Supply Chains

3.4 Decision making to improve financial performance

 What you need to know

• What are suppliers and the “supply

chain”?
• Factors influencing the choice of
suppliers
• How to manage a supply chain
effectively
Suppliers & Supply Chains Link Closely With

Capacity Unit Costs

Economies of
Working Capital
Scale

Suppl
Inventory
Management
y Outsourcing

Chains
 What is a Supplier?

A business or individual
that provides goods
and services to another
business
 Suppliers - Examples

Example Business Typical Suppliers

Food manufacturer Raw materials
Energy (electricity, gas, light)
Fashion retailer Suppliers of garments
(wholesalers)
Landlord (shop lease)
Online publisher Authors
Web host & website designers
Supply Chain – Simple Example
 Supply Chain – Complex Example
Publishing a Magazine

Origination Publishing Manufacture Distribution Retail

Primary Activities

Originating of Commission and Printing and Warehousing, Purchasing

content acquisition of reproduction stock control and Stock Management
content delivery to the
points of sale POS, display and
Co-ordination of
(“POS”) marketing
design production
and promotion
Control of content
rights

Support Activities
Procurement: Editorial management; sourcing writers
Human Resources: Recruiting, rewarding, developing, firing
Technology: Publishing design software & associated hardware; maintenance of content archive; online
Infrastructure: Organisational design, finance, general management
 Why Suppliers are Important

• For a business to meet the needs and wants of

customers, it needs an effective “supply chain”
• Suppliers determine many of the costs of a
business (e.g. raw materials, distribution)
• Suppliers are closely linked to product quality
• Suppliers can be an important source of finance
to a business (trade credit)
• For businesses that use lean production
techniques, effective relationships with key
suppliers are essential
 What Makes an Effective Supplier?

Factor Characteristics of an Effective Supplier

Price Often considered the most important; value for money is
crucial
But, lowest price not necessarily the best value – depends on
quality
Quality Consistently high quality; the right product at the right time

Reliability Delivers the correct product on time

Goods and services work as described
Communication Easy to communicate with supplier – e.g. place orders,
develop trading relationship
Financially Long-term trading relationship requires supplier to stay in
secure business! Also more likely to offer better payment terms
Capacity Ability to handle increased volumes of supply, perhaps at short
notice
 Importance of Supplier Price

• Textbooks like to emphasise importance of

non-price factors (e.g. reliability, quality,
location)
• But suppliers must offer a competitive price
(value for money)
• Supplier prices can be pushed lower by:
– Grouping purchases with fewer suppliers (use
bargaining power to get lower price)
– Ensuring suppliers compete against each other for
regular orders
 Strategic versus Commodity Suppliers

• Some suppliers are strategically crucial to a

business
• Strategic = the business cannot succeed without
maintaining an effective supplier relationship.
These goods and services are crucial to
business success
• Other suppliers can be regarded as “Commodity
Suppliers” – they provide goods and services
that can easily be bought elsewhere and which
are not hugely important to the business.
 Example – Strategic v Commodity

Example Business Strategic Suppliers Commodity

Suppliers
Car manufacturer Car components Office stationery
Energy Magazines
(advertising)

National chain of fast Local fresh produce Shop cleaning

food sandwiches Product distribution Refuse collection

UK-wide car hire Vehicle suppliers Office water coolers

company IT systems Head office
photocopiers
Suppliers & Better Business Performance

Lower purchase Better prices from a supplier lower the

costs costs of a business
Better quality Crucial for a business to satisfy customers
Improved E.g. fewer late deliveries
customer service
Increased E.g. fewer production delays, less
productivity wastage (lean production)
More flexible E.g. ability of a business to work with
capacity suppliers to meet sudden increase in
demand
 Suppliers and Cash Flow

• Managing suppliers is linked to managing cash

flow
• Trade credit = where a business buys goods and
servicers from a supplier and pays for them later
(e.g. 60 days)
• Extending trade creditor terms is a way of
improving cash flow (delays cash outflows)
• However, extending trade credit too far risks
damaging supplier relationships