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Supply Chain Management. Operations Management Session 5. Objectives. By the end of this session, student will be able to: Discuss relative merits of different types of relationships with suppliers Discuss criteria for selection of suppliers Identify different purchasing strategies

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supply chain management

Supply Chain Management

Operations ManagementSession 5


By the end of this session, student will be able to:

  • Discuss relative merits of different types of relationships with suppliers
  • Discuss criteria for selection of suppliers
  • Identify different purchasing strategies
  • Evaluate different approaches to e-procurement
  • Make/Buy decision
  • Vertical integration
  • Purchasing strategies
  • Kieretsu
  • Supply chain partnerships
  • Virtual companies
  • Supplier selection
  • Purchasing techniques
  • E-procurement
importance of supply chain
Importance of Supply Chain
  • As firms strive to increase their competitiveness through product customisation, high quality, cost reductions and speed to market, they place added emphasis on the supply chain
push and pull
Push and Pull
  • Push – goods are produced and pushed down the supply chain to the customer
  • Pull – customer demand triggers events in the supply chain to pull goods through the process eg. (ECR) efficient customer response. Mass customisation is a consequence of this type of thinking.
make or buy
Make or Buy?
  • Make – agency costs. The costs involved in conducting transactions within an organisation.
  • Buy – transaction costs. The costs involved in conducting transactions in the market place.
  • Problem of ‘hold up’ when there are relationship specific assets
make buy considerations
lower production cost

unsuitable suppliers

assure adequate supply

utilize surplus labor and make a marginal contribution

obtain desired quantity

remove supplier collusion

obtain a unique item that would entail a prohibitive commitment from the supplier

maintain organizational talent

protect proprietary design or quality

increase/maintain size of company

lower acquisition cost

preserve supplier commitment

obtain technical or management ability

inadequate capacity

reduce inventory costs

ensure flexibility and alternate source of supply


item is protected by patent or trade secret

frees management to deal with its primary business

Make/Buy Considerations

Reasons for Buying

Reasons for Making

vertical integration
Vertical Integration
  • In backward vertical integration, the company sets up subsidiaries that produce some of the inputs used in the production of its products. For example, an automobile company may own a tire company, a glass company, and a metal company.
  • In forward vertical integration, the company sets up subsidiaries that distribute or market products to customers or use the products themselves. An example of this is a film studio that also owns a chain of cinemas.
repeat transactions
Repeat Transactions

The Prisoner’s Dilemma:-

  • Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and having separated both prisoners, visit each of them and offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, the police can only give both prisoners 6 months for a minor charge. If both betray each other, they receive a 2-year sentence each.
purchasing strategies
Purchasing Strategies
  • Many Suppliers - Negotiate with many suppliers; play one supplier against another
  • Few Suppliers - Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer
  • Vertically integrate - buy the actual supplier
  • Keiretsu - have your suppliers become part of a company coalition
  • Virtual company - uses suppliers on an as-needed basis
many suppliers strategy
Many Suppliers Strategy
  • Many sources per item
  • Adversarial relationship
  • Short-term
  • Little openness
  • Negotiated, sporadic PO’s
  • High prices
  • Infrequent, large lots
  • Delivery to receiving dock

© 1995 Corel Corp.

few suppliers strategy
Few Suppliers Strategy
  • 1 or few sources per item
  • Partnership (JIT)
  • Long-term, stable
  • On-site audits & visits
  • Exclusive contracts
  • Low prices (large orders)
  • Frequent, small lots
  • Delivery to point of use

© 1995 Corel Corp.

