Operations Management as a Competitive Weapon
Module:
Supply Chain Management
OM Course Framework
1. Cost
3. Dependability
- Design & Selection
- Project Management
- JIT 4. Flexibility
2. Quality
- TQM
- SQC
- Inventory
- Supply Chain
- Location
- Forecasting
- Aggregate Planning
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Learning Objectives
At the end of this module, each student will be able to:
1. Describe an overview of supply chain
management
2. Describe information sharing
3. Analyze insourcing or outsourcing
problems
4. Describe the role of virtual organizations
5. Describe the role of vertical integration
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1. Overview
 A supply chain is the network of activities
that deliver a product/service to the
customer

Raw materials, assembly, warehousing, order entry,
distribution, delivery
 Supply Chain Management is the business
function that coordinates all of the network
links


Coordinates movement of goods through supply chain from
suppliers to manufacturers to distributors
Promotes information sharing along chain like forecasts, sales
data, & promotions
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A Basic Supply Chain
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Overview (Cont.)
 Several factors have emerged that
now require companies to use supply
chain management as part of their
competitive strategy.




Globalization
Increased competition
Information technology
Shorter product life cycles
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Overview (Cont.)
 Globalization has led to new markets, but
at the same time it increases the
competition.
 One way of winning market share is
introducing new products, leading to
shorter product life cycles.
 One way to be more competitive is
through supply chain management.
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2. Information Sharing
 Traditionally, information has been
shared only between adjacent supply
chain pairs, and that information has
been very limited.
 This limited approach to information
sharing leads to “bullwhip effect.”
 To reduce the bullwhip effect, supply
chains use a hub and spoke approach to
sharing information.
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3. Insourcing vs. Outsourcing
 What questions need to be asked before
sourcing decisions are made?





Is product/service technology critical to firm’s
success?
Is operation a core competency?
Do you have the capital to provide capacity & keep
the process current?
Will outsourcing extend lead times and limit
flexibility?
Can others do it for less cost and better quality?
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Make or Buy Analysis
 Analysis will look at the expected sales
levels and cost of internal operations vs.
cost of purchasing the product or service
Total Cost of Outsourcin g :
TCBuy  FCBuy  VCBuy  Q 
Total Cost of Insourcing :
TCMake  FCMake  VCMake  Q 
Indifferen ce Point :
FCBuy  VCBuy  Q   FCMake  VCMake  Q 
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Make or Buy Example
A small snowboard manufacturing company is
presently sourcing the major portion of its
manufacturing process. The cost for the
purchased board is $50 each and they estimate
their current fixed manufacturing costs at
$25,000. A consultant has presented a plan which
would reduce the variable cost to $20 each, but
requires a major in-house investment which would
increase their fixed cost to $400,000.
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Make or Buy Analysis
The owner wants to know what unit sales must
be to justify the new proposal.
FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)
$25,000 + ($50 x Q) = $400,000 + ($20 x Q)
Q = 12,500 units
Purchasing has identified a new supplier that
can produce a board for $30 each. Now what
is the Indifference Point?
$25,000 + ($30 x Q) = $400,000 + ($20 x Q)
Q = 37,500 units
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4. Virtual Organizations
 Outsourcing is gaining in popularity
because of cost advantages and the
opportunities for greater coordination.
 This system has even led to “virtual
corporations,” that exist only as an
administrative shell, with all other
functions outsourced.
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5. Vertical Integration
 If a company owns its suppliers, it is
called backward vertical integration.
 If companies own the distribution
systems and retail outlets that sell
their products, then that is forward
vertical integration.
 Both integration help the companies to
get a close coordination with suppliers.
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