MMM341/1 © Dr. C.Hicks, MMM Engineering University of Newcastle upon Tyne Supply Chain Management

MMM341/1

© Dr. C.Hicks, MMM EngineeringUniversity of Newcastle upon Tyne

Supply Chain Management

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References

• Dobler D.W. and Burt D.N. (1996) “Purchasing and supply management: text and cases 6th Edition”, McGraw Hill, Singapore, ISBN 0-07-114144-8

• Hicks C., Earl C.F. and McGovern T. (1999) “Supply Chain Management: a Strategic Issue in Engineer-to-Order Manufacturing”, International Journal of Production Economics 65(2) pp179-190

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“A 5% reduction in costs can have the same effect on the bottom line

as a 25% increase in turnover”

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Drivers

Companies in all sectors are seeking ways to:

• reduce costs

• shorten product development times

• manage risk.

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Supply Chains

There are two types of supply chain:

• External supply chain - involving other companies. Supply chain management involves relationships with: the customer through marketing and sales; and with suppliers through the procurement function.

• Internal supply chain - involving functions / departments / business units within the organisation.

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Supply Chains

The transactions in supply chains are characterised by:

• adding value up through the chain

• incurring costs (and consequent payments) down the chain.

A market economy can be viewed in terms of competing supply chains. Many sectors have therefore focused on reducing waste in the supply chain as a whole e.g. automotive industry, CRINE in the oil industry.

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Types of supply chain relationship

• Single stage - sourcing standard items for steady state production

• Double stage - tendering stage, followed by contract execution stage. May involve significant engineering activity and the development of conceptual designs. Probability of success often low <30%

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Supply Chain Management Aims

• Reduction of costs

• Reduction of lead times

• Reduction in transactions

• Release of value

• Ensuring appropriate quality

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Trends

• Outsourcing of non-core activities to suppliers

• Focusing of operations

• A reduction in supply base as companies shift from multiple to single sourcing

• Long-term buyer supplier relationships.

• Partnerships rather than adversarial trading

The outcome of these changes are that companies are establishing new relationships with their suppliers.

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Traditional model

• Adversarial arms-length trading.

• Buyers defined production and process specifications.

• Components were obtained from multiple sources.

• Little information was disclosed to suppliers on technologies, processes and production targets

• Price competition was the primary criterion on which contracts were awarded.

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Multi-sourced trading

• Characterised by win-lose transactions and mutual mistrust

• Multiple sourcing constitutes a strategy for reducing purchasing uncertainty.

• Moving towards single sourcing partnership arrangements can be frustrated by long-term adversarial attitudes.

• Cultural change, the absence of trust and the prevalence of opportunism are major barriers to change in buyer-supplier relationships.

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Evolution of partnership models

• Adversarial relationships proved counter productive to both parties.

• By 1980’s a partnership model was being adopted to reduce costs, resolve scheduling problems and other technical difficulties.

• Strategic change was required to implement total quality principles and JIT.

• The partnership, or obligational model, is characterised by close operational and strategic links between buyer and supplier; the provision of technical and managed assistance to suppliers and the establishment of preferred supplier status or single sourcing agreements.

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Outsourcing opportunities

• Strategic benefits of outsourcing to best-in-class suppliers

• Greater flexibility in the purchase of rapidly developing new technologies

• A reduction in design cycle times

• Higher quality

• Cost advantages due to higher volume production

• Risk is transferred to the supplier

• Less capital is required as the requirement for investment is transferred to the supplier. This is a major driver for companies aiming to optimise ROCE.

• Technology critical to success should not be outsourced.

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Power Relationships

• In many cases “collaborative” relationships are underpinned by strong buyer control, enforced through vetting and monitoring

• Powerful buyers impose terms on weaker dependent suppliers (e.g. supermarkets)

• Research has concentrated upon focal producers able to exert a significant degree of control over smaller suppliers (e.g. automotive companies)

• Other sectors such as engineer-to-order, low volume manufacture may have different power relationships.

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Core Activities

Core activities can be interpreted in several ways:

• an activity traditionally performed internally;

• critical to business performance

• creating current or potential competitive advantage

• driving future growth, innovation or rejuvenation of the enterprise.

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Common doubts

• Research suggests that adoption of new practices is piecemeal and concentrated in particular sectors e.g. automotive and electronics industries.

• Even in leading-edge companies mistrust between buyers and suppliers has been found to be prevalent

• There have been difficulties experienced in establishing tiered systems of component supply.

• Many companies have struggled to implement JIT

• Despite the importance of quality and delivery, price and cost are still the main determinant of contract awards

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Comments

• Large batch and flow line systems generally exhibit the characteristics of standardisation of products, repetitive manufacturing and assembly processes that are necessary to allow the full application of JIT techniques.

• Some techniques such as supplier quality certification and point of use delivery may far broader applicability.

• Development of partnership relationships may require a significant volume of business.

• The impetus for product development may reside with either the buyer or the supplier.

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Traditional Purchasing

Traditionally the purchasing function was evaluated in terms:

• The purchase price of materials.

• The ability to “keep production running”

• The cost of the Purchasing Department’s operation

It was often a reactive clerical function that responded to requests from other business functions such as engineering or production.

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Current Perspective

World-class companies expect supply chain management to focus on the following value adding outputs:

• Quality – purchased materials and services should be virtually defect free. Many defects can be traced back to bought in items.

• Cost – minimisation of total cost of acquiring, transporting, holding, converting items as well as quality costs.

• Time – need to minimise time to market for new products as well as minimising lead-times to increase flexibility.

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Current perspective (continued)

• Technology - ensuring that the firm’s supply base provides appropriate technology in a timely manner; ensuring that technology associated with core competence is carefully controlled.

• Continuity of supply - need to reduce risk of supply disruptions. These may have impact on other functions (aluminium vs carbon fibre reinforced plastics in the aerospace industry). May involve the development of alliances.

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Strategic Focus• Integration - the firm’s supply chain

strategy should be integrated with marketing, production and financial strategies.

• Business environment - supply chain must address the identification of threats and opportunities (with particular reference to suppliers and customers).

• Technology - access and control, avoid turning suppliers into competitors.

• Information systems - need timely, accurate and cost effective transfer of information with buyers and suppliers (e.g. electronic data interchange).

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Strategic focus (cont.)

• Value chain - need to ensure that the value chain of which the company is a part is competitive (e.g. careful management of margins through the supply chain)

• ABC analysis - concentrate on high value items - decentralise decision making for low value items.

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Major Developments

• Cross functional teams - engineering, procurement, marketing, tendering, accounting

• Supply chains - management and development to ensure competitiveness

• Partnerships and alliances - relationships may be either mutually beneficial open relationships or the creation of a separate legal entity called a joint venture (e.g. capital goods for the oil industry).

Documents

MMM341/1 © Dr. C.Hicks, MMM Engineering University of Newcastle upon Tyne Supply Chain Management