CHAPTER

4
 Talabo
Antolihao, Matugas

Member of the group

 1. discuss the components of supply chain
management;
2. define and explain the importance of
inventory management;
3. contrast manufacturing from assembly;
4. examine the interrelationships of the
sequential processes of the logistics circle;
5. assess the different popular competitive
strategies;
6 distinguish the role of innovation as a
competitive strategy; and
7 explain why companies opt to implement
stability or retrenchment strategies.
 Because of the volatility of the environment, business survival has become more
challenging than ever. There is a greater demand for an honest review of functional
activities and development of a proactive mindset through various strategic modes
of growth and competitiveness. Realignment, enhancement, reinventing,
strategizing, and refocusing have become more imperative to any organization. In
this chapter, we will discuss value chain analysis and the different types of business
strategies. These include growth strategies, competitive strategies, life cycle
strategies, stability strategies, and turnaround strategies.
As global markets widen, businesses have to pay closer attention to where their raw
materials come from, how they are produced, how finished products are stored and
transported, and what their end products users are really asking for. The main business
definition of any organization is to produce goods or render services, and to achieve these
set goals and objectives, it engages in a series of activities. If an organization wants to be
profitable, it has to sell value to its buyers-value that is worth paying for. Thus, the whole
concept of value chain analysis comes to the picture. Value chain is a general term that
refers to a sequence of interlinked undertakings that an organization operating in a
specific industry engages in. It looks at every phase of the business from the time of
procurement of raw materials to the time its products reaches its eventual end users or
consumers. The value chain concept is concretized in supply chain management. Here,
value creation is greatly emphasized.
Supply Chain
management
SUPPLY CHAIN MANAGEMENT
Supply chain management is a broad continuum of specific activities employed by a
company. It consists of the following

•purchasing or supply management which includes the sourcing, ordering, and inventory
storing of raw materials, parts, and services
•production and operations, also known as manufacturing and assembly:
•logistics which is the efficient warehousing inventory tracking order entry,
management, distribution and delivery to customers: and
•marketing and sales which includes promoting and selling to customers.
 Figure 4.1 Supply Chain Management
Logistics
•Warehouse
•Scheduling
Supply Management •Transportation
• Sourcing and ORGANIZATI
•Delivery
Ordering ON
• Inventory
Management

Marketing & Sales

Production/ Operations •Promotion
•Manufacturing •Selling
•Assembly
Supply management is now a popular term used for purchasing which
was formerly termed as procurement. It is a key business function that
is responsible for: (1) identifying material and service needs; (2)
locating and selecting suppliers; negotiating and closing contracts; (3)
acquiring the needed materials, services, and equipment; (4)
monitoring inventory stock keeping units; and (5) tracking supplier
performance.
In this stage, it is important to create “value” by establishing and managing supplier
relationships, identifying strategic sources, accurately forecasting demand
requirements, and understanding inventory management. Thus, the goal of supply
management is to obtain the right materials by meeting quality requirements in the
right quantity, for delivery at the right time and the right place, from the right source,
with the right service, and at the right price. In addition, supply management
objectives include improving the organization’s competitive position, providing
uninterrupted flow of materials, supplies, and services, keeping inventory and loss at a
minimum, maintaining and Improving quality, finding best-in-class suppliers,
purchasing at lowest total costs, and achieving harmonious relations with suppliers.
Following are the steps to take when an
organization needs to source out raw
materials or parts.
1. Specify the need clearly by writing down
the details. Normally, the stock keeping unit
(SKU) is coded with brief but complete
details like date, identification number, the
originating department, the account to be PENYEBAB
charged, complete description of the raw
materials /service, date needed, any special
instruction, and signature of authorized
DAMPAK
person making the request. PENANGGULANGA
N
2. Identify and analyze possible sources of supply. Generally,
more than one supplier should be considered. The criteria for
choosing suppliers are sound business sense and attitude, good
record of accomplishment, sound financial base, suitable
technical capability, quality orientation, customer service
mentality, and effective logistical arrangements.

