Vendor Selection
❑ Vendor evaluation

❑ Critical decision

❑ Find potential vendors

❑ Determine the likelihood of them becoming good

suppliers

❑ Vendor Development

❑ Training

❑ Engineering and production help

❑ Establish policies and procedures

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 Vendor Evaluation
Scores Weight x
Criteria Weights (1-5) Score
Engineering/research/innovation skills .20 5 1.0
Production process capability .15 4 .6
(flexibility/technical assistance)
Distribution/delivery capability .05 4 .2
Quality systems and performance .10 2 .2
Facilities/location .05 2 .1
Financial and managerial strength .15 4 .6
(stability and cost structure)
Information systems capability (e- .10 2 .2
procurement, ERP)
Integrity (environmental compliance/ .20 5 1.0
ethics)
Total 1.00 3.9
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 Vendor Selection
❑ Negotiations

❑ Cost-Based Price Model - supplier opens

books to purchaser

❑ Market-Based Price Model - price based on

published, auction, or indexed price

❑ Competitive Bidding - used for infrequent

purchases but may make establishing long-
term relationships difficult

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 Logistics Management
◆ Objective is to obtain efficient
operations through the integration of all
material acquisition, movement, and
storage activities

◆ Is a frequent candidate for outsourcing

◆ Allows competitive advantage to be

gained through reduced costs and
improved customer service
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 Outsourcing Logistics

◆ Outsourcing logistics can reduce costs and

improve delivery reliability and speed

◆ Coordinate supplier inventory with delivery

services

◆ May provide
warehousing,
assembly, testing,
shipping, customs

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 Measuring Supply-Chain
Performance
Benchmark
Typical Firms Firms

Lead time (weeks) 15 8

Time spent placing an order 42 minutes 15 minutes

Percentage of late deliveries 33% 2%

Percentage of rejected material 1.5% .0001%

Number of shortages per year 400 4

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 Make-or-Buy Decisions

Choice between internal production

and external sources

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 Outsourcing
❑ Transfers traditional internal activities and
resources of a firm to outside vendors

❑ Utilizes the efficiency that comes with

specialization

❑ Firms outsource information technology,

accounting, legal, logistics, and production

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 Outsourcing :
Theory of Comparative Advantage

Comparative advantage is an economy's ability to produce a

particular good or service at a lower opportunity cost than its trading
partners. The theory of comparative advantage introduces
opportunity cost as a factor for analysis in choosing between
different options for production’

Therefore, if an external outsourcing provider can perform activities

more productively than the client firm, the outsourcing provider
should do the work

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 Risks of Outsourcing
Outsourcing Examples of
Process Possible Risks
Identify non-core Can be incorrectly identified as a
competencies non-core competency
Identify non-core activities Just because the activity is not a
that should be outsourced core competence for your firm does
not mean an outsource provider is
more competent and efficient

Identify impact on existing May fail to understand the change

facilities, capacity, and in resources and talents needed
logistics internally

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 Risks of Outsourcing
Outsourcing Examples of
Process Possible Risks
Establish goals and draft Goals can be set so high that
outsourcing agreement failure is certain
specifications

Identify and select Can select the wrong outsource

outsource provider provider

Negotiate goals and Can misinterpret measures and

measures of outsourcing goals, how they are measured, and
performance what they mean

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 Risks of Outsourcing
Outsourcing Examples of
Process Possible Risks
Monitor and control current May be unable to control product
outsourcing program development, schedules, and quality

Evaluate and give feedback May have non-responsive provider

to outsource provider (i.e., one that ignores feedback)

Evaluate international County’s currency may be unstable, a

political and currency risks country may be politically unstable, or
cultural and language differences may
inhibit successful operations

Outsourcing Examples of
Process Possible Risks
Evaluate coordination May not understand the timing
needed for shipping and necessary to manage flows to different
distribution facilities and markets

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Advantages of Outsourcing

❑ Cost savings

❑ Gaining outside experience

❑ Improving operations and service

❑ Focusing on core competencies

❑ Gaining outside technologies

❑ Other advantages

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 Disadvantages of Outsourcing

❑ Increased transportation costs

❑ Loss of control

❑ Creating future competition

❑ Negative impact on employees

❑ Longer-term impact

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