Management Supply Chain

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The Supply Chain’s The Supply Chain’s Strategic Importance Strategic Importance

Supply chain management is the Supply chain management is the integration of the activities that integration of the activities that procure materials and services, procure materials and services,

transform them into intermediate transform them into intermediate goods and the final product, and goods and the final product, and

deliver them to customersdeliver them to customers

Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains

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Supply Chain ManagementSupply Chain Management

1.1. Transportation vendorsTransportation vendors2.2. Credit and cash transfersCredit and cash transfers3.3. SuppliersSuppliers4.4. Distributors Distributors 5.5. Accounts payable and receivableAccounts payable and receivable6.6. Warehousing and inventoryWarehousing and inventory7.7. Order fulfillmentOrder fulfillment8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and

production informationproduction information

Important activities include determiningImportant activities include determining

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A Supply Chain for BeerA Supply Chain for Beer

Figure 11.1Figure 11.1

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Global Supply Chain IssuesGlobal Supply Chain Issues

React to sudden changes in parts React to sudden changes in parts availability, distribution, or shipping availability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates

Use the latest computer and transmission Use the latest computer and transmission technologies to schedule and manage the technologies to schedule and manage the shipment of parts in and finished products shipment of parts in and finished products outout

Staff with local specialists who handle Staff with local specialists who handle duties, freight, customs and political issuesduties, freight, customs and political issues

Supply chains in a global environment Supply chains in a global environment must be able tomust be able to

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How Supply Chain How Supply Chain Decisions Impact StrategyDecisions Impact Strategy

Low-Cost Low-Cost StrategyStrategy

Response Response StrategyStrategy

Differentiation Differentiation StrategyStrategy

Supplier’s Supplier’s goalgoal

Supply demand Supply demand at lowest at lowest possible cost possible cost (e.g., Emerson (e.g., Emerson Electric, Taco Electric, Taco Bell)Bell)

Respond quickly Respond quickly to changing to changing requirements requirements and demand to and demand to minimize minimize stockouts (e.g., stockouts (e.g., Dell Computers)Dell Computers)

Share market Share market research; research; jointly develop jointly develop products and products and options (e.g., options (e.g., Benetton)Benetton)

Primary Primary selection selection criteriacriteria

Select primarily Select primarily for costfor cost

Select primarily Select primarily for capacity, for capacity, speed, and speed, and flexibilityflexibility

Select primarily Select primarily for product for product development development skillsskills

Table 11.1Table 11.1

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Process Process charact-charact-eristicseristics

Maintain high Maintain high average average utilizationutilization

Invest in excess Invest in excess capacity and capacity and flexible flexible processesprocesses

Modular Modular processes that processes that lend lend themselves to themselves to mass mass customizationcustomization

Inventory Inventory charact-charact-eristicseristics

Minimize Minimize inventory inventory throughout the throughout the chain to hold chain to hold down costdown cost

Develop Develop responsive responsive system with system with buffer stocks buffer stocks positioned to positioned to ensure supplyensure supply

Minimize Minimize inventory in the inventory in the chain to avoid chain to avoid obsolescenceobsolescence

Tab 11.1Tab 11.1

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Lead-time Lead-time charact-charact-eristicseristics

Shorten lead Shorten lead time as long as time as long as it does not it does not increase costsincrease costs

Invest Invest aggressively to aggressively to reduce reduce production lead production lead timetime

Invest Invest aggressively to aggressively to reduce reduce development development lead timelead time

Product-Product-design design charact-charact-eristicseristics

Maximize Maximize performance performance and minimize and minimize costscosts

Use product Use product designs that designs that lead to low lead to low setup time and setup time and rapid rapid production production ramp-upramp-up

Use modular Use modular design to design to postpone postpone product product differentiation differentiation as long as as long as possiblepossible


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Make-or-Buy DecisionsMake-or-Buy Decisions1.1. Maintain core competenceMaintain core competence2.2. Lower production costLower production cost3.3. Unsuitable suppliersUnsuitable suppliers4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities6.6. Obtain desired qualityObtain desired quality7.7. Remove supplier collusionRemove supplier collusion8.8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive

commitment for a suppliercommitment for a supplier9.9. Protect personnel from a layoffProtect personnel from a layoff10.10. Protect proprietary design or qualityProtect proprietary design or quality11.11. Increase or maintain size of companyIncrease or maintain size of company

Reasons for MakingReasons for Making


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Make-or-Buy DecisionsMake-or-Buy Decisions

1.1. Frees management to deal with its core Frees management to deal with its core competencecompetence

2.2. Lower acquisition costLower acquisition cost3.3. Preserve supplier commitmentPreserve supplier commitment4.4. Obtain technical or management abilityObtain technical or management ability5.5. Inadequate capacityInadequate capacity6.6. Reduce inventory costsReduce inventory costs7.7. Ensure alternative sourcesEnsure alternative sources8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources9.9. ReciprocityReciprocity10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret

Reasons for BuyingReasons for Buying


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OutsourcingOutsourcing Transfers traditional internal Transfers traditional internal

activities and resources of a firm to activities and resources of a firm to outside vendorsoutside vendors

Utilizes the efficiency that comes Utilizes the efficiency that comes with specializationwith specialization

Firms outsource information Firms outsource information technology, accounting, legal, technology, accounting, legal, logistics, and productionlogistics, and production

