Supply Chain Logistics/ International Operations Lecture 14, 21 January 2009 Dr Michael Wynn-Williams 1

 Supply chain: a simplistic term for complex activities  It describes the system of resources and processes from raw materials to the market  The value chain describes a similar internal perspective for a single company adding value  The value chain concerns the exploitation of value, supply chain concerns management of the supply system  Supply chain management – Coordination of materials, information, and funds from the initial raw material supplier to the ultimate customer  Logistics (materials management) is part of the supply chain process

The value chain links the value-creating activities involved in designing and bringing a product to market Source: Download Route

Value chain analysis also takes in upstream and downstream activities Source: Download Route

Buyers/ Customers Suppliers The Firm Forward integrationBackward integration Multiple distribution channels Multiple vendors Should all firms be fully vertically integrated?

Buyers/ CustomersSuppliers The Firm Forward integration Backward integration Multiple distribution channels Walkers Crisps Flavourings Farmers Packaging Manufacturers TESCO WH Smiths Should Walkers be a vertically integrated firm ?

 Should a firm make or buy the component parts that go into their final product?  The decision is based on Transaction Cost Analysis (O E Williamson)  “Bounded rationality” means that knowledge is limited – opportunism occurs when new information emerges or there is specificity  Costly contracts control opportunism

 Access to market pricing  Access to economies of scale  Strategic flexibility in sourcing components  Open to new developments  Reduces coordination costs  Strategic alliances with suppliers give benefits of vertical integration without the associated organizational problems

 “Bounded rationality” – perfect market is impossible  Avoids “friction” of transactions  Search costs  Contracting costs  Coordination costs  Williamson gave three dimensions of transaction costs  Frequency  Uncertainty  Specificity  Vertical integration reduces risk by internalising the employment contracts

 Walkers Crisps is a famous Leicester manufacturer of crisps  Suppliers include raw potatoes, flavourings and packaging  Walkers supplies supermarkets, pubs and local shops  You have been appointed as the manager of vertical integration  What opportunities are there for vertical integration?

 Role of just-in time inventory (JIT)  Economize on inventory holding costs  Speeds inventory turnover  Difficult to achieve over international distances  Drawback: no buffer stock  Role of organization  Organizational linkages more numerous and complex  Require a separate functional department  Role of IT and the internet  Track components across globe to an assembly plant  Electronic data interchange (EDI)

 Lower costs  Disperse manufacturing to efficient locations  Accommodate local demands  Decentralize production  Respond to shifts on customer demand  Time-based competition extremely important

Concentrated manufacturing favoured Decentralized manufacturing favoured Country factors Differences in politics, eco., culture Trade barriers Location externalities Exchange rates Substantial Important in industry Stable Few Not important in industry Volatile Technological factors Fixed costs Minimum efficient scale Flexible manufacturing technology High Available Low Not available Product factors Value-to-weight ratio Serves universal needs High Yes Low No

 Optimum PEST conditions  Externalities  Skilled labor pools  Supporting industries  Formal and informal trade barriers  Exchange rate Fixed costs Minimum efficient scale Flexible manufacturing (lean production) Flexible machine cells

 Two product features affect decisions  Value to weight ratio (Cement)  Product serves universal needs (Screws, Bolts)  Two basic strategies  Concentrating in a centralized location and serving the world market (Coke, Microsoft)  Decentralizing them in various regional or national locations close to major markets (Nike)

 Initially, established where labour costs low  Later, important centers for design and final assembly – Dispersed centers of excellence are consistent with a Transnational Strategy  Upward migration caused by pressures to:  Improve cost structure  Customize product to meet customer demand  An increasing abundance of advanced factors of production

 Describe different dimensions of global manufacturing strategy  Discuss factors important for making manufacturing location strategies  Examine issues related to global supply chain management  Explain how inventory management is a key dimension of the global supply chain

 Examine the international supply chain for the following groups of industries  Steel  Sports wear  Banking  Scotch whiskey  You are expected to come prepared with some background reading of these industries.

Download Route Williamson O E (1981) The economics of organization: the transaction cost approach in The American Journal of Sociology 87, 3, November 1981 pp Wynn-Williams M S (2009) Surfing the Global Tide. London: Palgrave Macmillan