MGT 563 OPERATIONS STRATEGIES

MGT 563OPERATIONS STRATEGIES Dr. Aneel SALMAN Department of Management Sciences COMSATS Institute of Information Technology, Islamabad

Recap Lecture 18 • Triple A Supply Chain • Case Study – Zara • Supplier Relationship • Partnership Model • Weakest Link in Supply Chain

Supply network strategy The concept of supply networks Supply network relationships Supply network behavior The network perspective Vertical integration Market trading Partnerships Network dynamics Network management Co-ordination Differentiation Reconfiguration Quantitative Qualitative Supply network issues

“Second tier” Suppliers “First tier” Suppliers “First tier” Customers “Second tier” Customers The Operation Supply side of the network Demand side of the network The Total Supply Network The Immediate Supply Network Internal Supply Networks Total and Immediate Supply Networks Slide 6.4

Operations performance should be seen as a whole supply chain issue • Benefits of looking at the whole supply chain include • Puts the operation into its competitive context • Helps to identify the key players • Shifts emphasis to the long term • Sensitizes the operation to macro changes • Changes the nature of the ‘supplier-buyer’ relationship

COMPAQ Corp. Market Home Office Market Suppliers Retailers Corp. Market DELL Home Office Market Retailers Suppliers Firms in the same industry may configure their supply networks in different ways

Extent of Activity (Quantitative) Nature of Activity (Qualitative) ‘Structure’ Number of relationships ‘Posture’ Closeness of relationships Market Relationships Importance of activity performed ‘in-house’ Degree of activity performed ‘in-house’ Resource Scope The market and resource dimensions of supply networks

Integration and Collaboration In today’s world of international trade and global competition, where increasingly supply chains compete more so than individual firms and products,integrationandcollaboration have become key differentiators of high performing supply chains.

Supply chain integration • Integration is the alignment and interlinking of business processes, and embodies various communication channels and linkages within a supply network • Collaboration is a relationship between supply chain partners developed over a period of time • Integration should not be confused with collaboration, and integration is possible without collaboration, but it can be an enabler of collaboration

Internal integration • To integrate communications and information systems so as to optimise their effectiveness and efficiency • Can be achieved by structuring the organisationand the design and implementation of information systems • Non-value adding activity is minimised • Costs,lead-times, andfunctional silos are reduced • Service quality is improved • BPR and STS method are commonly used to analyse existing organizational structures, eliminate non-value adding activities, and implement new work structures→let organization be optimally aligned • ERPis key enabler of internal integration, often expose any remaining non-value adding activities in the organization

External integration • EDI is a key enabler of supply chain integration • It streamlines information sharing and processingbetween supply chain partners • Effective and efficient organisational design is a prerequisite • ‘Keiretsu’ supply chain structure: • OEMwork closely with their first tier suppliers to integrate manufacturing, logistics and information processes; which is passed upstream • This enables just-in-time line-side delivery at their assembly plants • A seamless lean supply chain is created • The supply chain is viewed as one extended operation • It was pioneered in Japanese banking

Supply chain collaboration principles • While IT are enablers of supply chain integration, optimal and uniform organizational structures are fundamental to integrating factors in a supply chain • The key constraint of integration across multiple echelons • The scale and complexity of global supply chains • Information sharing may not be benefit to all supply chain partners, possibly exposing suppliers to their competitors • Supermarket retail is intensely competitive • Drives down consumer prices at the supermarket shelves • Squeeze their suppliers to operate with lower profit margins and tighter delivery schedules • Competitively rather than collaboratively

Supply chain collaboration principles • Collaboration is dependant on the provision of mutual benefit, but it between suppliers is difficult to achieve in supply chains • Hence trust becomes an issue

The prisoner’s dilemma You and a partner are suspected of committing a crime and arrested. The police interview each of you separately. The police detective offers you a deal: your sentence will be reduced if you confess! Here are your options: • If you confess but your partner doesn’t: your partner gets the full 10-year sentence for committing the crime, whilst you get a 2-year sentence for collaborating. • If you don’t confess but you partner does: the tables are turned! You get the full 10-year sentence, whilst your partner gets the 2-year sentence. • If both of you confess: you each get a reduced sentence of 5 years. • If neither of you confess: you are both free people.

The prisoner’s dilemma • The dilemma you face is ‘do you trust your partner to make the same decision as you?’ • The best strategy is based on trust, • and results in a ‘win-win’ situation.

The journey from open market negotiations to collaboration • A trust-based win-win situation in a supply chain partnership takes time • Trust needs to be built up step-by-step, the journey towards a collaborative supply chain can be long and arduous

Supply chain Management Partnership relationships are seen as desirable because they can reduce the transaction costs of doing business

Actions Trust Sharing success Long-term expectations Attitudes Multiple points of contact Joint learning Closeness of relationship Joint co-ordination of activities Few relationships Joint problem solving Information transparency Dedicated assets Elements of partnership relationships

Supply chain Management There are strong forces acting against the maintenance of trust

Factors in Global Supply Chain • Substantial geographic distances • Foreign market forecasting difficulties • Exchange rate fluctuations • Infrastructural inadequacies • Explosion in product variety in global markets

Taxonomy of International Supply Chains • International distribution • International suppliers • Off-shore manufacturing • Fully integrated global supply chain

Forces Driving Globalization • Global Market Forces • Technological Forces • Global Cost Forces • Political and Economic Forces

Global Market Forces • Foreign competition in local markets • Growth in foreign demand • Domestic consumption from 40% to <30% of world consumption since 1970 • Foreign sales fuel growth • Global presence as a defensive tool • Nestle’s and Kellogg’s • Presence in state-of-the-art markets • Japan -- consumer electronics • Germany -- machine tools • US: SUV’s

Technological Forces • Diffusion of knowledge • Many high tech components developed overseas • Need close relationships with foreign suppliers • For example, Canon has 80% of laser engines • Technology sharing/collaborations • Access to technology/markets • Global location of R&D facilities • Close to production (as cycles get shorter) • Close to expertise (Indian programmers?)

