Topic 5.

7: Supply Chain Logistics/

International Operations


Dr Michael Wynn-Williams
wm97@gre.ac.uk
1
Supply chain: 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 maximisation of
value
Supply chain concerns management of the supply
system costs
Supply chain management Coordination of
materials, information, and funds from the initial
raw material supplier to the ultimate customer
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 integration Backward integration
Multiple
distribution
channels
Multiple
vendors
Should all firms be fully vertically integrated?
Buyers/ Customers Suppliers
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
8
Issues to
consider:
Control
Risk
Investment
Flexibility
Strategic
control
(produce
internally)
Low Control
(buy off the
shelf)
Moderate
control (special
venture or
contract
arrangement)
Degree of strategic vulnerability
High Low
Potential for
competitive
advantage
High
Low
Source: Griffin and Pustay (2010:516) on Queen and Hilmer (1994)
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
11
Global
Reducing costs
Improving quality
Access to new technology
Offset requirements
Presence in a foreign
market
Domestic
Avoid problems of
different:
language
culture
currency
tariffs
Few concerns about quality
and safety
Domestic
purchasing
only
Foreign
buying
based on
need
Foreign
buying as
part of a
procurement
strategy
Integration of
global
procurement
strategy
Assign domestic buyers for foreign purchasing
Use foreign subsidiaries or business agents
Establish international purchasing offices
Assign the responsibility for global sourcing to specific
business units
Integrate and coordinate worldwide sourcing
Continual reevaluation of implementation status, requirements, and
capabilities
Select best suppliers, establish contract terms and conditions and build
desired relationship
Request/evaluate proposals from suppliers
Determine appropriate nature of buyer-supplier relationship
Identify and evaluate potential suppliers worldwide
Define scope of international purchasing effort
Evaluate operating and competitive environments
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)
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
Lower costs
Disperse manufacturing to efficient locations
Accommodate local demands
Decentralize production
Respond to shifts on customer demand
Time-based competition extremely important

Centralised
manufacturing
favoured
Decentralized
manufacturing
favoured
Country factors
Differences in politics, eco.,
culture
Trade barriers
Location externalities
Exchange rates
Substantial
Substantial
Important in
industry
Stable
Few
Few
Not important in
industry
Volatile
Technological factors
Fixed costs
Minimum efficient scale
Flexible manufacturing
technology
High
High
Available
Low
Low
Not available
Product factors
Value-to-weight ratio
Serves universal needs
High
Yes
Low
No
How to read the table: from left (factors) to the preferred cell (high/low
etc.) and up to manufacturing style (centralised/decentralised)
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 centres for design and final
assembly Dispersed centres of excellence are
consistent with a transnational Strategy

The upgrading of production capability is known as
upward migration

Upward migration caused by pressures to:
Improve cost structure
Customize product to meet customer demand
An increasing abundance of advanced factors of production
Father Christmas is a purveyor of gifts to
children
Suppliers include Sony, Apple and ToysRus
Father Christmas supplies parents who
purchase on behalf of their children
You have been appointed
as the chief elf for vertical
integration
What is Father Christmas
core competency?
Where are the
opportunities for
vertical integration?
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
Download, print and read the article on
Supply Chain Management (SCM) in the
tutorial folder
Download and print the accompanying
question paper
Bring both documents to the tutorial and
be prepared to discuss the issues.
Download Route <http://www.downloadroute.com/VALUE-
CHAIN-ANALYSIS-MEGA-SOFTWARE-sqaki-com-16-
VALUE-CHAIN-ANALYSIS-MEGA/image.html>
Hill and Hernandez-Requejo (2011) Global Business Today
Chapter 14
Williamson O E (1981) The economics of organization: the
transaction cost approach in The American Journal of
Sociology 87, 3, November 1981 pp548-577
Wynn-Williams M S (2009) Surfing the Global Tide. London:
Palgrave Macmillan