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Supply Chain StrategiesSupply Chain Strategies Negotiating with many suppliersNegotiating with many suppliers Long-term partnering with few Long-term partnering with few

supplierssuppliers Vertical integrationVertical integration KeiretsuKeiretsu Virtual companies that use Virtual companies that use

suppliers on an as needed basissuppliers on an as needed basis

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Many SuppliersMany Suppliers Commonly used for commodity Commonly used for commodity

productsproducts Purchasing is typically based on Purchasing is typically based on

priceprice Suppliers compete with one Suppliers compete with one

anotheranother Supplier is responsible for Supplier is responsible for

technology, expertise, forecasting, technology, expertise, forecasting, cost, quality, and deliverycost, quality, and delivery

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Few SuppliersFew Suppliers Buyer forms longer term Buyer forms longer term

relationships with fewer suppliersrelationships with fewer suppliers Create value through economies of Create value through economies of

scale and learning curve scale and learning curve improvementsimprovements

Suppliers more willing to participate Suppliers more willing to participate in JIT programs and contribute in JIT programs and contribute design and technological expertisedesign and technological expertise

Cost of changing suppliers is hugeCost of changing suppliers is huge

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Vertical IntegrationVertical Integration

Figure 11.2Figure 11.2

Raw material Raw material (suppliers)(suppliers) Iron oreIron ore SiliconSilicon FarmingFarming

Backward integration SteelSteel

Current transformation Automobiles Integrated

circuits Flour milling

Forward integration Distribution Distribution systemssystems Circuit boardsCircuit boards

Finished goods Finished goods (customers)(customers) DealersDealers

Computers Computers Watches Watches

CalculatorsCalculatorsBaked goodsBaked goods

Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration

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Vertical IntegrationVertical Integration Developing the ability to produce goods or Developing the ability to produce goods or

service previously purchasedservice previously purchased Integration may be forward, towards the Integration may be forward, towards the

customer, or backward, towards supplierscustomer, or backward, towards suppliers Can improve cost, quality, and inventory Can improve cost, quality, and inventory

but requires capital, managerial skills, and but requires capital, managerial skills, and demanddemand

Risky in industries with rapid technological Risky in industries with rapid technological changechange

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Keiretsu NetworksKeiretsu Networks A middle ground between few suppliers A middle ground between few suppliers

and vertical integrationand vertical integration Supplier becomes part of the company Supplier becomes part of the company

coalitioncoalition Often provide financial support for Often provide financial support for

suppliers through ownership or loanssuppliers through ownership or loans Members expect long-term relationships Members expect long-term relationships

and provide technical expertise and stable and provide technical expertise and stable deliveriesdeliveries

May extend through several levels of the May extend through several levels of the supply chainsupply chain

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Virtual CompaniesVirtual Companies Rely on a variety of supplier Rely on a variety of supplier

relationships to provide services on relationships to provide services on demanddemand

Fluid organizational boundaries that Fluid organizational boundaries that allow the creation of unique enterprises allow the creation of unique enterprises to meet changing market demandsto meet changing market demands

Exceptionally lean performance, low Exceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed

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Vendor SelectionVendor Selection Vendor evaluationVendor evaluation

Critical decisionCritical decision Find potential vendorsFind potential vendors Determine the likelihood of them Determine the likelihood of them

becoming good suppliersbecoming good suppliers Vendor DevelopmentVendor Development

TrainingTraining Engineering and production helpEngineering and production help Establish policies and proceduresEstablish policies and procedures

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Vendor SelectionVendor Selection NegotiationsNegotiations

Cost-Based Price Model Cost-Based Price Model - supplier - supplier opens books to purchaseropens books to purchaser

Market-Based Price ModelMarket-Based Price Model - price - price based on published, auction, or based on published, auction, or indexed priceindexed price

Competitive BiddingCompetitive Bidding - used for - used for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships establishing long-term relationships difficultdifficult

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Vendor EvaluationVendor EvaluationCriteriaCriteria WeightsWeights

Scores Scores (1-5)(1-5)

Weight Weight x Scorex Score

Engineering/research/innovation skillsEngineering/research/innovation skills .20.20 55 1.01.0Production process capability Production process capability (flexibility/technical assistance)(flexibility/technical assistance)

.15.15 44 .6.6

Distribution/delivery capabilityDistribution/delivery capability .05.05 44 .2.2Quality systems and performanceQuality systems and performance .10.10 22 .2.2Facilities/locationFacilities/location .05.05 22 .1.1Financial and managerial strength Financial and managerial strength (stability and cost structure)(stability and cost structure)

.15.15 44 .6.6

Information systems capability (e-Information systems capability (e-procurement, ERP)procurement, ERP)

.10.10 22 .2.2

Integrity (environmental compliance/ Integrity (environmental compliance/ ethics)ethics)

.20.20 55 1.01.0

TotalTotal 1.001.00 3.93.9

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PurchasingPurchasing Most costly activityMost costly activity

The acquisition of good and servicesThe acquisition of good and services Important to reduce cost and improve Important to reduce cost and improve

contribution margincontribution margin

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Objective of Purchasing Objective of Purchasing ActivityActivity

To help identify the products and To help identify the products and services that can be obtained externallyservices that can be obtained externally

To develop, evaluate, and determine the To develop, evaluate, and determine the best supplier, price and delivery for best supplier, price and delivery for these products and servicesthese products and services

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Purchasing AgentPurchasing Agent A person with legal authority to A person with legal authority to

execute purchasing contracts on execute purchasing contracts on behalf of the firm.behalf of the firm.

Except signing of contractExcept signing of contract Product functionProduct function Product engineering drawingProduct engineering drawing QC documentsQC documents Testing activitiesTesting activities

Service Enterprise: Service Enterprise: the primary product is intellectual onethe primary product is intellectual one

Management Supply Chain

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