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Supply Chain Strategies
Bruce O. Bartschenfeld
University of Indianapolis
Bruce O. Bartschenfeld is currently a full-time undergraduate in Business
Administration at the University of Indianapolis, Indianapolis, Indiana.
4241 Bluff Road
Indianapolis, IN 46217
(317) 786-8462
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Chain Strategies
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Supply chain strategies are one of the most important aspects of supply
chain management.
The success of any business as a whole relies on the
specific techniques executed to manage costs. Purchasing materials is a large
part of managing costs. Two of the major issues in purchasing are: selecting the
right supplier and finding the correct purchasing strategy in hiring suppliers.
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The key to success of an organization is the supply chain strategy. (12)
"The supply chain is made up of two essential elements: strategic sourcing and
strategic logistics." (12, pg.1) The supply chain makes up 55-85% of total costs
for a business, so it is understandable
newer and better strategies.
Innovative strategies can drastically improve the
profitability of that organization.
the demise of a business.
why so many people are searching for
On the other hand, bad strategies can lead to
Building a competitive advantage is important to
getting one step ahead of the competition. (13)
As the information age soars into the new 21st Century, the logistics of a
corporation are greatly affected by the technology that is employed. (10)
Business is more competitive than ever with the popularity of the Internet rising at
a feverish pace. Many companies are finding out that they must share
information electronically, or else they not be able to stay competitive with their
rivals. (11)
Another popular strategy is a just-in-time system. This means keeping
inventory as low as possible and cutting process times down to a minimum.
With
careful planning in the warehouse, improvements can be made any number of
innovative ways. "Real improvement comes from making a change in the way
business gets done from a process standpoint, an operational standpoint, and a
supply chain structure perspective.
Many purchasing strategies lead to a competitive advantage in supply
chain management.
These strategies are: many suppliers, few suppliers, virtual
companies, and vertical integration.
If employed correctly, each of the strategies
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be a large asset. "Adoption of supply chain strategies could be a significant
determinant of profitability for companies in the future." (3, pg.204)
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PURCHASING STRATEGIES
Purchasing strategies are the most difficult, and maybe, the most critical
aspect of the supply chain. (4) Relationships with suppliers can be a touchy area
for management.
information.
Some companies are reluctant to tell suppliers too much
They fear the information will be relayed to competitors or their
suppliers may eventually become the competition.
Also, companies and
suppliers are each trying to get the best deal for their respective companies.
Many companies are starting to establish closer relationships with suppliers.
It is
important to figure out what is going on inside the business of suppliers to make
sure the supplier is operating smoothly.
Other companies treat suppliers as their
enemies, and in effect, they feel the supplier must not be trusted. (4) Another
strategy is to produce products within the company.
This usually involves the
buying out of a supplier. (5) Virtual companies are organizations who hire
suppliers on an as needed basis.
Each of these strategies is very different in nature, but the most important
aspect is how a company goes about implementing the strategy. (9) When
executed effectively, the purchasing strategy can provide a competitive
advantage.
If the strategy is not given the proper attention, it can be extremely
costly to the company and the success of the company as a whole.
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Few Suppliers
According to Jay Heizer and Barry Render, "A strategy of few suppliers
implies that rather than looking for short-term attributes, such as low cost, a
buyer is better off forming a long-term relationship with a few dedicated suppliers.
(5, pg.421) Although looking to drive costs down seems to be a great short-term
plan, it has not always led to the best quality or best service to the customer. (1)
The few suppliers strategy has many advantages.
First of all, a company
can build trust in the supplier, and the supplier also has a chance to build trust in
the company being supplied.
A Company must trust the supplier enough to
create a close relationship with them. (4) This type of partnership requires a
company to share exclusive information about the company.
the supplier is comfortable with the stability of the business.
This ensures that
"Companies that
routinely swap information and ideas with suppliers create an environment for
joint achievement." (12, pg.7) In this type of relationship, the supplier puts much
of its success in the hands of the company it is supplying.
If the company the
supplier is working for performs poorly, the supplier will also struggle in business.
Supply chain strategies are not only limited to factories or manufacturing,
either. The mining industry has determined that it needs to implement new
supply chain strategies.
The industry cannot survive under its current conditions.
They are spending too much money on non value-added expenses, and mining
companies are not using the most efficient practices within their supply chain.
Mining companies must find the most competent suppliers and build a close
relationship with them.
Mining equipment is extremely expensive, while the
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safety of the equipment is also a major concern for the company.
Many mining
companies have admitted that they believe almost half of their suppliers are
inadequate and others have over 1,000 suppliers. (3) The companies need to
take control of their dying industry.
They need to study suppliers and find out
which ones are or are not performing up to standards.
It is time that the
companies stop allowing suppliers to freeload off the industry of mining. (3)
Another benefit is that the few suppliers approach supports just-in-time
systems.
