Supply Chain Management

Supply Chain Management Operations ManagementSession 5

Objectives By the end of this session, student will be able to: • Discuss relative merits of different types of relationships with suppliers • Discuss criteria for selection of suppliers • Identify different purchasing strategies • Evaluate different approaches to e-procurement

Topics • Make/Buy decision • Vertical integration • Purchasing strategies • Kieretsu • Supply chain partnerships • Virtual companies • Supplier selection • Purchasing techniques • E-procurement

Importance of Supply Chain • As firms strive to increase their competitiveness through product customisation, high quality, cost reductions and speed to market, they place added emphasis on the supply chain

Push and Pull • Push – goods are produced and pushed down the supply chain to the customer • Pull – customer demand triggers events in the supply chain to pull goods through the process eg. (ECR) efficient customer response. Mass customisation is a consequence of this type of thinking.

Additional Sales Needed to Equal £1 Saved Through Purchasing

Make or Buy? • Make – agency costs. The costs involved in conducting transactions within an organisation. • Buy – transaction costs. The costs involved in conducting transactions in the market place. • Problem of ‘hold up’ when there are relationship specific assets

lower production cost unsuitable suppliers assure adequate supply utilize surplus labor and make a marginal contribution obtain desired quantity remove supplier collusion obtain a unique item that would entail a prohibitive commitment from the supplier maintain organizational talent protect proprietary design or quality increase/maintain size of company lower acquisition cost preserve supplier commitment obtain technical or management ability inadequate capacity reduce inventory costs ensure flexibility and alternate source of supply reciprocity item is protected by patent or trade secret frees management to deal with its primary business Make/Buy Considerations Reasons for Buying Reasons for Making

Vertical Integration • In backward vertical integration, the company sets up subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company. • In forward vertical integration, the company sets up subsidiaries that distribute or market products to customers or use the products themselves. An example of this is a film studio that also owns a chain of cinemas.

Repeat Transactions The Prisoner’s Dilemma:- • Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and having separated both prisoners, visit each of them and offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, the police can only give both prisoners 6 months for a minor charge. If both betray each other, they receive a 2-year sentence each.

Table of Outcomes

Purchasing Strategies • Many Suppliers - Negotiate with many suppliers; play one supplier against another • Few Suppliers - Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer • Vertically integrate - buy the actual supplier • Keiretsu - have your suppliers become part of a company coalition • Virtual company - uses suppliers on an as-needed basis

Many Suppliers Strategy • Many sources per item • Adversarial relationship • Short-term • Little openness • Negotiated, sporadic PO’s • High prices • Infrequent, large lots • Delivery to receiving dock © 1995 Corel Corp.

Few Suppliers Strategy • 1 or few sources per item • Partnership (JIT) • Long-term, stable • On-site audits & visits • Exclusive contracts • Low prices (large orders) • Frequent, small lots • Delivery to point of use © 1995 Corel Corp.

Kieretsu • Japanese term to describe suppliers who become part of a company coalition • Interlocking relationships bind together the links in the supply chain

Keiretsu Network Strategy • Japanese word for ‘affiliated chain’ • System of mutual alliances and cross-ownership • Company stock is held by allied firms • Lowers need for short-term profits • Links manufacturers, suppliers, distributors, & lenders • ‘Partnerships’ extend across entire supply chain

Partnership Supply Relationships • Sharing success • Long-term expectations • Multiple points of contact • Joint learning • Few relationships • Joint co-ordination of activities • Information transparency • Joint problem solving • Trust

Virtual Company Strategy • Network of independent companies • Linked by technology • PC’s, faxes, Internet etc. • Each contributes core competencies • Typically provide services • Payroll, editing, designing • May be long or short-term • Usually, only until opportunity is met

Vendor Selection Steps • Vendor evaluation • Identifying & selecting potential vendors • Vendor development • Integrating buyer & supplier • Example: Electronic data exchange • Negotiations • Results in contract • Specifies period of agreement, price, delivery terms etc.

Company Financial stability Management Location Product Quality Price Service Delivery on time Condition on arrival Technical support Training Supplier Selection Criteria

Purchasing Techniques • Drop shipping and special packaging • Blanket orders • Invoiceless purchasing • Electronic ordering and funds transfer • Electronic data interchange (EDI) • Stockless purchasing • Standardization

Supply Chain Management • Advantages of vertical integration but also allows concentration on core competencies and economies of scale and scope

Dell Computer Corp - Responsive Supply Chain • The Dell marketing strategy targets customers who desire having the most up-to-date personal computer equipment customized to their needs. Dell has opted for a responsive supply chain. • It relies on more expensive express transportation for receipt of components from suppliers and for delivery of finished products to customers. • Dell achieves product variety and manufacturing efficiency by designing common platforms across several products and using common components. • It has located manufacturing facilities to ensure rapid delivery. • Dell has invested heavily in information technology to link itself with suppliers and customers.

Wal-Mart - An Efficient Supply Chain • Wal-Mart’s marketing strategy is to be a reliable, lower-price retailer for a wide variety of mass consumption consumer goods. • This strategy favours an efficient supply chain designed to deliver products to consumers at the lowest possible cost

Electronic Procurement • Business-to business (B2B) purchases are estimated to be $1.3 to $2.0 trillion by 20036. • Former uses of electronic data interchange (EDI) were costly and required special technology to implement have given way to the publicly available Internet. • This has opened the door to increased applications of E-commerce techniques to procurement.

Common Uses of E-commerce • Research vendor and product information • Electronic check of available stock • Price negotiation • Order products or services • Check on the status of an order • Issue invoice and receive payment

Advantages of Electronic Procurement • Lower Operating Costs • Reduce paperwork • Reduce Sourcing time • Improve control over inventory and spending • Improve Procurement Efficiency • Find new supply sources • Improve communications • Improve personnel use • Lower cycle times • Reduce Procurement Prices • Improve comparison shopping • Reduce overall prices paid

Disadvantages of Electronic Procurement • Security of electronic messages • Lack of face-to-face contact • Other technological concerns • Standard protocols • System reliability

Four Basic Types of E-commerce Models • Sell-side system • Administered by the seller • Usually free to the buyer • Electronic marketplace • Administered by a third party • Collection of electronic catalogs • One-stop sourcing for buyers

Types of E-commerce Models (2) • Buy-side system • Administered by the buyer • Pre-approves vendor access • Expensive and usually the domain of large companies • On-line trading community • Maintained by a third party • Used by multiple buyers and sellers • Eg web based trade exchange developed by Ford, GM and Daimler Chrysler

Supply Chain Management