Supply Management

SuppliersManufacturersWarehouses & Distribution Centers Customers Material Costs Transportation Costs Transportation Costs Transportation Costs Inventory CostsManufacturing Costs

 Supply management has a significant role to play in focusing operations. All organizations have to focus to some degree as they do not have limitless resources and cannot, therefore, provide a limitless range or volume of products or services around the world. However, focus is much more specific than this and can have profound importance for the firm.

Supply and Outsourcing  Whereas focus includes divesting business assets that were once part of the firm’s attempts to diversify, outsourcing is more often associated with the configuration in which the firm finds itself within the supply chain. The perceived wisdom was formerly that a firm should own all activities within the supply chain.  For example, at one time, Ford made almost everything that went into its cars, including the steel and glass. In 1980, it made about 87 per cent of a car itself. Now it makes less than 40 per cent.

Managing supply – the objective  For many organizations, the major proportion of value offered to the customer is actually derived not from doing things, but from adding value to things that have been bought. This is sometimes referred to as the ‘purchasing ratio’.  Control of material costs may actually be more important than savings on labor or overheads. As purchasing people like to point out, such savings go directly to the bottom line for the company and improve profits in a way that increased sales could rarely achieve.

 In practice, however, materials costs result from a series (or chain) of events – the supply chain. Reducing them is thus not simply a matter of attacking the immediate target – the price paid for the goods or services – but a more complex task of analyzing the build-up of value, cost and time that has resulted in the material cost as it is experienced by the organization.

Importance of SCM  Dealing with uncertain environments – matching supply and demand  Boeing announced a $2.6 billion write-off in 1997 due to “raw materials shortages, internal and supplier parts shortages and productivity inefficiencies”  U.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than anticipated inventories on the shelves of hospitals”  IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue  Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s from Taiwanese suppliers in 1999 due to a massive earthquake  U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998

Importance of SCM  Shorter product life cycles of high-technology products  Less opportunity to accumulate historical data on customer demand  Wide choice of competing products makes it difficult to predict demand  The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners  If you don’t do it, your competitor will  Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its suppliers  Availability of SCM technologies on the market  Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes

Bullwhip Effect

Factors contributing to bull whip  Demand forecasting practices  Min-max inventory management (reorder points to bring inventory up to predicted levels)  Lead time  Longer lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costs  Batch ordering  Peaks and valleys in orders  Fixed ordering costs  Impact of transportation costs (e.g., fuel costs)  Sales quotas  Price fluctuations  Promotion and discount policies  Lack of centralized information

Setting up a supply strategy  In forming a supply strategy, there are four requirements, the first two of which may be considered together:  a general policy on how the organization is to engage with its external activities, accompanied by a suitable strategy for implementing it;  an internal strategy for the role that the purchasing process (and thus the functions associated with it) should play;  a set of specific approaches to managing supply relationships.

Supply policy and strategy  A policy is concerned with clarifying an organization’s position on a specific matter – an articulation of the way it feels about something. In this case, the matter is supply. Directors of the organization may decide that the nature of their business means that they must be very competitive in the supply chain (i.e. in terms of controlling the value-adding process) rather than collaborative. This would be the case where the resources needed for the business (including skills, materials, information, locations, equipment and finance) were scarce and the number of suppliers or subcontractors with whom one might work was high.

 The supply policy might also include meddling with the resources issue – to create scarcity and thus influence the degree of competitiveness or collaboration in the chain.  Other factors come into the policy-making process, such as ethical and environmental issues, social considerations and the nature of the organization, including the constraints on its freedom of action (now discussed under the general title of ‘corporate social responsibility’). This will entail a series of trade-offs, such as the commercial benefits of sourcing in low-labor- cost countries, versus the issue of child labor, which may form a part of the low-cost labor.

 The organizations within a supply chain are both competitors and collaborators. Their operations are interdependent but they must also compete for the available value-adding business from which profit may be made.  In order to develop a supply strategy, it is necessary to have a policy on how the organization should behave in the supply chain, a strategy to implement that policy, an internal strategy for the positioning of the purchasing and supply process, and a set of techniques for managing relationships within the supply chain.

 Once policy is set, an overall strategy for supply requirements may be formed. This will include matters such as ‘make or buy’ (or ‘do or buy’), location and alliances. In the first of these, the organization must decide whether or not it wishes to carry out a process itself, or have it done by an outside party. This may be a simple matter of subcontracting (having something done for you that you could do yourself but choose not to) or outsourcing (setting up an external resource that does something for you in which you choose not to become expert). This is clearly fundamental to the organization’s success and is not usually left to traditional supply managers.

 Policy may lead to the strategies of outsourcing, as we saw earlier. The policy evident in Nintendo and Sega, for example, is that the natural dynamism of their products should not be reduced by heavy corporate inertia. The strategy associated with this is to outsource everything and concentrate on the competence of marketing. They are thus never left with production competencies that are out of date (including the mercurial resource of software writing) and can switch to a new idea with only minimal costs.

Internal strategy for the role of the purchasing process  Having built a strategy for supply itself and a way of understanding the management of sourcing decisions, the supply strategist must decide how purchasing is conducted within the organization. This has two parts: location and process.

The process of purchasing and supply  The purchasing and supply process is one of responding to demand for products and services from within the organization by providing the necessary resources to specification. This involves competences, action and knowledge.