The supplier is available on shorter notice if it is already under
contract.
This works effectively for just-in-time systems. The supplier may
relocate to a warehouse closer to the larger company, and therefore inventory is
kept to a minimum and deliveries are made in smaller lots.
Some challenges also come along with a few suppliers approach.
supplier has an opportunity to take advantage of the company.
The
They may drive
prices up because they are already under contract for an extended period of
time. The company is vulnerable to losing valuable information, since suppliers
have been exposed to inside information.
Nothing is stopping suppliers from
relaying information to others, including the competition.
It may be a necessity to
sign an agreement with the supplier that all information shared is confidential,
and any breech of contract is considered illegal. (9) Another disadvantage is
meeting future needs of the company.
Companies must carefully examine the
capacity of the supplier. (1) If the supplier cannot meet all of the capacity
requirements of a company, then the company will have to limit production.
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few suppliers approach is becoming very popular in the business
world.
It has provided a major boost for many companies that have been close
to bankruptcy.
Xerox and Minolta were both about to go out of business when
they decided to reduce the number of suppliers. (9) The strategy revived both
companies and they are now leaders of their respective industries.
Many Suppliers
A popular and widely used approach to purchasing is the many suppliers
strategy.
'With the many supplier strategy, the supplier responds to the
demands and specifications of a 'request for quotation,' with the order usually
going to the lowest bidder." (5, pg.420) This requires companies to form an
adversarial relationship with suppliers.
There is little trust between the company
and its suppliers in this strategy.
"Supply chain strategies must exploit global resources.
The management
of these resources requires new methods in order to collaborate with, and
maximize the results of, each of the participants outsourced around the planet."
(11, pg.35) Numerous suppliers allow companies to explore suppliers all around
the world. This will ensure that the lowest priced supplier will be employed.
Suppliers will maintain a fair price because they know they are in competition
with other possible suppliers.
It also increases the level of service from suppliers
because they must do everything possible to get the business of a company.
This strategy also works extremely well in case one supplier goes out of
business or changes its line of business. When there is no relationship with the
supplier, a company can move along with business if something happens to the
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supplier.
If a supplier raises prices, a company can easily shift business
to a more competitively priced supplier.
Companies are able to keep important information within the company in
the many suppliers approach.
No information is shared with suppliers because
they are not considered a part of the organization.
In fact, suppliers are almost
an enemy for the company.
On the other hand, a company is not able to gain much information about
suppliers, either. The reliability of suppliers may also be in question.
"An
undependable source of parts can cripple a plant, leading to inflated lead times,
and resulting in problems across the supply chain, all the way to the final
customer." (4, pg.1 0)
The many suppliers approach does not support a just-in-time system.
Deliveries are made in large lots. Since suppliers are not available on demand, a
company must deal with inventory and deliveries that are not as frequent as in a
few suppliers approach.
Marks and Spencer, a British textile manufacturer, is
leaving the many suppliers approach because of a 43% decline in profits over the
past year. This is attributed to slow reaction to customer's needs. With a few
suppliers approach, Marks and Spencer can find out what the customer wants
and get it to them more efficiently.
The new suppliers will deliver products three
times more often than before, which gives Marks and Spencer more time to get
the newest styles shipped to the factory. (8)
The many suppliers approach seems to be a strategy of the past. Most
companies still use this strategy, but they are in the process of integrating a more
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innovative approach to business.
Companies are finding that they can save
money by reducing the number of suppliers and maintaining a relationship with
the supplier.
Vertical
Integration
"Vertical integration is developing the ability to produce goods or services
previously purchased or actually buying a supplier or distributor." (5, pg.422) This
occurs when a company actually purchases its supplier.
set of operations is a major acquisition at a company.
The integration of a new
All members of the
executive team have to be informed of the developments.
It is considered a new
and extremely risky investment for an organization.
Vertical integration can offer an opportunity for a company to lower its
overall costs. Producing a product within the company eliminates a member of
the supply chain.
Fewer members in the supply chain ultimately leads to better
margins for the company.
When dealing with a supplier, the company must pay
for the supplier to cover its costs and maintain a positive profit. This is a great
opportunity when the company has the necessary capital to incur the costs of
production.
When a company produces the product within the company, they do
not have to pay the premium associated with buying it from an outside source.
Costs are high for production in the short-term, but this approach will save the
company money in the long-term.
Vertical Integration goes on in the entertainment industry as well as in
manufacturing.
Disney has bought ABC and Viacom bought CBS. The two
companies used to sell programming to the networks and would only receive
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payment for the initial rights to the show. These are attempts to gain a larger
platform to sell and advertise their own products.
many commercials for Disney World.
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Disney airs its shows and has
Both acquisitions have been profitable so
far. (7) Instead of letting the television networks make the majority of the profits
on Disney and Viacom programming, the two companies now make more money
by airing their own shows.
Vertical integration requires a company to take on extra responsibility.
