BBA 5th SEMESTER Unit - Four

Supply Chain
Management
Supply Chain Management 3 LH
1.Introduction Of Supply Chain Management
2.Supply Chain Strategy
3.Supply chain Design strategy
4. Out Sourcing and Mass Customization
 Supply Chain Management
Meaning:
A supply chain is a network of supplier, manufacturing,
assembly, distribution, and logistics facilities that perform
the functions of procurement of materials, transformation
of these materials into intermediate and finished
products, and the distribution of these products to
customers. Supply chains arise in both manufacturing and
service organizations.
 Supply Chain For a manufacturing Organization

Supplier A Storage Manufacturing Storage

Retailer
Supplier B Distribution

Supplier C Customer
 Supply Chain For A Service Organization

Supplier A

Storage Service Customer

Supplier B
Supply chain management is the integration of the activities that
produce materials and services, transform them into intermediate
goods and final products, and deliver them to customers. These
activities include purchasing and outsourcing activities, plus many
other functions that are important to the relationship with suppliers
and distributors. Supply chain management includes determining
(1) Transportation vendors (2) Credit and cash transfers (3)
Suppliers (4) Distributors (5) Accounts payable & receivable (6)
Warehousing & inventory (7) Other fulfillment (8) Sharing
customer, forecasting and production information.
Cont….
Supply chain management is important in business today. The
term supply chain comes from a picture of how organizations are
linked together as viewed from a particular company.

Supply chain management seeks to synchronizeable a firm’s

processed and those of its supplies to match flow of materials,
services and information with customer demand.

Basic purpose of supply chain is to control inventory by managing

the flows of materials.
 Supply Chain Strategies

For goods and services to be obtained from

outside sources, the firm must decide on
a supply chain strategy.
One such strategy is the approach of
negotiating with many suppliers and
playing one supplier against another.
A second strategy is to develop long-term
“partnering” relationships with a few
suppliers to satisfy the end customer.
A third strategy is vertical integration,
in which a firm decide to use vertical
backward integration by actually
buying the supplier.
A fourth variation is a combination of few
supplier and vertical integration, known as
a keiretsu. In a keiretsu, suppliers become
part of a customer of a company union.
Finally, a fifth strategy is to develop
virtual companies that use
suppliers on an as-needed basis.
 Many Suppliers
With the many suppliers strategy, a suppliers responds to the demands and
specification of a “request for quotation”, with the order usually going to the
low bidder. This is a common strategy when products are commodities. This
strategy plays one supplier against another and places the burden of meeting
the buyer’s demands on the supplier. Suppliers aggressively compete with
one another. Although many approaches to negotiations can be used with
this strategy, long-term “partnering” relationships are not the goal. This
approach holds the supplier responsible for maintaining the necessary
technology, expertise, and forecasting abilities, as well as cost, quality, and
delivery competencies.
 Few Suppliers
A strategy of few suppliers implies that rather than looking
for short-term attributes, such as low cost, a buyer is better
off forming a long-term relationship with a few dedicated
suppliers. Long-term suppliers are more likely to understand
the broad objectives of the procuring firm and the end
customer. Using few suppliers can create value by allowing
suppliers to have economies of scale and a learning curve
that yields both lower transaction costs and lower
production costs.
 Vertical Integration
Purchasing can be extended to take the form of vertical integration. By
vertical integration, we mean developing the ability to produce goods or
services previously purchased or actually buying a supplier or a distributer.
Backward integration suggests a firm purchase its suppliers, as in the case of
Ford Motor Company deciding to manufacture its own car radios. Forward
integration, on the other hand, suggests that a manufacture of components
make the finished product. An example is Texas Instruments, a manufacturer
of integrated circuits that also makes calculators and flat-screens containing
integrated circuits for TVs.
Vertical Integration Examples of Vertical Integration
Raw material (suppliers) Iron Ore Silicon Farming

Backward Integration Steel

Current Transformations Automobile Integrate Flour Milling

Circuits

Distribution
Forward Integration Circuit boards
System

Computers
Dealers Watches Baked Goods
Finished Goods (customers)
Calculators
 Keiretsu Networks
Many large Japanese manufacturers have found a middle ground
between purchasing from few suppliers and vertical integration. These
manufacturers are often financial supporters of suppliers through
ownership or loans. The supplier becomes part of a company coalition
known as a keiretsu. Members of the keiretsu are assured long-term
relationships and are therefore expected to function as partners,
providing technical expertise and stable quality production to the
manufacturer. Members of the keiretsu can also have suppliers farther
down the chain, making second and even third-tier suppliers part of the
coalition.
 Virtual Companies
The limitation to vertical integration are severe. Our
technological society continually demands more specialization,
which complicates vertical integration. Moreover, a firm that
has a department or division of its own for everything may be
too bureaucratic to be world class. So rather than letting
vertical integration lock an organization into business that it
may not understand or be able to manage, another approach is
to find good flexible suppliers.
Contd…

