Supply Chain Logistics/ International Operations

Lecture 14, 21 January 2009Dr Michael Wynn-Williams wm97@gre.ac.uk

1

Supply chain: a simplistic term for complex activities

It 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 exploitation of value, supply chain concerns management of the supply system

Supply chain management – Coordination of materials, information, and funds from the initial raw material supplier to the ultimate customer

Logistics (materials management) is part of the supply chain process

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 integrationBackward integration

Multiple distribution channels

Multiplevendors

Should all firms be fully vertically integrated?

Buyers/ Customers

Suppliers

The Firm

Forward integrationBackward 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

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

“Bounded rationality” – perfect market is impossible

Avoids “friction” of transactionsSearch costsContracting costsCoordination costs

Williamson gave three dimensions of transaction costsFrequencyUncertaintySpecificity

Vertical integration reduces risk by internalising the employment contracts

Walkers Crisps is a famous Leicester manufacturer of crisps

Suppliers include raw potatoes, flavourings and packaging

Walkers supplies supermarkets, pubs and local shops

You have been appointedas the manager of verticalintegration

What opportunitiesare there for vertical integration?

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)

Lower costsDisperse manufacturing to efficient

locations Accommodate local demands

Decentralize production Respond to shifts on customer

demandTime-based competition extremely

important

Concentrated manufacturin

g favoured

Decentralized manufacturing

favouredCountry factors

Differences in politics, eco., cultureTrade barriersLocation externalitiesExchange rates

SubstantialSubstantialImportant in

industryStable

FewFew

Not important in industryVolatile

Technological factorsFixed costsMinimum efficient scaleFlexible manufacturing technology

HighHigh

Available

LowLow

Not available

Product factorsValue-to-weight ratioServes universal needs

HighYes

LowNo

Optimum PEST conditions

ExternalitiesSkilled labor poolsSupporting industries

Formal and informal trade barriers

Exchange rate

Fixed costs Minimum efficient

scale Flexible

manufacturing (lean production)

Flexible machine cells

Two product features affect decisionsValue to weight ratio (Cement)Product serves universal needs (Screws, Bolts)

Two basic strategiesConcentrating 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 centers for design and final assembly – Dispersed centers of excellence are consistent with a Transnational Strategy

Upward migration caused by pressures to: Improve cost structure Customize product to meet customer demand An increasing abundance of advanced factors of

production

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

Examine the international supply chain for the following groups of industriesSteelSports wearBankingScotch whiskey

You are expected to come prepared with some background reading of these industries.

• Download Route <http://www.downloadroute.com/VALUE-CHAIN-ANALYSIS-MEGA-SOFTWARE-sqaki-com-16-VALUE-CHAIN-ANALYSIS-MEGA/image.html>

• 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