Lecture 5

Supply Network Management

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a
customer request.
A supply network perspective means setting an operation in the context of all the
customers and suppliers that interact with it. Materials, parts, information, ideas,
finance and people may all flow through a supply network.

Supply Chain Management is the management of the interconnection of organisations

that relate to each other through upstream and downstream linkages between the
processes that produce value to the ultimate consumer in the form of products or
services. Concerned with the following:

Flow between operations in the whole network

Flow between a string of operations

Upstream: Flow of customer requirements

Long Term plans and requirements
Market Research Information
Individual orders
Payment
Development of potential new products and services
Downstream: Flow of products and services for customer fulfilment
Products and Services
New Products and Services
Delivery Information
Payment Request/Credit
Why adopt a network perspective?

It helps understanding of competitiveness - in order to better understand

the needs of the end consumer, the company must understand the
requirements of its immediate links.
It helps identify significant links in the network that must be given
importance eg. A plumbing appliance manufacturer is more concerned with
the stockholders than the end user as they ensure delivery. Hence, the company
must focus on reducing lead-times and increasing availability to stockholders.
It helps focus on long-term issues Weak links of the network can be
addressed before problems arise and asses the relative advantage of
strengthening a link. If costs of strengthing are higher than the benefit there is
no point in strengthening the link. Eg. If customers are willing to wait for a
product and are compensated by a cheaper product, there is no need to reduce
lead times.
It helps focus on cost procurement is the single biggest cost of any
company, and by focusing on its suppliers and their links it may be able to
reduce costs.

The do or buy decision (Vertical integration vs Outsourcing Decision)

Performance Objectives for Do or Buy decisions

Supply Network Alignment

Dependent on:
Product/Service Life Cycle
Profit Margins
Forecast Error
Functional Products: Longer Life Cycle, Lower Margins, Low forecast Error.
Eg. Chocolates that have been in the market for over 50 years or shoe manufactures
with classic shoes
Innovative Products: Shorter Life Cycles, Higher Margins, High forecast error.
Eg. Chocolates branded with superheroes in line with latest movies releases or in
fashion shoes that become out of fashion in 2-3 seasons.
Supply Network policies implemented for the two types of products and services are
either efficient supply networks or responsive supply networks.
Efficient Supply Networks
Low inventories for fast throughput and reduced working capital tied up in
inventory.
Inventory concentrated mainly in the manufacturing operation for high
utilisation and low manufacturing costs
Information must flow quickly to replenish few stocks in the network

Responsive Supply Network

High service levels and responsive supply
Inventory in the network will be deployed as closely as possible to the customer
Ability to Supply even when dramatic changes occur in customer demand
High levels of availability to end customer

Relationships in Supply Networks

A relationship is a process that must be managed, streamlined and focused

In order succeed, relationships must be evaluated for outputs in relation to
inputs
Firms must think about relationship with customers and suppliers

Types of relationship
Business to Business - E.g. Alibaba.com, Boeing
Business to Consumer E.g. Nestle, Unilever, Lacoste
Consumer to Business Consumer places an offer and business decides to buy,
Google AdSense
Consumer to Consumer Auction sites like eBay and file sharing sites

Traditional Market Supply

Seeking the best supplier every time. Hence, focusing on the short-term gains of a
relationship.
Advantages
Maintain competition between suppliers. Hence, get the best product
Specialisation of supplier = economies of scale mean lower costs, quicker and
cheaper innovation
Flexibility. As demand changes, supplier and order quantity can be changed
Operations can focus on core activities
Disadvantages
Supply uncertainties. Difficult to maintain control over how the order is fulfilled.
Decision process for buying decisions can be time consuming due to
information required.
Over-reliance on outsourcing can hollow out company, leaving it with few
competencies to perform in the market.
Short-term decisions of low cost may lead to low reliability and support from the
supplier. Hence, resulting in long term high costs.
Partnership Supply
Relatively enduring inter-firm cooperative agreements, involving flows and linkages
that use resources and/or governance structures from autonomous organisations, for
the join accomplishment of individual goals linked to the corporate mission of each
sponsoring firm. Partnerships are assessed by degree of closeness.
Sharing success
Long-term expectations from the relationship
Level of Communication
Joint and collaborative learning process
Few other relationships
Joint coordination of activities
Information transparency and sharing
Joint problem-solving

Trust

Virtual Operations
Virtual operations do relatively little themselves, but rely on a network of
suppliers that can provide services and products on demand
Example: Hollywood film industry. A production company may buy and develop
an idea for a movie but it is created, edited and distributed by a loose network
of agents, actors, technicians, studios and distribution companies.
Advantage: Flexibility and low risk due to low level of investment in facilities.
Disadvantage: Outsourced Expertise available to everyone and difficult develop
a unique core of technical expertise
Core Competence = Management of the supply network
Sourcing Suppliers
The ability to produce a quality product at a reasonable cost and in a timely
manner is heavily influence by its suppliers capabilities
Supplier selection is one of they key issues of Supply Chain Management as cost
of materials and components makes up majority of the cost of a product

Numerous factors are considered when choosing a supplier. Factors include hard
factors such as cost, quality, delivery and downtime, as well as, soft factors such as
capability, work culture, ethics, environment etc. Due to importance of factors
varying, companies use a weighted system to make supplier decisions.

The Bullwhip Effect

The tendency of supply chains to amplify relatively small changes at the demand
side of a supply chain such that the disruption at the supply end of the chain is
much greater.

Causes of the Bullwhip Effect

Panic ordering by customers resulting incorrect anticipation of shortages and
demand
Forecasting Errors
Long lead times
Lead time variability
Order Batching quantity discounting and low transport costs
Lack of communication
Consequences of the Bullwhip Effect
Lower Revenues
o Stockouts and Backlogs = customer going elseswhere
Higher Costs
o Due to speed at which products are required, high transportation costs,
overtime costs and set up costs
o All entities in the supply chain must invest heavily to expand and meet
peak demand, resulting in under and over utilisation.
Quality
o Unplanned changes in production and delivery may disrupt quality control,
which are costly to rectify
Poor Service
o Irregular and unpredictable demand resulting in longer lead times and
delays, leading to customer dissatisfaction
Reducing the Bullwhip Effect (Communication)
End to End Supply chain visibility and transparency
o Vendor Managed Inventory (Single Control of orders)
o Information Collection and Sharing from EPOS
o Reduction in Supply Chain Stages
o Smaller Batch Sizes and increased speed of replenishment for flexibility
o Historical Sales forecasting
o Everyday Low Pricing