Global Cost Forces • Low labor cost • Diminishing importance (Costs underestimated, benefits overestimated) • Other cost priorities • Integrated supplier infrastructure (as suppliers become more involved in design) • Skilled labor • Capital intensive facilities • tax breaks • joint ventures • price breaks • cost sharing

Political and Economic Forces • Exchange rate fluctuations and operating flexibility • Regional trade agreements (Europe, North America, Pacific Rim) • Value of being in a country in one of these regions • Implications for supply network design • Reevaluation of foreign facilities (Production processes designed to avoid tariffs)

Political and Economic Forces • Trade protection mechanisms • Tariffs • Quotas • Voluntary export restrictions • Japanese automakers in US • Local content requirements • TI/Intel factories in Europe • Japanese automakers in the EU • Health/environmental regulations • Japanese refused to import US skis for many years (different snow) • Government procurement policies • Up to 50% advantage for American companies on US Defense contracts

Added Complexities • Substantial geographic distances • Added forecasting difficulties • Infrastructural Inadequacies • Worker skill, performance expectations • Supplier availability, reliability, contracts • Lack of local technologies • Inadequacies in transportation, communications infrastructure

Added Complexities • Exchange rate uncertainties • Cultural differences • accepted partnerships, styles • value of punctuality • Political instability • tax rates • government control • Added competition “at home”

Additional Issues In Global SCM • Regional vs. International Products • Cars vs. Coca-cola • Local Autonomy vs. Central Control • SmithKline introducing Contact to Japan • Short term expectations • Collaborators become competitors • China • Toshiba copiers, Hitachi microprocessors

The Strategic Importance of the Supply Chain Supply-chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers Competition is no longer between companies; it is between supply chains

Supply-Chain Management Important activities include determining Transportation vendors Credit and cash transfers Suppliers Distributors and banks Accounts payable and receivable Warehousing and inventory Order fulfillment Sharing customer, forecasting, and production information

Global Supply-Chain Issues Supply chains in a global environment must be able to • React to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates • Use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out • Staff with local specialists who handle duties, freight, customs and political issues

How Supply-Chain Decisions Impact Strategy Table 11.1

Reasons for Making Maintain core competence Lower production cost Unsuitable suppliers Assure adequate supply (quantity or delivery) Utilize surplus labor or facilities Obtain desired quality Remove supplier collusion Obtain unique item that would entail a prohibitive commitment for a supplier Protect personnel from a layoff Protect proprietary design or quality Increase or maintain size of company Make-or-Buy Decisions Table 11.4

Reasons for Buying Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity Reduce inventory costs Ensure alternative sources Inadequate managerial or technical resources Reciprocity Item is protected by a patent or trade secret Make-or-Buy Decisions Table 11.4

Outsourcing • Transfers traditional internal activities and resources of a firm to outside vendors • Utilizes the efficiency that comes with specialization • Firms outsource information technology, accounting, legal, logistics, and production

Supply-Chain Strategies • Negotiating with many suppliers • Long-term partnering with few suppliers • Vertical integration • Keiretsu • Virtual companies that use suppliers on an as needed basis

Many Suppliers • Commonly used for commodity products • Purchasing is typically based on price • Suppliers are pitted against one another • Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

Few Suppliers • Buyer forms longer term relationships with fewer suppliers • Create value through economies of scale and learning curve improvements • Suppliers more willing to participate in JIT programs and contribute design and technological expertise • Cost of changing suppliers is huge

Vertical Integration Examples of Vertical Integration Vertical Integration Figure 11.2

Vertical Integration • Developing the ability to produce goods or service previously purchased • Integration may be forward, towards the customer, or backward, towards suppliers • Can improve cost, quality, and inventory but requires capital, managerial skills, and demand • Risky in industries with rapid technological change

Keiretsu Networks • A middle ground between few suppliers and vertical integration • Supplier becomes part of the company coalition • Often provide financial support for suppliers through ownership or loans • Members expect long-term relationships and provide technical expertise and stable deliveries • May extend through several levels of the supply chain

Virtual Companies • Rely on a variety of supplier relationships to provide services on demand • Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands • Exceptionally lean performance, low capital investment, flexibility, and speed

Managing the Supply Chain There are significant management issues in controlling a supply chain involving many independent organizations • Mutual agreement on goals • Trust • Compatible organizational cultures

Issues in an Integrated Supply Chain • Local optimization - focusing on local profit or cost minimization based on limited knowledge • Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale • Large lots - low unit cost but do not reflect sales • Bullwhip effect - stable demand becomes lumpy orders through the supply chain

Opportunities in an Integrated Supply Chain • Accurate “pull” data • Lot size reduction • Single stage control of replenishment • Vendor managed inventory • Postponement

Opportunities in an Integrated Supply Chain • Channel assembly • Drop shipping and special packaging • Blanket orders • Standardization • Electronic ordering and funds transfer

MGT 563 OPERATIONS STRATEGIES