Supply Chain Management
Operations Management
Session 5
1
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 eprocurement
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Topics
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Make/Buy decision
Vertical integration
Purchasing strategies
Kieretsu
Supply chain partnerships
Virtual companies
Supplier selection
Purchasing techniques
E-procurement
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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
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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.
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Additional Sales Needed to Equal £1 Saved
Through Purchasing
Proportion of Sales Revenue Spent on Purchases
Net
Profit
30%
40%
50%
60%
70%
80%
90%
2
2.78
3.23
3.85
4.76
6.25
9.09
16.67
4
2.70
3.13
3.70
4.55
5.88
8.33
14.29
6
2.63
3.03
3.57
4.35
5.56
7.69
12.50
8
2.56
2.94
3.45
4.17
5.26
7.14
11.11
10
2.50
2.86
3.33
4.00
5.00
6.67
10.11
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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
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Make/Buy Considerations
Reasons for Buying
Reasons for Making
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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
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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
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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.
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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.
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Table of Outcomes
Prisoner B Stays Silent
Prisoner B Betrays
Prisoner A
Stays
Silent
Both serve six months
Prisoner A serves ten years;
Prisoner B goes free
Prisoner A
Betrays
Prisoner B serves ten years;
Prisoner A goes free
Both serve two years
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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 asneeded basis
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Many Suppliers Strategy
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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.
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Few Suppliers Strategy
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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.
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Kieretsu
• Japanese term to describe suppliers who
become part of a company coalition
• Interlocking relationships bind together the
links in the supply chain
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Keiretsu Network Strategy
• Japanese word for ‘affiliated chain’
• System of mutual alliances and
cross-ownership
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Company stock is held by allied firms
Lowers need for short-term profits
• Links manufacturers, suppliers,
distributors, & lenders
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‘Partnerships’ extend across entire supply chain
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Partnership Supply Relationships
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Sharing success
Long-term expectations
Multiple points of contact
Joint learning
Few relationships
Joint co-ordination of activities
Information transparency
Joint problem solving
Trust
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Virtual Company Strategy
• Network of independent companies
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Linked by technology
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PC’s, faxes, Internet etc.
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Each contributes core competencies
– Typically provide services
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Payroll, editing, designing
• May be long or short-term
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Usually, only until opportunity is met
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Vendor Selection Steps
• Vendor evaluation
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Identifying & selecting potential vendors
• Vendor development
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Integrating buyer & supplier
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Example: Electronic data exchange
• Negotiations
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Results in contract
Specifies period of agreement, price, delivery
terms etc.
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Supplier Selection Criteria
• Company
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Financial stability
– Management
– Location
• Product
• Service
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Delivery on time
– Condition on arrival
– Technical support
– Training
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Quality
– Price
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Purchasing Techniques
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Drop shipping and special packaging
Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Electronic data interchange (EDI)
Stockless purchasing
Standardization
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Supply Chain Management
• Advantages of vertical integration but also
allows concentration on core
competencies and economies of scale and
scope
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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.
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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
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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.
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Common Uses of E-commerce
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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
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Advantages of Electronic
Procurement
• Lower Operating Costs
– Reduce paperwork
– Reduce Sourcing time
– Improve control over inventory and spending
• Improve Procurement Efficiency
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Find new supply sources
Improve communications
Improve personnel use
Lower cycle times
• Reduce Procurement Prices
– Improve comparison shopping
– Reduce overall prices paid
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Disadvantages of Electronic
Procurement
• Security of electronic messages
• Lack of face-to-face contact
• Other technological concerns
– Standard protocols
– System reliability
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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
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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
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