11 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall

11 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall The Supply Chain has Strategic Importance Supply chain management is integrating the activities that buy raw materials and services, change them into intermediate and final products, (and) distribute them to the final customer.

The Supply Chain has Strategic Importance The aim of supply chain management is to  reduce costs within the supply chain (and)  maximise value to the customer Competition is not between companies; it is between supply chains © 2011 Pearson Education, Inc. publishing as Prentice Hall

11 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall Supply Chain Management 1.Transportation vendors (global  local) 2.Credit and cash transfers (timing, size, methods) 3.Suppliers (one, few or many?) 4.Distributors (intensive or exclusive strategy) 5.Accounts payable and receivable (links to 2, also ownership of goods) 6.Warehousing and inventory (market access, size & timing) 7.Sharing customer, forecasting, and production information ( information sharing leads to competitive supply chain) Important activities include managing

The Supply Chain has Strategic Importance As the supply chain is of strategic and competitive importance,  businesses within the same supply chain are cooperating, not competing,  this means that pricing, terms of trade, etc should be favourable to other supply chain members.  marketing activities should be well coordinated for maximum success. © 2011 Pearson Education, Inc. publishing as Prentice Hall

11 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall A Supply Chain for Beer A Supply Chain for Beer (very important) Figure 11.1

11 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall How Supply Chain Decisions Impact Strategy Low-Cost StrategyResponse StrategyDifferentiation Strategy Supplier’s goal Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell) Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers) Share market research; jointly develop products and options (e.g., Benetton) Primary selection criteria Select primarily for cost Select primarily for capacity, speed, and flexibility Select primarily for product development skills Table 11.1

11 - 8© 2011 Pearson Education, Inc. publishing as Prentice Hall Supply Chain Risk  More reliance on supply chain partners means more risk, such as  Vendor reliability and quality risks  Fewer suppliers increase dependence (Porters 5 forces)  Globalization / international supply chains increase risk, such as  Political and currency risks (Oooby story)  (Extreme weather events) ?

11 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall Make-or-Buy Decisions  Choice between  internal production (make)  and external sources (buy)  Issues of capacity, costs, quality, flexibility, etc  (Can be short term capacity mgt, or strategic decision to outsource)

© 2011 Pearson Education, Inc. publishing as Prentice Hall Supply Chain Strategies  Negotiating with many suppliers  Long-term partnering with few suppliers  Vertical integration  Joint ventures  Keiretsu  Virtual companies that use suppliers on an as needed basis

© 2011 Pearson Education, Inc. publishing as Prentice Hall Many Suppliers  Commonly used for commodity products  Purchasing is price sensitive  Suppliers compete with one another  Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

© 2011 Pearson Education, Inc. publishing as Prentice Hall Few Suppliers  Buyer forms long term partnerships with few suppliers  Create (extra) value through economies of scale (bulk) and learning curve improvements  Suppliers more willing to join JIT programs and share design and technological expertise  Cost of changing suppliers is huge due to ‘supplier lock in’.

© 2011 Pearson Education, Inc. publishing as Prentice Hall Vertical Integration Figure 11.2 Raw material (suppliers) Iron oreSiliconFarming Backward integration Steel Current transformation Automobiles Integrated circuits Flour milling Forward integration Distribution systems Circuit boards Finished goods (customers) Dealers Computers Watches Calculators Baked goods Vertical IntegrationExamples of Vertical Integration

© 2011 Pearson Education, Inc. publishing as Prentice Hall Joint Ventures  Formal collaboration / contract  Enhance skills  Secure supply  Reduce costs  Cooperation within supply chain that does not affect brands or give away competitive advantage

© 2011 Pearson Education, Inc. publishing as Prentice Hall Keiretsu Networks  Supplier and buyer company buy shares in each other to have common interest  Members expect long-term relationships and provide technical expertise and stable deliveries  May extend through several levels of the supply chain  Toyota (Nagoya City) a good example of this.

© 2011 Pearson Education, Inc. publishing as Prentice Hall Virtual Companies  Rely on a variety of suppliers to provide goods/services on demand  Flexible organisation to create ‘unique’ enterprises to meet changing markets.  Exceptionally lean performance, low capital investment, flexibility, and speed.  BUT – high risk strategy. Very good controls needed. E.g. Nike

© 2011 Pearson Education, Inc. publishing as Prentice Hall Managing the Supply Chain  Agreeing on goals  Trust  Compatible cultures/values There are significant management issues when controlling a supply chain of many independent organizations

Eurodell Global supply chains from Europe to NZ. Wide range of products to wide range of clients, small and large. Driven by customer service and profit © 2011 Pearson Education, Inc. publishing as Prentice Hall

Ooooby Short supply chain to maximise return to suppliers. Connecting small business with small markets locally. Resilient system as a reaction to global experience. Driven by social and environmental agenda. © 2011 Pearson Education, Inc. publishing as Prentice Hall

