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Supply chain management


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Supply chain management

  1. 1. MD 021 Operations Management Supply Chain Management Outline  Definitions  Make vs. buy considerations  Developing the supply chain  Strategic management of the supply chain  Global outsourcing and offshoring  Supply chain dynamics 87
  2. 2. Supply Chain Management Definitions Supply Chain The interconnected set of linkages between suppliers of materials and services that spans the transformation of raw materials into products and services and delivers them to a firm’s customers Supply Chain Management Synchronizing a firm’s functions and those of its suppliers to match the flow of materials, services, and information with customer demand 88
  3. 3. Developing the Supply Chain Make vs. Buy Pros Cons  Increased control over price,  Capital costs quality, etc.  Capability limits Make  Economies of combined  Time limits operations  Opportunity costs  Proprietary products protected  Reduced flexibility to change partners  Reduced volume flexibility  Low capital costs  Unfavorable allocation of  Specialization product Buy  Competition  Lack of control over price,  Increased flexibility quality, etc.  Lock-in from specialized contracts and assets  Transaction (coordination) costs 89
  4. 4. Developing the Supply Chain Supplier Relations Competitive Orientation The view that negotiations between buyer and seller is a zero-sum game. Often used when a firm represents a significant share of the supplier’s sales or many substitutes are available. Example: WalMart Cooperative Orientation The view that the buyer and seller are partners. Includes sole sourcing. Often used with strategically important and/or high value-added components. Example: McDonald’s Mixed strategy Seeks to combine the advantages of the competitive orientation (e.g. low prices) with the cooperative orientation (e.g. few suppliers). Example: Dell Computer 90
  5. 5. Managing Supply Chain Relationships Long term relationships Arm’s-length Non-strategic Strategic Characteristics  Short-term contracts  Longer-term contracts  Long-term contracts  Price sensitivity  Price sensitivity more broadly  Relation-specific  Minimal interface defined investments between firms  Minimal to moderate interface  Supplier performance more  Contractual between firms broadly defined safeguards are  Contractual safeguards are  Self-enforcing agreements sufficient to enforce sufficient to enforce agreements are necessary for optimal agreements performance When to use  Product is necessary  Product is necessary but non-  Components help to but non-strategic strategic differentiate the customer’s  Commodity product  Dividing purchases across multiple product  Purchases account for suppliers reduces the ability of  Customized, non-standard a small percentage of suppliers to achieve significant products supplier’s production economies of scale  Multiple interaction effects  Switching costs are  Vigorous competition can be with other inputs low achieved with few suppliers  High degree of supplier/  Low value-added  Switching costs are relatively high buyer interdependence  Low value-added  High value inputs 91
  6. 6. Strategic Management of the Supply Chain Efficient Supply Chains: The purpose of efficient supply chains is to coordinate the flow of materials and services so as to minimize inventories and maximize the efficiency of the manufacturers and service providers in the chain. Efficient supply chains work best when demand is predictable and products/services are stable. Examples of competitive priorities: low cost. Responsive Supply Chains: The purpose of responsive supply chains is to react quickly to market demands by positioning inventories and capacities in order to hedge against uncertainties in demand. Responsive supply chains work best when demand is unpredictable, new product introduction is frequent, and product variety is high. Examples of competitive priorities: development speed, fast delivery, customization, volume flexibility. In addition: Innovations in information technology and other practices are facilitating the integration of the supply chain for greater efficiency and responsiveness and enabling “orchestrated” networks. 92
  7. 7. Global Outsourcing and Offshoring Specific considerations: Capabilities/resources Coordination requirements Strategic control and risks 93
  8. 8. Supply Chain Dynamics Bullwhip Effect The bullwhip effect is characterized by fluctuations in inventory and order levels that tend to increase as one moves back up the channel from the final customer. Some causes include lack of visibility/communication throughout the supply chain, delays in information flows, ordering and shipping lags. The bullwhip effect can be alleviated by:  Reducing the number of stages in the supply chain  Communicating consumer demand directly up the supply chain  Reducing ordering and shipping delays  Reducing demand destabilizing practices  Counter consumer “gaming” during shortages 94