Virtual companies rely on a variety of supplier relationship to

provide services on demand. Virtual companies have find, moving
organizational boundaries that allow them to create a unique
enterprise to meet changing market demands. Suppliers may
provide a variety of services that include doing the payroll, hiring
personnel, designing products, providing consulting services,
manufacturing components, conducting tests, or distributing
products. The relationships may be short-or long-term and may
include true partners, collaborators, or simply able suppliers and
subcontractors.
 Supply Chain Design Strategy
One of the major challenge in supply chain management
is developing an efficient supply chain strategy that
meets the organizational requirements.
Many aspects like product life cycle, demand product
ability, product variety, market standards for lead times
and services etc. must be taken into account.
Moreover, it is obvious that there is fluctuation in regard
to demand and supply this aspect also should be taken
into account.
Supply chain design strategy includes the definition of all elements
of the supply chain and the corresponding monitoring. Strategies
related to supply chain design focus on:
Improving customer services
Increasing revenue
Reducing operating cost and increasing efficiency
Fisher has developed a framework that helps managers
understand the nature of demand for their products and than
devise the supply chain that can satisfy the demand in best
possible way:
 Fisher divides product into two categories

 Functional Products
 Innovative Products

Based on the logic that each category requires a distinctly

different kind of supply chain. He also explains that when
there is mismatch between product type supply chain type,
supply chain problem occurs:
Functional products are the product that consumer buy in a wide
range of retail outlets in general they do not change much on the
course of time, have low profit margin, stable predictable demand
and long life cycle. They have established product categories and
low forecasting error.

Innovative products on the other hand have short life cycle

stages, high product verities unpredictable demand, high margins
and high forecasting error.
Outsourcing
Outsourcing transfers some of what are
traditional internal activities and resources of a
firm to outside vendors, making it slightly
different from the traditional make-or-buy
decision.
Outsourcing is part of the continuing
trend toward utilizing the efficiency that
comes with specialization.
The vendor performing the
outsourced service is an expert in
that particular specialty.
This leaves the outsourcing firm to focus on
its critical success factors, that is, its core
competencies that yield a competitive
advantage.
 Reasons for Making Reasons for Buying
1. Maintaining core competence 1. Frees management to deal with its core competence

2. Lower production cost 2. Lower acquisition cost

3. Unsuitable suppliers 3. Preserve supplier commitment

4. Assure adequate supply (quantity or delivery) 4. Obtain technical or management ability

5. Utilize surplus labor or facilities and make a marginal 5. Inadequate capacity

contribution
6. Obtain desired quality 6. Reduce inventory costs

7. Remove supplier collusion (conspiracy) 7. Ensure alternative sources

8. Obtain unique item that would entail a prohibitive 8. Inadequate managerial or technical resources
commitment for a supplier
9. Protect personnel from a layoff 9. Reciprocity

10. Protect proprietary design or quality 10. Item is protected by a patent or trade secret.

11. Increase or maintain size of the company

 INTRODUCTION
A Working Definition of Outsourcing

Services
COMPANY OUTSOURCER
Organization Service
Level Level
Agreement Agreement

Outsourcing denotes the continuous procurement of

services from a third party, making use of highly integrated
processes, organization models and information systems.
 What is
Outsourcing?
Outsourcing -
“The strategic use of outside resources to perform
activities traditionally handled by internal staff and
resources.” Dave Griffiths

Why Outsource?
Provide services that are scalable, secure, and efficient,
while improving overall service and reducing costs.
Why do Companies Outsource?
 Key areas of outsourcing ?
•Information Technology/IT solutions

