Supply Chain Management

Supply chain efficiency

It is better to optimise the supply chain as a whole rather than optimise each individual element within the supply chain

A main source of waste is the delay of resource in a system, whether it is an item stuck as inventory in a store or trapped in a queue.

Throughput efficiency = (Total value adding time/Total throughput time) x 100

The bullwhip effect

Where demand fluctuations magnify through the supply chain

Magnifies demand variability at each interface between customer and supplier.

There are some practices that can reduce the demand amplification

Reducing the number of stages in the supply chain

Sharing demand information across the supply chain

Generating smaller, more frequent replenishment orders

Reducing lead times

Limiting promotions that create demand surges.

Why it is created?

Demand uncertainty across the supply chain

Lead times between supply chain tiers

Under or over reaction to demand changes

The situation is not helped by

Process characteristics that make coordination difficult

Limited levels of collaboration between tiers

Conflicts of interest with different customers

Difficulties in deciding who keeps what stock and where this is kept

Vertically integrated supply chains

Material extraction > Material processing > Component production > Manufacture/assembly > Warehousing > Distribution > Retailer

To address how much of the supply chain one organisation should own, there are three sets of decisions to make:

1. The direction of any further intended integration

If we are part of a middle tier of a supply chain, we can choose to integrate upstream (to buy our suppliers) or to integrate downstream (to buy our distributors or customers)

2. The extent of the integration

We need to address how far upstream or downstream we integrate

Do we really want to own our raw materials producers or is component supply far enough?

Do we want to get involved in retail or is that someone elses competence

3. The balance of the integration

We need to address how much capacity to have at each tier in the supply chain

Do we want to own enough capacity at one tier to meet all our needs or should we buy out some supply?

Def - Where different parts of the supply chain are owned by one organisation

Upstream drivers

Security of supply

Reliability of supply

Restriction to competitors of scarce materials

Control of raw material costs

Downstream drivers

Control customers

Guarantee of business

Access to market data

Customer knowledge

Narrow extent

Only controlling few areas of the supply chain

Wide extent

Controlling the whole supply chain

Can be more desirable

Allows for disintermediation - the removal of a supply chain tier through closer integration of the tiers either side

In seasonal market, the entire supply capacity will have to adjust

Creates the questions as to whether one should design the supply chain with sufficient capacity to meet core demand and then outsource any variation

It is difficult to integrate systems vertically due to different scale and cycle times

Why have supply chains de-integrated?

Issues with vertical integration

VI reduces the market forces in the supply chain

Ownership of the entire supply chain reduces market forces within that supply chain

If a supplier has guaranteed business they may become inefficient

Minimum economic scales are different at each tier

Usually very different in each tier

Upstream usually operates at a very large scale

Downstream typically tends to be on a smaller scale with smaller volumes

Typically tends to be a capacity mismatch

Product variety/ complexity increases downstream

Difficult to control if all tiers are owned

Cost competition increased upstream

Commodity items upstream compete on cost

Downstream competition is on differeitnation (qauilty

Vertically integrated supply chains find that different tiers have different competitive strengths

VI 'locks in' supply for better or worse

If a supplier is not performing/noncompetitive a VI system are still stuck with this supplier - can change if you accept the cost of doing so

Risks - what if the end demand falls away

The capacity will have to be reduced at the end supply as well as potentially along the whole supply chain

Supply chain control can be problematic

Challanging to coordinate and contro the flow

Better to have decoupling points where you have buffers in between tiers - reduces efficiency

Outsourcing is the main alternative to VI

Where producers have a contractual relationship with external suppliers to provide goods and services

In the majority, external suppliers are selected for their distinct capability in excess of what can be provided in house

Outsourcing

Advantages

Disadvantages

The ability to focus on core internal capabilities

Access to supplier capabilities

Reduced need for capital investment

Fewer direct staff

Outsource suppliers usually have lower unit costs

Clear, identifiable supply chain costs

Can be used to expand overall capacity

Loss of control

Costs involved in managing suppliers

Reduced economies of scale

Potential closure of existing facilities

Need to share sensitive information with third parties

Risks of being dependent on a supplier

Increased supply chain risks

When considering outsourcing, two things should be considered...

The strategic value of the good/service

The criticality of the component or service

For each component or service the decision-makers should assess the extent to which the item contributes in some way to the overall competitive advantage of the business

You should ask whether or not the component or service contributes to the performance of the final product or service

The Barnes outsourcing mix

Proprietary items

Commodity items

Novelty items

Utility items

Ones that create competitive advantage and are critical to the end product or service. These would normally be made in-house

Use proprietary technology and are not critical to the performance of the final product. They would normally be widely available from a range of low-cost suppliers. These can usually be outsourced

Specialized and can contribute to competitive advantage. They are not critical but can be difficult to source reliably at low cost. The company has to decide whether it is more economical to make in-house or to outsource.

Based on widely available technology but performance of the product depends on the performance of that technology. This type of item can be outsourced and there should be a range of potential suppliers willing to supply the item at a competitive price. However, it is important that the supplier is reliable and is willing to cooperate and develop a supply relationship because failure to deliver can lead to significant problems with product availability or performance.

Supplier relationships

Working with a supplier is rarely as simple as arranging a contract that states details such as price and service level agreements

In many cases, there is a degree of collaboration and cooperation between customer and the supplier

Within the supply chain, there are three levels of collaboration (Lamberts categorisation of supply relationships)

Type 1

Type 2

Type 3

Organisations recognize each other as partners, with limited coordination and planning. Often only one division or functional area

Organisations progress beyond coordination to integration of activities. Multiple functions/departments involved in the partnership

Organisations share a significant level of operational integration. No ‘end date’ to the relationship

Arms length

‘Joint ventures’ and ‘Vertical integration’ are structural ways of generating joint working. Where no collaboration exists, this is classed as ‘Arm’s length’.

Nicholson and Young (2012)

Identify a number of abusive buying practices that can arise from the imbalance of power between supermarkets and their suppliers

Cancellation of an order

Listing feeds

Delisting feeds

Late payments