A. Use a Request for Quotation when the need is clear, the PENYEBAB
commodities are in constant use, and quotations are easily
obtainable. DAMPAK
B. Use a Request for Proposal when the buyer has complex
requirements and plans to use negotiation to determinePENANGGULANGA
price and
terms. N
C Lastly, use a Request for Bid when the desire is a competitive
bid process.
3. Ask potential suppliers for their respective quotations,
proposals, and bids. PENYEBAB
DAMPAK
4. Compare and evaluate submitted documents, then select the
suppliers. Both buyers and suppliers agree and determine the
PENANGGULANGA
terms of the contract. Correspondingly, the negotiated order
placements follow. N
 5. Prepare, place, follow up, and expedite the purchase order (PO).
The purchase order is a written requisition placement to purchase
supplies
PENYEBAB
6. Confirm that the order placed has actually arrived in good
condition and at the quantity. Forward the shipment to its
DAMPAK
destination, properly document and register the receipt, and forward
it to the accepting party/parties.
7. Lastly, invoice clearing and payment follows. PENANGGULANGA
N
In sourcing and ordering, value is generated
when supplier relationships are created and
managed in delivering quality products,
delivering on time, delivering at competitive
prices, providing good service back-up when
needed, and keeping promises.
 Another facet of supply management is inventory management. The role of
inventory is to buffer uncertainty. It includes all purchased materials and goods,
partially completed materials and component parts, and finished goods. There are
four broad categories of inventories.
1. All unprocessed purchased input or raw materials for
manufacturing. Companies purchase supplies for any of the following
reasons: to avail of quantity discounts, to anticipate future price
increases, to safeguard against supplier problems, to minimize
transportation costs, and to avoid supply shortage.
2. Work-in-process (WIP)
3. Finished goods include all completed products for shipment.
4. Maintenance, repair, and operating supplies (MRO) include the
materials and supplies used when producing the products but are not
parts of the products.
Inventory management is ordering the right quantity of SKUs at minimum inventory
costs. Inventory cost is the sum total of ordering costs and carrying costs. Ordering costs
(set-up costs) are variable costs associated with placing an order with the supplier like
managerial and clerical costs in preparing the purchase, while carrying costs (holding
costs) are costs incurred for holding inventory in storage like handling charges,
warehousing expenses, insurance, pilferage, shrinkage, taxes, and costs of capital.
The inventory model answers two questions: how much to order?” and “when to order?” . The
question how much to order, is answered by determining the economic order quantity (EOQ). E
seeks to determine The seeks to determine an optimal order quantity where the sum of the annua
order cost and annual carrying cost is minimized.On the other hand, the question, when to order
answered by computing for the reorder point (RP).

The application of the EOQ Model presupposes that the following are known and constant:
demand, order lead time, price, carrying cost, and ordering cost. Likewise this model assumes th
replenishment is instantaneous and stock outs. Lead time refers to the span of time (in days) it
takes for a stock to be delivered from the time it was ordered, while instantaneous replenishmen
is delivery of stocks all at the same time.
The value of inventory Management is evidently reflected in the minimization of costs.
This is achieved when organizations develop efficient ways of procuring their raw
materials like accurately forecasting demand and ordering in bulk to avail of quantity
discounts. Reduction in carrying costs lower handling costs, storage expenses, and costs
of capital. Optimum ordering of stocks increases efficiency while scheduled purchases
contribute to a decrease in inventory costs.
.
Toyota, for example, espouses the concept of just-in-time. Just-in-time (JIT) is an
operational strategy whereby the company estimates its demand for raw materials and
makes sure that they are delivered on time. To effectively implement JIT, Toyota found it
necessary to establish good supplier relationships. As a result, Toyota’s operational costs
largely decreased. It sold its cars in the United States at prices lower than Ford, General
Motors, and Chrysler. Thus, it can be inferred that minimization in costs by an
organization in its supply management activities like sourcing, ordering, and inventory
management is a form of value creation where savings made by the organization can
translate into lower prices for the consumers.
.
Production and operations are processes that transform operational
input into output to satisfy consumer needs and requirements. This
transformational process consists of manufacturing and assembly.
 Figure 4.2 Production and Operation Model

Transformatio OUTPUT
INPUT
nal
Process
Manufacturing is the process of producing goods using people or machine
resources. It commonly refers to industrial production where raw materials
are converted into finished goods. Assembly is the process of putting together
raw materials into a desired output. Quality raw materials and parts, efficient
production layouts and processes, and employees with skills and motivation
are essential to effective transformational processes. Once achieved, value
can be generated through appealing product designs, quality and reliability,
efficient service performance, accessible location site, attractive store
displays, affordable prices, and good customer service.
The Logistics Circle
Now a popular term in supply chain management, logistics
management includes the supervision of certain sequential processes.
This includes warehousing, scheduling , dispatching in transportation,
and delivery.
 1.
Figure 4.3 The Logistics Circle Warehousing
5.
Delivery

Logistics Circle

4. 2.
Transportation Scheduling

3.
Dispatching
1. Warehousing is the function of physically packing finished goods or merchandises
in a building, room, or any space for temporary storage. While these items are
stocked in storerooms, they are timetabled for release to customers or buyers.
2. Scheduling is the act of organizing these inventory units and booking them for
delivery.
3. Dispatching products are for transfer; this may include posting, mailing, shipping
out, transmitting, forwarding, or releasing commodities.
4. Transportation scheduling and other logistics are necessary to make dispatching
cost efficient. The goal is to minimize transportation costs. Therefore, considerations
have to be prioritized in terms of location site, ease, or gravity of traffic, safety, and
labor requirements.
5. Delivery to the specified site is undertaken. It closes the entire logistics circle.