•Call Centers

•Finance & Accounting Outsourcing

•Procurement Outsourcing

•Textiles

•Manufacturing

• Human resource Management

 Advantages of Outsourcing
Cost Savings
There can be significant cost savings when a business function is outsourced.
Employee compensation costs, office space expenses and other costs associated with
providing a work space or manufacturing setup are eliminated and free up resources for
other purposes.
Focus on Core Business
Outsourcing allows organization to focus on their expertise and core business. When
organizations go outside their expertise, they get into business functions and processes
that they may not be as knowledgeable about and could potentially take away from
their main focus.
An example of this is when a grocery store decides to add a florist to their operation. If too
much focus is put on that part of the business they lose focus of the core business which
is grocery.
Improved Quality
Improved quality can be achieved by using vendors with more expertise and more specialized
processes.
An example of this would be contracting out a cleaning service. An outside service would have
the resources for hiring, proper training and facility inspections that may not be available if
the function were kept in-house.
Customer Satisfaction
The advantage of having a vendor contract is they are bound to certain
levels of service and quality.
An example of this is if your IT function is outsourced and the technician calls in sick, it is the
vendor’s responsibility to find someone to replace them and meet your support needs.
Operational Efficiency
Outsourcing gives an organization exposure to vendor specialized systems. Specialization
provides more efficiency that allows for a quicker turn around time and higher levels of
quality.
 Disadvantages of Outsourcing
Quality Risk
Outsourcing can expose an organization to potential risks and legal exposure.
As an example, if a car is recalled for faulty parts and that part was outsourced, the car
manufacturer carries the burden of correcting the potentially damaged reputation of the
car maker.
While the vendor would need to make good on the faulty product by contract, the
manufacturer still has the black eye from the incident and carries the burden of correcting
the negative public perception.
Quality Service
Unless a contract specifically identifies a measurable process for quality service reporting,
there could be a poor service quality experience. Some contracts are written to
intentionally leave service levels out to save on costs.
Language Barriers
If a customer call center is outsourced to a country that speaks a different
language, there may be levels of dissatisfaction for customers dealing with the
language barriers of someone with a strong accent.
Employee/Public Opinion
There can be negative perceptions with outsourcing and the sympathy of lost
jobs. This needs to be managed with sensitivity and grace.
Organizational Knowledge
An outsourced employee may not have the same understanding and passion for
an organization as a regular employee. There is the potential that an outsourced
employee will come in contact with customers and not be as knowledgeable of
the organization, resulting in a negative customer experience.
Labor Issues
Organized labor in the United States has very strong feelings about outsourcing to other
countries that have a less standard of living and worse working conditions. This
viewpoint can affect how the workforce responds to outsourcing and can affect their
daily productivity.
Legal Compliance and Security
It is important that issues regarding legal compliance and security be
addressed in formal documentation. Processes that are outsourced need to
be managed to ensure there is diligence with legal compliance and system
security.
An example of this is outsourcing the IT function and having an outsourced
employees use their access to confidential customer data for their own
gain.
Employee Layoffs
Outsourcing commonly results in the need to reduce staffing levels.
Unless it can be planned through attrition, layoffs are inevitable.
This is difficult at best and if not managed appropriately, can have
a negative impact on remaining employees.
Finally, when researching vendors for outsourcing be sure to think
through your specific needs and get at least three Requests for
Proposals (RFP) to ensure you are getting the best value for your
dollar.
Mass Customization
 Mass Customization
The process of delivering wide-market goods and services
that are modified to satisfy a specific customer need.
Mass customization is a marketing and manufacturing
technique that combines the flexibility and personalization
of "custom-made" with the low unit costs associated with
mass production.
Many applications of mass customization include
software-based product configurations that allow end-
users to add and/or change certain functionalities of a
core product. Sometimes called "made to order" or "built
to order."
 Facts of Mass Customization
• Mass customization is a business model which
creates a high variety of products and services in
response to customer defined requirements.
• Mass customization is the ability of a company to
deliver highly customized products and services to
different customers around the world.
 Some Strategies for Mass Customization
• Design products for mass customization
• Use robust components
• Develop workers for mass customization
• Apply quality concepts
• Reduce setup times
• Use appropriate automation
• Break down functional silos
• Manage the value chain for mass customization
A FEW SUCCESSFUL NICHE MARKETS
 A PIONEER IN MASS CUSTOMIZATION

• Dell assembles computers according to the specifications ordered by

the customers.

• Uses collaborative approach and assembles computers to customer's

exact specifications.
A PIONEER IN MASS CUSTOMIZATION
Dell has recently become the
number one maker of file servers in
the U.S., as well as holding the
number two position worldwide.
The production process from order to
delivery is managed electronically,
which allows Dell to build servers
very efficiently and their customers to
know where their server is during
each step of the process.
 Conclusion
• Mass customization defies the contradiction between
mass and customization and aims to deliver products and
services that best meet individual customers’ needs with
near mass production efficiency
• It is important that all parties concerned can engage in
collaboration with sufficient trust and only then
collaborative engineering can play a significant role
• The Economist: “Mass Customization a Result of the Third
Industrial Revolution”
BBA 5th