B207A Big ideas in organizations

1. B207ABig ideas in organizations Shaping Business Opportunities I

2. Block 2 Session 4: Supply chain management

3. Session outline This session will cover some of the opportunities as well as some of the challenges of supply chain management, with particular focus on understanding the inherent instability of modern supply chains. You will explore the role that outsourcing plays as a way of controlling supply without the need to own the supply chain. • By the end of this session you should be able to: • understand the general benefits of supply chain management • understand the advantages and disadvantages of having a vertically integrated supply chain • understand the benefits of outsourcing and when it is best used • understand the phenomenon of the bullwhip effect in supply chains and how to minimise its harmful effects • assess the advantages and disadvantages of offshoring supply. Session 4: Supply chain management

4. Defining supply chain management • Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. Session 4: Supply chain management

5. 4.2 Supply chain efficiency • The main theory of supply chain management is that it is better to optimise the supply chain as a whole rather than optimise each individual element within the supply chain. • A main source of waste is the delay of resource in a system, whether it is an item stuck as inventory in a store or trapped in a queue. In order to assess the total waste in a system, one of the measures you can apply is the ratio ‘throughput efficiency’: Session 4: Supply chain management

6. Activity 4.2: The throughput efficiency of supply chains A typical example of a complex supply chain is the production of multi-packs of canned soft drinks for supermarkets such as Tesco. The most challenging and complex component of this product is the aluminium can. Figure 4.1 illustrates this supply chain as it was designed for Tesco years ago. Session 4: Supply chain management

7. Figure 4.1 Drinks can supply chain map Session 4: Supply chain management

8. The bullwhip effect as an added complexity • One of the real surprises is just how difficult it can be to coordinate activity across a supply chain. As you saw in Blanchard (2010), supply chains are inherently unstable because of a phenomenon known as the bullwhip effect, whereby demand fluctuations magnify through the supply chain. This instability creates constraints on how supply chains can be managed. • The bullwhip effect magnifies demand variability at each interface between customer and supplier. A retailer can pass on a small demand spike to their wholesaler; this then magnifies as the wholesaler orders from the bottler, etc Session 4: Supply chain management

9. Session 4: Supply chain management

10. The bullwhip effect You must remember that the bullwhip effect can occur at any point in the supply chain; the potential can never be completely eliminated. However, there are some practices that can reduce the demand amplification: • reducing the number of stages in the supply chain • sharing demand information across the supply chain • generating smaller, more frequent replenishment orders • reducing lead times • limiting promotions that create demand surges. Session 4: Supply chain management

11. 4.3 Vertically integrated supply chains Session 4: Supply chain management

12. Vertically integrated supply chains To address how much of the supply chain one organisation should own, there are three sets of decisions to make: • The direction of any further intended integration – If we are part of a middle tier of a supply chain we can choose to integrate upstream (to buy our suppliers) or to integrate downstream (to buy our distributors or customers). • The extent of the integration – We then need to address how far upstream or downstream we integrate. Do we really want to own our raw materials producers or is component supply far enough? Do we want to get involved in retail or is that someone else’s competence? • The balance of the integration – We need to address how much capacity to have at each tier in the supply chain. Do we want to own enough capacity at one tier to meet all our needs or should we buy out some supply? • Activity 4.3: Integration at Ford River Rouge Session 4: Supply chain management

13. 4.4 Outsourcing • vertically integrated systems are not always effective in meeting market needs. The main alternative is outsourcing, where producers have a contractual relationship with external suppliers to provide goods and services. • In the majority of cases external suppliers are selected for their distinct capability in excess of what can be provided in-house. Table 4.2 summarises some of the key advantages and disadvantages of outsourcing • Activity 4.4 Session 4: Supply chain management

