Supply Chain Management MD707 Operations Management Professor Joy Field

Definitions Supply Chain Supply Chain Management 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

Developing the Supply Chain Insourcing vs. Outsourcing Considerations Pros Cons Insourcing Increased control over price, quality, etc. Economies of combined operations Proprietary products protected Capital costs Capability limits Time limits Opportunity costs Reduced flexibility to change partners Reduced volume flexibility Outsourcing Low capital costs Specialization Competition Increased flexibility Unfavorable allocation of product Lack of control over price, quality, etc. Lock-in from specialized contracts and assets Transaction (coordination) costs

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: Toyota

Managing Supply Chain Relationships Long-term relationships Arm’s Length Non-strategic Strategic Characteristics Short-term contracts Price sensitivity Minimal interface between firms Contractual safeguards are sufficient to enforce agreements Longer-term contracts Price sensitivity more broadly defined Minimal to moderate interface between firms Long-term contracts Relation-specific investments Supplier performance more broadly defined Self-enforcing agreements are necessary for optimal performance When to use Product is necessary but non-strategic Commodity product Purchases account for a small percentage of supplier’s production Switching costs are low Low value-added Dividing purchases across multiple suppliers reduces the ability of suppliers to achieve significant economies of scale Vigorous competition can be achieved with few suppliers Switching costs are relatively high Components help to differentiate the customer’s product Customized, non-standard products Multiple interaction effects with other inputs High degree of supplier/ buyer interdependence High value inputs

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. Example 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.

Global Outsourcing and Offshoring Specific considerations Capabilities/resources Coordination requirements Strategic control and risks

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