  • Japanese term to describe suppliers who become part of a company coalition
  • Interlocking relationships bind together the links in the supply chain
keiretsu network strategy
Keiretsu Network Strategy
  • Japanese word for ‘affiliated chain’
  • System of mutual alliances and cross-ownership
    • Company stock is held by allied firms
    • Lowers need for short-term profits
  • Links manufacturers, suppliers, distributors, & lenders
    • ‘Partnerships’ extend across entire supply chain
partnership supply relationships
Partnership Supply Relationships
  • Sharing success
  • Long-term expectations
  • Multiple points of contact
  • Joint learning
  • Few relationships
  • Joint co-ordination of activities
  • Information transparency
  • Joint problem solving
  • Trust
virtual company strategy
Virtual Company Strategy
  • Network of independent companies
    • Linked by technology
      • PC’s, faxes, Internet etc.
    • Each contributes core competencies
    • Typically provide services
      • Payroll, editing, designing
  • May be long or short-term
    • Usually, only until opportunity is met
vendor selection steps
Vendor Selection Steps
  • Vendor evaluation
    • Identifying & selecting potential vendors
  • Vendor development
    • Integrating buyer & supplier
      • Example: Electronic data exchange
  • Negotiations
    • Results in contract
    • Specifies period of agreement, price, delivery terms etc.
supplier selection criteria

Financial stability







Delivery on time

Condition on arrival

Technical support


Supplier Selection Criteria
purchasing techniques
Purchasing Techniques
  • Drop shipping and special packaging
  • Blanket orders
  • Invoiceless purchasing
  • Electronic ordering and funds transfer
  • Electronic data interchange (EDI)
  • Stockless purchasing
  • Standardization
supply chain management1
Supply Chain Management
  • Advantages of vertical integration but also allows concentration on core competencies and economies of scale and scope
dell computer corp responsive supply chain
Dell Computer Corp - Responsive Supply  Chain
  • The Dell marketing strategy targets customers who desire having the most up-to-date personal computer equipment customized to their needs.  Dell has opted for a responsive supply chain.
  • It relies on more expensive express transportation for receipt of components from suppliers and for delivery of finished products to customers.
  • Dell achieves product variety and manufacturing efficiency by designing common platforms across several products and using common components.
  • It has located manufacturing facilities to ensure rapid delivery.
  • Dell has invested heavily in information technology to link itself with suppliers and customers.
wal mart an efficient supply chain
Wal-Mart -  An Efficient Supply Chain
  • Wal-Mart’s marketing strategy is to be a reliable, lower-price retailer for a wide variety of mass consumption consumer goods. 
  • This strategy favours an efficient supply chain designed to deliver products to consumers at the lowest possible cost
electronic procurement
Electronic Procurement
  • Business-to business (B2B) purchases are estimated to be $1.3 to $2.0 trillion by 20036.
  • Former uses of electronic data interchange (EDI) were costly and required special technology to implement have given way to the publicly available Internet.
  • This has opened the door to increased applications of E-commerce techniques to procurement.
common uses of e commerce
Common Uses of E-commerce
  • Research vendor and product information
  • Electronic check of available stock
  • Price negotiation
  • Order products or services
  • Check on the status of an order
  • Issue invoice and receive payment
advantages of electronic procurement
Advantages of Electronic Procurement
  • Lower Operating Costs
    • Reduce paperwork
    • Reduce Sourcing time
    • Improve control over inventory and spending
  • Improve Procurement Efficiency
    • Find new supply sources
    • Improve communications
    • Improve personnel use
    • Lower cycle times
  • Reduce Procurement Prices
    • Improve comparison shopping
    • Reduce overall prices paid
disadvantages of electronic procurement
Disadvantages of Electronic Procurement
  • Security of electronic messages
  • Lack of face-to-face contact
  • Other technological concerns
    • Standard protocols
    • System reliability
four basic types of e commerce models
Four Basic Types of E-commerce Models
  • Sell-side system
    • Administered by the seller
    • Usually free to the buyer
  • Electronic marketplace
    • Administered by a third party
    • Collection of electronic catalogs
    • One-stop sourcing for buyers
types of e commerce models 2
Types of E-commerce Models (2)
  • Buy-side system
    • Administered by the buyer
    • Pre-approves vendor access
    • Expensive and usually the domain of large companies
  • On-line trading community
    • Maintained by a third party
    • Used by multiple buyers and sellers
    • Eg web based trade exchange developed by Ford, GM and Daimler Chrysler