14. Advantages/disadvantages of outsourcing • Advantages • the ability to focus on core internal capabilities • access to supplier capabilities • reduced need for capital investment • fewer direct staff • outsource suppliers usually have lower unit costs • clear, identifiable supply chain costs • can be used to expand overall capacity. • Disadvantages • some loss of control • costs involved in managing suppliers • reduced economies of scale • potential closure of existing facilities • need to share sensitive information with third parties • risks of being dependent on a supplier • increased supply chain risks. Session 4: Supply chain management

15. Outsourcing decisions • Although many outsourcing decisions seem to be rather tactical – simply part of a routine purchasing function – outsourcing decisions are actually strategic in nature. As in the previous example of Mr Singh’s Chilli Sauce, the decision to outsource touches on the question of what one organisation’s core activities or competence should be. Two aspects need to be considered: • The strategic value of the good or service – For each component or service the decision-makers should assess the extent to which the item contributes in some way to the overall competitive advantage of the business. • The criticality of the component or service – You should ask whether or not the component or service contributes to the performance of the final product or service. Session 4: Supply chain management

16. The 2 x 2 matrix shown in Figure 4.4 can help decision-makers to assess these aspects for any components or services they are looking to outsource.

17. Products and services are categorised in four ways: • Proprietary items are the ones that create competitive advantage and are critical to the end product or service. These would normally be made in-house. • Commodity items use proprietary technology and are not critical to the performance of the final product. They would normally be widely available from a range of low-cost suppliers. These can usually be outsourced. • Novelty items are specialised and can contribute to competitive advantage. They are not critical but can be difficult to source reliably at low cost. The company has to decide whether it is more economical to make in-house or to outsource. • Utility items are based on widely available technology but performance of the product depends on the performance of that technology. This type of item can be outsourced and there should be a range of potential suppliers willing to supply the item at a competitive price. However, it is important that the supplier is reliable and is willing to cooperate and develop a supply relationship because failure to deliver can lead to significant problems with product availability or performance. Session 4: Supply chain management

18. Activity 4.5: Outsourcing in air travel

19. 4.5 Supplier relationships Working with a supplier is rarely as simple as arranging a contract that states details such as price and service level agreements. In many instances there is a degree of collaboration and cooperation between customer and supplier within the supply chain (Lambert, 2006). This collaboration can also extend to more than two tiers of supply. Figure 4.6 presents a framework from Lambert et al. (1996) showing the different types of relationship that may exist within supply chains. Session 4: Supply chain management

20. Within supply chain partnerships, three levels of collaboration are seen: • Type 1 – Organisations recognise each other as partners, with limited coordination and planning. Often only one division or functional area. • Type II – Organisations progress beyond coordination to integration of activities. Multiple functions/departments involved in the partnership. • Type III – Organisations share a significant level of operational integration. No ‘end date’ to the relationship. ‘Joint ventures’ and ‘Vertical integration’ are structural ways of generating joint working. Where no collaboration exists, this is classed as ‘Arm’s length’. Session 4: Supply chain management

21. Activity 4.6: Supplier collaboration – ‘Hugh's War on Waste’

22. The supermarkets are in a position to control the market. They largely dictate the volumes and specifications of what is stocked in supermarket outlets. This, combined with their logistics control, allows them to deliver product to the customer very efficiently. What is the power balance between the supermarkets and the farmer? Are the supermarkets managing their supplier relationships well? To what extent is this relationship a supply partnership? Session 4: Supply chain management

23. Session summary This session has emphasised: • It is often better to try to optimise performance across an entire supply chain rather than just concentrating on local optimisation of one tier in the supply chain. • The ‘bullwhip effect’ means that supply chains are naturally unstable and flow of goods or services through supply chains must be carefully managed. • Vertically integrated systems can often be inefficient because of inherent lack of flexibility and a removal of market forces. • Many supply chains are integrated through partnerships between organisations to improve their performance. • The trend has been towards more outsourcing within supply chains – but care has to be taken to outsource carefully and not outsource too much. • Supply partnerships are most effective if there is not too much of a power imbalance between parties. The supply chain must be managed for the benefit of all parties. Session 4: Supply chain management