Supply Chain issues  Planning  Supply chain strategy (one/many ? etc)  Sourcing products.  Method & timing of shipping/delivery.  In-store processing & storage.  Continual supply issues. (seasonality?) © 2011 Pearson Education, Inc. publishing as Prentice Hall

Supply Chain issues  Purchasing  Size and pricing of purchases.  Timing of purchases.  Payment methods / problems.  Quality checks etc. © 2011 Pearson Education, Inc. publishing as Prentice Hall

Supply Chain issues  Processing  Break in bulk / repackaging.  Rebranding to retailers.  Quality checks.  Assembly / disassembly.  Resources & facilities needed. © 2011 Pearson Education, Inc. publishing as Prentice Hall

Supply Chain issues  Distribution  Number of outlets supplied.  Frequency, size & timing of deliveries.  Cost efficiency.  Third party?  Vertical integration? © 2011 Pearson Education, Inc. publishing as Prentice Hall

© 2011 Pearson Education, Inc. publishing as Prentice Hall Issues in an Integrated Supply Chain  Local optimization  Local optimization – individual firms focus on lifting their profit or reducing costs which may reduce overall efficiency of whole supply chain  Incentives (sales incentives, quantity discounts, quotas, and promotions)  Incentives (sales incentives, quantity discounts, quotas, and promotions) – can push merchandise into supply chain and fill it up, increasing stock levels and costs  Large lots  Large lots - low unit cost (good) but may not reflect sales(bad). Often a bias to big lots having low unit cost.

Issues in an Integrated Supply Chain  Bullwhip effect  Bullwhip effect - stable demand at retail becomes uneven at manufacturer due to lag effects and over-compensation.  1. An Increase in demand causes short supply at retail 2. As orders move from retailer back through wholesalers to manufacturers the size of the order is increased by a ‘safety - buffer’ at each step. 3. This leads to overstocking and next time the orders are decreased slightly at each step. 4. The manufacturer gets wild fluctuations between orders. © 2011 Pearson Education, Inc. publishing as Prentice Hall

Bullwhip © 2011 Pearson Education, Inc. publishing as Prentice Hall

© 2011 Pearson Education, Inc. publishing as Prentice Hall Opportunities in an Integrated Supply Chain  Accurate “pull” data  Lot size reduction  Single stage control of replenishment  Vendor managed inventory (VMI)  Collaborative planning, forecasting, and replenishment (CPFR)  Blanket orders  Standardization  Postponement  Drop shipping and special packaging  Pass-through facility  Channel assembly

© 2011 Pearson Education, Inc. publishing as Prentice Hall E-Procurement Methods:  Online catalogs 1.by vendors 2.published by intermediaries 3.Exchanges provided by buyers  Trading Exchanges  Auctions  Alibaba – 80% of SME sourcing from China (?)

© 2011 Pearson Education, Inc. publishing as Prentice Hall E-Procurement (other online functions)  Electronic ordering and funds transfer  Electronic data interchange (EDI)  Advanced shipping notice  RFQs  Can make requests for quotes (RFQs) less costly  Improves supplier selection  Real-time inventory tracking

© 2011 Pearson Education, Inc. publishing as Prentice Hall Vendor Selection  Vendor Evaluation  Can be a critical decision  Find potential vendors (use RFQ)  Ability to supply / relationship ‘fit’  Vendor Development (supply chain as competitive unit)  Training  Engineering and production help  Establish policies and procedures

© 2011 Pearson Education, Inc. publishing as Prentice Hall Vendor Selection  Negotiations  Cost-Based Price Model  Cost-Based Price Model - supplier opens books to purchaser  Market-Based Price Model  Market-Based Price Model - price based on published, auction, or indexed price  Competitive Bidding  Competitive Bidding - used for infrequent purchases (eg one-off subcontracting) but may not help long-term relationship

© 2011 Pearson Education, Inc. publishing as Prentice Hall Logistics Management (think ‘whole supply chain’)  Aim of logistics is to have costs effective and efficient operations by integrating all material acquisition, movement, and storage activities across whole supply chain  Specialist service = often outsourced  Allows competitive advantage to be gained through reduced costs and improved customer service

© 2011 Pearson Education, Inc. publishing as Prentice Hall Distribution Systems  Trucking   expensive, flexible (any size, any location)  Railroads  Cheap, large volume, railway investment, few locations  Airfreight  Very expensive, very fast, specialist goods only.  Waterways  Canals not common, useful for larger volume, weight. Intl shipping slow.  Pipelines  Fixed, suitable some products, usually not very long.

© 2011 Pearson Education, Inc. publishing as Prentice Hall Third-Party Logistics (allows business to focus on core activities)  Outsourcing logistics can reduce costs and improve delivery reliability and speed  Coordinate supplier inventory with delivery services  May provide warehousing, assembly, testing, shipping, customs