If
management does not have the expertise to run new operations, they will
eventually fail. A higher degree of risk is also involved with gaining a new
department.
The amount of capital tied up in internal expense increases greatly.
Also, extra costs are incurred.
A company could take on more operations than
they are able to afford. Integration may seem like a good idea, but management
could get overzealous in the estimation of existing capital available for new
ventures.
Vertical integration carries with it major risks. Many companies have
bought out suppliers or began to produce their own materials.
Often times the.
company has underestimated the costs of making such a large purchase or
acquisition.
The plan must be well thought out, and financial risks must be
considered.
Companies need to have enough money to back up the venture
should it fail.
Virtual
Company
"Virtual companies rely on a variety of supplier relationships to provide
services on demand.
Virtual companies have fluid, moving organizational
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boundaries that allow them to create a unique enterprise to meet changing
market demands." (5, pg.424) In this strategy, a company forms a network with
other companies.
All companies are dependent upon one another.
member of the network performs essential functions to the project.
Each
Technology
systems and financial services are major contributors to the network.
Virtual companies work well in situations of short-term projects of a
company.
They do not want to fully integrate new operations for just one project.
This cost is not worth it for the company because they use many different
operations depending on the particular project.
Technologies,
IBM Corporation and EXE
Inc. have teamed to develop software that will help automotive
and packaged goods companies.
The software provides links to consulting
services, technology, and integration skills. (2) Information technology is a major
cost for a business. (10) Many companies are not ready to take on all of these
costs.
Much of the success of a company lies in the hands of outside companies.
If another company does not fulfill its responsibilities, all members of the network
fail.
It is not only the lagging company that suffers. Also, many extra costs are
incurred by hiring other companies to perform major operations.
This, in turn,
lowers the profitability of the company.
Virtual companies are a great idea for smaller organizations.
The small
companies do not have the resources to purchase all of the manpower and
materials necessary for a short-term project. Merging with other companies for a
particular project provides a company the needed resources to complete the
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project without the financial burden of creating and spending capital on all of the
departments.
CONCLUSION
Many supply chain strategies can be effective for a company.
The key to
finding the best strategy for a particular company is to put full effort toward the
project.
If only partial attention is given to a new strategy, it will most surely end
up in failure.
New strategies that are given the proper attention can provide new
life for a company and its success. All of the strategies that have been
mentioned in the paper can be successful under the correct circumstances.
It is
up to the individual to find the strategy that will be most effective for his or her
organization.
Supply chain strategies could be the most important aspect of the
corporate world today.
Most people are aware that it takes a great deal of effort
to get ahead in the business world. That is not to say it can not happen.
Managers and supervisors with innovative new strategies can send their
company straight to the top. It is also the responsibility of the leader of the
project to sell other members of the company on the supply chain strategy.
one employee can single-handedly implement an entirely new strategy.
No
It takes
a team effort. Each and every employee must believe that the new strategy will
work more efficiency than anything the company has ever seen before.
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REFERENCES
1.
Arnold, J.R. Tony, Lloyd M. Clive, and Henry Alex Hutchins.
Basics of Supply Chain Management.
APICS
MGI Management Institute, Inc.,
West Plains, NY, 1997.
2.
Electronic
Buyers' News.
"IBM, EXE Offer E-biz Solutions," 11
November 1999, Issue 1187, 70.
3.
Gattorna, John. "Supply Chain Management," Mining Magazine.
April
1999, p. 204.
4.
Handfield, Robert B. and Ernest L Nichols, Jr. Introduction
Chain Management,
5.
6.
Prentice Hall, Inc., Upper Saddle River, NJ, 1999.
Heizer, Jay and Barry Render.
3rd Edition,
to Supply
Principles
of Operations
Management,
Prentice Hall, Inc., Upper Saddle River, NJ, 1999.
Hicks, Donald A. "The State of the Supply Chain Strategy," liE Solutions,
Vol. 31, No.8, August 1999, p. 24-29.
7.
Lubove, Seth. "Conspiracy Theory," Forbes.
Vol. 164 Issue 13,
November 1999, p. 52-53.
8.
Marks and Spencer.
"Black Marks," The Economist,
Vol 353 Issue 8144,
6 November 1999, p.66-68.
9.
Preston, Robert.
InternetWeek.
10.
"Supply Chains Render More than Cost Savings,"
Issue 790, 22 November 1999. p. 7-8.
www.mchugh.com.
"Les Central," Nov 1999. Lexis-Nexis.
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11.
Rodin, Robert. "Supply Chain Strategies Must Exploit Global Resources,"
Electronic News. Vol. 44, 11 May 1998. p. 35.
12.
www.sourcing.com.
13.
liE Solutions.
"The Supply Chain," 2 Nov 1999. FirstSearch.
"Control of the Supply Chain is Lifting," Vol. 31, No.7, July
1999, 7.
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